The Occupy Wall Street protesters and the bankers share a common delusion

Friday, August 18th, 2017

Eric Weinstein explains the crisis of late capitalism:

I believe that market capitalism, as we’ve come to understand it, was actually tied to a particular period of time where certain coincidences were present. There’s a coincidence between the marginal product of one’s labor and one’s marginal needs to consume at a socially appropriate level. There’s also the match between an economy mostly consisting of private goods and services that can be taxed to pay for the minority of public goods and services, where the market price of those public goods would be far below the collective value of those goods.

Beyond that, there’s also a coincidence between the ability to train briefly in one’s youth so as to acquire a reliable skill that can be repeated consistently with small variance throughout a lifetime, leading to what we’ve typically called a career or profession, and I believe that many of those coincidences are now breaking, because they were actually never tied together by any fundamental law.

Weinstein shares this anecdote about class warfare:

I reached a bizarre stage of my life in which I am equally likely to fly either economy or private. As such, I have a unique lens on this question. A friend of mine said to me, “The modern airport is the perfect metaphor for the class warfare to come.” And I asked, “How do you see it that way?” He said, “The rich in first and business class are seated first so that the poor may be paraded past them into economy to note their privilege.” I said, “I think the metaphor is better than you give it credit for, because those people in first and business are actually the fake rich. The real rich are in another terminal or in another airport altogether.”

The Occupy Wall Street protesters and the bankers share a common delusion, he says:

Both of them believe the bankers are more powerful in the story than they actually are. The real problem, which our society has yet to face up to, is that sometime around 1970, we ended several periods of legitimate exponential growth in science, technology, and economics. Since that time, we have struggled with the fact that almost all of our institutions that thrived during the post-World War II period of growth have embedded growth hypotheses into their very foundation.

That means that all of those institutions, whether they’re law firms or universities or the military, have to reckon with steady state [meaning an economy with mild fluctuations in growth and productivity] by admitting that growth cannot be sustained, by running a Ponzi scheme, or by attempting to cannibalize others to achieve a kind of fake growth to keep those particular institutions running. This is the big story that nobody reports. We have a system-wide problem with embedded growth hypotheses that is turning us all into scoundrels and liars.

Let’s say, for example, that I have a growing law firm in which there are five associates at any given time supporting every partner, and those associates hope to become partners so that they can hire five associates in turn. That formula of hierarchical labor works well while the law firm is growing, but as soon as the law firm hits steady state, each partner can really only have one associate, who must wait many years before becoming partner for that partner to retire. That economic model doesn’t work, because the long hours and decreased pay that one is willing to accept at an entry-level position is predicated on taking over a higher-lever position in short order. That’s repeated with professors and their graduate students. It’s often repeated in military hierarchies.

It takes place just about everywhere, and when exponential growth ran out, each of these institutions had to find some way of either owning up to a new business model or continuing the old one with smoke mirrors and the cannibalization of someone else’s source of income.

Then there’s the Wile E. Coyote effect — as long as Wile E. Coyote doesn’t look down, he’s suspended in air, even if he has just run off a cliff:

But the great danger is understanding that everything is flipped. During the 2008 crisis, many commentators said the markets have suddenly gone crazy, and it was exactly the reverse. The so-called great moderation that was pushed by Alan Greenspan, Timothy Geithner, and others was in fact a kind of madness, and the 2008 crisis represented a rare break in the insanity, where the market suddenly woke up to see what was actually going on. So the acute danger is not madness but sanity.

The problem is that prolonged madness simply compounds the disaster to come when sanity finally sets in.

SciFutures offers “corporate visioning”

Wednesday, August 16th, 2017

Hoping to distract himself from the boredom of his day job as the president of a market-research company, Ari Popper enrolled in a course on science-fiction writing at UCLA:

“It was, like, the best ten weeks of my life,” Popper told me recently. “But I knew I wasn’t going to pay the bills as a science-fiction writer.” Still, the course gave him an idea: since businesses often spend money trying to predict how the world will change, and since speculative fiction already traffics in such predictions, perhaps one could be put in service of the other — corporate consulting through sci-fi narratives. Soon, Popper quit his job, moved to a smaller house, and launched his own firm, SciFutures. Today, his network of a hundred or so authors writes customized stories for the likes of Visa, Ford, Pepsi, Samsung, and nato. Popper calls their work “corporate visioning.”

A company that monetizes literary imagination might itself seem like a dystopian scenario worthy of Philip K. Dick. “There can be a little tension,” Trina Phillips, a full-time writer and editor at SciFutures, acknowledged. The authors’ stories, she added, which range in length from a few hundred to several thousand words, are “not just marketing pieces, but sometimes we have to pull back or adjust to accommodate a brand.” She and Popper have found that clients generally prefer happy endings, though unhappy ones are permissible if the author also proposes a clear business strategy for avoiding them. Rarely is there room for off-topic subplots or tangential characters.

[...]

One of SciFutures’s more prominent contributors is Ken Liu, a Hugo Award-winning author and the translator of the popular Chinese science-fiction novel “The Three-Body Problem.” Liu told me that he relishes the level of influence that the firm offers. “As a freelancing gig, it’s not much money,” he said; typically, stories pay a few hundred dollars. “But you have the chance to shape and impact the development of a technology that matters to you. At a minimum, you know that your story will be read by an executive, somebody who’s actually able to decide whether to invest money and develop a product.” Liu dismissed the notion that writing science fiction for corporate clients compromised something essential about the genre. “I’m not a big fan of this vision of the artist as some independent, amazing force for good,” he said. “Everybody writes in a context for an audience.”

The audience that gives SciFutures writers the most freedom to imagine negative outcomes is, not surprisingly, the military. “Those stories can be grittier,” Phillips said. “They already do a lot of worst-case-scenario planning.” Last year, she and her colleagues produced thirteen stories that were read and discussed in a workshop for forty senior officials from a range of nato member countries. One involves a “smart gun” that gets hacked, nearly causing a massacre of civilians. Another, told from the perspective of a twelve-year-old girl in Uruguay, describes a group of child soldiers around the world who shoot targets through an online gaming site without realizing that the game is real: they are operating drones and other remote weapons that kill enemies of the Russian government. (Readers familiar with Orson Scott Card’s novel “Ender’s Game,” from 1985, may notice some similarities.) A third story follows a member of a Chinese “Fear Battalion,” a group of soldiers who have been genetically modified to emit a pheromone that induces terror in anyone who smells it.

As a woman in tech, Megan McArdle realized: these are not my people

Tuesday, August 15th, 2017

Until the age of 26, Megan McArdle was employed as a technology consultant by a small firm that served the financial industry, where she realized something:

I built servers and workstations, mostly for banks, and in a happy foreshadowing of my future writing for Bloomberg View, I installed some of the first PC-based Bloomberg terminals for a Japanese firm’s office in New York.

Finance back then was heavily male, as it is now. And technology, the same. At the intersection of the two … well, I can count on one hand all the women I worked with directly during almost four years of consulting.

It was very male-centric. I heard about client outings, involving strippers, to which I was obviously not invited. And the sexual harassment (entirely from clients, not colleagues), could be spectacular.

Which has nothing to do with why I left. This will make me sound a bit dim, but at the time, it never occurred to me that being a female in this bro ecosystem might impinge my ultimate career prospects. Nor did I miss having women in the room. I liked working with the bros just fine. And the sexual harassment, while annoying, was just that: annoying. I cannot recall that it ever affected my work, nor that I lost any sleep over it.

No, the reason I left is that I came into work one Monday morning and joined the guys at our work table, and one of them said “What did you do this weekend?”

I was in the throes of a brief, doomed romance. I had attended a concert that Saturday night. I answered the question with an account of both. The guys stared blankly. Then silence. Then one of them said: “I built a fiber-channel network in my basement,” and our co-workers fell all over themselves asking him to describe every step in loving detail.

At that moment I realized that fundamentally, these are not my people. I liked the work. But I was never going to like it enough to blow a weekend doing more of it for free. Which meant that I was never going to be as good at that job as the guys around me.

If parents really want to give their kids a movie night, they’ll pay

Sunday, August 13th, 2017

Virginia Postrel recently went to see Atomic BLonde, and someone brought two kids to the very R-rated movie:

Its fight scenes are lethal and bloody. “Character is choked with a garrote, very visible and intense, lasts for a :30-:60 seconds,” is one note from IMDB’s parents guide. The only respite from the mayhem is a lesbian love scene.

[...]

Like most U.S. theaters, AMC bars kids under 6 from R-rated movies after 6:00 p.m. “Since implementing this policy, guest complaints concerning noise in the theatres have decreased significantly,” a spokeswoman told me by email. Our 7:15 showing was covered by the rule — and demonstrated its flaws.

The first is that children under 6 don’t have driver’s licenses. If the parents say the kids qualify for admission, the theater has to take their word for it. Unless a child is so disruptive that the rest of the audience complains, it’s easy enough to break the rule. Maybe the kids near us were 6, maybe not.

The second is that the mere presence of children too young to understand a movie disturbs other audience members.

[...]

Instead of charging children $3.00 less than adults at R-rated movies, charge them $5.00 more. If parents really want to give their kids a movie night, they’ll pay. But if they just don’t want to pay a babysitter, they’ll stay home and let everyone else enjoy the show.

I still remember someone bringing little kids to the matinée of Gladiator years ago. Not cool.

He picked it up

Friday, August 11th, 2017

Handle has returned to discuss Average Is Over. Tyler Cowen’s book reminds him of a friend’s situation:

I know a Tesla mechanic and he really likes his job. He used to work for BMW, and said it had a truly toxic culture (not one that sounded very traditionally German) and the rats (i.e. other mechanics) were fleeing from a sinking ship. A former BMW maintenance manager was poached by Tesla, and he knew who the good guys were at BMW, and so was given the task of poaching them too.

Which really make you think.

One thing Tesla has is that anyone who can create a new car company from scratch will maintain a permanent advantage over all established car companies, in that it won’t be saddled with all those tremendous pension liabilities to former workers, and established super-powerful unions. Musk certainly has an incentive to get as far ahead on the automation curve as possible to avoid ever having to deal with those problems at anything like the magnitude of burden all the other companies must carry.

That makes it very hard for any established company to eat his lunch by copying simple and widely available tech, while also making it hard for any other new company to overcome the barrier to entry, especially if future subsidies are likely to be less generous than what Musk got to help him get started. That means there is a special, one-time opportunity to pick up this particular $100 bill off the sidewalk. He picked it up.

I admit I didn’t give this particular advantage enough consideration before, and now it seems to help account for Tesla’s unique ability to capitalize on electric cars with big batteries, which, after all, anyone can make. But his timing means that he’s the only one that can make them both with the most generous subsidies and before amassing manufacturing-era labor liabilities and before sclerosis infects his company.

It’s not necessarily regulatory arbitrage as it is also a kind of legacy sclerosis arbitrage. Indeed, this was and remains a considerably portion of the competitive advantage of East Asian automakers in the US market. All else being equal, the Big Three had to make an extra few thousand dollars per vehicle to pay for their liabilities. Tesla gets to start from scratch with a clean slate. That just having a clean slate is such a huge advantage these days is revealing in itself. Combined with ludicrously generous crony subsidies, it makes a strong case for his special, inimitable position.

Furthermore, in addition to not being saddled with the unions and all those pension liabilities to former workers, he’s got another advantage which accrues to any new company in an established sector, indeed one the big Silicon Valley companies have conspired among themselves to avoid by means of forming a labor-market demand-side cartel.

I’m guessing a lot of your work environments are a lot like mine, where compensation is fairly flat and compressed and bears little relation to ones marginal productivity in the short term, despite everyone knowing informally who is really pulling the weight. In the long term high performers are rewarded with promotions, but this suffers from Peter Principle problems, and anyway only works in tall hierarchies. There is a new employee where I work who is getting paid nearly as much as I am, but who is doing 20% of the work, because he is a moron, but he beats everybody in seniority, which is, alas, how the system works. He won’t get promoted, but in a way that’s almost worse, since the good performers will leave the job and people like him will stick around, lowering average productivity.

Everybody I know has lots stories like these.

So that creates another kind of obvious arbitrage opportunity. Maybe “Productivity Correlation Arbitrage.” If one could only pick one good manager in a unit or office, tell him he must fire 60% of people, and that he has unlimited authority to fire anyone he wants, and those he retains will get paid double so long as all the work gets done, then I have no doubt that the company and everyone left will be much better off.

Some seasonal companies actually do something like via over-hiring, automatic attrition, and selective rehiring. I had an uncle-in law who worked a job like this on the Alaskan oil fields and called it something like an “underbrush fire” that left all the big timbers standing.

But most mature organizations, especially those saddled with strong unions, can’t legally or practically manage anything remotely approaching this kind of ruthless culling.

But if a new company can poach a few good managers with the special inside knowledge needed to be future poachers of more good people, then your new company can start off with much better people producing much more value and for only a little more money. Is Tesla doing this too? That’s pretty smart, and it seems to borrow from some insights that may have been gained from Silicon Valley experiences.

Hmm… something to think about.

Jordan Peterson interviews James Damore

Wednesday, August 9th, 2017

Jordan Peterson interviews James Damore on his memo regarding Google’s diversity programs and their overweening ideological basis:

Peterson provides some links to the pertinent hate facts:

Sex differences in personality:

http://bit.ly/2gJVmEp

http://bit.ly/2vEKTUx

Larger/large and stable sex differences in more gender-neutral countries: (Note: these findings runs precisely and exactly contrary to social constructionist theory: thus, it’s been tested, and it’s wrong).

https://www.ncbi.nlm.nih.gov/pubmed/1…

https://www.ncbi.nlm.nih.gov/pubmed/1…

http://bit.ly/2uoY9c4

(Women’s) interest in things vs (men’s) interest in things:

http://bit.ly/2wtlbzU

http://bit.ly/2fsq7Ru

The importance of exposure to sex-linked steroids on fetal and then lifetime development:

http://bit.ly/2vP0ZLS

Exposure to prenatal testosterone and interest in things (even when the exposure is among females):

http://bit.ly/2wI28RE

Primarily biological basis of personality sex differences:

http://bit.ly/2vmtSMs

http://bit.ly/2uoPzy0

Status and sex: males and females

http://bit.ly/2uoWkMh

http://bit.ly/2uoIOw8

http://bit.ly/2vNzcL6

To quote de Bruyn et al (first reference on status and sex, above): high status predicts more mating opportunities and, thus, increased reproductive success. “This is true for human adults in many cultures, both ‘modern’ as well as ‘primitive’ (Betzig, 1986). In fact, this theory seems to be confirmed for non-human primates (Cheney, 1983; Cowlishaw and Dunbar, 1991; Dewsbury, 1982; Gray, 1985; Maslow, 1936) and other animals from widely differing ecologies (Ellis, 1995) such as squirrels (Farentinos, 1972), cockerels (Kratzer and Craig, 1980), and cockroaches (Breed, Smith, and Gall, 1980).” Status also increases female reproductive success, via a different pathway: “For females, it is generally argued that dominance is not necessarily a path to more copulations, as it is for males. It appears that important benefits bestowed upon dominant women are access to resources and less harassment from rivals (Campbell, 2002). Thus, dominant females tend to have higher offspring survival rates, at least among simians (Pusey, Williams, and Goodall, 1997); thus, dominance among females also appears to be linked to reproductive success.”
Personality and political belief

http://bit.ly/2hJ1Kjb

http://bit.ly/2fsxIzB

http://bit.ly/2fsILJd

http://bit.ly/2uoPS87

http://bit.ly/2ftDhOq

Conscientiousness associated with conservatism; neuroticism and agreeableness with liberalism: http://bit.ly/2wHNA4r
Occupations by gender:

https://www.dol.gov/wb/stats/occ_gender_share_em_1020_txt.htm

Electron rockets and Rutherford engines

Sunday, July 30th, 2017

At 18, Peter Beck strapped a rocket engine to his bike. Now he’s taking on SpaceX, with smaller, even less expensive rockets:

In 2007, New Zealand’s government let Beck take over a floor, rent-free, at the lab where he’d been working. He now had access to high-end equipment, but he needed money to buy other gear. So he called Mr. Rocket — real surname, first name Mark — a wealthy internet entrepreneur and fellow Kiwi whom Beck had heard on the radio talking about his interest in space. Beck arrived at their meeting with a proposal to launch a cheap rocket every week. Rocket was intrigued enough to start making calls. “When I was pitching the idea to my lawyer and accountants, there were some raised eyebrows,” he says. “It seemed like an easy way to get rid of a bunch of money. But Peter had engines he could show me, and we shared the same vision.”

Beck raised $300,000 from Rocket and some family and friends, then spent two years building a prototype. In November 2009 he and two new hires unveiled the Atea-1 — a nod to the Maori word for space. He arranged to launch the 20-foot-long rocket, which weighed only 130 pounds, from a pad on Great Mercury Island, co-owned by a businessman named Michael Fay.

[...]

Since that first triumphant test, Rocket Lab has become a lean, accomplished builder. The company’s manufacturing facilities, a few low-slung warehouses in an industrial part of Auckland, have a giant assembly area for its Electron rockets and rooms where software engineers fine-tune its Rutherford engines, which are named after the New Zealand-born physicist Ernest Rutherford. Rocket Lab conducts engine tests a few miles away, in a patch of pasture near the Auckland airport. Things have gone awry on occasion — like the time a wayward igniter caused a bush fire that shut down the airport — but on the whole, the company has progressed much faster than typical aerospace startups. It has raised $148 million to build out its operations and is valued at more than $1 billion.

There’s a degree to which all viable rockets are the same: thin, metal tubes packed with as much explosive material as physics will allow. Rocket Lab’s primary innovation was to opt for carbon fiber over aluminum, which makes the Electron much lighter than competing models. It’s also much smaller — a sleek, black 56-by-4-foot shell with nine Rutherford engines at the base. SpaceX’s workhorse, the Falcon 9, is 230 feet tall and 12 feet across, and can take a 50,000-pound payload into low Earth orbit, compared with the Electron’s 500-pound limit. Rocket Lab charges just $5 million per flight, though, while SpaceX charges $60 million.

Beck’s goal of launching at least once a week is also more ambitious than SpaceX’s once a month. His target is made more plausible by an additional innovation: Rutherford engines are among the first to be almost entirely 3D-printed, which means more of their parts are fused together and don’t need to be assembled by hand. This lets Rocket Lab build engines practically at the press of a button.

The company will also be able to launch more frequently because it has a private facility — a rarity in the aerospace industry — on the eastern coast of New Zealand’s North Island. Launch Complex 1 sits at the pointy edge of the Mahia Peninsula. The setting is stunning: a 26-by-26-foot launch pad, surrounded by the grasslands of the 10,000-acre sheep and cattle farm from which Rocket Lab leases its land. All of this is positioned atop a plateau that gives way to sheer, rocky cliffs that drop to a beach and open up to the turquoise ocean. Decades ago, Europeans and Americans had whaling stations here; during World War II, American troops practiced beach landings nearby.

[...]

That Peter Beck and New Zealand have been at the forefront of it all has been unlikely, to say the least. But Beck’s lack of formal training and his home country’s remoteness gave him a unique vantage from which to reimagine the rocket business.

Amazon is just beginning to use robots in its warehouses

Saturday, July 8th, 2017

Amazon is just beginning to use robots in its warehouses and they’re already making a huge difference:

Amazon acquired Kiva for $775 million in 2012 but only started using the orange robots in its warehouses in late 2014. The deal was expected to make inventory management more efficient. It’s now beginning to become clear by how much.

The “click to ship” cycle used to be around 60-75 minutes when employees had manually to sift through the stacks, pick the product, pack it, and ship it. Now, robots handle the same job in 15 minutes, according to a Deutsche Bank note published Tuesday (June 14) based on Amazon’s metrics.

These robots are not only more efficient but they also take up less space than their human counterparts. That means warehouse design can eventually be modified to have more shelf space and less wide aisles. At the end of the third quarter of 2015, Amazon was using 30,000 Kiva robots across 13 warehouses. Each Kiva-equipped warehouse can hold 50% more inventory per square foot than centers without robots. In turn, the company’s operating costs have been sliced by 20% — or almost $22 million — per warehouse.

If Kiva robots are dispatched to the rest of the 110 Amazon warehouses, the tech giant could save almost $2.5 billion, according to Deutsche Bank. However, since it takes $15-$20 million to install robots in each warehouse, the one-time savings is expected to be closer to $800 million.

Disney’s biggest business is cable TV, for now

Friday, July 7th, 2017

Disney’s biggest business is cable TV, and kids are tuning out:

The troubles are twofold: a lack of hits and the broader move by audiences away from traditional television to digital alternatives. The shift to streaming services such Netflix Inc. and web-based platforms like Google’s YouTube is particularly pronounced among younger viewers targeted by these Disney networks.

[...]

Disney Channel programming is focused on children, while Freeform, which changed its name from ABC Family in January of 2016, is aimed at teenagers and young adults.

Cable TV has long been Disney’s biggest business, accounting for 30% of its revenue and 43% of profits last fiscal year. About 26% of cable revenue and profits come from entertainment networks like Disney Channel and Freeform, Morgan Stanley estimates, while the rest is generated by ESPN. (Disney doesn’t disclose the breakdown).

[...]

Also at stake for Disney is the exposure its TV channels offer for toys, clothes and other products that the company relies on for hundreds of millions of dollars annually in revenue.

As consumers “cut the cord,” Disney’s once fast-growing cable business has slowed down. Cable revenue is flat and operating income down 6% in the first half of the current fiscal year, which has alarmed Wall Street.

Disney Chief Executive Robert Iger has said that strengthening online accessibility for television programs is a priority and that the company is preparing to offer its channels, in part or whole, directly to consumers online rather than just through costly cable packages.

[...]

For the first six months of this year, the commercial-free Disney Channel’s ratings among in its core 2-11 and 6-14 demographics fell 23% in prime time and 13% and 18%, respectively, during the full day, compared with the same period a year ago, according to Nielsen. Ratings are also down at the smaller Disney Jr. and Disney XD networks, which fall under Mr. Marsh’s Disney Channel umbrella.

Have parents caught on to how Disney’s “family friendly” programming consists largely of bullying followed by laughter?

A quick stroll through grocery-store history

Wednesday, June 28th, 2017

Gary Hoover takes us on a quick stroll through grocery-store history:

By 1912, America’s first great retail chain, the Great Atlantic and Pacific Tea Company (“The A&P”) had 480 stores spread across many states. The founder’s son John Augustine Hartford thought the highly successful company could do better if they lowered prices, but his father and conservative brother would not hear of it. Finally, he wore them down and they said, “Ok, you can open one of your cheap store ideas a few blocks from an A&P. But you cannot call it A&P and you can only have $3,000 with which to open the store.” They figured this would prove the stupidity of his “Economy Store” concept. Within months, the regular A&P around the corner had to close as customers loved the new concept. By 1927, only fifteen years later, A&P had opened 15,671 of these little stores, sometimes just a block apart in major urban centers. By 1929, the A&P had become one of America’s first companies to achieve $1 billion in annual revenue. The largest retailer in the land, these revenues were greater than those of #2 Sears, Roebuck and #3 FW Woolworth combined.

Despite this huge success, the A&P was not without competition. In 1929, Kroger of Cincinnati, Safeway of San Francisco, American Stores of Philadelphia, National Tea of Chicago, and First National of Boston operated an additional 14,188 stores. Grocery chains represented 4 of the 10 largest retail companies in America.

Then, on August 4, 1930, Michael J. Cullen opened his King Kullen store in Jamaica, Queens, New York, generally accepted as the first true supermarket. Cullen, a veteran of A&P and Kroger, had tried to convince the leaders of Kroger to try his new idea, described as “a new type of food store with a focus on low prices, cash sales, and without delivery service, in larger stores (at low rents) with ample parking.” These were to be “monstrous” stores, about forty feet wide and hundred and thirty to a hundred and sixty feet deep, located one to three blocks off the high rent district with plenty of parking space, to be operated as a semi-self-service store — twenty percent service and eighty percent self-service. Cullen suggested that this new type of store could achieve 10 times the volume and profits of the average Kroger or A&P. But his letter never even made it to the head of Kroger, as the chief’s lieutenants knew the idea was crazy.

But it wasn’t crazy. King Kullen and others around the nation added meat and produce to the standard mix of “dry groceries,” added parking, but most of all deep discounts. Others followed Cullen: two years later, Big Bear opened in New Jersey in the former Durant auto factory, its single store doing the revenue of 100 A&P’s.

Within a few years, the industry leaders woke up to the new concept. In 1937 A&P, ever ready to evolve under the same brilliant John Hartford, began closing its tiny stores and replacing them with the new “giant” supermarkets. In just thirteen years, by 1950 A&P had dropped from more than 14,000 stores to just over 4,000, but their revenues rose from $800 million to $3 billion. In 1955, 11 of the 25 largest American retailers were grocery store chains.

During the 1960s, the new concept of the discount store — general merchandise but no food — spread across America. Over time, many retailers attempted to integrate general merchandise with food: Walgreen’s and St. Louis’s Schnuck’s grocery chain, Skaggs/Albertson’s from the western US, Kmart and Detroit’s Allied Supermarkets, and others tried to make it work, with mixed success at best. Weekly “convenience goods” shopping for low margin groceries did not fit with the less frequent and more leisurely “shopping goods” trips for clothing, home furnishings, hardware, and other categories. The industry mentalities and restocking processes were radically different. A few regional firms made it work — Schwegmann’s in New Orleans, Meijer’s Thrifty Acres in Michigan, and Fred Meyer in Oregon. But none of the industry giants could figure it out.

Fast forward to 1987. Booming discount chain Walmart — still smaller than Sears or Kmart — opened an experimental store combining the general merchandise (non-food) that it knew well with groceries, a new category in an already fiercely competitive field. The store was called Hypermart USA, modeled on the “hypermarches” which were sweeping through Europe, led by France’s Carrefour. The store did not work and was soon closed.

Nevertheless, ever-experimenting Walmart opened its first “Supercenter” the next year (1988) in Washington, Missouri. This time it worked. For the next several years, the company gradually replaced most of its discount stores with the new food and general merchandise combination stores. As of January 31, 2017, there were 3,522 Walmart Supercenters in 49 of the 50 U.S. states, the District of Columbia, and Puerto Rico. Everywhere but Hawaii. Walmart is by far the largest food retailer in the world, with revenues almost twice those of runner-ups France’s Carrefour and Britain’s Tesco combined. Kroger remains the largest pure food chain in the US, and the only company to finish among America’s top ten retailers ever since 1929, a remarkable record in itself.

Yet another breakout of the 1970s and 1980s was the invention of the warehouse club with Sol Price’s Price Club in San Diego. Costco and Walmart’s Sam’s Club came along soon after. Costco later acquired the original Price Club organization. No retailer in American history has lived with such low profit margins as these stores, relying on membership fees for profitability (not unlike Amazon). Between 2000 and 2016, Amazon grew its North American revenue by $76 Billion, while Costco added $63 Billion.

Step ahead another 30 years to today. Convenience stores are getting a rising share of the food dollar, led by Sheetz, Wawa, 7-Eleven, and many smaller firms. Walgreen’s, in the 1970s a sleeping giant, and CVS, back then a small division of shoe giant Melville Corporation, are now adding more food on virtually every good street corner in America, often facing each other. Family Dollar, Dollar General, and DollarTree are adding stores and expanding in food. Aldi and Lidl are invading in spades. Those in the traditional supermarket industry in the “know” consider privately owned Publix, HEB, and Wegman’s as among the best in class — conclusions supported by surveys of customer loyalty and satisfaction.

According to Statista, in 2016 Walmart sold 17.3% of the food sold in America (excluding restaurants), followed by Kroger at 8.9%, Albertson’s/Safeway at 5.6%, Costco at 5.1%, Ahold Delhaize at 4.2%, Sam’s Club and Publix tied at 3.4%, HEB at 1.9%, Whole Foods and ShopRite at 1.7%, Target at 1.5%, Meijer at 1.4%, and Aldi at 1.3%. Further down the list were Trader Joe’s at 1.1%, and Wegman’s and Amazon tied at 0.8%. That is a LOT of upside for Amazon and the other tiny players, just as Whole Foods’ leaders realized 35 years ago.

Ceremony is central to the creation of civilization

Sunday, June 25th, 2017

Longtime friend of the blog Aretae has another book out. It’s called Ceremony: A Profound New Method for Achieving Successful and Sustainable Change:

Secreted away inside of weddings, graduations, religious services, and sporting events are powerful ceremonial techniques for dramatically increasing human performance — ways to increase productivity, strengthen relationships, and effectively manage change.

Ceremony is central to the creation of civilization. It is an intrinsic tool in religions, militaries, schools, and governments. Yet executives, entrepreneurs, and front-line managers cannot formally describe what it is, how it works, or how to leverage it in their organizations.

Surprisingly, ceremony as a conscious organizing strategy remains almost unknown in the business world. It has been ignored by an entire generation of business consultants. But there is hope. For two decades, the agile software development community has been quietly demonstrating the power of directed ceremony. In this book, we share insights gathered over the last two decades, first on agile software teams and later across entire organizations.

Does your staff come to work because they love what they do, or simply because they are paid? Ceremony builds a workplace people love.

Do people look forward to attending meetings, or do they sneak out of them at the first opportunity? Ceremony creates productive gatherings people want to attend.

Are you able to implement significant change rapidly, or do a whole generation of employees need to retire before real change succeeds? Ceremony enables quick, painless, and effective change.

Do you need to raise productivity, improve quality, and reduce costs, all at the same time? Ceremony is a strategy for doing all three. And it can be implemented in tiny, incremental, low-risk steps.

Ceremonial systems are humanity’s true heritage; rediscover their power.

Coal mines make expensive batteries

Tuesday, June 6th, 2017

The growth of not-so-on-demand renewable power sources has people looking at converting coal mines into pumped-hydro energy-storage systemes:

Compared with other types of energy storage, the underground pump concept is expensive but designed to last longer than a chemical battery.

The cost of the German system is about €2,750 ($3,075) per kilowatt-hour. New Jersey-based Eos Energy Storage, a cutting-edge battery company, offers a storage system powered by zinc-hybrid batteries for $168 a kilowatt-hour that can last around 20 years, according to the company’s director of business development, Charles Russell.

“The advantage of pumped hydro is that it’s high capex, but it’s there for 100 years,” said Gerard Reid, a founding partner at Alexa Capital, a London-based corporate finance firm specializing in energy technology and infrastructure.

The engineer’s report described the pump as “long-lasting and virtually maintenance free.”

But there is another problem affecting all types of power-storage systems. Even if an investor fronted the money to build the pump, the low price of electricity on both sides of the Atlantic would make it difficult to turn a profit. For the pump to make money, it needs wide spreads in the wholesale power market, so it can buy power when prices are low and sell when prices are high.

Right now, wholesale electricity is cheap pretty much all the time.

A cruise ship is not a democracy

Monday, June 5th, 2017

While cruising to Bermuda, Bryan Caplan concludes that cruise ships show the logic of open borders:

On a cruise ship, people of all nations — and all skill levels — work together. Top-notch pilots and mechanics from Scandinavia ply their craft alongside cabin stewards and janitors from the Third World. Via comparative advantage, their cooperation allows them to provide an affordable, high-quality vacation to eager consumers.

A Bastiat fan notes that a cruise ship is not a democracy.

China and Namibia are all-weather friends

Thursday, June 1st, 2017

Is China the world’s new colonial power?

China’s gravitational pull can be felt today in every nook of the globe. Few countries feel the tug more strongly than Namibia, a wind-swept nation with a population of 2.4 million — barely a tenth the size of Beijing’s — some 8,000 miles away from the Chinese capital. The desert where the Husab mine has materialized in recent years used to be known only for the presence of Welwitschia mirabilis, the short, droopy national plant that grows just two leaves — and can live for more than 1,000 years. Now, in little more than 1,000 days, China’s reach has spread far beyond the uranium mine.

Just north of Swakopmund, a Chinese telemetry station sprouts from the desert floor, its radar dishes pointing skyward to track satellites and space missions. Twenty-five miles south, in Walvis Bay, a state-owned Chinese company is building an artificial peninsula the size of 40 baseball fields as part of a vast port expansion. Other Chinese projects nearby include new highways, a shopping mall, a granite factory and a $400 million fuel depot. Chinese trade flows through the port: shipping containers filled with cement, clothing and machinery coming in; tiles, minerals and — in some cases — illegal timber and endangered wildlife heading out to China. The activity is so frenzied that rumors of a proposed naval base in Walvis Bay, though vehemently denied by Chinese officials, do not strike locals as implausible.

This small outpost offers a glimpse of what may be the largest global trade-and-investment spree in history. Driven by economics (a hunger for resources and new markets) and politics (a longing for strategic allies), Chinese companies and workers have rushed into all parts of the world. In 2000, only five countries counted China as their largest trading partner; today, more than 100 countries do, from Australia to the United States. The drumbeat of proposed projects never stops: a military operating base, China’s first overseas, in Djibouti; an $8 billion high-speed railway through Nigeria; an almost-fantastical canal across Nicaragua expected to cost $50 billion. Even as China’s boom slows down, its most ambitious scheme is still ramping up: With the “One Belt, One Road” initiative — its name a reference to trade routes — President Xi Jinping has spoken of putting $1.6 trillion over the next decade into infrastructure and development throughout Asia, Africa and the Middle East. The scheme would dwarf the United States’ post-World War II Marshall Plan for Europe.

China’s relationship with Africa goes back to the 1960s, when Chairman Mao Zedong promoted solidarity with the developing world — “Ya Fei La,” as he called it, using the first syllables for Asia, Africa and Latin America. Though it was poor and mired in the chaos of the Cultural Revolution, China won new allies in Africa by finishing, in 1976, a 1,156-mile railroad through the bush from Tanzania to Zambia. Aid continued to trickle in, but there were no other big projects for nearly 30 years, as China focused on building up its domestic economy, following its leader Deng Xiaoping’s prescription to “hide your strength and bide your time.” That ended in the 2000s, when Beijing, recognizing the need for foreign resources and allies to fuel its economic growth, exhorted the nation’s companies to “go out” into the world.

Today, if you take the red-eye flight from Shanghai to Addis Ababa, the Ethiopian capital, chances are you’ll be seated among Chinese workers heading to a construction site in oil-rich Equatorial Guinea, a cotton-processing plant in Mozambique, a telecom project in Nigeria. China’s trade with African nations has increased fortyfold in the past 20 years. The workers and migrants carrying out China’s global vision are now so ubiquitous in Africa — as many as a million of them, according to one estimate — that when my wife and I wandered into a Hunanese restaurant in Addis, the red-faced workers devouring twice-cooked pork blurted out: “Ah, laowai laile!” “Foreigners have come!” It seemed rude to point out that they were foreigners, too.

China’s advances have come as the West seems to be retreating. United States engagement in Asia, Africa and Latin America declined after the Cold War, when the regions served as proxies for superpower rivalries. China’s rise and the wars in the Middle East also pulled away resources and attention. And now, with Washington raising doubts about global agreements on issues like free trade and climate change, Beijing has more leverage to push its own initiatives and show its capacity for global leadership. President Trump’s disdain for the Trans-Pacific Partnership has already made Beijing’s trade proposals, which exclude the United States, more appealing. “In certain parts of the world, the relative inattention of the Trump administration is definitely creating an opening for China to fill,” says David Shambaugh, director of the China Policy Program at George Washington University and author of the 2013 book “China Goes Global.” But “China remains very much a partial power — and only offers other countries an economic relationship.”

Still, for a nation like Namibia, China’s pitches can be irresistible partly because they’re rooted in historical solidarity. Beijing backed the black nationalist movement’s liberation struggle against apartheid and its white South African overlords. Sam Nujoma, the leader of the South West Africa People’s Organization (Swapo), visited Beijing in search of guns and funds in the early 1960s. When Namibia finally claimed independence in early 1990, with Nujoma as president, China became one of its first diplomatic allies, pronouncing the two countries “all-weather friends.” (Beijing was also desperate for allies to break its diplomatic isolation after its violent crackdown on the 1989 democracy movement.)

I can’t help but think of Amy Chua’s World on Fire and its market-dominant minorities:

James and Rose are part of the early wave of Chinese immigrants who landed in Africa 20 years ago and never left. The Chinese diaspora has a long history of finding a foothold, and then thriving, in some of the world’s most remote places: I’ve bumped into Chinese merchants everywhere from the Arctic tundra of Siberia to mining towns in the Andes. In Africa, entrepreneurs like James and Rose found a new frontier with the space, freedom and opportunities that many early settlers saw in the American West. “My husband came to look at business here, and he fell in love with the wide-open spaces,” Rose told me. “But we’re still Chinese first and foremost.” Like many Chinese immigrants around the world, the couple began by opening a small mom-and-pop shop, filling the shelves with cheap clothes, shoes and bags shipped by container from China. Their store, James and Rose, still stands at a central intersection of Walvis Bay, even as their ventures have expanded to include a hotel, a restaurant, a karaoke bar, a massage parlor and a trading company. Today there are such Chinese-run stores in nearly every town in Namibia — and thousands more across Africa. On a recent Sunday in Windhoek’s Chinatown, where dozens of shops occupy a series of long warehouses in the city’s industrial district, Namibian families strolled the lanes, haggling over everything from knockoff Nikes and plastic children’s toys to solar panels and secondhand mobile phones. One man told me he liked the low prices, even as he complained about the goods’ poor quality — and the harm they did to the local garment industry. Wu Qiaoxia, a Chinese entrepreneur whose real estate business began with a simple store in the northern town of Oshakati, waves off such criticism. “Many Namibian children didn’t even have shoes before we got here,” Wu says. “The people here needed everything, and we sold it to them, cheaply.”

Money earned is a reasonable approximation of the value you’re creating

Tuesday, May 30th, 2017

Amazon is the most defensible company on earth — for not-so-obvious reasons:

It’s the fact that each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition.

I remember reading about the common pitfalls of vertically integrated companies when I was in school. While there are usually some compelling cost savings to be had from vertical integration (either through insourcing services or acquiring suppliers/customers), the increased margins typically evaporate over time as the “supplier” gets complacent with a captive, internal “customer.”

There are great examples of this in the automotive industry, where automakers have gone through alternating periods of supplier acquisitions and subsequent divestitures as component costs skyrocketed. Divisions get fat and inefficient without external competition. Attempts to mitigate this through competitive/external bid comparison, detailed cost accountings and quotas usually just lead to increased bureaucracy with little effect on actual cost structure.

The most obvious example of Amazon’s SOA structure is Amazon Web Services (Steve Yegge wrote a great rant about the beginnings of this back in 2011). Because of the timing of Amazon’s unparalleled scaling — hypergrowth in the early 2000s, before enterprise-class SaaS was widely available — Amazon had to build their own technology infrastructure. The financial genius of turning this infrastructure into an external product (AWS) has been well-covered — the windfalls have been enormous, to the tune of a $14 billion annual run rate. But the revenue bonanza is a footnote compared to the overlooked organizational insight that Amazon discovered: By carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation.

In the 10+ years since AWS’s debut, Amazon has been systematically rebuilding each of its internal tools as an externally consumable service. A recent example is AWS’s Amazon Connect — a self-service, cloud-based contact center platform that is based on the same technology used in Amazon’s own call centers. Again, the “extra revenue” here is great — but the real value is in honing Amazon’s internal tools.

If Amazon Connect is a complete commercial failure, Amazon’s management will have a quantifiable indicator (revenue, or lack thereof) that suggests their internal tools are significantly lagging behind the competition. Amazon has replaced useless, time-intensive bureaucracy like internal surveys and audits with a feedback loop that generates cash when it works — and quickly identifies problems when it doesn’t. They say that money earned is a reasonable approximation of the value you’re creating for the world, and Amazon has figured out a way to measure its own value in dozens of previously invisible areas.

But this much is obvious — we all know about AWS. The incredible thing here is that this strategy — in one of the most herculean displays of effort in the history of the modern corporation — has permeated Amazon at every level. Amazon has quietly rolled out external access in nooks and crannies across their entire ecosystem, and it is this long tail of external service availability that I think will be nearly impossible to replicate.