Old blaggers & secular stagnation

There’s a link between the Hatton Garden blag and one of the big issues of our time – secular stagnation.

The blaggers were all old men. Having learned the trade of robbing in the 70s, they stuck with it even though technical change has made their trade more difficult:

a decade or two ago, there was not the ANPR [automatic number plate recognition] or CCTV coverage there is now, and they would have had a better chance of getting away with it.

Most of us, though, are like the Hatton Garden gang. We’re one-trick ponies. Footballers and soldiers struggle to adapt when their careers are over just as cons find it difficult to go straight. Even those of us who do change careers – such as me when I moved from banking to journalism - do usually do so by redirecting our skills rather than learning new ones from scratch. You can’t teach an old dog new tricks.  

Human capital is a putty-clay technology: it might be malleable in our youth, but it’s more fixed when we’re older. Our skills, like many things, are path-dependent.

It’s not just people of whom this is true. It’s also true for companies. They too are stuck with the “core competences” they inherited from the past. As Jovanovic and Rousseau say, they have specific vintages of organizational capital. In fact, this might be even more true of firms than individuals: some key workers or managers have vested interests in doing things the old familiar and easy ways, and corporate groupthink breeds the “not invented here” syndrome.  

This traps them into particular technologies, which means that they find it hard to adopt new ones.  IBM, for example, was the dominant computer company in the 1970s, but it didn’t succeed in developing successful operating systems: that took a new company – Microsoft. Microsoft then didn’t develop a great search engine – but a new company, Google, did. And Google didn’t develop social media, but new companies Twitter and Facebook did.

The more “disruptive” new technologies are, the more likely it is to be that they’ll be implemented by new companies rather than incumbents: as David Audretsch has shown, this has been the case in recent years.  

It’s this that gives us creative destruction: if incumbents could easily adopt new technologies they’d survive and thrive during technical change. Sometimes, though, they don’t – and in fact, as Ormerod and Rosewell have shown, firms are often unable to foresee their demise.

All this helps explain three of the big questions of our time, which are tied up with secular stagnation:

 - Why are firms not investing much despite talk about the potential of robots and AI? One reason could be that they lack core competences in the new technologies. Worse still, they fear that future new firms, using even cheaper technology and greater skill, will undercut them.

 - Why are firms holding so much cash? One reason (of many) is that they know that they don’t know much about future technologies, but hope to acquire new small firms that do.

 - Why are share prices so low despite techno-optimism? One reason is that future technologies will be embodied by firms that don’t yet exist, whilst today’s incumbents might be the victims of disruptive change. Jovanovic and Greenwood have argued that one reason for low share prices in the 70s was that investors anticipated the stock market revolution. Even if you’d had perfect foresight of technical change in the 70s, you couldn’t have bought shares in Microsoft, Google, Apple or Amazon but you would have shied away from existing firms then for fear that they'd give way.  

Perhaps, therefore, today’s big firms have much in common with the Hatton Garden blaggers. They are sad old men used to ripping people off who find themselves trapped on the wrong side of technical change.

Comments

[Bob]

"Human capital is a putty-clay technology: it might be malleable in our youth, but it’s more fixed when we’re older."

That's precisely the sort of daft thinking that you hear from dyed in the wool socialists who have never dealt with staff in the lower end of the secondary market.

Very simply you cannot make a silk purse out of a sows ear. You can't fix things by putting on a few training courses. People don't work like that. Even for youth.

There are strict limits to fungibility. Ignore them at the higher skill levels as happened with 1970s style Keynesian injections and you enjoy your supply side inflation.

[aragon]

https://en.wikipedia.org/wiki/OS/2
OS/2 failed because IBM tried to regain control of the hardware with the PS/2 design. But read accidental empires.

https://en.wikipedia.org/wiki/Category:IBM_operating_systems

http://www.cringely.com/2013/02/04/accidental-empires-part-1/
Just keep selecting next (top of the text). (I have a 1992 dead tree copy).

Clayton M. Christensen is normally seen as the authority on innovation.
https://en.wikipedia.org/wiki/Clayton_M._Christensen

https://en.wikipedia.org/wiki/The_Innovator's_Dilemma
"First published in 1997, Christensen's book suggests that successful companies can put too much emphasis on customers' current needs, and fail to adopt new technology or business models that will meet their customers' unstated or future needs."

http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/#2715e4857a0b69ba8f884c53
"In the HBR interview, Palmisano reveals himself to be a true believer in maximizing shareholder value—the very idea that even Jack Welch has called "the dumbest idea in the world.""

The dumbest idea in the world seems to have a lot of current adherents, the dumbest idea in the world thy name is financialiastion.

[Bob]

"Why are firms not investing much despite talk about the potential of robots and AI? "

Lack of demand and cheap labour

[gastro george]

Bob is right. All the theorising about secular stagnation is just so much hand waving. It's lack of demand.

Re Microsoft and "developing successful operating systems" - well that would depend how you define success. It was successful in terms of money, but they've spent an awful long time writing very bad operation systems - it's just that they could use monopoly to squeeze out competitors. Microsoft have innovated very little.

[odeboyz]

British anti-intellectualism, short term dividend policies and risk aversion will get kicked into touch by highly motivated immigrants. Compare late 19th Jewish immigration and their impact! The last paragraph was a work of beauty.

[Dave Timoney]

IBM did "succeed in developing successful operating systems", most obviously for its mainframes, many of which are still in use. This might mean little to non-business users, but it's what made IBM financially successful and provided the base for its move into services in the 1990s (an example of corporate guided-evolution).

It wasn't disrupted by Microsoft, though it clearly underestimated the potential of PCs. It outsourced the provision of an OS for the IBM PC (which it saw as a cross between a mini and a terminal - i.e. an office machine) to Bill Gates, thereby adopting the contemporary best practice of experts who would later eulogise disruption. In a further irony, Microsoft didn't have an OS ready and had to buy-in a kernel from SCP.

Clayton Christensen's theories on corporate disruption have been extensively challenged on both theoretical grounds and his interpretation of the evidence. Jill Lepore's 2014 New Yorker article is probably the best known recent take-down.

http://www.newyorker.com/magazine/2014/06/23/the-disruption-machine

One reason why firms appear to be investing less is that the unit cost of investment has fallen as new tech has shifted in composition from hardware to software. This is a result of hardware commoditisation, the lower upgrade cost of software (due to frequency/ease), and the wider shift in the economy from manufacturing to services. In other words, exceptional productivity can give rise to the appearance of stagnation.

[gastro george]

"... unit cost of investment has fallen as new tech has shifted in composition from hardware to software"

I read somewhere that all you needed for a high tech startup was an Amazon Cloud account. Overstatement maybe, but the commoditisation of processing power is a thing.

[aragon]

Sorry but "exceptional productivity can give rise to the appearance of stagnation".

"If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck."

Whatever the criticism of C. M. Christensen,
(I enjoyed reading the article) he is still an authority in the field. Hard Disks are currently be disrupted and replaced with flash memory.

http://www.forbes.com/sites/davealtavilla/2014/05/29/seagate-drops-a-bomb-on-storage-industry-buys-lsi-flash-business-from-avago/#2715e4857a0b2939d1576051

"The storage market continues on its consolidation trend and today’s announcement that Seagate has moved in to acquire LSI LSI +% Accelerated Solutions Division (ASD) and Flash Components Division (FCD) from Avago, is more proof-positive that spinning media is steadily riding off into the sunset, while solid state storage continues to disrupt and revolutionize the industry from desktop to data center."

The story linked form the IBM article about C. M. Christensen's more recent thinking is instructive.

http://www.forbes.com/sites/stevedenning/2014/05/23/clayton-christensen-are-investors-bad-for-business/#2715e4857a0b765b8c232b88

"In fact, as Deloitte’s Shift Index has shown, the rates of return on assets and on invested capital of US firms have been on steady decline for over four decades and are now only one-quarter of what they are in 1965."

Definitely a duck!

Especially the link to the HBR article.
https://hbr.org/2014/06/the-capitalists-dilemma

"So, to come back to our central question (phrased in a new way): Why do companies invest primarily in efficiency innovations, which eliminate jobs, rather than market-creating innovations, which generate them?"

Which addresses the issue Chris raised.
The dumbest idea in the world, shareholder value, and the resulting financialisation.

[aragon]

Offshoring is the

http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/#2715e4857a0b4c3720a75ba2

The investment is taking place in China where they still make things.

"Take the story of Dell Computer [DELL] and its Taiwanese electronics manufacturer. The story is told in the brilliant book by Clayton Christensen, Jerome Grossman and Jason Hwang, The Innovator’s Prescription"

"Economists: Economists need to realize that merely adding up the numbers is not enough. They have to look at the meaning behind the numbers. When they trumpet their finding that "Chinese goods are only 1% of the U.S. economy", it’s akin to saying "we kept the house but gave away the keys."

Of course George Osbourne won't be happy until the Chinese have the house too.

[Dave Timoney]

@aragon, "If it looks like a duck, swims like a duck, and quacks like a duck ...", then it's probably an amphibious droid.

[Kaleberg]

You lost me at the IBM case.

IBM got out of the operating system business when it introduced its new PC because it was spending tens or even hundreds of millions of dollars fighting anti-trust suits and generally losing them. IBM had already been forced to license OS/360 to clone makers, publish its I/O bus specifications, and make a number of other concessions. The trial was still ongoing and costing them a fortune.

I was walking down Fifth Avenue, near St. Patrick's, and mentioned the IBM case to my friend. Some middle aged guy in an expensive looking suit jerked in horror. He interjected that he was a lawyer involved in IBM's defense and he had never in his life seen anything like this case. There were lawyers, platoons of lawyers, brigades of lawyers, armies of lawyers. The hierarchy went up and down with primary and secondary contractors arraying a mass of legal capability against the persistent and powerful government team and their private sector allies.

When the PC was introduced IBM was perfectly capable of producing an operating system for it. In fact, they even had an in house one for very early prototypes. The firm I worked with had early access to their PC as we were expected to have our software ready for the system release date. Basically, IBM threw that bouquet away like a bride finding a hand grenade among the flowers. Bill Gates, recognizing the precise nature of that bouquet jumped higher than any of the other brides maids and caught it. It had nothing whatever to do with technical competence, corporate sclerosis or the like.

IBM wanted out of the software business. They were tired of fighting their anti-trust case. Their legal fees were eating their profits.

You'll notice that IBM did pretty well as a systems integrator and software developer. Their AIX based workstations and the like were state of the art and followed industry standards assiduously. I had never seen a compiler cite chapter and verse of a language standards document before. Usually it's a casual "unknown variable" or the like, but here it was "Unable to resolve reference to variable subject to resolution rules in section 4.3.4B in context as described ..." It is possible that they did not fire everyone on their legal team.

[Kaleberg]

I should also point out that you underrate people. They may have areas of expertise, but I have seen lots of older techies make the move from analog to digital to integrated. You just have to hire them and pay them. As a bonus, you got war stories, like how communications worked at the Yalta Conference or how delicate Tiros satellites were inside.

Most of the complaints about older workers not being up to date in their skills is bogus. The problem is that older workers have a higher salary history. The fact that they are probably more productive having gone through several generations of technology and able to understand the background issues better than one lacking such experience means that it is often worth paying them more than a newcomer. A common refrain among older technical types is that most jobs don't require innovating, they are just memory exercises. You want people with scar tissue.

[rogerh]

If you were first in the market you built up an expertise and installed base of old troublesome junk and reluctant customers. At one time the competition would play catch-up while you got the second/third generation out there. Now there is no catch-up time, correctly designed technology works more or less straight off the designer's work station. So your good idea will be copied in a trice. Now we have a cat-and-mouse game - who moves first. This does not suit the British psyche, the swashbuckling days are over, the bean counters have won and they play a slow game.

Thinking of old ripoff artists make me think of politics. Mr Corbyn seems to be lifting the hood for a good look at the malaise. I suspect the more he looks the worse the situation appears. Mr Cameron however favours a quick paint job and a few bumper stickers. Takeover bid anyone?