Finding Wisdom — Four novels by Nadine Gordimer

Nadine Gordimer passed away this year on July 14, 2014.  Rarely is there an opportunity for a gifted writer to be both brave and essential.  She was both of these throughout her 90 years.  Gordimer, of course, was a South African novelist and short story writer.  Her fiction dealt with the issues regarding race and the racial apartheid that defined South African society during a time when writing and openly speaking about such issues was forbidden.  She addressed these issues when similar regimes of apartheid, white supremacy, and racial segregation were in force elsewhere, most notably in the American South and in Rhodesia, thus her words spoke to millions beyond the borders of her native country, where many of her books were banned.  But she went beyond just writing, placing herself in jeopardy by joining the African National Congress (ANC) in support of overturning apartheid during a time when membership in that organization was illegal, participating in anti-apartheid demonstrations, and hiding ANC members in her home from the police who were sought for arrest.  She was close friends with the attorneys of Nelson Mandela’s defense team during his trial, helping him prepare his “I Am Prepared to Die” speech, which he gave during his defense in 1964.  Years later, after his release from prison, Gordimer was one of the first people Mandela sought out.

Gordimer’s fiction explores the society around her in a progression of discovery that I suspect very much traces her own intellectual and emotional progression.  She had begun writing when she was 15 years old, a largely isolated only-child of nurturing and protective parents.  By the time she was married for the first time and had her first child in her mid-twenties, she submitted one of her stories to The New Yorker and was published there for the first time in 1951.  Additional stories–which she continued to believe was the most essential fictional form for her time–and novels ensued; quite a number of them.

In her first novel, The Lying Days, which she published in 1953, we follow the growing awareness of a twenty-four year old woman by the name of Helen Shaw to the realities of both apartheid and the small town life–with its other prejudices and taboos–in which she lives.  It is in this novel that Gordmer’s keen eye for the essential truth of a matter and her ability to communicate it in her fiction was first revealed.  The vultures of South Africa hover everywhere, she wrote, over both the veld and the cities, and in doing so they look down on all of the people of the plain and the cities, both the rich and the poor.  In the city of Johannesburg and its outskirts where poverty tends to collect, as in all cities, there is that thing called charity.  But, she wrote, ”in South Africa there is one difference, a difference so great that the whole conception of charity must be changed.  The people…were not the normal human wastage of a big industrial city but…the entire black-skinned population on whose labor the city rested…too poor to maintain themselves decently because no matter what their energy, their skill, their labor was not allowed value above subsistence level.”  But if this were her only insight it would be slight indeed, but Gordimer plumbs the society around her with a keen eye for detail: the brute labor and hopelessness in working in the local mine, the Jewish boy who dare not talk of his identity or declare his love for Helen, the black girl with whom Helen befriends in university who cannot come to Helen’s home, and who would be turned away in any event by Helen’s parents.  Helen’s lover as young woman, Paul, works to provide some measure of human kindness to the poor of the city and is frustrated at every turn.  Through the eyes of Helen and the other characters in the novel we see a panorama of the conflicts and frustration that makes up South African society under its strictures and oppressive taboos regarding race, ethnicity, and religion.  From the outside–and now with the benefit of history–we can see that this is a regime that cannot hold.  But beyond a novel of ideas, the greatest sin that Gordimer committed as a member of that society in this first novel is what is essential to making a great writer, it is in humanizing her characters and bringing them forth as three dimensional, communicating to the reader that these people in their interactions have an internal life like our own, regardless of their skin color or their background.  To those conservatives and defenders of the social order in her own time, this was just the first of many sins should would commit.

In the story Occasion for Loving, which was published in 1963, is told by the observant third party.  In this novel Jessie and Tom Stilwell are part of the liberal intellectual class of South Africa, leading a comfortable suburban existence.  It is through Jessie that the story is told.  The Stilwells supplement their income by renting out extra space and in this case it is to newly married Ann and Boaz Davis.  Boaz is a composer but he has been suffering writer’s block and so is busy collecting and transcribing the native tribal music of Africa before it disappears.  He is also Jewish in a land hostile to Jews.  Ann, for her part, is open to experience and challenges convention at every turn.  She is a young English woman used to getting her way.  Into the picture enters Gideon Shibalo, a talented and passionate young African man who has received a fellowship to study painting in Rome, but who is denied a passport by the South African authorities.  The Stilwells and Davises feel for Gideon’s injustice.  The Stilwells, in particular, given their status live in a world where normal social convention doesn’t seem to touch them. They travel to the townships at will and have contact with the Africans in defiance of the authorities, supporting organizations to overturn apartheid.  Along the way Ann falls in with Gideon.  But this is not some esoteric societal transgression.  The relationship between Ann and Gideon is a political crime with serious consequences if they are found out.  It is hard to tell Ann’s motivation when she and her lover decide to run away together, whether her personal “occasion for loving” is due to her true feelings or some other high minded motivation to save the young man’s dreams.  And so it is with all of the characters and the tragedy which this story becomes.  They try to insulate themselves from their actions through intellectualizing their actions, refusing to see that “…Every contact with whites was touched with intimacy; for even the most casual belonged by definition to the conspiracy against keeping apart.”  In the end Ann is convinced by Jessie, who faces her own conflicts regarding her former first marriage, the child from that marriage, and her three children with Tom, to end the affair and return to Boaz.  In the end she is a realist regarding the difference between familial love and sexual love.  But Ms. Gordimer is not going to let her characters off the hook that easily, lest the book become another trivial potboiler.  She uses this form to explore the other aspects of the characters, the affair, and the larger context in which they occur.  Jesse may be a realist in matters of the heart, but can she really understand the motivation for the basic freedoms that Gideon is denied?  In the story’s “occasion for loving,” how complicit are the Stilwells and Davises, for all of their liberalism and moderation, in the oppressive and racist system that was South Africa?

A Guest of Honour published in 1970 garnered her the James Tait Black Memorial Prize, which was her first major literary award.  It tells the story of a British colonial administrator by the name of Evelyn James Bray.  Mr. Bray is a pariah among the white settlers of the colony that he serves because of his activism in favor of the black freedom movement, and is forced to flee as a result.  A while after these events, however, the colony is granted its independence and Mr. Bray is invited back to the new republic by its chosen president.  The president is Adamson Mwete, a popular and gregarious man who lives in poverty one day only to be propelled to the head of a new country the next.  His closest friend and advisor has been Edward Shinza, both an intellectual man and one who can turn thought into action.  The two men–Mwete and Shinza–completed one another, were opposite sides of the same coin, but when Bray returns he notices that Shinza has fled to the bush.  Bray, who initially takes a passive role in celebrating the newly independent state, is pulled into the events that now take on a life of their own.  For the differing visions of Mwete and Shinza play out across the country in real time.  Mwete believes that the state first and foremost must benefit in order for everyone to benefit, while Shinza sees the benefits of freedom needing to play out in practicality, changing the lives of the people for the better.  Mwete is the more adept politician and so overwhelms his old friend and ally.  In implementing his program, he outsources the country’s mines to foreign interests, with the state sharing in the profits.  The hitch is that the workers must accept lower wages and poor working conditions.  The unions are thus co-opted to enforce the will of the state, as is the former independence party apparatus.  The workers, who had been the vanguard of the independence movement, are suppressed.  As popular discontent grows Mwete enforces ever increasingly oppressive measures, creating a police state not so different from the one that existed prior to independence, tying himself closer to the empire from which the country fled.  Foreign interests are invited in to bolster the regime and the rich are allowed to keep their fortunes and rule over the wage earners, subsistence farmers, and the poor; tied as they are to the largesse of the state and foreign economic interests.  Soon the old revolution returns, the president flees to England, and foreign troops arrive to restore order.  The storyline in A Guest of Honour seems all too familiar today with the benefit of 44 years hindsight since its publication; similar stories having been played out across Africa and Asia.  It is the story of a revolution gone bad, of ideals betrayed to expediency, of greed, of human stupidity and ignorance borne of the desire to do good but without the tools or the knowledge to know how to go about it.  It is an indictment of paternalism, of colonialism, of economic imperialism, and the savage cruelty of the strong over the weak.  For Gordimer writing from the perspective of 1970, it is a warning–a cautionary tale–of how things could turn out in the wake of apartheid’s removal.  But it is not simply a didactic exploration of philosophies or politics or consequences.  The characters live and breath and–all too frequently–err, as those in all great literature do.

Gordimer’s 1974 novel The Conservationist won her the Booker Prize, the most prestigious literary award in England, the equivalent to the National Book Award in this country.  To many it is considered her masterpiece, though there are many candidates for that title.  The novel’s lyrical telling is much like an impressionist painting, allowing the reader to see details that are only faintly described, the colors and overall effect communicating more than the misleading simplicity of the subject matter.  The main character is a wealthy white industrialist from Johannesburg by the name of Mehring, and it through his perspective that the story is told.  He buys a 400 acre farm less than an hour from his work as a meeting place for his mistress, Antonia, and because the losses from the farm’s operations is a tax write-off.  In his mind he loves the land, but treats it as any other investment, viewing the productiveness of the cattle and cornfields as the ultimate measure of his stewardship while, at the same time, dismissing the concerns and well-being of the Zulu caretakers who run the farm.  The same can be said for all of the people in his life–he is disconnected from them and sees them only in terms of his holdings or what they offer him, in particular the need for young women to feed his sexual appetite.  The farm’s foreman, Jacobus, finds a dead body on the farm.  The police are called but the deceased man is black, and so the circumstances of his death are of little official concern.  The police bury the body where it is found.  This knowledge haunts Mehring throughout the novel.  The story, of course, is allegory, but one that contains a great deal of psychological wisdom and human insight.  It deals with the immediate issue of apartheid but it reveals much about human nature.  In the mind of Mehring we find a man whose self-image is driven by wanting to be seen as doing the “right” thing, of being a “proper” human being (one cannot characterize the self-interest he seeks and which is his central defining characteristic as “good”), at least in his mind’s eye.  That the language and perceptions of a racist and materialist worldview color his perspectives does not in the least come to mind.  For all of his wealth and internal drive there is little self-reflection or self-awareness.  It is only when the body of the unidentified black man is exhumed by a flood and he witnesses the black farm hands burying the man as if a relative that he feels his own isolation.  But that is the condition of all who would be rulers of a kingdom, even the petty ones of our own times.

In her overall body of work, for which she received the Nobel Prize in 1991, Nadine Gordimer challenged in her writing not only apartheid but all forms of oppression.  Her books are both cleared-eyed and brutally honest.  The wisdom to be learned from her body of work sits not in the polemics of freedom, but into the insights of how people come to terms with a great evil.

There are other works that I could have chose aside from these four.  There are her works that were famously banned in her native country:   A World of Strangers (1958)which tells the story of a white South African man who witnesses the brutality of apartheid and is force by conscience to join an organization like the ANC.  The novella, The Late Bourgeois World (1966), which was banned for a decade, directly attacks the privileged white suburban life upon which the slavery and repression of the black majority is based.  Burger’s Daughter (1979) about the daughter of a Communist activist in South Africa in the wake of her father’s death.  July’s People (1981) banned during the apartheid and post-apartheid period, in which she imagines a black revolution turned oppressive against white people, an upside down apartheid.

There are also the more recent novels.  A Sport of Nature (1987) about an angry young woman without a cause who is caught up in the politics of South Africa without being emotionally touched by them,  The House Gun (1998) explores the psychology of seemingly reasonable people who are forced to face the reality of their lives from a single act of violence.  The Pickup (2001), about the challenges of two lovers from different cultures without a country.  No Time Like the Present (2012), which chronicles the struggle of life in South Africa after the struggle.

In all of Ms. Gordimer’s works there are connections that tie people together even under a system of forced separation, though the psychological barriers of separation are just as real.  In the end, no matter what kind of justifications are built to separate people or that people use to insulate themselves or their tribe or their identify, the fact is that we are all connected in some way for what happens in the world around us.  Her writing attacks prejudice wherever it tries to hide, whether it be in others or in ourselves.

In thinking about the significant body of work left by Nadine Gordimer–for the short stories and short story collections, which I haven’t addressed here, are significant–I am struck by the fact that the American South never produced an author of the same stature in dealing with the defining evils of segregated southern society.  Certainly no one that combined Gordimer’s bravery, conviction, and writing talent.  Instead, we are left with only the alcohol-infused paternalist voice of William Faulkner, who dealt with issues of “miscegenation” early, but the oppression he witnessed is chronicled only obliquely, writing directly about what went on as a matter of course only once:  in his excellent Intruder in the Dust.  There are fairy tale stories and domestic concerns of Eudora Welty, the southern gothic of Carson McCullers, and the apologists like Robert Penn Warren (later reformed),  and Elizabeth Spencer.  Harper Lee, a southern expatriate, gave us To Kill a Mockingbird and nothing else.

This is not an indictment, necessarily, of American southern literature.  Certainly the effects of Jim Crow and the Black Codes have been told by African American authors (James Baldwin, Ralph Ellison, and others) and the occasional works of white southerners (such as William Styron) to great effect–and there are certainly other aspects of living in the American south.  But I find it interesting that the one voice during a significant period in our own history that consistently spoke against racial prejudice and oppression and the blind spot that societies construct to mask its effects and beneficiaries–and which appeared regularly in publications like The New Yorker–came from a South African author.  For this we owe a great deal of thanks to Nadine Gordimer.

Saturday Music Interlude — Three from London Grammar

London Grammar consists of vocalist Hannah Reid, guitarist Dan Rothman, and multi-instrumentalist Dot Major.  Out of university from Nottingham, U.K., Reid and Rothman met in the dorms and began recording and posting their music on-line.  “Hey Now” became an internet viral hit in 2012 and they released a debut album in 2013.

Their music is dominated by the emotive voice of Reid, whose powerful vocal instrument always stays in the foreground but is supported and propelled effectively by both Rothman and Major.  The three acting in empathy effectively mine the emotional potential of each song.

The following two videos from WFUV showcase the band’s raw talent in an organic, unproduced setting.  Their version of Chris Isaak’s classic “Wicked Game” performed here is a their performance evokes both the sorrowful reflection and obsessive passion expressed in the song’s lyrics, though it is apparent that “Hey Now,” a self-penned song, possesses more urgency and passion in the minds and hearts of the artists.

Finally, here is their most recent official video which most effectively displays the band’s potential backed by full instrumentation and with Reid’s disciplined but powerful vocals tested to their full range.

Doctor My Eyes — Excel is Not a Project Management Tool (and neither is PowerPoint)

This is not to disparage the utility of a good spreadsheet to take care of those transient requirements to take a bit of data from the reporting systems and to run some custom algorithms or trends to perform what-if or other one-off analysis.  Probably most of us do this occasionally.

What I am referring to is the condition in many organizations in which data that consists of information essential to business operations is kept and analyzed using spreadsheets or other flat delimited storage or text methods.  The issue here is the optimum use of information, which the use of Excel and PowerPoint does not achieve.  Before anyone thinks that this is a contrarian’s post that is critical of Microsoft products, one need only read the technical advantages of true relational database management systems that are managed by specialized language like MS SQL.  Each of these applications and products has their proper place.

I would prefer that this post would be unnecessary since the title should be considered self-evident at this point–it is very similar to a presentation I gave almost 20 years ago when still advising senior managers in the U.S. Department of Defense and the aerospace industry–but the facts tell us that it’s assertion not so self-evident.  For example, a survey of 262 financial executives by the Financial Executives Research Foundation and the staffing firm Robert Half in 2012 indicated that 64% of public and private companies in the U.S. still used spreadsheets and manual methods for their financial solutions.  In 2011 a study by the ERP company IFS found that “of more than 281 manufacturing executives, 75 percent of study respondents aged 35 and under report using desktop spreadsheet software like Microsoft Excel instead of their company’s ERP, customer relationship management (CRM), supply chain management (SCM) or other enterprise software” while “respondents aged 36 to 45, 58 percent said they would use desktop spreadsheet software instead of their company’s designated enterprise applications.”

There are certainly good reasons in each study that people sub-optimize in using their data.  First and foremost is the hassle and expense of the centralized IT office.  The same methods and organizations that secure data and are tasked with maintaining configuration control for the IT resources of an organization are the same ones that oftentimes tend to impede flexibility in the acquisition of needed digitized business process solutions.  Back in the 1980s as the PC began to displace the old mainframes run by the stodgy folks wearing white shirts, pen holders, and black glasses who had to be bribed, cajoled, and stroked in order to obtain processing time, access to archived data, or–heaven forbid–devise and run a program, a new world order was declared in which the centralized and non-responsive central IT office was declared dead forever.  Then digital crime raised its ugly head along with a cacophony of new products, some of which delivered on their promises, but most which did not.  Thus the need, once again, to bring some semblance of order to the chaos that incompatible and ineffective products (among other problems) wrought.  So IT has come full circle and we are back to highly bureaucratized IT organizations (or aggressive IT services companies) that in many cases will defend their turf ruthlessly, many times to the detriment of the interests of the organization.  Thus, people do what they have always done when inflexible rules get in the way–they find ways around them.  The most convenient way is to use the “legal” workaround, which is the spreadsheet, the Word document, or the PowerPoint presentation.  Along with being able to achieve what is needed without having to ask permission or miss a deadline, managers and employees oftentimes learn these basic applications first.  They are intuitive, readily available, and familiar.

The problem, of course, takes many forms.  The first is that manual methods are rife with errors.  In fact, study after study shows that almost 90% of spreadsheets contain errors.  In 2007 CIO Magazine published an article listing the eight worst spreadsheet errors of all time, highlighting the very real damage that relying on these methods have created to organizations and businesses.  And this was before the financial crisis revealed similarly large errors in the financial markets during the most recent housing bubble deflation and resulting Lesser Depression.

In providing project management solutions to my target verticals, the area most in need of remediation–and which presents the most immediate opportunity for return on investment, improving data and process credibility, and preventing fatal business errors–is in displacing those processes built around managing data using Excel, Word, and PowerPoint.  In identifying data that is most appropriate for moving to a relational database management solution, I have found that this data shares certain characteristics:

a.  The data is an element essential to decision-making and must therefore be credible.

b.  The data is an element essential to trend analysis, organizational history, or corporate knowledge.

c.  The methods and algorithms used in the data’s processing must be provide results that are repeatable and consistent.

d.  The various elements of data are interrelated and may originate from systems of record.

g.  The output from the processing of the data is essential to job of more than one person or one process.

h.  The time it takes to construct, maintain, update, adjust, and use the manual processing environment for the data greatly exceeds the marginal value of the effort that could be saved using more automated methods to achieve the same or greater results.  That is, replacing the manual and spreadsheet method of using the data results in greater productivity and either cost savings or work shifting to more productive tasks tied to project success.

As a localized tool or as an intermediate point of review for data residing in tables augmented by more robust automation, Excel has proven itself to be a workhorse.  For in-depth papers and extended communication Word is the appropriate medium and for presentations PowerPoint provides a good basis for simplified communication of an idea or set of ideas.  But for the processing and integration of enterprise data these applications are inappropriate–and can be quite damaging–to business operations.

Saturday Music Interlude — Tony Bennett and Lady Gaga in Brussels and in the Studio

There is not much more that can be said about Tony Bennett.  He is a living treasure.  Since “I Left My Heart in San Francisco” I have followed him on his musical odyssey and then later, as a man in my 30s, explored the rich musical legacy of his earlier years.  It is hard to believe that Tony Benedetto of Astoria, New York, is 88 years old.  The surprise for me on the duets these artists have performed is the wonderful instrument that is the voice of Lady Gaga (Stefani Joanne Angelina Germanotta of Yonkers, New York).  It is almost as if her musical career was destined to lead her to this album.  Her powerful voice is both expressive and enveloping, tuned perfectly to the tempo and the register of the music.  I am only disappointed that there is no video of “Lush Life” performed by Lady GaGa solo which critics have described as one of the best renditions of this difficult song.  This collaboration, which began life from a benefit concert in New York, plows no new ground for these jazz standards.  But big things always start out with small steps.  Lady Gaga has always been known for her ability to handle vocal gymnastics and jazz music is a gold mine of challenging songs that would suit her voice and attitude.

 

 

 

Family Affair — Part II — The Micro and Managerial Economics of Projects under Public Monopsony

In my last post I summarized by the macroeconomic environment in which we operate and delved into some discussion of microeconomic foundations.  The response was positive if lukewarm overall, but ego-boosting is not why I started a blog.  One of my readers once asked why I don’t take on some hot button issues.  Well that’s not my role or area of expertise.  I’m not a politician or a social commentator.  The community I inhabit has a large impact but is relatively small and mostly consists of engineers, scientists, mathematicians, some policy-makers, thought leaders, and other technically-focused professionals.  I’m not trying to stir up emotions.  I’m out to stimulate discussion and thought.  I’m relieved that I don’t get trolls when posting factual information that goes against popular misconceptions.  They are a waste of time.

So for me this blog serves two purposes.  First, it is a public discussion of sorts on topics both familiar and unfamiliar, but which I consider interesting.  I do a lot of background research for each post and usually learn something new.  That’s why I don’t post every day.  I give things some thought and research what I write about.  I think it useful to share these discoveries and insights.  The ones that relate to my professional development and expertise in software and project management get posted to my company’s website.

Secondly, I think we live in interesting times.  This is meant both positively and ironically.  I think it useful to record the human condition as we find it in our daily lives during the period of human history we inhabit, and to record many of the intellectual and cultural issues that are topical.  I always find it interesting to return to a subject years later through the writings of others as well as my own to see how they stack up against the perspective of time.  Dr. Roger Spiller of the Army’s Combat Studies Institute, one of my mentors for my graduate degree in history, once told me that if I can look back at anything I’ve written and not be embarrassed by something in those writings would make me a very lucky man.  I’m not that lucky.  But taking the chance to be wrong is part of the price of intellectual curiosity.  Recognizing and admitting one’s wrongness is part of intellectual honesty and maturity–and we are nothing if not thinking.  Our intellect is the most significant feature that we possess that distinguishes us from the other animals.  It is in the cliche’, the ideology, the spin, the doctrine–types of non-thought–where evil finds comfort.

So in continuing from my last post; in understanding the basis of the macroeconomic environment in which we operate, how these systems behave, and how the microeconomics under the macroeconomic environment are affected by the framing of the macro rules of behavior allow us to then flesh out the microeconomics and managerial economics of project management.

As I stated in my last post on the topic, markets are really good at establishing price and pretty bad mechanism for anything else.  Everyone who has taken basic economics understands the basic supply and demand curve.  Here is an example for housing*:

 

So when we make decisions for projects within an organization or firm regarding price, which then allows us to determine the resources we will have to do business given a set of assumptions on possible sales volume, it is useful to understand the nature of the market in which it inhabits, and the competitive environment of that market.  Some examples follow.

Public Monopsony

I have a great deal of experience in operating in this type of market from my perspectives as a business operator and owner and, previously, as a government Contracting Officer and acquisition professional.  Monopsony exists where there is one dominant buyer of the supplies and services from that market.  There are both public and private monopsony (and some are forced by unfair competitive practices such as exclusivity agreements by dominant market entities due to their monopolistic or oligopolistic ambitions or position in a market as sellers).

The traditional supply and demand curve does not apply in the way that classical economics recognizes it under these conditions.

In government monopsony, such as the market for items for the Department of Defense and other specialized government agencies, the chances are that only a portion of the available commercial products in the market can be adapted to the requirement.  Very few commercial products need to survive missile impacts, evade guidance and radar systems, or survive through high G escape velocities and then perform in the vacuum of space, to name only some capabilities often desired.  Oftentimes commercial technologies that can be applied must be modified or “hardened” in order survive in the expected environments.

Governmental or public monopsony power cuts both ways.  As it is practiced in the United States under republican institutions, it behaves mostly in a benevolent manner.  The companies that inhabit this space in large part would not exist and achieve profitability if not for the specialized skills and products required.  They are, for all intents and purposes, semi-public institutions.  It is the irony of our times that free market fundamentalists will simultaneously criticize this type of governmental power while acknowledging the need for the end items that are only possible under this arrangement, especially in regard to national defense, but also for any measure of infrastructural, health, and other items required by a functioning nation.

In terms of microeconomics, there are a number of mechanisms that exist to balance out the asymmetrical relationship between the parties, while at the same time certain peculiarities in which the sovereign (the government) maintains its position.  For example, in contracting, the government invites an offer.  The methods of acquisition are requests for quote, requests for proposals, requests for information, etc.  The private or semi-private entity is always the offeror and, therefore, it is assumes freely engages in the activity being contracted.  In addition, only those offerors deemed both responsible and responsive can enter into a contract.  Responsibility includes a host of technical measures but, simply, it means that the firm offering the supplies and services has both the means and ability to perform the work.

The balancing mechanisms that apply in this market are many of the same institutions that provide checks and balances in competition with the Executive Branch: the Courts and the Congress.  The press operating as the Fourth Estate also provides a check in this area.  In addition, economic organizations from industry can petition the government through both direct lobbying and lobbying organizations, and influence the development of policy and standards through membership in professional organizations where certain competencies are shared.

Thus, because of these interrelationships and the nature of the market, competition is oftentimes limited to a few firms possessing expertise that is highly specialized.  Price competition, when it does occur, is oftentimes marginal (or should be) and employs a number of strategies summarized by the phrase “priced to win.”  These strategies can result in market distortions known as “buying-in” to a contractual arrangement.  There may be compelling reasons on the part of the producer/supplier to “buy-in”–denying market share to a competitor, to protect an area of expertise or a skillset or, alternatively, to develop one;  to ensure employment of internal competencies that would otherwise drive up overhead costs due to unutilized labor, apart from the motivation to win business.  For example, on the issue unutilized labor, one can reasonably ask how much it costs to develop an engineer familiar with the airframe of, say, an F-16 and, if lost, how can this expertise ever be reacquired so as to be available when it is needed?  Thus, in government acquisition, it falls upon the Contracting Officer to weigh these issues and prevent outright buying-in, though their expertise and skill in identifying and preventing this type of behavior is certainly not uniform.

Where there is an overlap for supplies ands services across both private and public sectors, there is an opportunity for some competition among firms that provide items based on commercial-off-the-shelf-pricing that responds to a certain extent to the supply and demand pricing mechanism.  For example, in project management, these are usually firms devoted to consulting and to software companies with sharply targeted functionality.  But even here, the expertise required to fulfill some of the needs of the market are unique and, as a result, prices tend to be sticky or inelastic; resisting wholesale competition that would drive a race to the bottom based solely on price.

Furthermore, since acquisition is an Executive Branch responsibility subject to acquisition law, rules, and regulations, their interpretation and implementation is oftentimes influenced not only by operational, but also political considerations.  Since the imposition of sequestration, for example, project managers and contracting officers have been under a great deal of pressure to reduce both costs and prices.  This can often result in government agencies acquiring an inferior or deficient product–or fewer units than needed based on operational requirements–where cost and price pressure is the overriding consideration.  The tenor of looking for cost reduction has been a constant since the early 1980s.  Thus, over the years, a number of “acquisition reform” methods have been employed to counteract the perceived and real inefficiencies in acquiring the latest technology at the most reasonable cost.

Where cost and price pressure is seen to undermine quality, the supply and demand curve in setting price is modified by agencies to require that an assessment of value be determined, and that the item providing the best value, even if not the lowest cost, be selected.  Even in an expansive open market with many competitors there will be a range of similar products offered under range of prices, where the consumer will view several of the products as falling within an acceptable range of value.  This perception of value can be influenced by the asymmetrical relationship between the parties regarding information, or influenced by other psychological factors such as fashion and marketing.  Government monopsony counteracts the asymmetrical relationship of information and psychological factors that tend to distort good market decisions through specialized requirements on offerors–Truth in Negotiations (TINA), representations and certifications of full disclosure, socio-economic and non-discriminatory status, in sensitive areas restrictions on the use of foreign nationals and foreign influence, adherence to U.S. federal labor laws, among other requirements.  For highly complex cost-reimbursable efforts, the offeror must provide cost accounting data and procedures, and ensure that business systems adhere to certain minimum standards prior to award.  Contracting officers can also open discussions and negotiations at will to determine the true cost or value of the supplies and services being acquired–compelling the offeror to provide the necessary information.

Value analysis also acts as a break to downward price pressure.  For example, in my own area of software technology, while it is true that general expertise in areas of programming that 10 years ago were fairly rare–and commanded high salaries–is no longer the case due to policies that promoted globalization, there are some very highly specialized skillsets that cannot be outsourced, at least not yet.  Finding someone who understands not only how to code, but how that code needs to operate in the environment for which it is designed, is a skill that is highly influenced by culture.  The culture can be one of a nation, a people, a market, or a specialty.  In the area of public project management in the United States, it may not be sufficient for someone to come forward with general programming skills without an understanding of the managerial economics that influence the environment.  Instead, they may be called upon to know or be able to learn very quickly the security protocol required for the data being processed, the structure of the organizations in the market, and the manner in which information is consumed and analyzed, as well as issues of cost management, schedule management, risk management, and technical achievement.  Individuals with these skillsets exist but they are few and far between, and command salaries commensurate with their talents and expertise.  From the microeconomic perspective, when there is no longer a demand for this expertise the value will no longer be there to sustain the price established, but there isn’t going to be a lot of price competition while there is demand, so pricing tends to be inelastic.

In public monopsony, the government is the consumer.  As such, this differs from private monopsony such as that recently described by The New Republic regarding Amazon’s impact on the publishing industry, where the dominant market entities are part of the supply chain between producers and consumers.

The management economics of project management under public monopsony, then, leaves no room for pricing adjustments other than what is provided by the contracts that govern the acquisition of the products and services.  Where commercial products can be utilized, pricing is flexible enough in making a difference in terms of project cost reduction for those niches, assuming that they do not require a great deal of specialization or configuration to meet the special needs of the public marketplace.  This creates an environment of both certainty (and hence stability until, at least, instability is introduced by the political system) and a series of constraints on both managerial action and economic flexibility.

As such, there is no room for lack of estimating, scheduling, risk assessments, or performance management as has been pointed out numerous times, but most recently by Glen Alleman in his excellent “Herding Cats” blog.  There is no room for “exploring” because “we don’t know what we need until we build it.”  Recently I attended a meeting with both public and private industry officials discussing how Agile methods can be reconciled with the more structured environment of public project management.  Well, I guess if we forget about budgets and contracts we can all get to that day when developers don’t have to be accountable and we all can pursue imaginary cost avoidance in providing unmeasurable value under the rubric of cults built on catchphrases.  (And a sad day that would be).

In the meantime, for a firm to survive and its products to be sustainable so that it continues to win a share in this market, inelastic pricing that must be established by strong estimating skills in determining what the market entities will accept, an active regulatory regime, and a structured contracting environment–which provide both advantages and constraints–are the overriding factors in managerial economics as they apply to project management under public monopsony.

I will be dealing with private monopsony in a post next week.

*From “Comparative Statics: Changes in the Price of Housing”, section 19.2 from the book Theory and Applications of Economics (v. 1.0).  The chart can also be found here.

 

Finding Wisdom — Coit Tower Murals, San Francisco

On this site on most Sundays I’ve written about writers and thinkers who have not only advanced knowledge about their subject matters, but provide some insight into the human condition to provide us a guide for wisdom.

The frescoes of the interior of Coit Tower depict the rise of the proletarian movement and with it the trend of social realism in art.  Art critics in New York, Chicago, Paris, and elsewhere considered this art, showing common people at work and play, to be inferior to the other styles of the time, a form of Regionalist art and American scene painting: American expressionism, abstract expressionism, post-impressionism, and other modern forms.

Social Realism had also been co-opted for propaganda purposes in both Germany and the Soviet Union, undermining its legitimacy, especially since many of the artists at the time had become radicalized by the oppressive practices of the large industrialists and the widespread poverty engendered by the stock market crash and Great Depression.

So how do we find wisdom in art?  I believe, that it goes to the purpose of art itself and what drives the artist–or any creative person–to do the thing that he or she does.  The best of art, music, film, and literature take the pedestrian and make it larger, bringing to the viewer, the reader, the listener into the world created by the artist, documenting the human condition in ways that sterile facts cannot.

In the visual arts, when the artist paints a scene, it is not simply to create a photographic portrayal of what is being seen composed through charcoal, oils, or plaster.  That is simply illustration.  Instead, in art, the use of light, expression, juxtaposition, point of view, perspective, distortion, and the inclusion and exclusion of objects are used to make an emotional connection both to the subject and the viewer.  When all of this works, the simplest subjects can record a moment in time that transcends time itself, providing a glimpse into the experience of existence and all of the hopes, fears, joys, comedy, and emotions associated with human existence.

The murals in Coit Tower are artifacts of their time, but they tell us something about human existence that transcends their own time and place.  As most great art tends to be, the final product was quite controversial in its day, which spilled over into politics, civil disobedience, and class conflict.  It was the first Works Progress Administration (WPA)-funded art project.  Twenty-six Bay Area artists participated in creating the murals.  When it was completed there were demands that the murals be removed or white-washed.  Fortunately for us, artistic expression won out over social convention.

In its American form, Social Realism became the art of the common man and woman.  In many ways it hearkened back to the Dutch Golden Age of painting, though it took the subject of daily life out of the interior and into the open air.  As such, its lasting images reflects a democratic people going about their business.  Even in those scenes that depict social upheaval, poverty, and protest, it is an art that records an optimism in the human spirit even in the face of heavy labor and the regimentation of the age of the machine.

In this panel of a city scene by Victor Arnautoff, an auto accident is recorded in the background.  In the foreground the mail is being picked up from a box, a policeman is directing traffic, and as he is checking his watch a man is having his pocket picked.

Coit Tower 'City Life' mural left half

 

In the next panel, which depicts a library, people are reading books and newspapers.  The headlines in the papers, some of them radical, record the topics of the day.  To the artist, Bernard Zakheim, the choices for the country at the time were between unfettered capitalism (“rugged individualism” as it was then called), the New Deal, or communism.  The man just to the right of window in green is taking down Marx’s Das Kapital.

 

Library mural in Coit Tower

 

In the next panel, city life is again recorded, with people from all walks of life going about their business.

Coit Tower 'City Life' mural right half

 

The following two panels by Gordon Longdon depict the California agricultural industry.

Coit Tower Mural: California Agricultural Industry by Gordon Longdon

 

Coit Tower Mural: California Agricultural Industry by Gordon Longdon

 

John Langley Howard completed this panel to record California industry.  The vision of progress and hydroelectric power is juxtaposed against a man panning for gold, homeless families washing clothes in the river while living in tents, and striking workers.

 

Ralph Stackpole completed these panels for the Industries of California mural series.

Coit Tower 'Industries of California' mural left half

Coit Tower 'Industries of California' mural right half

 

There are many more panels in Coit Tower and each depicts the varieties of life in America.  Though they depict a particular place and time, the overall effect is a message that speaks to us today–a message of continuity, of change, of dissent, of both the mindlessness and the therapeutic effects of different kinds of work, of a people that are rich in cultural and material assets, that must grapple with their blindness to poverty and class differences,  Moreover, the murals drive home the message that we are a social species that cannot survive without one another, whether that be from the labor or the assistance of others.

Family Affair — Part I — Managerial Economics of Projects, Microeconomic Foundations, and Macro

A little more than a week ago I had an interesting conversation on a number of topics with colleagues in attending the National Defense Industrial Association Integrated Program Management Division (NDIA IPMD).  A continuation of one of those discussions ended up in the comments section of my post “Mo’Better Risk–Tournaments and Games of Failure Part II” by Mark Phillips.  I think it is worthwhile to read Mark’s comments because within them lie the crux of the discussion that is going on not only in our own community, but in the country as a whole, particularly in the economics profession, that will eventually influence and become public policy.*

The intent of my posts on tournaments and games of failure consisted of outlining a unique market variation (tournaments) and the high cost of failure (and entry), that results from this type of distortion.  I don’t want to misinterpret his remarks but he seems to agree with me on the critique but can’t think of an alternative, emphasizing that competitive markets seem to be the best system that we have come up with.  About this same time a good friend and colleague of mine spent much energy bemoaning the $17 trillion debt in light of the relatively small amounts of money that we seek to save in managing projects.  Both contentions fail on common logical fallacies, but I don’t want to end the conversation there, because I understand that they are speaking in shorthand in lieu of a formal syllogism.  Their remarks are worthy of further thought and elaboration, especially since they are held by a good many people who come from scientific, mathematical, engineering, and technical backgrounds.

I will take the last one first, which concerns macroeconomics, because you can’t understand micro without knowing and understanding the environment in which you operate.  Much of this understanding is mixed in with ideology, propaganda, and wishful thinking.  Bill Gross at Pimco is just the latest example of someone who decided to listen to the polemicists at CNBC and elsewhere–and put his investors’ money where his mouth was.  You have to admit this about the lords of finance–what they lack in knowledge they make up for in bluster, especially when handing out bad advice.

Along these lines, a lot of energy gets expended about federal debt.  There have been cases–which are unique and well studied where countries can hold too much debt, especially if their economic fundamentals show significant weakness, but a little common sense places things in perspective.  Of the $17 trillion in debt, a little over $12 trillion is held by the public in the form of bonds and $5+ trillion held by other government agencies, particularly the trust funds for things like Social Security.  The bonds are exactly the same: assets for an investment portfolio and assets for any other institution that holds them.  U.S. treasury bills are very safe investments and so are traded worldwide, even by other countries.  Some of this is often spun as a negative but given that the U.S. dollar and U.S. securities are deemed safe, it turns out that–short of us doing something stupid like defaulting on our obligations–the U.S. is a stabilizing force in the world economy.

So $12 trillion in debt held by the public is about 74% of Gross Domestic Product, that is, the value of goods produced in the United States in any given year.  This is about the same level that the debt stood relative to GDP around 1950.  In 2007 it stood at about 37% of GDP but we had this thing called the Great Recession (though for those of us who run a business we couldn’t quite tell the difference between it and a depression).  Regardless, the country didn’t go bankrupt in 1950 (or in the 1940s when the pubicly-held debt to GDP ratio was over 100%).  Great Britain didn’t go bankrupt during its period of hegemony with debt to GDP ratios much higher.  When making the comparison of government finances to households, folks like those at the Peterson-funded and Washington Post Fix the Debt crowd speak like Victorian moralists about how no responsible household would have garnered such debt.  Well, household debt in 2014 stands at $11.63 trillion.  Average credit card debt is about $15K and average mortgage debt is $153,500.  Then there are other types of debt, such as student loans, on top of that which averages about $35K per household.  Given that median U.S. household income is a little over $51K, the debt to income ratio of households is 400% of annual income.  Given that comparison our national finances are anything but profligate.** One could make a very good case that we are underinvesting in capital improvements that would contribute to greater economic growth and opportunity down the line.

But there is a good reason for the spike in national debt that we saw beginning in 2008.  In case you missed it, the housing bubble burst in 2007.  This caused an entire unregulated field of securities to become virtually worthless overnight.  The banking and insurance assets that backed them lost a great deal of value, homeowners lost equity in their homes, investors lost value in their funds, the construction industry and its dependencies then tanked since part of a large part of the bubble consisted not only of overvalued real property but extremely high vacancy rates brought on by overbuilding, bank lending seized up, businesses found themselves without liquidity, seeing the carnage around them people who had jobs tightened their belts and the savings rate spiked, and those who lost jobs tapped into savings and retirement funds, which lost a large part of their values.  The total effect was that the economy took a nose dive.  In all about $8 trillion of wealth was wiped out almost overnight.  Yes, those Wall Street, banking, and real estate self-proclaimed geniuses reading their Drucker, Mankiw, and Chicago School books (when not leafing The Fountainhead for leisure) managed to use other peoples’ money and–not only lose a good part of it but managed to sink the world economy.  Millions of people were thrown out of work and businesses–many of which were household names–closed for good.  People not only lost their jobs but also their homes, through no direct fault or negligence of their own.  Most of those who found new jobs were forced to work for much less money.  Though the value of their homes (the asset) fell significantly, the obligations for that asset under their mortgages remained unchanged.  So much for shared moral hazard in real estate finance.

Economic stabilizers that have been in place for quite some time (unemployment insurance, Food stamps, etc.) came into play at the same time that collections from taxes fell precipitously, since fewer people were making money.  The combination of the social insurance stabilizers and President Obama’s combination of new spending and tax cuts to provide a jolt of temporary stimulus–despite polemicists to the contrary–was just enough to stop the fall but was not enough to quickly reverse it.  Even with the additional spending, the ratio of debt to GDP would not have been so marked if the economy had not lost so much value.  But that is the point of stabilizers and stimulus.  At that point it just doesn’t matter as long as what you do stops the death spiral.

A lot of energy then gets expended at this point about private vs. public expenditures, who received or deserved a bailout, etc.  Rick Santelli–also one of the geniuses at CNBC who has been consistently wrong about just about everything–had his famous rant about bailing out “losers” (after the bankers and investors got their money) without blushing.  This is because, I think, that people–even those well educated–have been convinced that political economy is a “soft” science where preferences are akin to belief systems along the lines of astrology, numerology, and other forms of magical thinking.  You pick your side; like skins vs. shirts.

This kind of thinking cannot be more wrong.  It is wrong not only because our scientific methods have come along pretty far, but also because the “ideological” thinking that has been sold in regard to political economy undermines the ability of citizens in a democratic republic to understand their role in it.  “A nation is great, and can only be as great, as its rank and file,” said historian and later president, Woodrow Wilson.  This proposition is as true today as it was a hundred years ago.  More urgently, it is wrong because after the world’s experience with disastrous semi-religious ideologies and cults of personality in the 20th century capped off by Radical Islam at the start of our own century, the last thing we need is more bigotry and stupidity that demands sacrifice and revolution, harming millions in the process, in the name of some far off, Utopian future or to regain some non-existent idealized past.

On the everyday level, it is important to end the magical thinking in this area because that is the only way for those of us who are not the masters of the universe–with a billion or so in the bank with politicians and media clowns willing to backstop our bad decisions–can survive.

Fallacy Number One: our economic structure is based on “private enterprise” with public action an imposition on that system

I begin refuting this fallacy with this image:

U.S. dollar

Notice that our currency is issued by a central bank.  This central bank is the Federal Reserve.  George Washington, our first President, is on the $1 bill.  Other dead presidents are on our other denominations.  On the front of the dollar bill it clearly states “The United States of America.”  That is because U.S. currency and the economy on which it is built is a construction of the U.S. government.  The rules that govern market behavior are established within guidelines prescribed by the government of the United States or the various states.  The People of the United States, as in “We the People of the United States…” that begins the Preamble to the Constitution, establish the currency and good faith and credit of the country.  J.P. Morgan Chase, Bill Gates, the Koch brothers, Bitcoin, and every other participant in the economy are subject to the will of the sovereign–in this case the People of the United States–that establishes this currency.

This is important to know when talking about such things like the debt.  For example, once the economy is back to growing at trend, should we still consider the debt level too high, we can marginally raise taxes to balance the budget and even pay down the debt like we were doing just 13 years ago.  It is also important because it allows us to use our critical thinking skills even though we may not be professional economists when faced by specious claims, like that of the debunked study by econmists Reinhart and Rogoff that purportedly showed a link to economic stagnation when countries exceeded 90% debt to GDP ratio.  For example, since the Federal Reserve is the central bank, should we find that there is a magic point at which we are concerned about debt as a percent of GDP, the Fed can buy its own bonds back at low prices that it previous sold at higher prices, thereby reducing the debt to GDP ratio simply by swapping paper.  Of course this would be ridiculous.  The important metric is understanding if we can make the annual payments and the percent of interest against GDP.

Understanding this essential nature of the economy in which we operate, combined with our critical thinking skills, can also inform us regarding why the Fed bought securities to provide cash to the economy–what is known as quantitative easing (QE).  Paul Krugman, the Nobel economist and New York Times columnist, has also posted some useful slides here.  This was done in several stages by the Federal Reserve because the economy was in what is called a liquidity trap with short term interest rates near zero.  Thus, there were not enough liquid assets (cash), to keep businesses and banking going.  The housing market and other businesses dependent on liquidity and low interest rates were also deeply depressed.  In project management, start-up costs must oftentimes be financed.  Businesses don’t have a vault of money sitting around just in case they get that big contract.  The bank of last resort–the Fed–used its authority to buy up existing bonds to prime the pump.  Rather than some unheard of government intervention in the “private” economy, the Fed did its job.

As to political economy, Thomas Paine, the publicist of the American Revolution, put it best in Agrarian Justice, and the common sense that he expressed over two hundred years ago is still true today:  “Personal property is the effect of society; and it is as impossible for an individual to acquire personal property without the aid of society, as it is for him to make land originally…Separate an individual from society, and give him an island or a continent to possess, and he cannot acquire personal property. He cannot be rich.”  Private property in the definition of Paine and Adam Smith, who was a contemporary, is defined as real property or the means of production, not private possessions.  We are long past the agrarian economies observed by Paine and Smith, where wealth was defined by land holdings.  But Smith did observe in one mention in The Wealth of Nations that the systems he observed–those markets that existed in his day–acted as if controlled by an “invisible hand.”  Much cult-like malarkey has been made of this line but what he was describing is what we now know of as systems theory or systems engineering.

Given this understanding, one can then make two essential observations.

First, that our problems where bogeyman numbers are used ($17 trillion!) aren’t so scary when one considers that we are a very large and very rich country.  We can handle this without going off the rails.  Is there a point where annual deficits are “bad” from a systems perspective?  Yes, and we can measure these effects and establish models to inform our decision making.  Wow–this sounds a lot like project management but on a national scale, with lawyers, lobbyists, and politicians involved to muck things up and muddy the waters.

The other observation is that we can also see how government policy was responsible for the manner in which it exposed its manufacturing workers to foreign competition, undercutting the power of domestic unions, not some natural order dictated by “globalization.”  It demonstrates how the shrinking of the middle class since 1980 was also the result of government action, and how the slow recovery, with its lack of emphasis on either job creation or wage protection, was also the result of government action.

Those who throw up their hands and say that there is nothing to be done because the rich always find a way to avoid responsibility and accountability not only are wrong from an historical and legal perspective, they also commit the sin of an act of omission, which is unforgivable.  That is, when you let something bad happen due to cynicism, indecisiveness, or apathy.

This then leads us to Fallacy Number Two:  Capitalism Is Necessarily Complimentary to Competition and Democracy

Mark Phillips’ on-line comment paraphrased Churchill’s observation that our system is one that, while imperfect, is the best we’ve found.  But Churchill was not speaking of free market fundamentalism or our current version of capitalism.  The actual quote is: “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”  (Churchill, House of Commons, November 11, 1947).  It is hard to believe today that the conflict in Western thought before the Second World War, and the topic on which Churchill was reflecting, was not between Democracy and Totalitarianism and its ilk.  For most Europeans, as documented extensively in Tony Judt’s magisterial work Postwar: A History of Europe Since 1945 (2005), the choice was seen as being between Fascism and Communism, liberal democracy being viewed as largely ineffective.

Furthermore, the democracy to which Churchill was referring in both the United States and the United Kingdom at the time, was much more closely organized around social democracy, where the economic system is subject to the goals of democratic principles.  This was apart from the differences in the types of democracy each was organized:  the U.S. on a constitutional, representative bicameral legislature, and presidential system of checks and balances; and the U.K. on a parliamentary, constitutional monarchy.  The challenge in 1947 was rebuilding the Western European countries, and those on the Asian periphery, to be self-sustaining and independent based on democratic principles and republican virtues as a counter to Soviet (and later Chinese) domination.  The discussion–and choice–had thus shifted from systems that assumed that people were largely economic actors where the economic system dictated the terms of the political system, to one that where a political system based on natural rights and self-government dictated the terms of the economic system.

Mark comments that competition is the best system that we have found in terms of economics, and I don’t necessary disagree.  But my level of agreement or disagreement depends on how we define competition and where we find it, whether it approximates what we call capitalism, and how that squares against democratic processes and republican institutions.

For example, the statement as it is usually posited also assumes that the “market picks winners” in some sort of natural selection.  Aside from committing the logical fallacy of the appeal to nature, it is also a misunderstanding of the nature of markets, how they work, and what they do.  As a government contract negotiator, contracting officer, and specialist for a good part of my career, understanding markets is the basis of acquisition strategy.

Markets set prices and, sometimes, they can also reflect consumer preferences.  In cases where competition works effectively, prices are driven to a level that promotes efficiency and the drive for newer products that, consequently, produce lower prices or greater value to the consumer.  Thus, competition, where it exists, provides the greatest value to the greatest number of people.  But we know this is not always the case in practice.  Also, just to be clear, what markets do not do is naturally elect someone, reward merit, define “makers” or “takers,” nor select the best ideas or the most valid ones.  It often doesn’t even select the best product among a field of competitors.  Markets focus on price and value, and they don’t even do that perfectly.

The reason for this is because there are no perfect markets.  Under classical economics it is assumed that the consumer has all of the information he or she needs in order to make a rational decision and that no supplier or buyer can dictate the terms of the market.  But no one has complete information.  Most often they don’t even have sufficient information to make a completely rational selection.  This was von Hayek’s insight in his argument against central planning before we discovered its tangible evils under both Soviet and Chinese communism.  This same insight speaks against monopoly and domination of a market by private entities.  This is called information economics.

Given that there is no such thing as a perfectly competitive market (since we do not live in a universe that allows for perfection), information economics has documented that the relationship among the independent players in a market is asymmetrical.  Some people have more information than others and will try to deny that information to others.  Technology is changing the fundamentals of information economics.

Compounding reality is that there are also different levels of competition that define the various markets, depending on vertical, product, industry, niche, etc. in the United States.  Some approximate competitive environments, some are monopolistic and others oligopolistic.  There can also be monopolistic competition among a few large firms.  Markets where competition is deemed destructive to the public interest (predatory competition) or is a result of a limited market for public goods (monopsony) are usually highly regulated.  How these markets develop is documented in systems theory.  For example, many markets start out competitive but a single market actor or limited set of actors are able to drive out competitors and then use their market power to dictate terms.  Since we operate in a political economy, rent-seeking behavior (seeking government protection through patent, intellectual property, copyright, and other monopolies as well as subsidies) is common and is probably one of the most corrupting influences in our political system today.

Thus, there is a natural conflict between our democratic principles and an economic system, which is established by the political system, that is based on economic rewards meted out in a hierarchical structure based on imperfect markets and rent-seeking.  This is why capitalism can morph itself and coexist in Leninist China and Autocratic Russia.  Given this natural conflict our institutions have passed laws that modify and regulate markets to make them behave in a manner that serves the public and ensures the positive benefits of competitive markets.  They have also passed laws that play into rent-seeking behavior and encourage wealth concentration.

A good example of both types of law and the conflict outlined above is the U.S. health care system and the Affordable Care Act (that I’ve previously written about), also known as Obamacare.  There are several aspects of the new law, and sections of the omnibus bill that passed under its rubric read almost as if they were separate laws with conflicting goals.

For example, the ACA, under which it is also known, established the healthcare exchanges on which plans could be purchased from private insurance providers.  This aspect of the law set up a competitive marketplace with information about each plan clearly provided to the consumer.  In addition, the ACA passed what had previously been known as the Patient’s Bill of Rights, which established minimal levels of service and outlawed some previously predatory and unethical practices.  This structure is the real world analogue of a competitive market that is regulated to outlaw abusive practices.

At the same time other portions of the bill prohibited the federal government from using its purchasing power to get the best price for prescription drugs, and also prohibited competition from Canadian drugs.  This is the analogue of rent-seeking.  When combined with laws that establish drug patent monopolies which allow companies to keep prices 300 to 400 percent above marginal cost, it is no wonder why per capita expenditures on healthcare are almost twice any other developed nation, though the cost seems to be coming down as a result of the competitive market reforms from the healthcare exchanges.

Revisiting our discussion earlier on debt, were our healthcare expenditures in line with other developed countries, we would be seeing budget surpluses well into the future.  The main driver of deficits is largely centered in Medicare.  Aside from cost cutting, other methods would be to expand, instead of shrinking, the pool of middle class workers which make up the broadest and largest source of revenue, with wages and salaries at least keeping pace with productivity gains.

In sum, competition is a useful tool and delegation of economic decisions is largely in line with our republican virtues.  But, I think, it is clear that there are hideous market distortions and imperfections that, in the end, undermine competition.  Many of these distortions and imperfections come about from competitive markets, which are then undermined once a market entity has gained control or undue influence.  Systems theory inform us about how markets behave and how we can regulate them to maximize the benefits of competition.

But the obscene fortunes that are held by a very small percentage of individuals–and the power that attends to them–represents in very real terms a danger to the institutions that we value.  So whether we can think of a better system is not the issue, taking incremental steps to reestablish republican virtues and democratic values is imperative.

Fallacy Number Three:  Microfoundations Determine Macro

Given the multiplicity of markets–and the mathematics and modeling that attend systems theory–it is clear that aggregation of microeconomic dynamics will not explain macroeconomic behavior–at least not as it is presently understood and accepted by the academic field.  Economics is a field that need not be “soft,” but which failed miserably to anticipate the housing bubble and resulting bursting of that bubble, and the blind alleys that some economists advocated that misled policy makers in the wake of the crisis exacerbated human suffering.  Europe is still under the thumb of German self-interest and an “expansionary austerity” ideology that resists empirical evidence.  Apparently 20% unemployment is just the corrective that peripheral countries need despite Germany’s own experience of the consequences of such policies in the 1930s–and extremist parties are rising across Europe as a result.

As a complex adaptive system, macroeconomic policies changes the behavior, structure, and terms of a market.  For example, ignoring antitrust legislation and goals to allow airlines and cable companies to consolidate encourages rent-seeking.  “Deregulating” such industries establish oligopolistic and monopolistic markets.  These markets dictate the behavior of the entities that operate in it, not the opposite way around.  The closed-loop behavior of this system then becomes apparent: successful rent-seeking encourages additional rent-seeking.  The consumer is nowhere in sight in this scenario.

Thus, we can trace the macro behavior of each system and then summarize them to understand the economy as a whole.  But this is a far cry from basing these systems on the behavior and planning of the individual entities at the microeconomic level.  Our insights from physics and tracing other complex systems, including climate, inform our ability to see that macro behavior can be summarized given the right set of variables, traced at the proper level of detail.

This then leads us to the fundamentals of the Managerial Economics of Projects, which I will summarize in my next post.

 

*I usually try to steer from these types of posts, especially since those that skirt politics and polemics tend to be contentious, but the topic is too important in understanding the area of managerial economics that involves projects and systems dynamics.  A blog, after all, is a public discussion, not a submission of an academic paper.  For those unfamiliar, my educational background is based in political science, economics, and business (undergraduate work and degree), and my graduate work and degrees focused on world and American history, business, and organizational behavior.  This is apart from my professional and other activities in software engineering, systems engineering, project management, group psychology, and the sciences, including marine biology.

**So the reader will not be scared of the big number for household income to debt ratios, keep in mind that the largest of these liabilities (and assets) is long-term.  For most mortgages this is 30 years.