Small business fetishism

I can't quite wrap my head around what's so all-fired special about small business compared to his larger bretheren. Look fellas, all businesses start out small. That's as true for the mom and pop grocery store or the corner adult bookstore as it is for General Dynamics or Microsoft. You know how small companies get big? by delivering value, that's how. Come on now. The sad truth of the matter is that most small businesses, especially the ones that stay small just don't deliver all that much value. Yeah, yeah, there could be other reasons, like if you're in an industry that doesn't scale well (think granite quarrying or roofing services) but by and large, when policy favors small business it does one of two things:

• it elevates the importance of relatively low-value-added enterprises

or

• it promotes (again, relatively) excessive risk-taking by encouraging the formation and propagation of itty bitty ventures.

Don't get me wrong here now. Vigorous competition and the entrepreneurial spirit are critical for any vibrant economy, but siphoning talent from established providers of value destroys the creation of surplus, especially once you adjust for the inherent uncertainty of a startup.

Let's use an example to illustrate what I mean.

Hugh is an out-of-work chemical engineer. Now, it just so happens that Dow has a plant not too far from where he lives, but because Congress is offering hiring incentives to small businesses (for the sake of argument, let's say that this is defined by firms who have 20 or fewer employees), he's offered a compensation package that just edges out what Dow is offering. So Mr. Jass, Hugh, takes a job at Flybynite Chemicals, a small bioplastics firm bicycling distance from his apartment (the poor goofball's old house got foreclosed last year). He's all happy about his new job and is ten kinds of excited about getting to work on the thrilling project of turning corn into car parts. Six months later, and the enthusiastic but mostly incompetent amateurs who run the company go broke and have to lay everyone off. Hugh is out another job, and back on the dole.

On the margin, there could be lots of Hughs. Folks who would have been better off taking jobs with large firms, producing products that people want and supported by competent management. Instead, we have policy that champions one class of business over another, to the detriment of both the worker and the economy as a whole. Policy makers simply do not have the requisite information to judge whether or not employment with a large firm is less preferable than employment with a small firm. Only the workers themselves and the folks actually involved with the firm have the knowledge to make anything even approximating a best guess about the relative value of their resources (and yes people, labor is a resource. They call the hiring/firing departments in most companies Human Resources with little willy-nilliness involved). By pushing for more small business activity, we're shelving the valuable contributions made by big players, proven players, and taking risks with, yes, you guessed it, other people's money (well, maybe not money specifically, but with talent, time, and expertise, which are all worth a heck of a lot of money out there in the Wide World of Business). It's a recipe for misery and it's being sold to us in a cute perfume bottle as eau de economic recovery. Pathetic.

Selection bias and educational efficiency

Ordinary civilian education tends to be mostly garbage. I'll admit that I've enjoyed most of the classes I've taken, but I'm also forced to admit that few of them in any way contributed to my workplace productivity (especially my lower-division classes). Of course, the natural underlying assumption here is that education is a capital good, not a consumption good, which may or may not be entirely defensible. I suppose one could make the case that the reason people (and by people, I mean non-arts majors here) sign up for film studies classes is to become better rounded individuals. Granted, I'm not sure why or how this justifies public assistance, but hey, who am I to complain about educational subsidies? Still, it's tough to justify many of the classes I took to get where I am on a cost-benefit basis, and that's just counting the cost to me, which is a fraction of the total real costs.

Then I look back at the classes I took in the Navy. Of those, close to zero were useless in my professional development. Perhaps the HTFF (heat transfer and fluid flow) class I had for a couple of weeks towards the beginning of power school didn't add too much to my ability to operate and maintain the reactor on my boat, but that's really the only one that crosses my mind.

As you might imagine, the public choice questions associated with this phenomenon race through my mind. Most obviously, the Armed Services have budget restrictions they have to justify to Congress, plus the people who teach classes are uniformed service members whose incentive structures don't encourage overconsumption of frivolous education. This is a bit unsatisfactory though. On the margin, there should be some slopover. If the civilian model drifted into the military, we would see crypto techs taking sonar courses and machinist mates taking boiler tech courses. To the extent that such courses contribute to a service member's productivity and professional development, this happens, but no one in uniform takes classes just for fun, at least not in my experience. I could be wrong. What you won't find is a soldier taking a Gender Studies or Modern Dance class during working hours.

Not, until that is, this soldier makes the move from the enlisted ranks up to O-gang. Once on the road to gentlemanhood, we see all manner of useless transcripts, filled o'erflowing with no-value-added humanities courses, forgotten social sciences lectures, and discarded out-of-major notebooks (mostly filled with halfhearted doodles). Why the discrepancy? If you would have asked me while I was still in the Navy, I probably would have cynically noted that officers don't really add much to operational efficiency, at least not afloat. I don't think I agree so much with that sentiment anymore. It's true that the crew knows very well how to operate the boat, but there really is a lot of coordination work that officers perform: work that makes for an efficient fleet (I can't directly comment about the ground forces, but I suspect that many of the same dynamics are present there as well). Whatever the details, the DoD throws piles of cash at useless education for officers, so long as the courses are provided in a university setting. What gives?

I can't give a truly satisfying answer, but it appears that the Joint Chiefs value the signal that a degree generates. Add to that a generous helping of institutional inertia, and kablammo, we have a whole mess of butterbars wandering around knowing stuff that doesn't do a lot to help them kill the enemy more effectively.

There's also the possibility that a university experience could help provide some civilizing effect on new officers. I'm skeptical about this as well. The wardroom civilizes faster and more thoroughly than the quad. Hm.

I wish I'd have more policy suggestions here. Let's say that (and this is being generous here, people) half of the classes your average officer takes can be applied towards operational performance, this is still a MASSIVE waste of fleet resources. Mind you, this is not just in terms of direct expenditures like salary, tuition, books, etc., but in lost productivity. I have to imagine that there's some efficiency enhancement we could make here. Maybe something like juicing up OCS to include one semester of military-specific education (military history, for example) and one semester of electives (computer science or something). That, or maybe keep the current system but force-waive garbage courses (you know the ones I mean).

I don't imagine that if I were an officer, or even a former officer that I would support any changes to the system (other than maybe closing the service academies). Military members retire relatively young, and to enter the civilian work force with an abnormal degree means entering the civilian workforce with a broken signal: not an encouraging prospect. Practically, as long as the college degree remains a valid signal for the population at large, it will remain an important signal for uniformed servicemembers. Ho hum.

Slap Leather

The big news today is the SCOTUS case that overturned Chicago's handgun ban. Mulling this over, I have been forced to revisit my stance on the applicability of the Second Amendment as well as the rights and responsibilities of gun owners.

One thought experiment I like to run with myself is something like this: what if everyone in this room were armed right now? If I find myself at a gun show (which happens a lot less these days than it used to), I nod and scratch my undercarriage solemnly, since a question that dumb deserves no greater answer. But what if I'm in a church? Depends on the church, I suppose. I'd probably be a lot more comfortable in a well-armed church that's received threats than surrounded by hands filled with prayer shawls or rosaries or whatever. How about a bus? Again, depends on the bus. Prisoner transfers aside, your average bus rider doesn't inspire a lot of confidence, but how would the ubiquity of firearms change the social miniscape? The standard micro analysis suggests that the relative costs of scuffles, disagreements, and other generally pugilistic behavior would increase greatly, leading to less consumption of unruliness, but when the shit hits the fan, you'd better make like a quack and duck.

You can repeat this experiment as you like. One iteration I keep coming back to is the classroom. Surely, the famous dreadful school shootings would not have been as terrible if someone had fired back. Then again, how much less would I be willing to fail a student who I knew was packing heat? I wonder what sort of adjustments professors would make with armed students filling a lecture hall. Depends on the professor, most likely. I reckon lots of 'em wouldn't hardly cotton to it at all. Could you imagine your average Gender Studies professor applauding students' decision to carry? Me either.

At any rate, maybe we could think of this gun thing as regulatory stimulus. Look people, open carry is a Schelling point in the violence prevention coordination game. Better even is the threat of concealed carry, since some folks can (maybe) free ride. We tried giving the auto industry a jump-start with Ca$h4Clunkers, so why not let regulatory relaxation goose the firearms industry? There's not even any deadweight loss here. Hell, it's probably a K-H improvement. It would generate a few jobs for Colt anyway. Maybe. Gun making is probably pretty capital-intensive. Or so's my guess. I've never visited a small arms factory. I should though. I bet it'd be fun. Hm.

Anyway, I'm going to ask around how people feel about the ruling. If I find anything interesting, I'll post it. Okay bye.

State vs Government

John Wallis gave a talk yesterday on a paper he's working on with Doug North about the difference between the state and government. The basic argument is that we should look at the state as the organization that organizes other organizations. The government is an organization that is part of the state, and to the extent that the government is the state, we observe strong governments and less tendency for civil wars and suchlike. One of the upshots of this is that hidden organizations within a state can hinder development efforts. This is a hell of a challenge for people interested in eradicating poverty. If there isn't one organization that subsumes the power to use violence, then both identifying and appeasing all interested, powerful parties can be prohibitively expensive.

I'm not sure how to feel about all this. I like the idea of clearly defining the difference between the state and the government, but I'm leery of the sort of reaction that this might generate in the development community. It's a good justification for bringing warlords into the fold, as well as working on making governments more transparent, so it could either lend legitimate authority to tinpot dictators or work towards establishing sound governance. Eh, whatever. I actually suspect that IMF and World Bank won't much care anyway. Too much bureaucratic inertia to change policy anyway.

Weird Strategy

Suppose you were one of those unfortunate souls with an absolutely bizarre first name, like my old friend Hrothflarr or Buttertenkin or B'drak'nar or what-have-ye. Let's also suppose you're in the job market trying to get work as an office assistant or dental hygienist. Let's further suppose that the people reviewing your resume and cover letter are otherwise inundated with pleas for their attention and they have limited resources for reviewing the material you send them. Let's make one more heroic assumption and say that there is a less than trivial chance that they will see your stupid, hard-to-pronounce, offensive, or trashy name and just pitch your otherwise quite informative personal information straight into the bin.

Now, you don't have to be a game theorist to understand that you have no control over the actions of other people. Sure, if you were inclined, you might lobby for regulations forcing HR personnel to stop discriminating on the basis of having a stupid name, but I think that even the notoriously economically ignorant Congress would smell something amiss with that kind of proposal (though, don't count them out just yet; they've surprised me in the past). Enforcement of this sort of regulation would be pretty close to unenforceable, not to mention preposterously costly and rather pointless. Point is, HR folks are people like the rest of us, and people do as people do, and names are a signal. Yes, they are an impressively noisy signal, and it would be cool to have Battleaxe V. Scarwound III working in Accounts Receivable, hiring that person might be a bit risky, all other things equal (the V stands for Victoria).

So what should you do with your idiotic name? For most of us, the answer seems obvious: get it legally changed. You can do this without telling your friends or relatives, thereby preserving the sense of kinship you have with all your other buddies named Grothnar the Vicious and Punky Brewstarr. It's like the mullet of appellations: business on the tax forms, party on the wedding invitations. It's a very low-cost strategy and it should have a wide range of returns (the quilt of conformity casts a wide shadow). I find it surprising that it's not a more common transaction. Looking for work is tough enough already; why burden yourself with the handicap of a buffoon's name?

Maybe the returns to identity are powerful enough to overcome incentives. I'm sure that any one of you could come up with a thumbnail mathematical model to illustrate the flow of value associated with changing or retaining your name under various conditions (minimum wage, labor regulations, transfer payments, etc). It might be the case that the parameters in this model are such that people are sufficiently compensated for holding their dumbass names.

There's a lot to think about here; the history of immigrants changing surnames upon arrival to the States strikes me as one particularly interesting historical example. There's also the matter of the near/far split between the distant reception of the name signal and the close retention of cultural or personal identity. I might have a whole line of thinking to do on this.

The Big Questions

What questions define Economics? To me, the most important problems that we have to tackle are: Why did the Industrial Revolution happen where it did, when it did, and why not elsewhere? and What caused the Great Depression? If Economics is the study of social behavior, especially in the marketplace, it would be hard to think of any event of comparable impact. These questions can be distilled to the more universally applicable "What are the causes of wealth?" and "What causes the economy to fall off the tracks?"

Macroeconomics has a lot to say about both of these, but its contributions to the first one seem unsatisfactory; the business cycle literature seems much more compelling than the growth literature. While the bumps that happen in modern economies is probably a much more poignant area of study right now, given the current state of the world, I find the first question much more interesting. Most of the non-class related economics reading has been about the Industrial Revolution, and why it happened.

I came into graduate school thinking that the change that enabled the IR was the growth of humanism - the belief of an individual that he or she can do something to improve his or her lot in life. Once that becomes the norm people are more willing to do little things differently; apply new technologies and methods to their work, come up with new ideas themselves, etc. The major inventions certainly helped, but as I mentioned last post a steam engine is useless if it is only a curiosity or a mental exercise on the part of its creator. I justified my belief by looking at how philosophy and theology had changed to some extent post-Aquinas. Obviously I can think of a hundred problems with this as the cause of the IR, one of which would be showing that a lot of people, rather than the select few clerisy thought this way; another would be showing that economic growth didn't encourage humanism rather than the other way around.

My primary source this year (as I'm sure no one will be surprised to learn) has been Deirdre McCloskey. I loved The Bourgeois Virtues (even though, I admit, she was long winded), though this seems like it lays some foundation rather than looking at the cause of economic growth. Her next book in the series, Bourgeois Dignity: Why Economics Can't Explain the Modern World, explicitly looks at and criticizes some current explanations, including Gregory Clark's work and Douglass North's. Her next-next book The Bourgeois Revaluation: How Innovation Became Virtuous is available in rough parts on her main page.

Right now I'm going through Douglass North's "The Rise of the Western World." We'll see what he convinces me of.

Art and Science

I went to the Smithsonian Museum of American History the other week to enjoy the spoils of imperialism. Wandering through one of the random exhibits on something like "what do we use coal for?!" I ran across a display that featured an imagined conversation between two chemists; the gist of it was them arguing over what they should do as chemists - one was talking about how he wanted to be able to use what they had discovered in order to make things people can use; the other responded 'we just need to learn more stuff, who cares how it can be used. That's the art of chemistry, we're scientists!' Or something like that.

I think this dichotomy between 'art' and 'science' is important. Science for the sake of science is important, yes, but economically insignificant. If we're wanting to explain the Industrial Revolution we can't look at science as the spur of it; we have to look at the 'art' of the sciences. The steam engine was invented in something like the 2nd century B.C., and several times again over the next couple hundred years. It wasn't for a long time before anything like it was used productively. It's not like they didn't have coal in the ancient times. I would wager that science was much more advanced in the past than we commonly credit it, but that for some reason there was a disconnect between science and its application.

It also led me to think about the distinction between the science of Economics and the art of Economics. I feel like advising policy or action based on Economic science is tricky, since unintended consequences are more probable and have more drastic effects.

It will be something I will be thinking about the next couple days, instead of the Macro test...