China: the Jeff Bezos of Industrial Production?

At Forbes, Karl Smith suggests that the global savings glut may be a result of the Chinese government's willingness to invest at a loss at an unprecedented scale, hoping to earn that back way down the road after more of its citizens have urbanized. 

China at some points has had investment rates of in excess of 40% of GDP. For super-geeks this exceeds the Ramsey Rule at a zero discount rate. For non-geeks it means that there is no investment strategy under which this is the profitable thing to do.

Its always hard to tell but on balance I think the Chinese government is aware of this, yet is willing to lose money on its capital investments in order to provide jobs for people moving to the city. This is a smart move if you think cities produce agglomeration effects.

With apologies to the less wonkish, China is using physical capital as a loss leader in order to grow cities that will produce network effects will in turn foster the human capital that really makes a country rich.

In this way China has become like Amazon’s Jeff Bezos, a Destroyer-of-Worlds. You can’t win a physical capital accumulation battle against someone whose plan is to overinvest and lose money on the physical capital.

If the Chinese government will invest so much of its GDP in these types of projects, that takes those investment opportunities out of play.

Earning to give

From "Join Wall Street. Save the World." 

Jason Trigg went into finance because he is after money — as much as he can earn.

The 25-year-old certainly had other career options. An MIT computer science graduate, he could be writing software for the next tech giant. Or he might have gone into academia in computing or applied math or even biology. He could literally be working to cure cancer.

Instead, he goes to work each morning for a high-frequency trading firm. It’s a hedge fund on steroids. He writes software that turns a lot of money into even more money. For his labors, he reaps an uptown salary — and over time his earning potential is unbounded. It’s all part of the plan.

Why this compulsion? It’s not for fast cars or fancy houses. Trigg makes money just to give it away. His logic is simple: The more he makes, the more good he can do.

He’s figured out just how to take measure of his contribution. His outlet of choice is the Against Malaria Foundation, considered one of the world’s most effective charities. It estimates that a $2,500 donation can save one life. A quantitative analyst at Trigg’s hedge fund can earn well more than $100,000 a year. By giving away half of a high finance salary, Trigg says, he can save many more lives than he could on an academic’s salary.

Fascinating article.

Among other tidbits of note: GiveWell, which analyzes charities for actual effectiveness in changing lives with each of your donated dollars, rates Against Malaria Foundation as the single most worthy charity. Their second ranked charity is GiveDirectly, which essentially just transfers your donation to a poor household in Kenya. They have only 2 employees and 8% overhead.

As for Peter Singer, he is fully supportive of earning to give. 

And [Singer] embraces earning-to-give as among the most ethical career choices one can make, more moral than his own, even. “There is a relatively small group of philosophers who actually have a big influence,” he says from his home in Australia. “But otherwise, the marginal difference that you’re going to make as a professor of philosophy compared to somebody else is not all that great.”

Some further discussion of this article here. 

Sony without electronics?

Sony, it is suggested, might be better off just selling insurance.

Or just making movies and music. But not electronics.

A new report from the investment banking firm Jefferies delivered a harsh assessment of Sony’s electronics business. “Electronics is its Achilles’ heel and, in our view, it is worth zero,” wrote Atul Goyal, consumer technology analyst for Jefferies, in the report, released this week.

“In our view, it needs to exit most electronics markets.”

 Ouch. As a kid who grew up jogging with a Walkman clutched in one hand (later a Discman, later a Sony Minidisc player) it's very strange to imagine Sony ever exiting the electronics business. Of all the Asian countries, Japan is the one I would've expected to make the leap to this new age most successfully given their strong design history. And of their companies, it would have been Sony I would have put in the pole position.

But it turned out to be China and Korea who have surged ahead, the spark coming from their ability to manufacture devices cheaply at scale. In particular, Korea, most notably Samsung, have accumulated market share at an astonishing rate.

Among strange things I did not know which I learned from this article: Sony's most financially lucrative business over the last decade (measured by operating profit) is selling insurance.

One problem for Sony is that electronics is a bloody war in which margins are low and moats are difficult to build. Their best chance, perhaps, was to shift from a pure hardware sales model to an ecosystem in which Sony's music label and movie studio interacted with Sony's hardware to become some type of closed network. 

Thankfully for consumers, perhaps, Sony's media or "software" groups never walled off their content that way. That those divisions are all housed under the same roof really doesn't seem to be benefiting Sony much. 

Factor-Price Equalization

Related to my previous post on the decline in labor arbitrage in the tech market, it's worth studying the data supporting factor price equalization in this age of greater factor mobility.

Per Arnold Kling:​

Again, I want to suggest that there is a connection between this trend and the stagnation of median incomes in the United States, and even to the decade-long drop-off in employment here. New patterns of trade are developing that are reducing the advantage that a person enjoys merely for being located in the United States. There still are advantages, as evidenced by the excess supply of people who wish to immigrate herte. However, the Great Factor Price Equalization is underway, thanks to the fall of Communism, the rise of the Internet, and sporadic progress in institutional development in the emerging-market countries.

Some of the most compelling evidence for Factor Price Equalization comes from Evan Soltas.​ In the early 1970's, something changed in the U.S. Up until then, "real wages and compensation had increased roughly one-for-one with productivity; since then, productivity has soared with comparatively no change in real earnings".

Taking the U.S. apparel market as a case study, Soltas goes to show convincingly that almost all apparel manufacturing fled to Asia, with corresponding spikes in trade to GDP, exports, and wage increases in manufacturing in Asian markets, all of which factor-price equalization would predict. The charts over at Soltas' post are damning.

Here's further evidence from the Conversable Economist.​ A World Bank report calls our current age, from about 2000 onward, the Third Age of Financial Globalization, and charts on both investment and savings show convergence between high income and developing countries.

Something like this is happening in technology, though it will be quite some time before wages between tech workers in Asia and the Bay Area come anywhere close to being equivalent.​ Even with the existing disparity, though, Chinese developers working for American companies are seeing their wages outpace those of their in-country peers at a dramatic pace.

Within the U.S., it's not a coincidence that so many companies in tech offer similar benefits and perks now: a liberal vacation policy, free food and drink, your choice of computing equipment, the ability work from home when desired, a lax dress code.

When skill converges, luck becomes more important. When the offer numbers and perks converge, getting an edge on recruiting and retention depends on other factors.

Fundamental attribution error and tech mercenaries

In social psychology, the fundamental attribution error (also known as correspondence bias or attribution effect) describes the tendency to overestimate the effect of disposition or personality and underestimate the effect of the situation in explaining social behavior. The fundamental attribution error is most visible when people explain the behavior of others. It does not explain interpretations of one's own behavior—where situational factors are more easily recognized and can thus be taken into consideration. This discrepancy between attributions for one's own behavior and for that of others is known as the actor–observer bias.

From Wikipedia. I've always heard fundamental attribution error used to describe people. But more and more, I believe it's applicable to companies as well.

​That's not to say it isn't also still a problem when applied to people in technology. For example, a common belief is that tech workers in Silicon Valley are more mercenary than in other tech markets like Seattle or New York.

When I moved up to the Bay Area from Los Angeles in mid 2011, I was curious to experience this supposedly venal culture firsthand.

Having worked in all three of those markets over many years now (and also having been at Hulu for three and a half years in Los Angeles), I'm not so sure the people are more mercenary in Silicon Valley. Much of the short tenures in the Bay Area may be explainable by ​the environment rather than some intrinsic ruthlessness on the part of the people living in the area.

For one thing, the number of tech companies in Silicon Valley just dwarfs that in any of those other tech markets. Sure, fewer people left Amazon than I would have expected , but if you wanted to stay in Seattle, where else would you go? To Microsoft? Real Networks?​

The number of startups in the Bay Area also exceeds that of any other tech market by a huge margin. Since startups have such a high failure rate, inevitably it drags down job tenures.​

If you control for those two factors, would the Bay Area still rate as having a more mercenary culture? Someone with access to more data would seem to be able to answer this question quite easily (maybe LinkedIn has enough data to run such an analysis).​ My hypothesis, just based on my personal experience, is that the Bay Area's supposedly mercenary culture is just a technology version of the fundamental attribution error.

If you're operating outside of the Bay Area and feeling fairly secure with your workforce, though, beware. The world is changing, and the fight is coming to your doorstep. For one thing, LinkedIn and other such services have made it easier and easier for other companies all over the place to reach your employees with enticing offers. If you don't think every one of your employees is receiving multiple offers a week, if not per day, from recruiters and headhunters and LinkedIn, you may be living in the 90's.

Think you're safe because your employees don't want to relocate? More and more companies are going to where the people are, opening satellite offices in any market with a good base of talent. Shoppers in many states may not be the only ones lamenting the fact that they now must pay sales tax on Amazon purchases. Competitors are also feeling the hit as Amazon now has free reign to open offices in those states and staff them with abandon. There are three major Amazon offices in the Bay Area already, and they're recruiting aggressively. But the same thing is happening in Seattle, Amazon's home court; Facebook and Google, among others, have opened offices there. 

This is not to mention the fact that some of the best employees can choose to work from wherever they want. It's rare, but not as much as it once was.​ Almost every company I've worked at in my career now has some employees who work by themselves out of some random place. They're good enough, and the demand for their skills so far outstrips supply, that they spend most of their work year in a remote destination of their choice, maybe a home office in their hometown in North Dakota.

All of this is good news for employees, who now have more options as the liquidity and efficiency of the labor market surges. For employers, it's difficult to say whether it's a positive or negative thing. If you treat it as a zero-sum game versus employees, it must by definition be a negative if employees are gaining.

Within the tech sector, though, one might hypothesize that companies that can offer more cash benefit from being able to compete for employees anywhere. Startups who need compete on the uncertain benefits of stock options more than cash now must contend with the tech giants, if even if the startups locate in more remote markets. However, this might just filter out those who who are risk averse and who'd flee at the first sign of adversity.

I began this post as an examination of the myth of the Bay Area mercenary culture, but the larger theme may really be the reduction of labor arbitrage in the tech industry.​ By no means has it disappeared entirely, I am not advising you start your next startup in Kansas City. If Jeff Bezos were starting Amazon.com in today's environment, though, it's not a slam dunk that he'd still choose Seattle.