In praise of conventional thinking

When does innovation work and when not? I'm prompted to ask by Ed Smith's wonderful new book, Making Decisions, which argues for the need for"anti-processes", original thinking and spontaneity to resist "the slide into bureaucratic inertia":

If your decisions do not diverge from conventional wisdom in any important respect, you are failing to do your job. Indeed, you no longer have a job. You have a sinecure.

All this is good and true. Following process and protocols can degenerate into groupthink, cargo-cult decision-making, and an irresponsible deference to algorithms.

But, but, but. I read Ed's book whilst cryptocurrencies were collapsing: whilst Elon Musk was ruining Twitter; whilst we are still awaiting the "sunny uplands" of Brexit; and a few weeks after Liz Truss's promise of "doing things differently" ended in abject failure. All of which show that there's something to be said for cleaving to the conventional wisdom. As Edmund Burke said:

We are afraid to put men to live and trade each on his own private stock of reason; because we suspect that this stock in each man is small, and that the individuals would do better to avail themselves of the general bank and capital of nations and of ages.

Reinforcing this point, whilst reading Ed I was listening to a lot of J.S. Bach, whose life shows that great genius sometimes consists not in originality but in sticking to rules.

Economics, perhaps, offers more examples of what I mean. It's not clear that recent new economic thinking - be it DSGE models or MMT - is much of an improvement on the functional finance and structural models we had before the 1980s. A while back, the Guardian used to run tiresome articles calling for new thinking about economics, when what I suspect they meant was a return to old thinking.

Nor is economics alone here. In Science Fictions, Stuart Ritchie describes "a deep corruption within science itself", which has a "dizzying array of incompetence, delusion, lies and self-deception." Hence the replication crisis which seems to have afflicted most academic disciplines. "New thinking" is often bad thinking with dubious results.

All of which raises the question: under what circumstances should we stick to conventional thinking, and which not?

Of course, the best time to innovate is when there is cheap money and lots of mug punters. The collapse of cryptocurrencies is yet another reminder that actually-existing markets incentivize bad innovation rather than good.

That aside, there are, I suspect, four conditions when we should reject Burke and Bach in favour of Smith.

One is that the conventional wisdom is sometimes merely the groupthink of the privileged, who use it to entrench inequality. Talk of a "fiscal black hole" for example is used to justify otherwise questionable austerity, just as talk of incentives or deregulation (pdf) can be a ideological cloak for inequality.

A second is that the cliche is true: necessity is the mother of invention. Bach had such abundant resources of genius that he could create brilliantly within existing conventions; he didn't need to innovate. The rest of us, though, often aren't so lucky. Francis Spufford's brilliant Backroom Boys describes how British boffins in the mid-20th century developed space rockets and computer games with little budget and puny computing power.

Ed had to do something similar. In 2019 England lacked top-quality opening batters and so experimented with a big hitter, Jason Roy, at the top of the order. That didn't work, but the subsequent performance of England's openers suggests it was worth a try.

A more successful example of innovation in response to lack of resources was "moneyball". The Oakland Athletics' small budget for players led their manager Billy Beane to evaluate players on the basis of statistics rather than conventional coaching judgements which led (briefly) to the recruitment of undervalued players and an improvement in the team.

Economic policy also provides an example. The UK adopted inflation targeting in 1992 in a panic and pretty much as a last resort after previous "monetary anchors" such as M3 targets, shadowing the Deutschemark or ERM membership had failed. Until recently, it worked much better than its predecessors.

A third circumstance favouring innovation and thinking outside the box is when the environment changes. Cricket provides another example. Jonathan Liew describes T20 as "an entirely different sport now" requiring the "shedding the decades of ingrained cultural baggage." In T20, a team's most aggressive batter should be not in the middle order but an opener, simply because he can then potentially face more balls.

The environment, of course, also includes technological possibilities. These don't just facilitate new companies, but also new strategies. As Stian Westlake and Jonathan Haskel have pointed out, modern intangible assets make production much more scalable which enables a few successful companies to get very big - hence the emergence of superstar (pdf) firms.

We see - or should see - this in politics too. The genius of Blair and Brown was to see that changing socio-economic conditions after the 1970s required a new form of social democracy. Equally, though, economic changes after the 90s requires yet another rethinking of social democratic politics. Most Blairites and Corbynites are too tribal to see it, but in important respects Corbyn was the heir to Blair.

But there is a limit here. It's easy to see a changed environment when in fact there is only fashion. One of the surest ways for investors to lose money is to believe "this time is different". Which it rarely is. Conventional thinking, such as intelligent momentum investing, beats believing hype about new technologies.

We could add a fourth circumstance when thinking outside the box works. In strategic interactions, be it sport or business, it can give one an edge over one's opponents. Arsene Wenger's use of healthy diets and more overseas players gave Arsenal big advantages in the late 90s.

The problem with these, however, is that one's opponents quickly learn to emulate such innovations, thereby neutralizing them. Wenger's use of sports science became less help as other coaches copied him, and Billy Beane's moneyball became less effective as rival teams adopted his methods.

The point generalizes. William Nordhaus has shown that the profits to companies' innovative activities are usually tiny simply because new products and processes get copied, thus bidding away initially high profits. Sustainable high profits come from conventional thinking about how to hold down costs, preserve brand power and fend off competitors thus maintaining what Warren Buffett calls economic moats.

All of which is to merely regurgitate an old saying of Niels Bohr: the opposite of a great truth is another great truth. Whilst there is sometimes (occasionally) a case for original thinking it is also true that conventional ideas are sometimes conventional for a very good reason. Which vindicates Ed's point: we will always need a "human dimension" if we are to have a hope of distinguishing the two.

Comments

[Aaron Headly]

A slight tangent, but an interesting one to me, is that Beane's new approach was easily (and successfully) copied pretty quickly, which erased the advantage — for Beane.
The players that are considered ugly by the standards of baseball aesthetics but that now have prettier stats analysis continue to enjoy better paychecks and more playing opportunities than before thanks to Beane.
Result.

[ltr]

Equally, though, economic changes after the 90s requires yet another rethinking of social democratic politics. Most Blairites and Corbynites are too tribal to see it, but in important respects Corbyn was the heir to Blair....

[ Please explain this, since Blairites set out to ruin Jeremy Corbyn and have with repeated falseness managed to throw-out Corbyn from Labour. What was done to Corbyn was beyond disgraceful and wildly harmful when an alternative voice on UK policy was sorely needed. ]

[Ernie Bornheimer]

Seems like the "human dimension" could benefit from rules of thumb such as Chesterton's Fence.

[rsm]

Is it too scary to imagine improvising on Bach's compositions?

[James Woods]

Regarding your remark about science, I am aware of a replication crisis in psychology but not in the physical sciences. This is not to say the physical sciences don’t have their moments but the majority of findings are reproducible.

[rsm]

Were epicyclists easily able to replicate their failure to find parallax motion of the stars, thus proving that the earth could not orbit the sun? How do you know current measurements aren't supporting models just as wrong as the epicycle model?

Also see widely-eyed optimistic Feynman in Cargo Cult Science:

《Millikan measured the charge on an electron by an experiment with falling oil drops and got an answer which we now know not to be quite right. It’s a little bit off, because he had the incorrect value for the viscosity of air. It’s interesting to look at the history of measurements of the charge of the electron, after Millikan. If you plot them as a function of time, you find that one is a little bigger than Millikan’s, and the next one’s a little bit bigger than that, and the next one’s a little bit bigger than that, until finally they settle down to a number which is higher.

Why didn’t they discover that the new number was higher right away? It’s a thing that scientists are ashamed of—this history—because it’s apparent that people did things like this: When they got a number that was too high above Millikan’s, they thought something must be wrong—and they would look for and find a reason why something might be wrong. When they got a number closer to Millikan’s value they didn’t look so hard. And so they eliminated the numbers that were too far off, and did other things like that. We’ve learned those tricks nowadays, and now we don’t have that kind of a disease.》

[ltr]

Most Blairites and Corbynites are too tribal to see it, but in important respects Corbyn was the heir to Blair....

[ I have thought carefully about this, but still do not understand. Corbyn was all about traditional Labour and about dispute settlement in foreign policy. I find Corbyn completely different from Blair, and praise the difference.

Blairites maliciously set out to destroy Corbyn at a terrible cost to Britain. ]

[ltr]

Just finished "Making Decisions"; really excellent.

Thank you. Now to consider the "but, but, but" and this column again. My leaning however is that Britain is entirely beset by making self-defeating policy decisions and sorely needs a shaking. Where the shaking comes from is unknown to me.

[aragon]

Finance and Financial Innovation is an Oxymoron.

Finance should be about allocating scare resources to provide the best returns on those resources moderated by the desires of the public/consumers, as should Government.

Of course that description does not represent the reality of greed, power and fraud.

Leverage will just magnify your gains and losses (when the TSHTF: see Minsky) as it always does.

But Finance is too big to fail, unlike Energy which is more fundimental to our lives (but you need some knowlege of Physics to appreciate that truth), so must be rescued by the state, to rinse and repeat, at the expense of the non-financial economy. (aka the business cycle).

As for Warren Buffits moat, the only moat that matters is the Government.
In control of physical resources or imaginary (interllectual property), you only have a moat while the state says so (or geography dictates it).

https://finance.yahoo.com/news/warren-buffett-explains-moat-principle-164442359.html

Therefore the state detemines the inequality and distribution of wealth.

Of course our most recent example of financial excess is web3

https://g147.medium.com/introducing-web-3-0-an-arrogant-treacherous-successor-doomed-to-fail-8b90529bb7be

"In fact the entire Blockchain arena is filled with either delusional or degenerate people who are inexperienced &, in no way, better than their predecessors."

Blockchain is just a distributed database based on consensus, that uses electricty ot maintain a quorum (or proof of stake for etherum - what was FTX's stake? $16B to zero in days)

For more amusement see: https://www.web3isgoinggreat.com/

"Genesis warns of bankruptcy if they can't raise $1 billion"

But the interllectual pigmys in Westminster want(ed) the UK to be the best place to trade Web3 currencies and NFT's. (Currently offshore) and no doubt deposit protection insurance so the public can be on the hook when it fails.

Real innovation like the industrial revolution benifits society, like the industrial revolution and should not be captured by companies not even in patents (a 20 year monopoly of copyright a 140 year monopoly).

Like in I.T true innovation should be continious and give innovateorsa a dilema (Clay Christenson) and not specious like fashion which is just a rotation of styles and colours (but at least it doesn't need copyright of patents.

Moats are only demanded when innovation has slowed or ceased.

Which gives power to the moat builders, and why Britain circles the plug hole. Returns from FIRE (finance, insurance, real estate) and interllectual property are symtoms of stagnation and decline.

On immigration, recessions are supposed to lead to corporarte failure, and unemployment, freeing resources, Shumpters 'Creative distruction', So more workers are about to become available regardless of the wrechedness of thier situation.

Companies should have to compete for labour rather than economicly enslave the working class. But as the people at Newport Wafer Fab (NPWF) know the British Government, City and Management, are incompetent as so sell the silver to anyone with oil and gas or just about anything else.

So bankrupsy faces the NPWF like the rest of the UK economy, due to resource starvation and mismangement, as Finance lives high on the hog, with bonuses, deregualtion and fraud all backed by UK Government.

https://www.telegraph.co.uk/business/2022/11/21/microchip-factory-staff-accuse-shapps-putting-600-job-risk-blocking/

"Staff at the plant have said Nexperia’s ownership brought certainty, added 100 jobs and led to bonuses."

p.s.
(Right decision with regard NPWF as they can sink with the rest of us - the logic of the press gang).

p.p.s
How to win friends in the Plutocracy!

[aragon]

Philip Hammond was an investor, Rushi wanted the postoffice to issue an NFT.
Kier wouldn't know a blockchain from a padlock. Everybody from Regan to Trump have tried the tax-cutting (and failed, as has Neoliberalism in general).

Finance is Crypto Currency with deposit protection insurance and the Bank of England.

The household model of economic is conventional thinking.

Not all innovation is good, but lack of innovation is decline.

The pink paper:
https://www.ft.com/content/ac058ede-80cb-4aa6-8394-941443eec7e3

"The overriding goal of policymakers should be to keep crypto systemically irrelevant. The best way to do this is let it implode under the pressure of its unsafe and unsound business practices."

As for finance Glass-Stegal anyone?

Masters of the Universe - See Mr Robot series 1.

[aragon]

The economist on Crypto Currencies.

Is Crypto dead, as dead as a norwegian blue nailed to it's pearch.

https://en.wikipedia.org/wiki/Dead_Parrot_sketch

https://www.economist.com/leaders/2022/11/17/is-this-the-end-of-crypto?itm_source=parsely-api

Sorry FTX went from $32bn to bankrupt in days. SBF's personal wealth was $16Bn.

"The underlying technology continues to improve. An upgrade to Ethereum’s blockchain in September radically reduced its energy consumption, paving the way for it to handle high transaction volumes efficiently."

No, it just consolidates the control with whales, like SBF, and devn algorithmic stable coins?

"Stablecoins, which are meant to hold their value in real-world currency, should be regulated as if they were payment instruments at banks. "

Banks are only stable because they are made
so by the state and central banks, and the real economy behind them.

"For crypto to rise again, it must find a valid use that leaves the dodginess behind."

No it's turtles (fraud) all the way down.
Finish taking the Kool Aid.