Cyreenik Says
This thought was inspired by the 25 May 12 WSJ Intelligent Investor article, Could Computers Protect the Market From Computers? by Jason Zweig, which he starts with "The electronic markets keep getting their wires crossed—and investors are tired of getting shocked.
Two years ago, in the 'flash crash' of May 6, 2010, U.S. stocks lost $1 trillion in roughly 20 minutes. Two months ago, BATS Global Markets, which runs the third-largest stock exchange in the U.S., yanked its initial public offering when its electronic market couldn't smoothly execute trades in its own stock."
This and other articles describe how stock trading over the last decade has become decentralized, faster, cheaper and filled with a new style of surprise: sudden extreme price moves. Some of this decentralized trading takes place in new formal stock exchanges springing up around the world. Some is taking place in organizations that don't call themselves exchanges. The current term for these alternatives to recognized exchanges is "dark pools" -- so called because the activity isn't quickly or directly reported to other exchanges. This decentralizing trend has produced benefits and glitches, the iconic glitch being the above-mentioned flash crash, and more recently glitches in trading as BATS (ironically, one of the new electronic market makers) and Facebook IPO'd.
These glitches are "messing with the money", something that everyone finds scary. When people come to fear uncertainty, an instinctive response is to try and directly remove the uncertainty. When people get deeply scared by crime or terrorism, the instinctive response is, "We will start monitoring everyone and everywhere. When we are doing that, there will be no more scary surprises." When investors get deeply scared by market glitches, the response is similar, "We will start monitoring every transaction. When we are doing that, there will be no more scary surprises." This theme is the heart of the Jason Zweig article.
Sadly, this is an expensive non-solution in both cases. The real world and the financial world are both too big, fast moving, and complex to be monitored with 100% accuracy... and alertness. One of the biggest occupational hazards in any security monitoring system is boredom.
The alternative is to design for systems that are numerous, independent, and small scale. In such a design there will be glitches, but their impact will be much more limited because part of the design is that all the systems are independent. It's the difference between having a fire in one of a hundred houses, or in a single high-rise complex that houses a hundred families. One of these events is much scarier than the other.
Over the past two decades plastic grocery bags have become an icon for environmental correctness. To my surprise, as indicated by this 24 May 12 LA Times article, L.A. OKs ban on plastic bags at checkout, this symbol is still growing stronger. I find this symbol an odd one because, once they are in a landfill, plastic and paper bags both last centuries, and paper bags weigh ten times as much as plastic bags, so they are filling the landfills ten times as fast. But... the concept of "plastic" carries a lot of "problem with modern times" emotion, and that emotion dates back still another three decades, so green-sensitive people feel instinctively good about scoffing plastic grocery bags.
As a result we have in this incident a good example of a community government expressing a community emotion as a law. The hazard of this kind of feel-good law making is that it is distracting, wasteful and disenfranchising. If it is any of these, it's not making the community a better place to live. And it's not being green, either.
Compare this grocery bag banning business with this new way of presenting products introduced in Korea. This 2 Sep 11 Amusing Planet article, World's First Virtual Store Opens in Korea, talks about Homeplus, a large Korean retailer, opening a smartphone-oriented store in a Seoul subway station. (here is a video) The store has virtual shelves. "Seven pillars and six platform screen doors have been plastered with images of life-size store shelves filled with goods -- such as milk, apples, a bag of rice or school backpacks -- which each carry a small barcode. Shoppers download a related application on their smartphone and make purchases by taking photos of the barcodes. 'You place an order when you go to work in the morning and can see the items delivered at home when you come home at night,' said a spokeswoman for Homeplus." If this saves on inventory and shipping expenses, this is much greener than the shopping bag business LA's Greenies are enthusiastically supporting.
Comparing these two solutions to the grocery bag problem shows the kind of difference that using-head versus using-heart thinking makes. The moral: Using our tools well is going to make our living much greener than supporting urban legend does.
The 12 May 12 Economist article, Something to Watch Over Us, is an article about the seismic shift that is happening in space exploration because The Curse of Being Important is beng lifted. The various governments, looking for ways to be austere, are cutting back on Earth monitoring satellites.
At first glance this looks like a bad thing, but there is a bright silver lining to the dark cloud: the monitoring will be taken over by commercial interests in place of government interests. This is good because the funding will become more stable and goals for each launching will become less whimsical. As the article points out, "The scientists who have a say in setting the priorities for Earth observation often fixate on pet projects and new sorts of measurement, as scientists are wont to do; that can lead to the vital business of long-term monitoring getting downplayed. Co-operation and co-ordination between agencies and countries is not what it should be."
If there is the steady funding that comes from commercial operation of these satellites, the harsh reality of matching satellite goals to what people are willing to pay for will reduce this kind of capriciousness, and, ironically, the market for satellite launches will grow bigger and stronger as a result.
So, while it is a bit sad that governments are backing out of the space busines and the industry may shrink, that should reverse in about a decade or so. After that strong and growing commercial interests should grow the space industry to ten times what it is these days.
This is the virtue of losing The Curse and letting the invisible hand weave its magic.
This article was inspired by a 28 Apr 12 Schumpeter article Simplify and repeat, "The best way to deal with growing complexity may be to keep things simple."
One of the constant big challenges to operating any business is correctly answering the question, "What business are we in?" And ironically, the more successful the business, the more challenging this question becomes.
The challenge grows because with success comes both more resources to employ in the business and more trust -- the customers, investors, managers and community-in-general respect success -- when a winning team proposes new ways of winning, people around them pay sincere attention.
But the harsh reality is that, as Mr. Peter of "Peter Principal" pointed out, there are limits to competence. There are also limits to attention span. And with success is added the big hazard of delusion arising from the pride of previous success. And so, the challenge of answering this question well remains a big one, even in our modern times.
Dealing with this challenge is where the flexibility of enterprise becomes vital. Failure is as important to progress as success, and being able to change quickly away from failures is vital to progress.
All of the above is easy to say, but failure is painful. It's not fun to be on the bait side when cutting bait time comes. And at times like these human Stone Age instinct raises its ugly head. The usual complaint heard is that pulling back is "not fair" for one reason or many. When that complaint is backed up with rules and regulations that slow change, then expense is going up, progress is slowing down, and problem is not being solved.
It is at times like these that remembering the importance of simplification becomes an enormous cost saver. When the house of cards crumbles it's important to look beyond writing rules and regulations to keep that house from crumbling again. Learn Lessons, But Don't Write Rules! Instead be looking diligently for the house that's going to replace the now-gone one. It will be a much better house.
The Third Industrial Revolution: This insight was inspired by reading the 21 Apr 12 Economist with its special report on said revolution (here's the leader article). The writers have done a wonderful job of summarizing parts of this tsunami of manufacturing that will crash over all of us during the next two decades.
What is being described, what we are all going to experience, is a wave of disruptive technology. How we make things, how we interact with our working environment, how we interact with each other, how we find meaning in life... all these are going to change dramatically because how we make things is going to change so dramatically.
How this transition turns out is going to depend a lot on how communities react to these disruptions. Members can treat them as threatening and become obstructive, or they can go with the flow and work hard to make sure the changes are good for the community.
The most recent example of the world having a difficult time dealing with a big wave of disruptive technology is the first half of the 20th century. Starting with World War One in 1914 and continuing through the break up of the USSR in 1991, the various communities of Europe, Asia and America came up with some spectacularly wacky, expensive, and tragic ways of dealing with the disruptions of the Second Industrial Revolution. (which ideas were the wacky ones depends on your interpretation of the history of that time) But mixed in with all this tragedy was a huge amount of triumph -- all of us living in civilized communities live in a better world now than the one of 1900.
The world's time of troubles mentioned above is a big example -- big and complex. To make my point more clearly of how important our choices will be in the upcoming adaptation, I'm going to describe a smaller example with which I have some personal experience: the two Koreas following their split at the end of World War Two in 1945.
The Industrial Revolution came to Korea in the turn-of-the-century 1900's in the form of foreigners bearing high technology landing on Korea's coasts and telling Koreans what to do. This was far from the first time Koreans had experienced powerful neighbors telling them what to do, so the choices were pretty well rehearsed: either listen and adapt what was being offered to Korean circumstances, or reject what was being heard and put up a wall of "strong national will" to keep out the foreigners and their foreign ideas. Both concepts had worked in the past and both were advocated by different Korean ruling factions in that decade of 1900's as the tide once again loomed strongly. Nearest neighbor Japan adapted so quickly and strongly to industrializing that in 1905 they swept over Korea, colonized it, and declared, with the best of intentions, that they would assimilate it into greater Japan. And for forty years they worked hard at doing so.
Then in 1945 a historical accident happened. Korea was split between North and South as Japan surrendered to the US and Russia. Because of the split Koreans inadvertently were allowed to answer this question of how to deal with industrializing in two ways. The South Koreans, in part because of the large American military presence even after the Korean War wound down in 1953, chose to do the "embrace and adapt" experiment. The choice was not an easy one. There was a lot of unrest in Korea in the 1950's and a string of military dictatorships through to the 1990's to enforce the choice, but the South Koreans kept at it, and emerged into the 21st century as a developed, industrialized economic power. They had embraced and adapted and grew mightily in economic power and creature comforts for their efforts.
The North chose to pursue the "strong national will" side of the experiment. They pursued industrializing, but in a way that would not pollute genuine Korean culture -- as their community chose to define it. As the Korean War wound down in 1953, the Russians were distracted by the death of Stalin and the Chinese by pursuing their own industrializing, so they both were happy to pull out and leave the Northern rulers a free hand to run their side of the experiment. This choice was not an easy one, either, there was unrest, and a dictatorship set up to enforce it. The North Koreans also kept diligently at their choice, and emerged into the 21st century as impoverished but pure, in their minds.
In sum, it's been an interesting experiment, and the results have been dramatically different.
The moral of this tale is that as the world comes to grips with the upcoming Third Industrial Revolution, there is going to be a lot of uncertainty, a lot of unhappiness, spectacular advancements in how we humans live, and many hard choices to be made.
And, those choices will make a difference.
Just as North Korea and South Korea have transformed into dramatically different communities because of the choices they have made in how to second generation industrialize, so the various communities of the world will be dramatically affected by their choices in how to third generation industrialize. And the results of those choices are going to lead to dramatically different outcomes.
-- The End --