Knowing and Making

Tim Harford's post pointing to some work on complexity and economics is an excellent starting point for some stimulating reading. In particular, understanding how systems work by starting from the local behaviour of agents and working up, is a key insight. We need to remember that large-scale structures do emerge even from small-scale actions, so to get an efficient understanding you probably need to look at both levels. The original post Tim is pointing to is by David Warsh, here so I suppose that's where I should really point. Tim gets the credit for introducing me to it, even though I have just read Warsh's interesting book, Knowledge and the Wealth of Nations. Both mention Thomas Schelling, Nobel prize laureate who also wrote a great book on a similar subject - Micromotives and Macrobehaviour. I'll come back to all these topics in the future. My key theoretical work at present is working out what kind of structures exist for coordinating local incentives to achiev...

The motivation principle : People act in their best interest, in the light of the information available to them, over a time period that they can accurately foresee. The first two of these statements seem relatively obvious but perhaps the third is not so clear. It means that people will not take an action today, for some nebulous potential benefit one day in the future. They must gain something in return for the action either immediately, or within a time horizon that they can clearly grasp. How long is that? If I make a calm and considered decision, the time horizon may be as much as a few hours; while in the heat of the moment it may only be a few seconds. Either way, in order to act in my longer-term interest, I must get some kind of short-term payoff or else it's too easy to sell out on my decision. For example, if I want to lose ten pounds and be able to run a marathon in six months, I won't succeed unless I give myself incentives that keep paying off for all those early ...

I've just finished Steven Landsburg's book, More Sex is Safer Sex . I guess I had been led into an expectation of what popular economics books are like, by Freakonomics and by Tim Harford's two recent books, The Undercover Economist and The Logic of Life . And my expectations may not be a good basis on which to judge a book. Still, I suspect many readers may have a similar measuring stick. So I expected a series of unexpected results based on interesting research by contrarian economists. But perhaps the well of real experiments has run dry. Because what we get instead is a lot of thought experiments. The economic theory is mostly conventional but Landsburg takes it to its logical (and unconventional) conclusion by advocating fully free market solutions for many social ills. Amusing and thought-provoking to an extent, but ultimately I'm left with the feeling of having consumed a calorie-free intellectual meal. We know very well that few of these solutions will ever be ...

Last week the CBI suggested that the way to fix the UK's "uncompetitive" economy is to reduce corporation tax from 28 to 18%. Economists might be surprised to hear that a tax on returns to capital investment is meant to have an effect on productivity and boost economic growth; but that is their thesis. Perhaps, to be fair, it would encourage an incremental increase in total investment across the economy, which should bring increased returns to labour productivity - but only if the returns are very marginal indeed will a 10% change in taxation on the profit make the difference between investing and not. The evidence for the UK's decline in competitiveness is that India and Russia have now overtaken it in a survey of investor preferences by Ernst and Young. Surely there are bigger trends responsible for that change than the UK tax level? Tax arguments in general are very weak grounds for talking about economic growth and business performance. It reminds me of the old IR...

In my last article I looked at typical structures for professional services firms, and why you would want an explicit structure at all. This time I’m examining some less common structures, which nevertheless work very well for some of the firms that have adopted them. Each of these is based on a specific company that we work with, so we know that these models can work in practice. Bespoke consultancy with process-driven units Bespoke consultancy with product joint ventures Fully productized firm Bespoke consultancy with product-driven units This firm has evolved from a consultancy providing expert services on a project basis. Having noticed that there was a high demand for a certain specific service, the firm made the effort to analyse the structure of the service and turn it into a standardised range of four products. Each of these can now be offered at a fixed price (with discounts for high-volume clients) and each of them triggers a particular well-documented process. These processe...

Most professional firms start out with one or two people. If they are successful in winning enough business they may take on more, whether another fee-earner, a PA or administrative person, an IT or other support person, and perhaps even someone responsible for sales or marketing. When there are only a few people in the company, the relationships and systems don’t matter too much – everyone pitches in and does their best to help the company grow. What’s important is cashflow, customer service, and the distinctiveness of the firm’s offering. But as you grow to a team of ten people or more, it starts to become important how this group is structured. So what does ‘structure’ mean? According to the dictionary it is: An arrangement of parts to make a whole A repeatable or standardised way of breaking down an object into its components In a business that means: What different roles are there in the company What business processes do they follow How clear is the information that flows in and ...