Sunday, March 29, 2015

On "The incredible shrinking alpha"




I’ve recently read “A Random Walk Down Wall Street,” in the new edition. 

This is basically a pocket version of that.  Active management is out. It always should have been  out.

Of course that is already my prejudice, so this just reinforces that.  

The Money Game is Your Grandfather's "Liar's Poker"



          Every generation, a writer and their books pop up that show the back end of Wall Street and its ilk running back to Bagehot’s “Lombard Street”. There was then Livermore’s Reminiscences of a Stock Operator, and Schwed’s “Where Are the Customers' Yachts?” The generation before me had Michael Lewis and his “Liar’s Poker.” You may say that he is contemporary, since he is still writing, but that book made his name, and he hasn’t worked on the street since. He’s more of an outsider now – in fact, “Liar’s Poker” just got a rerelease for its 25th anniversary. Our generation lacks our defining book. The writers who might have written those books are still grappling with the legacy of the 2008 financial crisis. 

                But I digress. Then if Lewis was for our fathers, the Adam Smith was for our grandfathers. It is an interesting read in the more things change, the more they stay the same sort of way. Some of the references are dated, but others are remarkably contemporary. One example is traders talking about the income potential of shale gas out west to produce once technology comes on line. There is a joke that they have always been waiting for technology to extract the oil, at least since the thirties. You know what the new technology was that was so promising 50 years ago? Drillers were going to plant small nuclear devices down wells to make them produce. It makes the current fracking debate seem quaint – oh, what’s a little flammable hydrocarbon in your water matter? It could have been much worse. That’s just a tiny part of the book. There’s also some good advice built in. For example, I flagged “If you know the stock doesn’t know you own it, then your ahead of the game” (72), which is evergreen advice against getting stuck in the sunk cost fallacy. There’s also worries that computers will take over and the value of the dollar will go down – which also seems familiar. Overall, this book is well worth a read for someone who is interested in the history of the market or even someone looking for advice in today’s market.

"The New Prophets of Capital" by Nicole Aschoff: Red Rosa for the New Age




This is a book in the Jacobin / Verso partnership, which puts together one of my favorite magazines with my favorite radical publisher. The books in the series have all been short looks at capitalism in the modern society, from teaching to writing to prostitution.

This book comes after several people who have tried to make changes in the relations of capitalism without changing the intrinsic nature of those relations. So it covers Oprah, Bill Gates, John Mackey, and Sheryl Sandberg. Each of these people has ideals that some might see as admirable, but are instead just capitulations to capitalism and not a direct challenge to it. She digs medium depth on all four of these people, and show that the greater goal is not met. I am more familiar with Gates and Oprah, as most people will be. Gates changed from uber-nerd to someone who wanted to save the world through elimination of disease and improved education. Oprah likes to hold herself up as an exemplar of pull yourself up by your bootstrap ideology. Both approaches are limited in their reality by the nature of economic and social relations that we call capitalism. Their very uniqueness shows the limits to capital, in that the mythos they perpetuate is limited by a confluence of happenstance that was beyond their control. Even if, like Gates, you ultimately want to put back the extraction of the resources you were able to affect through being a good programmer at the right time, there are still frictions in the system, and you will never be able to full give back. Your limits are also in part based on your focus -- Gates uses the market system to try to “Reform” schools; bypasses the state to eliminate diseases.  Mackey want to make a smarter market system, but even with his firm’s growth, even if it were a wonderful alternative to the WalMarts of the world, it doesn’t scale and just reinforces the privilege of the Whole Foods Shopper over any other consumer.

 The first essay in the book is the most troubling to me, since I have written positively of Sandberg’s “Lean In” crusade as trying to do the best within the capitalist system, even acknowledging Sandberg’s privilege of trying to make changes from the top. Aschoff and I have read a lot of the same writers, and she shows me the errors of my ways in being optimistic about the potential for change. Sandberg is focused on professional women and ultimately will only make incremental changes. Real change has to come from the bottom. Sandberg wants women to lean in, but the real goal is to lean against – and that is not just putting the onus for change on women, but it is the necessity of all people who want change to make a more equitable system.

 The book is short, but it is in the vein of Rosa Luxemburg, showing that yet again, reform is accepting the contradictions of the capitalist system, where real change is system change.

Sunday, March 22, 2015

Goldratt's "The Goal": Strong Foundation, Weak Structure



I haven’t read that many business books. The ones I have are usually more poorly written than the economics books I read. I know that there is often a dedicated course in business writing in the academy, but in my experience, it isn’t a focus of the program.
So when I was assigned a long business book as additional reading for my operations management class, I wasn’t too jazzed. I was pleasantly surprised though, the Goal isn’t that bad.

To talk about the Goal, I have to talk about the structure. It is a 330-page business novel.  I had no sense on going in what a business novel would be like, and it is basically that, a novel with plot and characters.

The problem is that it is a didactic novel. That means it is teaching you something. And in that role, it is often very heavy handed. The plot is that Alex, the main character who we get to enjoy present tense first person narration though, has been promoted to be the plant manager of his hometown plant. It is not producing the profits that corporate would like to see. On top of that, the orders are late and they’re always in a rush. So corporate comes down and gives Alex an ultimatum – you have three months to turn around the plant or we will look into closing it.          

So what does Alex do? Thankfully, Alex meets an old physics teacher friend of his named Jonah, who happens to be an internationally famous business consultant. The problem here is that Jonah is always busy, so he can’t handhold Alex to improve the plant. This device is here so that you as the reader and the character of Alex isn’t told straight up what changes to make. You/Alex need to find from the stated principles to improve the plant. The whole thing is based on the idea of the Socratic dialogue –where the teacher doesn’t tell you anything but the educate is a coming to knowledge of the student. It’s really heavy-handed, since the author mentions it in the introduction and also has a subplot where Alex’s wife starts reading philosophy and they have a couple dialogue exposition-dump conversations.
Ultimately, Alex does come up with a process of improvement where he takes some of the old rules off the board and looks at defining the ultimate goal of the plant vis a vis the company and what he can do to help the plant meet those goals. He and his team identify bottlenecks in the plant, reimagine them, and the plant is a success. He is promoted to district manager at the end, and he and his team start to see how they could apply the more general principles they had determined to processes that are harder to define than movement of material in a plant. For me, the end was the weakest part because I work in service and I kept trying to figure out how this could apply to me in my job. I still haven’t and I hope there was a sequel or something that applies the goal to a larger organization.
The general processes that Alex worked out by way of Jonah (who is a total stand-in for the author) are:      


1) Identify the system’s constraints
2) Decide how to exploit the system’s constraints.
3) Subordinate everything else to the above decisions
4) Elevate the system’s constraints
5) If in the previous steps, a constraint has been broken, go back to step 1, but do not allow inertia to cause a system constraint.
 
They sound like good general principles, and they work in the book. I do have some issues with the book and the idea though. First of all, the structure of the book feels entirely unnecessary. We as the reader have very little context for what the company Alex works for even makes. It is just some generalized manufacturing plant in a nameless town. That means the process described in the book cannot be fully trusted to have worked. I would like to see evidence-based material to prove that the process works. As it, it might as well be like the mystery writer who cannot really solve mysteries but just knows what he wants at the end so he can work backwards.
Second, the novel approach is just weird. It makes the book longer by three times than it could be to convey the same information. For example, there is a part in the book where the main character takes his son on a walk in the woods with the rest of the Boy Scout troop. The whole thing is just in there to illustrate that any process is only as strong as its weakest link or as fast as its slowest part. And it takes a long time to do so. The characters never really develop a secondary consideration. There’s a whole subplot where Alex and his wife are fighting and she ends up moving out for a while and it is just ridiculous. As a reader of fiction, it is horrible. You don’t know why these characters are in love in the first place and their reconciliation is unbelievable. It is also completely unnecessary for what Goldratt is trying to teach in his book. It just adds pages and I still never really cared about the characters.
Smaller things nagged as well.  For example, what is it about the impetus to restructure the company? Do you need to be close to failure to rethink your processes? Alex only went ahead with it because he had nothing to lose. That gave him reason to change. If things are working well enough at work, why change, even if efficiencies can be found? Another is that this book has been around a while now. Are efficiencies still possible? Or does every generation of managers have to relearn the same general principle here? Further – with the decline of manufacturing in the states to more labor-intensive countries, did the companies that embraced the goal succeed? There’s no indication in the book of the real world, so that bugged me.       
                
One last thing. Alex always refers to the cars he and his wife owns by their make. He has a Mazda, and she has an Accord. If he works in domestic manufacturing, why the heck does his family have two foreign cars?