Scottish secession? A failure of governance?

In the previous post, I discussed the issue of secession, admittedly, because it was a blog post and not a book, in a very oversimplified way, but the question remains, why join, or why secede? First, union. Groups unite because together they are stronger than when separate. Historically, strength was important to save the citizens from being exploited, or even pillaged. The US is now so strong militarily that probably nobody can defeat it, but that would not be the case if it comprised fifty squabbling separate countries. Similarly, the fact that the US has such a strong economy means that it alone of all countries can print the world’s reserve currency. However, to form a union, the various disparate groups have to give up things. Why secede? My guess is, at least one of the various groups feels it has been discriminated against. Thus in Iraq, the main problem is probably not religion, but rather the corruption of the various leaders who use religion to support their positions and suppress others. We see that at present in Iraq where the US set up a “democracy”, and al-Maliki set about suppressing the Sunnis. But shortly, Scotland will vote on secession. What could have led to that? The question is important because it shines some light on the nature of governance. Points to note are that the Scots have not been deliberately treated differently from any other citizens in the UK, which in turn has been quite reasonably governed. There has been no selective discrimination, and no clearly bad governance or corruption. So why? 

My guess is the ignition point came from Margaret Thatcher. Her ultra right wing policies caused the end of heavy industry in the UK, which in turn was largely in Scotland. The problem was not restricted to Scotland, as the Welsh coal industry shutdown, and the English automotive industry was effectively ended, but the damage to Glasgow was probably far greater than anywhere else. So, why did Thatcher do that? It most certainly was not just to deal to Labour party constituencies. The problem was that the industries in Britain had become very inefficient, and could not stand on their own two feet.

There were various villains. First, the cost of labour was not competitive with the cost in places such as Korea. The options for Clyde shipbuilding, for example, were to pay workers on Korean levels (that was not going to happen), sell their ships for higher prices (how?), or they had to make them more efficiently. The German automotive industry faced the same challenges, and it succeeded by accepting it would have to sell cars at a higher price, but they would make them better. The key was to give value. Many British industries did not follow this strategy, which required intense investment in R&D, and in modernizing their factories. Management failed Britain, and management is also part of governance.

The Unions were also part of governance, and were part of the problem. To protect employment, they demanded over-manning. The classic example involved changing a light bulb. It has been stated that an electrical worker had to change the bulb, a rigger had to hold the ladder, and there had to be someone from stores to bring the new bulb. This in turn has given rise to a range of jokes. One of the more biting examples is:

How many theoretical physicists are required to change a light bulb?

Answer: Two. One to hold the bulb, and one to rotate the Universe.

The joke has nothing to do with light bulbs, or employment.

Another problem is that union requires sharing, and agitators leap on the advantages of not sharing, when there are such advantages. Thus if Scotland secedes, Scotland will get the oil money. That will make some Scottish politicians salivate. There will be a price, and whether the voters hear about such prices is another matter. I have no idea what the Scottish voters will decide, but it raises the issue that as the size of a union grows, what matters most? Economic efficiency or fairness? What should be done to promote what you choose? Any thoughts?

Advertisements

How to reward people fairly? 2

In my previous post I raised the question of people being overpaid for what they do. This raises the questions: What is a reasonable reward? Who decides? On what basis do they decide? How much does someone really need to accept the job? Who pays?

The last question is the most straightforward for a company; it is the owners, or the shareholders, who pay. They pay for the salaries, they reap the rewards of success, and they pay the price of failure. Now, you may say, they can afford it, and sometimes they can, but also stop and think about how much of this investment came from pension funds. The managers of the investment funds do not lose, but rather it is ultimately the pensioners, who can least afford it.

Looking at who decides, we now see what I believe is a real problem: the people who set the boss’s salary are often either directly or indirectly setting their own rewards. If the investors vote, it is the managers of the investment funds who actually do the voting, and their salaries and rewards are usually set according “to what is general in the market”, but they in turn are creating the market price by setting CEO salaries/rewards in the companies on which they sit on the Boards. Anyone see a hint of a conflict of interest here?

However, it is the question of what is reasonable wherein the problem lies. A comment on my first post seemed to think that $25 million per annum was reasonable, obviously for a CEO of a really major company. The question now is, why? As I noted in the previous post, someone like Steve Jobs is almost unique, and deserves whatever he can get. There are also some that run small companies, and I have heard of one or two in the finance industry that have made extraordinary returns for their investors, and while they end up billionaires, I see that what they get as quite fair. They made the money in circumstances where just about everyone else was losing it, so they deserve to keep a good fraction of it. A really stellar performance at least justifies stellar returns. The trouble is, only too many get into such positions and turn in quite disastrous performances when the going gets tough. Worse than that, in some cases they can turn in near fraudulent performances, and fraud is probably the least punished crime.

Does fairness matter? I think it will if there is a real resource shortage, as is almost inevitable in the future? If supply cannot meet possible demand, those with large amounts of money have an extremely unfair advantage. To get around this, in my future history ebooks, I have introduced in A Face on Cydonia, a somewhat different system of payment. In this, you can negotiate whatever payment you can get, but there is rationing of all resource-constrained goods, and everyone gets personalized coupons that must be used to acquire them. That means that while higher salaries lead to the ability to purchase more fashionable things, and some other objects such as art that are not couponed, money itself becomes less of a goal. There are no coupons for private jets and so on. Of course, this creates some additional problems that will be part of the plots of future ebooks, however if anyone wants to suggest some, and if they are useful enough to incorporate in some of the follow-up novels, I promise your suggestions will be acknowledged.

How to reward people fairly? 1

Does anyone think economies should not be more efficient? Does anyone think they should not be fair? In the future, resources and opportunities are going to be scarcer, so how do we realize the two goals of efficiency and fairness? This is one of the topics I have included in my futuristic novels, and since I do not have the answers (every answer I postulate, I then show how someone gets around the rules, which then leads to undesirable outcomes) here is the chance for you, the reader, to show me the light.

One obvious current problem is how to reward people fairly? Obviously, what is considered “fair” will vary between people, and it is unlikely that there will ever be detailed agreement, and an example I gave in Red Gold was, on Mars, who gets paid the most: the carrot grower or the pumpkin grower? The carrot grower might claim carrots are more valuable, but the pumpkin grower might claim to produce more oxygen, which everyone breathes, but is inconvenient to charge for its use. There is another problem. Markets appear to be fair, but the general assumption is that the addition or removal of one player makes little or no difference. Where you have only one or two providers for a product, that assumption fails and monopoly behaviour is seldom fair.

What about salaries, particularly for unique positions? Consider Apple Computers. Now it is possible to justify whatever they paid Steve Jobs, because he rescued what was almost a basket case and turned it into what it is now. However, his predecessor took over the leading personal computer company and turned it into a basket case, and at the same time, took home tens of millions of dollars for the privilege of his doing that. That is neither fair nor efficient.

Closer to home (New Zealand) we have a state-owned company called Solid Energy, which, recently, was worth several billion dollars, and is now deep in the minus column. The management, who brought about this disaster, take home what are, for here, enormous salaries. Three examples of their “brilliant management”:

1. They spent something like 70 million dollars on a study to convert lignite to liquid fuels. I could have reached the correct conclusion for a few per cent of that, and got fat on it! There were several reasons why the idea was a lost cause, e.g. they did not own the land, the lignite was very wet, there were major environmental protests promised, the technology is well-known but nobody wants to use it because it is economically wrong right now, and there were more. It was always a dog!

2.  They spent a similar amount of money on a project to grow canola and make biodiesel. The problem was, apart from the fact this is a bad idea in its own right, they planted a huge area in a region where nobody else tried to grow it. The overall yield was negligible, most of the plants well dead before seed formation. They overlooked a golden rule of new ventures: unless you are sure, start with a small experiment. Small costs less when it fails.

3.  Over the last couple of years coal prices were extremely high, so they bullishly expanded. So far, so good. However, they were unprepared for the prices to fall again. Now, you do not have to be extremely bright to work out that the reason prices were high was because supply was short, and the reason for that was that the huge mines in Queensland were shut down due to flooding. Equally, you do not have to be extremely bright to realize that such highly efficient mines would eventually reopen, supply would be full to overfull, and prices would drop. Good management would keep an eye on Queensland, and close down the least efficient in time.

My question is, why did such stupidity justify excessive pay? For that matter, why are so-called investment bankers paid huge bonuses for bubble trading, with the taxpayer picking up the pieces when the bubble bursts? Why do not people who made fortunes generating shonky derivatives and dressing them up all nice go to jail for fraud? That is where I would go if I generated such rubbish and sold it, but it appears that when an “approved bank” does it, it is OK.

None of which answers the initial question, so feel free to offer your suggestions.

Economic development – big versus small

In previous posts I covered part of the energy crisis of the 1970s, as it affected New Zealand. The key part was that a large offshore gas field was found, and to use it, an offshore platform had to be built, and that meant using large amounts of gas. The government of the time had decided that large-scale projects would get the country out of its bind. This strategy was criticized heavily by many who kept saying, “small is beautiful”. As it turned out, the big projects did not solve the country’s woes, so the question is, why not? The debate, in my opinion, was wrongly based. The problem is that for any project, you have to select the right project, choose the right way to go about it, then follow General Wesley Clark’s dictum: choose a plan that might work and make it work.

Let’s consider the two options. The advantage of “small is beautiful” is that, because a small project failing does not seriously reverse your fortunes, you can afford some mistakes. On the other side of the coin, each success makes a relatively small impact, so you have to get it right many more times. At the personal level, where “small” is relative to your net assets, this may seem highly desirable to those of a nervous or conservative nature, but the fact remains, those who stay working at the “small” level, stay small. The problem is, a small project can take up an inordinate amount of management time.

The advantage of the “big” project is that, if it works, it solves problems. At the personal level, you will find that everyone who gets really wealthy (neglecting those who inherit) at some early stage in their career “take a risk”. If you look more closely at those who make it, though, I believe you will find that they did their very best to minimize risk, and while you hear a lot about those who were successful, and you hear many of them argue you should take risks, what you do not hear about are those who took the risk and failed. My view is, luck plays a big part in such success. When you are really young, of course, you can afford a wipe out, after which you start again, hopefully somewhat wiser.

What the New Zealand government of the 70s did was to adopt “big” projects, because only big projects would solve their problems. They realized that within the public service there was a very limited pool of people capable of delivering, so they wanted their efforts to get the maximum benefit. What they did not recognize was that that pool was very much smaller than they believed, and worse, only too many of those the politicians recognized as being capable, were being recognized largely through their own promotional skills. The politicians overlooked the fact that their advisers, top public servants, had no particular experience in this area, except possibly in defending positions that were subsequently shown to be poor. As I noted in a previous post, they could not even work out what exactly they were quoted on regarding the synthetic fuels plant. But then the worse part came to light. When the synfuels plant was up and running, nobody stopped to ask, what had they built? They might have thought it was a synthetic fuels plant, but it should have been viewed as a chemical plant. One of the sillier aspects was that they made methanol and converted that to hydrocarbons, the weight of hydrocarbon being less than 50% that of the methanol (because they also made water). Since at the time methanol was selling for about 20% more than petrol, they could have received about two and a half times the income by just selling the methanol. But this would have forced the ex-public servants to admit they had been wrong in the first place, and they were not going to do that! As noted in the previous post, the first rule of a mediocre organization is, do not revisit the past. They do not want to improve; they want to avoid confessing to error. Unfortunately, everybody makes mistakes; the successful learn from them while the incompetent persist with them.