Another of my good summertime reads was Paul Krugman’s updated work “The Return of Depression Economics“, subtitled “and the Crisis of 2008″.  Sombre stuff, you might think, but 2008 Nobel Laureate Krugman, a Professor at Princeton, successfully explains global financial problems in an easy-to-comprehend style.

After the Great Depression of the 1930s, the world’s economists and central bankers thought they had the financial system under control.  Yes, there would still be dramas, but they wouldn’t break the system because the system’s managers knew what interventions to make.  Yet, time and time again, well-meaning  interventions often had unintended consequences. For example, Krugman explains how currency boards (currently advocated in some quarters here in NZ) seem to solve one problem but create the seeds of other, far more damaging problems.  He also shows how regulatory and intervention mechanisms failed to keep up with the rapidly evolving nature of sophisticated financial mechanisms, the increased linkages within the system, and the hazardous distancing between risk and reward. The term “moral hazard” is explained by example, and occurs frequently. And Krugman argues that, contrary to popular opinion, the system is not as predictable and manageable as many people believe. Perhaps the biggest factor is the mood of the market (that’s you and me), which frequently defies logic and common sense, both on the way up and the way down.

Krugman finishes off with some broad-brush suggestions for financial system reform; in summary, anything “too big to fail” or likely to cause the system to fail should be regulated.  Beyond keeping main-street banking separate from investment banking, I’m sceptical.  If markets had been allowed to operate properly in the 1990s and 2000s, the system would probably have had some shocks but not as bad as those consequent to well-meaning interventions. Also, more regulation implies a degree of foresight and political/regulatory strong-mindedness noticeably absent in recent years.  Krugman also doesn’t address any alternatives, eg. whether anything too big to fail should be broken up.  However, I do agree  that risk and reward (eg. borrower and ultimate lender) need to be closely coupled.  The iterative repackaging of housing loans that enabled the sub-prime crisis broke that coupling.

My only other serious criticism of this very interesting book is that the updated version was written a year (or two) too early.  Originally published in 1999 in the aftermath of the Asian and Latin American financial crises, the new edition brings in the most recent cataclysm affecting the world financial system, and explains how multiple linked failures brought the world’s financial system close to collapse, but the $700 billion US TARP package was only just being implemented at the time of writing.  Krugman really needs to bring into account the events and interventions  of 2009 (such as the auto industry bailout), and the way the world system coped. No doubt a further edition will address this problem.

Despite that, it’s well worth the time to read it. The Economist described Krugman’s book as “essential reading”.  I agree.

One of my best reads this summertime had the somewhat dry title “The British Industrial Revolution in Global Perspective.“  Don’t be put off.  Written by Robert Allen, Professor of Economic History at Oxford University, it’s a very readable* and convincing account of why the Industrial Revolution happened in 18th-century Britain, rather than anywhere else. Allen discounts any notions that Britons were superior entrepreneurs or innovators; indeed, other countries enjoyed similar advances in science, education, institutions and commerce.  Instead, after setting the scene with societal and economic developments in the 16th and 17th centuries, Allen points to some primary factors which came together only in Britain and nowhere else:

• The highest wages in the world (thanks to the Black Death and its effects on British society).
• An abundance of cheap energy from coal (albeit not very useful initially, but developed to supply growing city populations).
• Ample supplies of iron ore close to that coal.

Those factor conditions did not come together anywhere else, and so there were not the incentives and rewards for creating the wave of technological and business innovation that transformed Britain (and later the world). Allen also shows that the state played very little distinctive role in the British transformation.  It was the cumulative efforts of individual entrepreneurs, engineers and other innovators addressing real business problems and opportunities which, because they were common in Britain, also generated classic cluster effects.

While interesting in its own right, Allen’s book reinforced for me much of what is wrong with current economic development thinking.  All we seem to hear is more education, more science, more infrastructure, less regulation, less tax, and so on.  All well and good (at least up to a point) but these are me-too strategies.  Everyone else is following them, more or less.  Me-too economies can’t make the step-change that Britain achieved in the 18th century (and sustained for 200 years).

The questions I think business innovators should examine are not only “What do we do to sustain and grow the industries we already have?” but also “What unique un-addressed problems and opportunities do we have which, if resolved, will enable us to build new unique and sustainable global competitive advantage?” And for policy-makers, “Will you adjust your economic development mechanisms to support those new initiatives?”

I can think of at least a couple of significant problem/opportunity combinations where New Zealand could build global leadership.  Know anyone with some serious spare investment dollars?

*For those wanting data and/or academic references, Allen provides plenty, but they don’t get in the way.

Over on Business Pundit, author Jonathan Salem Baskin asserts that brands are dead.  It came as no surprise to learn that Baskin has written a book based on this ridiculous proposition, with a witty title: “Branding only works on cattle“, but that’s about all I liked. Here’s a typical assertion:

… brands are simply irrelevant in a world wherein people know that one airplane seat looks like another, different clothes and PCs are made in the same factories overseas, and that most companies expect customers to help themselves.

But airlines are not all the same. I prefer Star Alliance airlines to One World, except I’m not keen on Lufthansa; even the cut-price airlines differ in brand personality from each other.  People clearly are prepared to pay more for products with names they trust (ask HP or Ralph Lauren).  Even in self service businesses (and web-based services are the ultimate low-barrier-to-entry, anyone can look big market), people make choices - often based on brand reputation.

Baskin falls into the trap of confusing brands with logos and jingles. A brand is an abstract concept which captures what your market offer is all about, and why people choose your offer. A successful brand is built on reality. It’s generated by what your product is and isn’t, what you do and don’t do, how you do it and don’t do it, what your product does for customers and what it doesn’t do, by market endorsement, by how customers react to, and in some cases, take over your brand, giving it even more personality (think Harley Davidson).

Brands are dead? I don’t think so!

I subscribe (for free) to Seth Godin’s weblog.  Godin is a US marketing writer, with several very successful books, a big fan base which gives him a lucrative speaking income, and one of the top blogs on the planet.  I don’t always agree with what he says, but he nearly always makes me think twice about a subject.  A good example of Godin’s ability to explain an idea is “Do you have 16 boxes?“, his take on oiling the squeaky wheel, where you overreact to the noisiest customer, the grumpiest staffer, the most irritating problem on your plate, just to stop the noise, while ignoring all the other facets of your business, and quite possibly missing the truly important issues and opportunities you should address.

Put it another way, “When you are up to your arse in alligators, it is difficult to remind yourself your initial objective was to drain the swamp.”

For those trying to understand the current financial schemozzle and looking for historical references, Business Pundit has handily listed ten of the world’s most dramatic financial crises, with a short  summary of what happened, why, and the ensuing action.

• Swedish Financial Crisis (1990-1994)
• United States Savings and Loan Crisis (1980s-90s)
• Northern Rock Bailout (Great Britain, 2007)
• Tulip Mania (The Netherlands, 1637)
• Wall Street Crash of 1929
• The Japanese asset price bubble (1986-1990)
• The .com bubble (1995-2000)
• 1997 Asian Financial Crisis (1997-1999)
• Russian financial crisis (1998)
• Argentine economic crisis (1999–2002)

BP offers a “moral of the story” on each crisis which I found less useful, and it seems to have applied some form of ranking to these crises which I can’t figure out. Despite these gripes, the article is is a timely memory jogger.

“Keep thy shop and it will keep thee.” That’s a quote from Benjamin Franklin, used by Warren Buffett in his foreword to a small book entitled ‘The Ten Commandments for Business Failure‘, to describe the management philosophy of the book’s author, Don Keough, the former president of Coca-Cola. Keough led Coke through a fantastic period of growth and shareholder value creation, but this book isn’t about how to succeed in business.  Rather, as the title implies, it’s about how not to succeed:

1. Quit taking risks
2. Be inflexible
3. Isolate yourself
4. Assume infallibility
5. Play the game close to the foul line
6. Don’t take time to think
7. Put all your faith in experts and outside consultants
8. Love your bureaucracy
9. Send mixed messages
10. Be afraid of the future
11. Lose your passion for work - for life.

Yes there is an eleventh commandment, just like the more familiar “Don’t get caught”. Keough uses it to advocate the power of emotion:

• Make an emotional connection with your customers
• Make an emotional connection with your brands
• Make an emotional connection with your people
• Make an emotional connection with your dreams.

I’ve written before about the power of Not, and the power of emotion, so I felt a great deal of resonance with Keough’s messages.  Although there’s not a lot new in this book, that doesn’t make it any less worthwhile reading.  Keough comes from the same Omaha town as Buffett, and has a similar down to earth style, which means the book is an easy read, full of pithy phrases and observations for people to draw upon in their own speeches and presentations.   I rather expect Don Keough is set to become one of those people who’ll be long quoted and much quoted.

French journalist and author Guy Sorman has written an essay in praise of free market capitalism, in the City Journal under the somewhat inapposite title “Economics does not lie.” He attributes most of the explosive progress of recent decades to a shift away from well-intentioned but woolly regulation towards increasingly free markets.

Sorman expounds ten key economics teachings that underpin modern capitalism:

1. The market economy is the most efficient of all economic systems.
2. Free trade helps economic development.
3. Good institutions help development.
4. The best measure of a good economy is its growth.
5. Creative destruction is the engine of economic growth.
6. Monetary stability, too, is necessary for growth; inflation is always harmful.
7. Unemployment among unskilled workers is largely determined by how much labor costs.
8. While the welfare state is necessary in some form, it isn’t always effective.
9. The creation of complex financial markets has brought about economic progress.
10. Competition is usually desirable.

While admitting to capitalism’s flaws, Sorman implies that its very nature requires such flaws to drive the continuous innovations which improve humanity’s lot. The answer to those flaws is good institutions, such as laws, taxes and regulations applied judiciously and fairly.  However he cautioned against the oft-seen tendency of governments to regulate for everything:

After all, the state is no more rational than the individual, and its actions can have enormously destructive consequences.

This leads to Sorman’s closing remarks:

To help the losers in the free market, government shouldn’t back away from either free trade or creative destruction and start subsidizing doomed and obsolete activities, a protectionist course that guarantees only economic decline. Instead, it should help the losers change jobs more easily by improving educational opportunities and by facilitating new investment, which creates more employment. An essential task of democratic governments and opinion makers when confronting economic cycles and political pressure is to secure and protect the system that has served humanity so well, and not to change it for the worse on the pretext of its imperfection.

Still, this lesson is doubtless one of the hardest to translate into language that public opinion will accept. The best of all possible economic systems is indeed imperfect. Whatever the truths uncovered by economic science, the free market is finally only the reflection of human nature, itself hardly perfectible.

Those of more socialist tendency will find some of Sorman’s generalisations too much to swallow, but despite his uncritical praise for capitalism and its companion economics, he sums up free market capitalism reasonably well.

Self-proclaimed innovation expert and author Scott Berkun asserts on Harvard Business that innovation is overrated.  I buy his argument up to a point.  We all have those favourite stores, restaurants, pubs, hotels, tradesmen, etc. where the business model hasn’t changed for years, decades or even centuries. It was always good and we don’t want it to change, just like we never want to change Grandma’s Yorkshire pudding cooked around rare roast rib of beef.

Some companies do waste a lot of effort, money and resources on pointless innovation eg. satisfying the noisy 1% of customers demanding expensive extras not valued by their main market, chasing the leader’s outdated pet ideas, flogging dead horses, or simply not innovating enough stuff that can add value. I’ve shut down such wasted efforts on several occasions.

However, Berkun makes a woolly case by citing, as examples of non-innovators, companies like Pixar and Apple, which have to be some of the most respected innovators on the planet.  Sure, Pixar didn’t invent film animation, but it leads the world in new ideas and techniques in that field, which in turn enables new story ideas and presentations to be realised.  Apple didn’t invent personal computing, personal music players or music downloads, but it still comes up with great products which stretch the market’s expectations. And even great traditional businesses keep themselves fresh in some ways in order to remain viable, albeit by minor but continuing improvement.

Berkun may have a very strict definition of innovation, but I suspect he’s really just doing the usual business author huckster trick of trying to drive book sales by making an outrageous statement based on a tiny kernel of reality. I don’t buy those books.

The veteran activist shareholder Carl Icahn has finally started to write on his own personal weblog.  An early February launch was followed by several months of silence, which perplexed many (including yours truly).  However, the wait is over, with The Icahn Report posting several previously prepared invectives on boards, CEOs and poison pills, to mention a few.  It’s all classic Icahn, and worth reading, even if it is very USA-centric. Enjoy.

I’ve just watched the documentary Startup.Com (borrowed from my local library, but available from Amazon), which tracks the birth, rise and fall of Govworks.com in 2000 and 2001. Govwork’s story is still relevant today. You see the enthusiasm of the founders, the frustration and excitement of the money-raising, the early plaudits and adulation, and then the fall into nothingness as the realisation strikes home that the business isn’t working.

The technology and the product were incidental to the story. The central theme is the relationship between the founders. One is kicked out early because he won’t risk his day job. One of the two principal founders is fired as things start to go wrong, because although he isn’t co-CEO, he acts as if he is, countermanding the actual CEO, his best friend from high school. Their friendship goes through massive strain, and although renewed, you wonder if it will ever be the same again. (However, they did patch things up as they went on to other ventures together including JumpTV.com)

Every budding young entrepreneur should watch this documentary - if only to realize that it will get tough (it always does), friendships may get hammered, and success isn’t guaranteed.

I’ve had the opportunity to read an advance copy of The Logic of Life by economist and journalist Tim Harford, aka The Undercover Economist. Harford is no dry ‘dismal scientist‘. His earlier book was an international success, explaining the micro-economics of coffee, the cost of pollution and the dynamics of auctions. Highly informative and educational, it was an entertaining read, and a hard act to follow. Can he repeat his success with this new book?

Harford draws on academic research from around the world to explain why so much of what makes up modern (and ancient) society is based on rational behaviour. It’s no dull read, as he repeats his ability to both educate and entertain. I should warn you, however, that he begins by exploring the rise of oral sex among teenagers, and that’s just for starters. Idealogues of gender, morality or class may find some of Harford’s subjects and arguments hard to take, rational though they may be to those of more classic liberal persuasion. The Logic of Life is full of rich pickings for an idea-magpie like me - too many to list here, but including why cities exist, and why your boss is paid more (it’s to encourage you!)

One example I’ve already used to show off at the lunch table was how prejudices can arise. A simple laboratory experiment divides the participants into ‘employers’ and ‘workers’, and the workers into ‘Greens’ and ‘Purples’. Workers can opt to spend ‘money’ on ‘education’, which will improve their ‘test results’ (determined by dice throw with weighted odds favouring the educated). Employers only know the person’s test results and colour code (which has no significance). Employers are rewarded when they hire someone who has been educated, and penalised when they hire someone who has not.

By statistical fluke, slightly more Greens gambled on education in the first round. Employers picked this up through the test results, and started to see Green as a positive indicator, albeit slight, The workers also started to notice this: Purples started to not invest in education, while Greens tended to invest. Through 20 repetitions, what had been a slight statistical fluke turned into a self-perpetuating prejudice that affected the behaviours of nearly all participants. By the end, Purples were uneducated and had no faith in education, and employers were rationally shunning them. Powerful stuff.

I’d recommend The Logic of Life to anyone, including business people, with an interest in why things are the way they are. However, the people who absolutely should read this book are our elected representatives and the policy analysts who serve them.

As well as being an entertaining and informative author, Tim Harford is an award-winning speaker, he writes a regular column for the Financial Times FT magazine, he presented the BBC TV series Trust Me, I’m an Economist, and he now presents the BBC radio series More or Less. He won the 2006 Bastiat Prize for economic journalism and he also writes an entertaining blog. Tim Harford is on an international speaking tour and will be in Wellington in late February.

A while ago, I recommended Tim Harford’s best-selling book The Undercover Economist. Now it’s your chance to meet the man himself. Tim’s on an international speaking tour, coinciding with the launch of his new book The Logic of Life. He’s the guest speaker at a lunch in Wellington (his sole public appearance in NZ) hosted by the Chamber of Commerce

Tim’s no dry ‘dismal scientist‘. As well as being an entertaining and informative author, he is an award-winning speaker, he writes a regular column for the Financial Times FT magazine, he presented the BBC TV series Trust Me, I’m an Economist, and he now presents the BBC radio series More or Less. Tim won the 2006 Bastiat Prize for economic journalism and he also writes an entertaining blog.

I’ve already booked my seat. See you there if you’re in town.

Date: Friday 29 February 2008
Time: 12.15pm - 2.00pm
Venue: WRCC, Level 28, The Majestic Centre, 100 Willis Street, Wellington
Invest: $65.00 Members; $90.00 Non-members
Table of seven: Members $455.00; Non-members $630.00 incl. GST
RSVP: register and pay at www.wellingtonchamber.co.nz

In what seems to be a very low-key anniversary, today (Sunday) Silicon Valley marks the 50th anniversary of its putative founding. The San Francisco Chronicle has a historical piece on what most people take as the start of Silicon Valley - the founding of of Fairchild Semiconductor. The Chronicle also has some comments from several of today’s leading CEOs. Silicon Valley’s local newspaper, the Mercury News, runs a similar historical article.

There is an alternative view of history. The eight founders of Fairchild Semiconductors had previously worked for Shockley Labs, which claims its founding 18 months earlier was the start of Silicon Valley.

What’s behind the different opinions on when Silicon Valley started? The Fairchild startup was seen as the one which also brought in many of the classic start-up elements - venture capital, flat management, staff equity deals, casual dress, egalitarian organisational ethos, etc, etc. Shockley was old-school. So enthusiasts say it was Fairchild Semiconductor that really epitomises the start of the new order.

Today Fronde hosted a very different type of open-invitation conference at our Wellington office - a BarCamp on eGovernment. BarCamp is very social, very participative, and free.

There’s a great deal of interest and ideas around how government can enhance its interactions with and between its citizens, its institutions and its community. I was impressed with the quality of the many attendees, where they came from, their ideas and their participation. There were 4 conference rooms going all day, with presentations and discussions self-organised by the participants.

I couldn’t do justice to the sessions I sat in on, but I learnt heaps, including, for example, a whole new way of thinking about places, and how rich the information possibilities are when you move away from simplistic approaches to location.

For obvious reasons, I also sat in on a session which looked at why public sector CEOs blog, or rather, why they don’t. This led into a much wider discussion on audiences, branding and positioning, and the constraints on government employees.

I must have got very enthusiastic at one stage in a session on Agile methods. Apparently, I’ve volunteered to talk to the top levels of the government service about achieving smarter outcomes via Agile management, design and development methods, both in IT and in wider strategy/policy initiatives. That needs a major shift in executive thinking and procurement processes, not just within operational departments, but also within those arms of government and the legislature responsible for funding, audit and oversight.

A great day. Congratulations to the organisers, and thanks to our fantastic Fronde reception team, who ran an awesome coffee production line.

Here are other people’s views on the day and any presentations posted on the web (to be updated as and when I find them): BarCamp eGov 2007 website, Eduard, Sandy, Thomas, Mike (great organising, mate).

I just found out that professional services guru David Maister is in Wellington on Thursday and Auckland on Friday to give a one day seminar. The focus is on strategy, management and client relations and draws on his forthcoming book “Strategy And The Fat Smoker .” What a title! This guy is good - I frequently refer to his classic book “Managing the Professional Service Firm“. I know it’s late notice , but break your schedule and attend if you can.

Further to my earlier piece on “How does Google work?“, here’s a fascinating report from The Economist looking at Google’s strengths and also its issues. Reminds me a bit of the internal and external changes we saw as Microsoft went from cheeky newcomer to industry behemoth.

I first saw this ages ago, but every time I see it again, I’m impressed. To quote the website for the TED conference at which it was given:

You’ve never seen data presented like this. With the drama and urgency of a sportscaster, Hans Rosling debunks myths about the so-called “developing world” using extraordinary animation software developed by his Gapminder Foundation. The Trendalyzer software (recently acquired by Google) turns complex global trends into lively animations, making decades of data pop. Asian countries, as colorful bubbles, float across the grid — toward better national health and wealth. Animated bell curves representing national income distribution squish and flatten. In Rosling’s hands, global trends — life expectancy, child mortality, poverty rates — become clear, intuitive and even playful.

Click on the blurry box on the bottom right of the image below to start the presentation in full screen mode. Enjoy, and be inspired for your next presentation.

There’s a great deal of interest and ideas around how government can enhance its interactions with and between its citizens, its institutions and its community. Fronde is hosting BarCamp WellingtonNZ egov on Saturday 15th September at our Queen’s Wharf office. BarCamp is a very different kind of forum, very social, and very participative. It’s also free. Read ‘BarCamp’ background and what to expect.

8 things you can do now:

1. Read about BarCamp Wellington NZegov
2. Book it in your diary (Sat 15th Sept)
   
3. Tell others you’re coming along (edit this page and enter your name)
4. Add your name to the mailing list:
   Subscribe by sending a blank email to barcampwellingtonnzegov-subscribe(at)googlegroups.com
5. Get a T-shirt
6. Copy this posting and add to your own blog or website (different sized images available)
7. Put your hand up for a ’subject’
8. Participate, communicate and be active

There are good consultants and there are bad consultants. If you’ve come across charlatan consultants, you’ll enjoy this:

The 14th New Zealand Hi-Tech Awards will be held in Wellington on 3rd November 2007. As a past winner, I can vouch for the increased attractiveness - for capital, people or customers - that being an award winner brings. So, wherever you fit on the scale, be it a growing or emerging company, a fantastic deal maker or superb marketer, an innovator or an entrepreneur, enter and join the ranks of New Zealand’s growing list of success stories.

This is the hi-tech industry’s big night out, and an opportunity for out-of-towners to make a weekend of it, experiencing the delights of Wellington. The Awards Gala Dinner has the theme ‘Kiwis can fly’, appropriate when you think of the massive number of air-miles we all clock up. Cartoonist, playwright and raconteur Tom Scott will MC the evening, so a fun time can be expected.

Award entries must be submitted by 21st September. The award categories include:

• PricewaterhouseCoopers Supreme Award
• Avnet Corporate Award
• Enatel Innovation Award
• Endace Young Achiever
• IRL Emerging Company Award
• NZX Entrepreneur Award
• Rakon Deal Award
• Company Leader Award
• Hi Growth Award
• PR/Marketing Campaign Award
• Professional Advisor Award
• and the Fronde Journalist Award.

PS. There are still a few sponsorship opportunities for the awards, so contact the organising committee if you’re interested: info@hitech.org.nz.

PPS. I’m one of the judges again this year, although which category I’m yet to be told.