Failures – exposed, reflected, considered

Posts Tagged ‘wall street

who rules the world?

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9th century Persian polymath Al-Khwārizmī needs credit. His treatise about linear equations was the most widely read in Europe during Middle Ages. “Algorithm” is a corruption of his name, referring to the decimal system from his book.

In 21st century, algorithms shape the world: “game of life,” robot-cleaners, algorithmic trading which runs 70% of Wall-Street (screwing it in 2010, Flash-Crash), e-commerce (a book “Making of Fly” being 23 million on Amazon), rental (60% of Neflix’s rental run by an algorithm), even Hollywood (an algorithm deciding which movies to produce) and health.

We have little idea about how much algorithms know/can do…

Written by Hayk

August 23, 2011 at 4:42 pm

Detroit’s 6 Mistakes and How Not to Make Them

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First Wall Street and now it seems GM and Chrysler came begging at the governments doors for additional $20+ billion dollars. What do they offer in exchange for this money? They want to give buyouts and early retirements packagesin their effort of cost cutting and layoffs. This means essentially that the two companies aim at reviving themselves the old, traditional way adding perhaps an edge of efficiency, leanness and flair of cautiousness in these new realities or do they offer a radical shift, a ideological quantum leap enabling reconstruction of an automotive industry that befits well the expectations, technological progress and strategic vision inherent in the 21st century?

GM and Chrysler so far seem to have chosen what is best characterised by Albert Einstein’s saying, “You can never solve a problem on the level on which it was created.”

Below is an illuminating piece on what (six) mistakes were made by Detroit industries during the 20th century from Umair Haque, one of visionary thinkers on this aspect. These errors, while allegedly bringing automobile industry to their knees in the 21st century, were largely paralleled, ideologically, by other mainstream industries of the 20th century.

1. Old rule: Choose evil. Industrial era business is unrepentantly and almost sociopathically evil: shifting costs onto others, while striving to internalize benefits. Detroit chose lobbying, marketing wars, and low-cost hardball – to always and everywhere try to socialize costs and privatize benefits. Never was this truer than Detroit’s lobbying against public transport throughout the 20th century. Why does public transport in the States suck? Because Detroit’s lobbying machine doesn’t.

New rule? Choose good. In the 21st century, every moral imperative is also a strategic imperative:doing good – for customers, employees, suppliers, or society – is a radical strategic choice that unlocks new pathways to innovation and growth. The opportunity cost of defending evil for Detroit was never learning how to choose good – and that’s a crucial mistake other auto players didn’t make. Tata chose to make a car that was accessible to the world’s poor. Porsche and BMW chose to invest in talent, people, and imagination. Honda and Toyota chose to invest in renewables and partnerships with the public sector. All opened new avenues to growth for an industry at the brink of extinction.

2. Old rule: Selfishness is self-interest.What’s strategic is supposed to be what’s in the firm’s self-interest. But how do we define self-interest? Consider for a second the fact that as recently as this year, Detroit’s lobbyists were hard at work, opposing stricter fuel efficiency standards. That’s 20thcentury self-interest at its finest – not authentic interest for one’s own long-run outcomes, but simply a childlike selfishness, both myopic and narrow, where cutting off the nose to spite the face is as rational as mutual nuclear annihilation.

New rule? Purpose is self-interest. The 21stcentury demands a more enlightened self-interest: one factoring in a longer timescale, fuller contingencies, and an honest and broad consideration of hidden and unintended consequences to people, society and the environment. When we understand all that, have begun to develop a purpose – a way in which we will change the world radically for the better. By confusing selfishness with self-interest, Detroit vaporized it’s own purpose – and will stay trapped in a wilderness of economic meaninglessess until it rediscovers it.

3. Old rule: Maximize destructiveness. The goal of orthodox strategy is to destroy the ability of others’ to imitate or commoditize you. And Detroit was a master of the art of destructive strategy: patenting, trademarking, and litigating; playing hardball to control distribution channels, defending brands with disproportionately steep marketing investment, and building entire new marques to gain share in key markets and segments. The point of all these tired, stale 20th century strategic moves was the same: strategy as an exercise in exclusion, isolation, and barrier-building.

New rule? Get constructive. True 21st century businesses can be judged in the blink of an eye: how intensely do they put the “co” in constructive? Can they let demand spark and fuel co-creation, can they co-produce from a pool of shared resources, are they capable of letting value activities be co-managed, are they tuned to cooperate? Detroit can’t get constructive because it’s spent the better part of a century playing the games of destructive strategy.

4. Old rule: Seek differentiation. When is a Jaguar really just a Ford? When it’s an S-Type. Under Alfred Sloan, GM famously organized itself divisionally – Pontiac, Buick, Cadillac… – for the sole purpose of differentiation. But industrial era differentiation is too often just skin-deep: the same lemons with slightly different marketing, distribution, and branding. So why pay a steep premium for a Buick if it’s just a Chevy with slightly nicer trim? Detroit discovered the hard way that in the 21st century, the concept of differentiation is increasingly stale.

New rule? Seek difference. Ultimately, the problem is simple: differentiation is about perception. Difference is about reality. People in the 21stcentury aren’t the zombified, braindead consumers of the 20th century. And so the 21st century demands not mere differentiation – a bean counters’ eye view of the world if ever there was one – but true difference. True difference is built by making different choices from the ground up – different in the very essence of the value activities that make the wheels of production and consumption spin. Porsche and BMW strove for difference – not mere differentiation – and it is that choice that is at the heart of their global leadership of the automotive sector.

5. Old rule: Seek agility. Strategy is in many ways simply the avoidance of crisis – the evasion of threat, weakness, and vulnerability. The goal of strategy as the avoidance of crisis is simple: agility. Industrial-era corporations seek agility, in other words, by insulating themselves from real-world economic pressures – that’s what Detroit did bar none, by always seeking to game the system: lobbying, marketing, and wheeling-and-dealing it’s way straight into oblivion.

New rule? Seek crisis. By insulating themselves from real-world economic pressures, boardrooms also dilute and sap incentives for innovation and renewal. Detroit wasn’t innovating because the opportunity cost of strategy as gamesmanship was, ultimately, foregoing innovation itself. In the 21stcentury, gamesmanship – and its attendant dilution of incentives – is a sure path to near terminal strategy decay. Forget Detroit – just ask big music, big pharma, or big food.

6. Old rule: Advantage happens against. Orthodox econ holds that it is through the pursuit of competitive advantage that corporations create the most value most quickly and reliably. And that’s a mistake Detroit made to the hilt. It sought a nakedly competitive advantage – against suppliers, dealers, consumers, and society alike. The result is an industry crippled by structurally antagonistic relationships with labour, buyers, suppliers, consumers, and society alike.

New rule? Advantage happens for. Competitive advantage against bears a striking resemblance to simply bullying. Bullying is easy: just as in the sandbox, any boardroom with market power can jack up margins by forcing others – buyers, suppliers, consumers, society – to bear costs. But if every corporation across the economy is playing that game, the economy’s just a game of musical chairs.

Written by Hayk

February 20, 2009 at 11:21 pm

The greatest economic failure of 20th century

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The Great Depression has central place in twentieth century economic history. All other depressions and recessions are from an aggregate perspective little more than ripples on the tide of ongoing economic growth. The Great Depression cast the survival of the economic system, and the political order, into serious doubt. A serious recession in modern times would be when gross domestic product (GDP) falls by 3% or 4% over two years. Between 1929 and 1932 America’s GDP fell by 30%.

Winston Churchill was on a visit to New York in 1929 on one of the worst days for share prices. Churchill was surprised not to see more frenzy among the brokers until he was told that rules prevented them from running, shouting or gesticulating. Churchill did witness something, though, that has become part of the grim history of the era: a man jumping to his death from a nearby hotel window.

Three days — Black Thursday, Black Monday, and Black Tuesday — come to to describe this collapse of stock values. The initial crash occurred on Black Thursday (October 24, 1929), but it was the catastrophic downturn of Black Monday and Tuesday (October 28 and 29, 1929) that precipitated widespread panic and the onset of unprecedented and long-lasting consequences for the US. The unemployment rate rose above 25%, with little social protection for the victims. Workers were idle because firms would not hire them to work their machines; firms would not hire workers to work machines because they saw no market for goods; and there was no market for goods because workers had no incomes to spend. Furthermore, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many people in the region became unable to pay taxes or other debts and had to sell their farms for no profit to themselves.

The crash followed a speculative boom of the American economy that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market (in the period of 1923-1929 corporate profits rose 62%, dividends rose 65% and the average output per worker increased 32% in manufacturing), a significant number even borrowing money to buy more stock. The Roaring Twenties, as this period came to be known, was a time of prosperity and excess, and despite warnings against speculation, many believed that the market could sustain high price levels. The rising stock prices encouraged more people to invest; people hoped the stock prices would rise further. Speculation thus fueled further rises and created an economic bubble (at the market peak in September 1929 about 40% of stock market values were pure speculation). Shortly before the crash, Irving Fisher proclaimed, “Stock prices have reached what looks like a permanently high plateau.”

The euphoria and financial gains of the great bull market were shattered on Black Thursday, when share prices on the NYSE collapsed. Panic selling started. More than 12 million shares were traded in a single day as people desperately tried to mitigate the situation. This mass sale is often considered a major contributing factor to the Great Depression. The market lost $14 billion in value on that day. Some 9,000 banks, accounting for nearly half of America’s banking capital, failed in less than a year later.

The first instinct of governments and central banks faced with this crisis was to do nothing. Businessmen, economists, and politicians (Secretary of the Treasury Mellon who said ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate’) expected the recession of 1929-1930 to be self-limiting. They expected workers with idle hands and capitalists with idle machines to try to undersell their still at-work peers. Prices would fall. When prices fell enough, entrepreneurs would gamble that even with slack demand production would be profitable at the new, lower wages. Production would then resume. Except that this scenario never materialized. Stock prices fell on Black Thursday and they continued to fall, at an unprecedented rate for a full month, bringing the entire economy to its knees.

When politicians and businessmen finally decided to act, their actions plunged the country into a longer, self-sustainable crisis. They reacted by introducing protectionist policies such as the passage of the Smoot-Hawley Tariff Act (raising import tariffs – in average by 60% – on more than 20,000 items and causing protectionist policies in the rest of the world in retaliation) through the Congress (purportedly resulting from Republican policies in 1928), causing more harm than the crash itself.

In 1931, the Pecora Commission was established by the Senate to study the causes of the crash. The Congress passed the Glass-Steagall Act in 1933, which mandated a separation between commercial banks and investment banks. After the experience of the 1929 crash, stock markets around the world instituted measures to temporarily suspend trading in the event of rapid declines, claiming that they would prevent such panic sales.

There is no fully satisfactory explanation of why the Depression happened when it did. The causes of the Depression are still actively debated among economists due to lack of consensus in describing the causal relationship between various events and the role of government economic policy in inducing or preventing the Depression. Milton Friedman and Anna Schwartz argued that the Depression was the consequence of an incredible sequence of blunders in monetary policy. Another popular theory is that the Depression was caused when investors became fearful of their stocks as markets expanded some focus to Europe, which still had nations that were economically damaged from WWI (war-induced inflation, brief recession in 1920 and 1921, chronic overproduction of food and resulting low prices, nationalistic selfishness).