Arnold Kling  

Out of Your Opening Book

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Here is a very worthwhile interview with businessman and libertarian benefactor Charles Koch.

Q: What do you envision Koch Industries to be in 10 years?

Mr. Koch: The future is unknown and unknowable. This is the perspective of a book called The Black Swan. The future will be comprised of facts that are outside our present concept of reality, so we have no idea what the future will hold.

I think that this is one of the main lessons that you learn in business that they don't teach in business school. In chess terminology, you are forced out of your opening book very rapidly in business. It's not the moves by your known opponent that surprise you. It's the opponents (competition) that you never knew you had. Or the brand new pieces with new capabilities that suddenly appear on the board (innovations). Or the new rules (government policy changes).

Planning does not enable a business to shape its future. It only serves to help big executives know what is going on now. That's a big deal. Think of military history--there were lots of battles, including Gettysburg and the Battle of the Marne, that were affected by commanders not knowing where their other commanders were at crucial points.

Koch also shows that he understands Douglass North.

For a country to prosper, first, it needs to develop a framework and culture for spontaneous order: people voluntarily cooperate beneficially, without being centrally directed. We must have beneficial rules of just conduct, which is the rule of law uniformly applied. These laws are universally applicable and supersede or obviate the need for bureaucratic rules or instructions. We need cultures in which people don't just tell the boss what he wants to hear. To be successful in a Communist country, you have to bribe, lie, cheat, and steal. These things break down a free market and lead to economic disaster.

A second key to prosperity is private property rights that align costs and benefits...

Finally, incentives in a culture (and business) must reward value creation, not predation.

Thanks to Tyler Cowen for the pointer.

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CATEGORIES: Business Economics

COMMENTS (10 to date)
eric falkenstein writes:

This is ridiculous. I bet The USA will be more prosperous than Mexico, which will be more prosperous than Guatemala in 10 years. Further, Exxon will be a large multinational company, along with WalMart and Microsoft...the fact we can't predict the next Google should not distract us from the fact that things are not that dissimilar from 20r years ago...Do you really think life has changed that much?

Marcus writes:


Your own post disproves itself. You 'bet' in 20 years that certain things will still be true. It is all just probabilities. Some things are more probable than others.

Every time you get in your car you're betting you won't be killed. Every year 50,000 people bet wrong.

As for the things you 'bet' on in your post, they're not even very good ones. 30 years ago who would have thought Pan Am had less then 15 years to go? Things change. In this case it was government policy and Pan Am couldn't adapt.

Today we have Southwest Airlines.

25 years ago who'd have thought that IBM, having introduced to the public the most important computer made, would lose effective control of it to little snotty nosed Microsoft?

Fact is, 25 years ago if you had wrote the post you just posted you would have said IBM and Sears (or K-mart). They're both still around (Sears having been purchased by K-mart AFTER it went BANKRUPT!) but they ain't what they were.

Now it's Microsoft and Walmart.

Of course, you qualified your statement, didn't you? You said they'd still me 'multinational corporations'.

Good move. You increased the odds of being right.

fd writes:

About Douglass North's quote - "to be successful in a Communist country, you have to bribe, lie, cheat, and steal."

Bribing, lying, cheating and stealing are also routes to success in free markets, just that these take more sophisticated and legitimised forms. We need only need to look at how some executives reward themselves through stock options and bonuses.

Brad Hutchings writes:

Someone has a "value" tick. I am particularly sensitive to it since my Dad is always saying this or that would be "of value". Obviously, I love my Dad to death and respect his intellect even more, but every time I hear him use that phrase, the voices in my head cry "Hallo-freakin-luyah, raise your arms to the sky because something is of value!". Oh, and it would scare me to ever know what my ticks are. I'm sure they are many.

Memo to Charles Koch... If it's you with the "create value" tick and not Hayden, mix in "do something useful", "make something people want", "save us money", "make us money", "bury a competitor", "help a customer", "do great things", etc. The biggest problem with constantly appealing to abstract value by the term "value" is that it commodotizes it in the listeners mind. And ironically... need I explain further?

Edgardo writes:

Arnold, as much as I appreciate North's contributions, I think you're wrong when you say that Koch shows that he understands North. Your quote shows that Koch understands Hayek. It seems, however, that Koch has read Taleb but not Hayek. Last week finally I got a copy of The Black Swan but I read only the prologue. It was clear that in the following 300 pages, Taleb was going only to repeat arguments that Hayek and others made decades ago. Maybe Taleb is a good writer and can provide an easy reading of Hayek's papers and books (ask Bryan about this), but I have already read Hayek.

Barbar writes:

Marcus, the Black Swan isn't making the point that things are not 100% certain (no shit, Sherlock). It's that the language of probability doesn't capture fundamental uncertainty.

Your example of car fatalities totally misses the point -- the fact is, the number of car accidents in the USA every year is fairly predictable, even if you can't know for sure if you'll get killed on your way to the grocery store. To say that the future is unknowable means that there can be a drastic shift in the pattern of fatalities, something that a statistical analysis would never uncover -- maybe car accidents go down 80% next year, or up 70%, because of some totally unforeseen event, even though they have been fairly stable over the past few decades (perhaps with some trend due to improving safety measures/advancements in medical technology).

If I asked you what country will have a higher GDP next year, the US or Guatemala, and you said the future is unknowable, you're bullshitting.

Fundamentalist writes:

I agree with Brad that Koch sounds more like Hayek than North, though North seems to build on Hayek.

I guess everyone has a different interpretation of Taleb, but what I got from his other books is that people should be more humble. We can plan things in the short run, but always keep a reserve for the unexpected.

Karl Smith writes:

the fact we can't predict the next Google should not distract us from the fact that things are not that dissimilar from 20r years ago...Do you really think life has changed that much?

Sure but no one is saying that the future is comprised only of random events for which we have no probability.

The point is simply that, almost by definition the future will be dominated by very powerful events. Such events are often out of sample. Thus, there very events that are most crucial for prediction are the hardest to predict.

Indeed, the reverse implication of Black Swan type analysis is our knowledge of average things is much greater than our knowledge on average.

Or, in other words most things are highly predictable because the uncertainity is concentrated in a few high impact events for which there is almost no fore-knowledge.

Eric Falkenstein writes:

It is a truism that specific random events will be unpredictable, like when 12-43-12-34-8-13 gets picked in the lottery. So after the fact, we can say 'who knew' Kevin Federline would be seen as a relatively responsible parent, or that Anna Nicole Smith would die, or that Google would exist. But that isn't interesting unless it suggests we should do something different, like take on lots of exposure to wild risks such as the market going up 500% or down 90% over the next 10 years, and there we know this doesn't pay off (people ask a lot to take the other side of that bet via bid-ask and volatility smile).

Furthermore, the set of 'unexpected' things is infinite. To say that unexpected things will be important, and generate a lot of value in the future doesn't imply anything because to get an expected return you need a denominator, in this case, the total market value of wacky, unconventional ideas.

The idea that the future is 'uncertain' is banal unless you can objectively identify a relatively large subset of bad uncertain activities or conversely a small set of good uncertain activities.

Matt writes:

If you asked Borders what they'd be doing in 20 years in 1980, I bet they'd say selling books. But would they have said selling them on the internet?

Koch is a company that owns many smaller companies. To ask him what business will be like in 10 years is like asking an investor, even a very successful one like Warren Buffett: what stocks will you own in 10 years?

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