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He's right to point out that the obsession with RoE is a big part of the problem. He's wrong to suggest that the billionaire class and founders will solve the

He's right to point out that the obsession with RoE is a big part of the problem. He's wrong to suggest that the billionaire class and founders will solve the problem if we only trust them and let them keep their money. Founders have just as much incentive to optimize the excess out of the system, they just call it "disruptive innovation" by which they mean tweaking how the system works so that they can squeeze out profit for themselves. I think economists call it rent-seeking.

bluetwo 5y ago
I don't think he is talking about tech founders. I think he is talking about mom and pop businesses of all types. Tech founders are a different breed.
- tmp538394722 5y ago
  What do you mean - How are they different?
- analognoise 5y ago
  As they constantly and insufferably tell us. Whether we believe them is another matter entirely.
- jonny_eh 5y ago
  Who aren't billionaires, so I don't know why he brought up criticisms of a proposed new tax scheme that only targets a few hundred people.
simonh 5y ago
You have it backwards. Rents are revenue accrued due to the ownership of a resource, such as grants, subsidies, tax breaks and loaning or leasing an asset. Optimising out excesses is minimising the holding of assets, so it’s directly antithetical to rent seeking strategies.
- SkittyDog 5y ago
  In the terms "economic rent" and "rent seeking", the concept of rent is not specific to assets. Rent paid to landowners was the original inspiration for the terminology, but in actual usage it refers to any economic behavior that extracts value without creating new value. • https://en.m.wikipedia.org/wiki/Rent-seeking https://en.m.wikipedia.org/wiki/Rent-seeking Notably, this usage does not include "providing liquidity", so most of what hedge funds and private equity do for a living is rent seeking, by definition. So the parent commenter's usage appears to be correct... If it's any consolation, I was under the same mistaken impression as you for a long time.
  - simonh 5y ago
    Liquidity is a service customers pay for. It’s not clear to me that’s unproductive work. More efficiently allocating capital can absolutely improve productivity. Some activities classed as renty can be economically beneficial. It’s not all pure usury, but activities that seek to increase rent revenue without increasing the value provided are a problem and that’s the ‘rent seeking’ part. I’ve no problem with fair value rents, but rents should be as low as the market can reasonably bear as excess rents are essentially a tax on production.
    - SkittyDog 5y ago
      I'm not arguing whether the definition is valid, just correcting the previous poster's misuse of some well-established economics jargon. Re: Liquidity... The fact that a service is immediately useful to somebody (and has a willing customer) does not prove that it's a net productive behavior for the society, as a whole. That's just how the field of economics defines it, and the practioners widely agree that "providing liquidity" falls into that category. Now, it sounds like you may be trying to defend the morality of rent-seeking behavior... If that's the case, I wish you good luck in your argument, with somebody besides me. I have no dog in that fight.
      - simonh 5y ago
        Car hire companies are built on a renting business model, but I don't hate Avis. I don't curse every time I need to hire a skip at the evils of the skip hire company. What am I going to do, buy a skip? Start a local skip share collective? As long as the 'landlord' or owner is improving the efficient allocation or utilisation of resources there really isn't a problem. The real issue is when owners seek benefits of ownership that are not correlated with efficiency or productivity. For example grants and subsidies, inflation of rents though monopolistic practices or opportunism. In fact all monopolistic profit inflation is renty in a way, regardless of what the business model is, because it's extracting extra profits from simply exercising control of something in excess of the economic value provided. It's exercising the power of incumbency that's the problem.
ladyattis 5y ago
Yep, the capital owning class just doesn't care if their businesses go into shock because they already have their cash in hand. They'll never go back to pre-ROE days because they'd have to live with less money and worse less control. While they still have personal reserves in the billions they can decide the fate of their ventures but if say 20% of their current cash was on the balance sheets of corporations with boards that don't vote their way most of the time then they're forced in the medium to long term acceptance of their policies. This isn't an argument for a return to traditional corporate power because they bungled so many things (GM and the rest of Detroit got their rear ends handed to them by the Japanese and their application of JIT). Rather, it seems like to me the reliance of having a few owners or a few institutions with consolidated power in the form of money or assets is a recipe for disaster. If anything, it's time to disperse the wealth and responsibility of production to as many firms as reasonably as possible. I'd rather have 20 smaller companies making the same thing than 3 big ones that supposedly make them cheaper due to scales of economy which imo is wrong and that most big firms are in diseconomy of said scales now (prices imo reflect this). Basically, we need to both economically and politically Switzerfy the economy (more dispersed institutions, less central control where reasonably possible).
- amelius 5y ago
  > Yep, the capital owning class just doesn't care if their businesses go into shock because they already have their cash in hand. What if there was inflation?
  - nostrademons 5y ago
    Inflation generally helps big business and its owners. They get to raise prices, and they usually get to raise prices more than the average firm does because they have little competition. You're seeing this now with record-high corporate earnings. As long as the capital-owning class is holding equity (stocks, real estate) they benefit from inflation.
    - Supermancho 5y ago
      > Inflation generally helps big business and its owners. I'm not sure that follows in extreme cases. I don't even think it follows in baseline cases (2% inflation yoy). Raising prices leaves customers with limited resources, as wages do not follow at anywhere near the same rate. If inflation brings prices up, consumers can only spend on specific items, prioritizing necessities over entire verticals of goods. For the vast majority of companies, it's bad.
JPKab 5y ago
The obsession with RoE is really just a major form of efficiency. Having things sitting around unused is a huge reason that US car companies got their asses handed to them by Toyota and their TQM/LEAN system they developed. People writing articles like this forget that it's not just Wall Street, but competitors who created the huge pressures for adopting JIT inventory systems. There's also the consumer. Are you willing to spend the additional money required to buy a car from a company who wastes tons of $ on excess inventory?
- ghaff 5y ago
  The Toyota system got a lot of attention in the DevOps world because basic principles such as empowering workers resonated with the movement. Reducing waste throughout the system doesn't get as much attention--given that computer software doesn't really have inventory as such (at least not literally)--but inventory/WIP reduction was an important motivation behind Toyota's system.
- acdha 5y ago
  > Having things sitting around unused is a huge reason that US car companies got their asses handed to them by Toyota and their TQM/LEAN system they developed. It didn’t help but I think that’s more of a symptom of building shoddy products: part of why inventory backed up is that Detroit was producing cars which simply weren’t as good. Toyota didn’t have a shortage of demand, and neither did Saturn. If you make shoddy, poor-handling gas guzzlers, yes, you’ll underperform on sales. That doesn’t meant the only option is less inventory.
  - JPKab 5y ago
    There's an entire book (I've read it) about this called "The Machine That Changed The World" published in the early 90's. It goes into great depth as to the issues that were plaguing GM/Ford etc. The excess inventory was absolutely not driven by too little demand. It was simply inefficiency in the manufacturing process and inability to rapidly reconfigure the shop floor or reallocate labor towards bottlenecks. The book is a deep, academic examination of the roots of lean production, and is a must read for any engineer who wants to get the Agile cultists to shut up and go away. I'm a hardcore believer in the ACTUAL Agile philosophy, which is rooted in lean, and I despise the cult of clerics that have risen up around it and turned it into management consulting BS. That book helps to know real agile from consultant billing hours agile.
kwertyoowiyop 5y ago
In the 80s and 90s it was called “unlocking value.”
015a 5y ago
I think his statement is that founder (and family) led businesses are the only businesses capable of building the shock absorbers necessary to weather hundred-year storms; not that they always will. By comparison, committee-appointed CEOs rarely, if ever, will, because they cannot.
- The_Beta 5y ago
  It's not that they cannot. They don't have an incentive to do it. If I'm being paid for my performance while I'm a CEO, why would I spend money today (and hurt my performance today) to fix a problem that MIGHT affect the company in 20 years
  - ODILON_SATER 5y ago
    It just that it is more likely that founders genuinely care about their baby, so they have more incentive to make the company more resilient to long term risks. I don't think this is an absurd claim. It's not that every founder is the same, there are founders who behave just like most CEOs.
  - jonas21 5y ago
    No, they literally cannot. Because if they try to, they will be fired by the board for failing to perform and replaced with someone who will undo their work.
  - tuatoru 5y ago
    To align incentives, perhaps we should have a law specifying that executive stock options can only be exercised after a delay of 17 years or more.
  - kansface 5y ago
    Because you aren't actually being paid for your performance as CEO. You are being "paid" by increasing the value of the company you mostly own. Its up to you to play the long game or the short game. Ivy MBAs don't even have the option.
- tonyedgecombe 5y ago
philwelch 5y ago
I’m not sure this is the case. The problem is that RoE is a metric that can be gamed for short term gains while incurring long term risks. This is more likely to be an issue with short term career-oriented leadership. Founders are more likely to have a concern for the long-term success of the business. Simply put, founders are not the people sacrificing their own companies’ long term success in exchange for enhancing their personal careers. A lot of the JIT fashion came from Toyota, and yet Toyota doesn’t seem to suffer from these issues as much as others. I don’t think it’s any coincidence that most of the senior executives of Toyota have all been at Toyota for longer than many of us have been alive, and that the company president is the grandson of the company founder.
- Invictus0 5y ago
  JIT works nicely in isolation--when everyone relies on it is when it starts to break down. It basically offloads the responsibility of forecasting your inventory needs to the supplier, who has absolutely no knowledge of your inventory needs.
  - andrekandre 5y ago
    > the supplier, who has absolutely no knowledge of your inventory needs. that would seem to assume a not close relationship with said supplier... ...doesnt jit work better if you have good relationships with them and they know well what your expectations are and can adjust accordingly?
- darawk 5y ago
  This is exactly right. It's about the term length of incentive alignment. Most founders have a long term reputational stake in the company they founded. Hired CEOs generally do not.
- quartesixte 5y ago
  Toyota has over the years adjusted how their JIT operates, and are now known to stockpile certain critical parts. This is pure speculation, but I also wonder if Japan’s geography + slightly more diverse economic landscape (lots of small businesses that do nothing but make components) help make their JIT more resilient to shocks. With Osaka, Tokyo, and Nagoya all within an area less than the length of California, it’s far easier to “in-time” material.
bobdosherman 5y ago
If I estimate a model to predict an anomaly using data that never has any realized anomalies, how well will that model do out-of-sample? While framing this as a bad unrestricted ROE maximization problem is a nice simplification, it's not clear that having everyone move to a restricted ROE maximization subject to keeping assets large enough to insure against some unforecastable shock is welfare enhancing. That could be a lot of wasted insurance. I will give him credit for cleverly spinning this logic all into a pitch to kill the unrealized cap gains tax proposal!
kbenson 5y ago
> He's wrong to suggest that the billionaire class and founders What? How did you get billionaire class and founders? He specifically says founder led companies and family owned businesses. Unless you reduce that group to the Waltons, how does family owned businesses equate to the billionaire class? "Only founder led companies and family owned businesses can stand up to the immense pressure from the dogmas of modern finance."[1] 1: https://twitter.com/typesfast/status/1453753942228160515 https://twitter.com/typesfast/status/1453753942228160515
paganel 5y ago
> I think economists call it rent-seeking. There was a book published a couple of years ago (before the pandemic) which was "demonstrating" (so to speak) that going back through history real financial/economic levelling at a reasonable scale only happened as a result of violent means (wars, revolutions etc). I think what those violent means do (among other, more nasty things like people getting killed) is that (in some cases) they obliterate the societal/institutional structures on which a specific rent-seeking system is based, which gives the majority of the people a chance to "level up" until a new rent-seeking system takes shape.
- jonny_eh 5y ago
  > violent means (wars, revolutions etc). Also plagues/disease. Currently relevant.
  - jason0597 5y ago
    This would be true if lockdowns didn't happen. As it is most of the wealth-owning class was told to shut themselves inside, isolate, then we got the vaccine and they manage to live on and keep their wealth. So not even plagues can save us anymore.
    - jonny_eh 5y ago
      Plagues don't change society by killing the rich and powerful, similar to how war doesn't upend society by killing those people.
- marvin 5y ago
  Probably "The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century"
  - spiralx 5y ago
    No, it's Piketty's controversial book, one of his points was his analysis of historical data showed that the only time the ratio of wealth between capital and labour R decreased was during wartime, especially the two World Wars when incredible amounts of wealth was destroyed, seized or simply reverted to states because there was nobody left who could claim it.
newbie789 5y ago
That part of the Twitter thread actually made me laugh out loud. In the middle of talking about how modern finance is messed up he has a kind of unprompted little aside about how “taxes are bad!!!” Dear lord the amount of smug “wE aRe ThE mOSt EfFicIEnt wAY Of AllOCaTinG CaPitAl” arguments from very wealthy founders that would prefer to become more wealthy is frankly ridiculous. I get it, you went to Stanford and they taught you some fancy words to trick people into giving you money instead of investing in public infrastructure and services.
- parineum 5y ago
  > “wE aRe ThE mOSt EfFicIEnt wAY Of AllOCaTinG CaPitAl” arguments from very wealthy founders "most" does a lot of work here since it's a relative term. I'm not sure I'd exactly call them efficient but I'm not sure there's a _more_ efficient way that I've seen.
- jonny_eh 5y ago
  Especially since it's easy for founders of such large companies to sell their shares, but give themselves fewer shares with greater voting rights… thereby maintaining control while spreading the wealth.
phkahler 5y ago
>> He's wrong to suggest that the billionaire class and founders will solve the problem if we only trust them and let them keep their money. He didn't say they'd solve the problem. He said they're the only ones who can be resilient in hard times. OK I think he said the ARE resilient, I say "can be" because it's still a choice. "I think economists call it rent-seeking." That's what the incumbents are after, and so are a lot of the startups - at least the startups seeking round after round of investment. If they're not seeking rent, they're trying to set up infrastructure (manufacturing or cloud this-or-that) and collecting returns (rent) on that investment. Nobody talks about profit on goods sold, they talk about return on capital (or RoE) and that seems a lot more like rent.
gruez 5y ago
> Founders have just as much incentive to optimize the excess out of the system, they just call it "disruptive innovation" by which they mean tweaking how the system works so that they can squeeze out profit for themselves. >I think economists call it rent-seeking. Are you saying all "disruptive innovation" rent-seeking? Or only certain kinds? If a founder was able to "optimize the excess out of the system" by providing a better consumer-facing experience (eg. amazon), why shouldn't they be rewarded with profits? Is there any room for profits without being called a rent-seeker?
- TAForObvReasons 5y ago
  There are genuine "disruptive innovations" that are not rent seeking, but by and large that is not what we've seen. Picking on Amazon for a moment, their original "innovation" was a sales and use tax dodge: based in Washington, they were able to sell books to California without having to charge the relevant sales tax upfront. That margin gave huge room to provide free shipping and other customer conveniences. Technically customers were supposed to pay a self-reported use tax but many did not. The relevant laws have changed since then, but the general point still stands. Does mere tax and legal arbitrage count as rent-seeking? Absolutely.
  - gruez 5y ago
    >Picking on Amazon for a moment, their original "innovation" was a sales and use tax dodge: based in Washington, they were able to sell books to California without having to charge the relevant sales tax upfront. That margin gave huge room to provide free shipping and other customer conveniences. Sales tax in california was 7.25%. While not having to charge tax was a competitive advantage, I'm skeptical that was the defining factor that led to amazon's success. This is further compounded by how prices work in the US (taxes are not included), so I doubt this even made a conscious difference to most people. Finally, the exemption isn't limited to e-commerce sites. According to wikipedia, it includes "companies doing mail order, online shopping, and home shopping by phone". Why did amazon dominate while sears languished?
    - 5y ago
caust1c 5y ago
Yeah, this guy has clearly read about the theory of constraints but his pivot into criticizing the wealth tax on the basis "founders will lose control of their company" is simply bullshit.
JoshCole 5y ago
I think a lot of people just read emotional language and turn off their minds. So let's expand out what you said to make it a bit easier for others to reason about what you said. We're talking about founder owned companies owned by billionaires. So let's use an example of one: SpaceX. You're maligning "disruptive innovation" so let's expand out your claim with the specific example: an order of magnitude reduction in the cost of space flight and the introduction of competition in rural internet service. So you're saying enabling access to other planets and the moon while providing people in isolated areas with internet service is an example of squeezing out profits and you're saying that you think it is rent seeking. Rent seeking is defined as an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs. We already had programs to access space. They were an order of magnitude more expensive. We already had programs to provide internet. They didn't serve well the subset of people that are in remote areas. So in both cases it just isn't the case that the company is doing rent seeking. In other words, you are completely wrong when we use a specific example. This applies to more specific examples. Lets use the specific example of Flexport. It is owned by a founder and you're replying to things posted by them so it's even less of a reach than before. They are introducing computers to an industry that has competitors from the 1400s era. These competitors sometimes have legacy processes built on physical paper and for some of them excel is an example of the use of cutting edge technology. You're saying that doing better than that for people using modern technology is an example of rent seeking.
Agathos 5y ago
The billionaires' tax he mentioned is dead anyway, so that part of the discussion is moot. It was floated a couple of days ago as a possible addition to the reconciliation bill, but it's not in the framework announced this morning.
AussieWog93 5y ago
> Founders have just as much incentive to optimize the excess out of the system ... tweaking how the system works so that they can squeeze out profit for themselves. So do workers, to be fair. The goal of workers in purchasing departments and HR isn't to make the business more efficient but to propagate a cushy lifestyle for themselves and their mates. To an extent, that same misalignment exists in all classes of worker, including engineers. SWEs are probably the worst at this; so many of the problems that we solve don't have anything to do with squeezing the most performance out of the hardware or reducing technical debt. Instead, a huge chunk of our time is spent on man-made bullshit that sysadmins don't solve properly because otherwise they'd be out of a job.
ren_engineer 5y ago
why blame the players rather than the game? It's the government's job to prioritize long term health of the nation Plenty of people warned about the hazards of allowing these companies to outsource everything, government did nothing. Mostly because they are bought off by lobbyists. This could have pretty easily been prevented by putting tariffs on key industries to keep manufacturing here or at least in North America
- andrekandre 5y ago
  > tariffs on key industries to keep manufacturing here or at least in North America would businesses be ok with that? it seems alot of expensive investing at home when it could be done cheaper overseas... im pretty sure massive lobbying would incur... but maybe im not seeing the whole picture.
BenoitEssiambre 5y ago
>obsession with RoE is a big part of the problem Is this even still true in a super low interest rate environment? Yeah in the 80s and 90s, tying your resources into inventory would have cost a lot in terms of missed opportunity to invest the money elsewhere. But with financing rates near zero or even sometimes negative in real term, wouldn't even the wall street guy be like: sure keep some inventory, cash is cheap right now. This RoE argument seems very last century to me.
scottcodie 5y ago
Economists would say that companies are willing to accept higher risk, the 'return on equity' isn't the only driving force. The question here is who shoulders the risk, the company or the consumer. With JIT, the consumer may bear more of the risk. It may not be a bad thing either. New companies aren't all trying to be rent-seekers, they also try to dodge existing regulation or actually innovate.
deleted 5y ago
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panarky 5y ago
The problem isn't RoE itself, it's the focus on short-term RoE. You can juice RoE in the short term by removing slack and shock absorbers, because increasing the brittleness of the supply chain probably won't show up in this quarter's returns. The supply chain for fuel is brittle. There isn't sufficient inventory in tanks to buffer even short disruptions. A pipeline offline for a couple days is enough to make a crisis. People catch wind of the crisis and start filling their tanks at three-quarters full instead of one-quarter full, and the brittle supply chain breaks with the accelerated demand. Same thing we're seeing with the global supply chain which was already brittle, now individuals and companies are putting in bigger orders sooner to compensate, and it fails in the face of accelerated demand.

bluetwo 5y ago

I don't think he is talking about tech founders. I think he is talking about mom and pop businesses of all types. Tech founders are a different breed.

tmp538394722 5y ago
What do you mean - How are they different?
analognoise 5y ago
As they constantly and insufferably tell us. Whether we believe them is another matter entirely.
jonny_eh 5y ago
Who aren't billionaires, so I don't know why he brought up criticisms of a proposed new tax scheme that only targets a few hundred people.

simonh 5y ago

You have it backwards. Rents are revenue accrued due to the ownership of a resource, such as grants, subsidies, tax breaks and loaning or leasing an asset. Optimising out excesses is minimising the holding of assets, so it’s directly antithetical to rent seeking strategies.

SkittyDog 5y ago
In the terms "economic rent" and "rent seeking", the concept of rent is not specific to assets. Rent paid to landowners was the original inspiration for the terminology, but in actual usage it refers to any economic behavior that extracts value without creating new value. • https://en.m.wikipedia.org/wiki/Rent-seeking https://en.m.wikipedia.org/wiki/Rent-seeking Notably, this usage does not include "providing liquidity", so most of what hedge funds and private equity do for a living is rent seeking, by definition. So the parent commenter's usage appears to be correct... If it's any consolation, I was under the same mistaken impression as you for a long time.
- simonh 5y ago
  Liquidity is a service customers pay for. It’s not clear to me that’s unproductive work. More efficiently allocating capital can absolutely improve productivity. Some activities classed as renty can be economically beneficial. It’s not all pure usury, but activities that seek to increase rent revenue without increasing the value provided are a problem and that’s the ‘rent seeking’ part. I’ve no problem with fair value rents, but rents should be as low as the market can reasonably bear as excess rents are essentially a tax on production.
  - SkittyDog 5y ago
    I'm not arguing whether the definition is valid, just correcting the previous poster's misuse of some well-established economics jargon. Re: Liquidity... The fact that a service is immediately useful to somebody (and has a willing customer) does not prove that it's a net productive behavior for the society, as a whole. That's just how the field of economics defines it, and the practioners widely agree that "providing liquidity" falls into that category. Now, it sounds like you may be trying to defend the morality of rent-seeking behavior... If that's the case, I wish you good luck in your argument, with somebody besides me. I have no dog in that fight.
    - simonh 5y ago
      Car hire companies are built on a renting business model, but I don't hate Avis. I don't curse every time I need to hire a skip at the evils of the skip hire company. What am I going to do, buy a skip? Start a local skip share collective? As long as the 'landlord' or owner is improving the efficient allocation or utilisation of resources there really isn't a problem. The real issue is when owners seek benefits of ownership that are not correlated with efficiency or productivity. For example grants and subsidies, inflation of rents though monopolistic practices or opportunism. In fact all monopolistic profit inflation is renty in a way, regardless of what the business model is, because it's extracting extra profits from simply exercising control of something in excess of the economic value provided. It's exercising the power of incumbency that's the problem.

ladyattis 5y ago

Yep, the capital owning class just doesn't care if their businesses go into shock because they already have their cash in hand. They'll never go back to pre-ROE days because they'd have to live with less money and worse less control. While they still have personal reserves in the billions they can decide the fate of their ventures but if say 20% of their current cash was on the balance sheets of corporations with boards that don't vote their way most of the time then they're forced in the medium to long term acceptance of their policies. This isn't an argument for a return to traditional corporate power because they bungled so many things (GM and the rest of Detroit got their rear ends handed to them by the Japanese and their application of JIT). Rather, it seems like to me the reliance of having a few owners or a few institutions with consolidated power in the form of money or assets is a recipe for disaster. If anything, it's time to disperse the wealth and responsibility of production to as many firms as reasonably as possible. I'd rather have 20 smaller companies making the same thing than 3 big ones that supposedly make them cheaper due to scales of economy which imo is wrong and that most big firms are in diseconomy of said scales now (prices imo reflect this). Basically, we need to both economically and politically Switzerfy the economy (more dispersed institutions, less central control where reasonably possible).

amelius 5y ago
> Yep, the capital owning class just doesn't care if their businesses go into shock because they already have their cash in hand. What if there was inflation?
- nostrademons 5y ago
  Inflation generally helps big business and its owners. They get to raise prices, and they usually get to raise prices more than the average firm does because they have little competition. You're seeing this now with record-high corporate earnings. As long as the capital-owning class is holding equity (stocks, real estate) they benefit from inflation.
  - Supermancho 5y ago
    > Inflation generally helps big business and its owners. I'm not sure that follows in extreme cases. I don't even think it follows in baseline cases (2% inflation yoy). Raising prices leaves customers with limited resources, as wages do not follow at anywhere near the same rate. If inflation brings prices up, consumers can only spend on specific items, prioritizing necessities over entire verticals of goods. For the vast majority of companies, it's bad.

JPKab 5y ago

The obsession with RoE is really just a major form of efficiency. Having things sitting around unused is a huge reason that US car companies got their asses handed to them by Toyota and their TQM/LEAN system they developed. People writing articles like this forget that it's not just Wall Street, but competitors who created the huge pressures for adopting JIT inventory systems. There's also the consumer. Are you willing to spend the additional money required to buy a car from a company who wastes tons of $ on excess inventory?

ghaff 5y ago
The Toyota system got a lot of attention in the DevOps world because basic principles such as empowering workers resonated with the movement. Reducing waste throughout the system doesn't get as much attention--given that computer software doesn't really have inventory as such (at least not literally)--but inventory/WIP reduction was an important motivation behind Toyota's system.
acdha 5y ago
> Having things sitting around unused is a huge reason that US car companies got their asses handed to them by Toyota and their TQM/LEAN system they developed. It didn’t help but I think that’s more of a symptom of building shoddy products: part of why inventory backed up is that Detroit was producing cars which simply weren’t as good. Toyota didn’t have a shortage of demand, and neither did Saturn. If you make shoddy, poor-handling gas guzzlers, yes, you’ll underperform on sales. That doesn’t meant the only option is less inventory.
- JPKab 5y ago
  There's an entire book (I've read it) about this called "The Machine That Changed The World" published in the early 90's. It goes into great depth as to the issues that were plaguing GM/Ford etc. The excess inventory was absolutely not driven by too little demand. It was simply inefficiency in the manufacturing process and inability to rapidly reconfigure the shop floor or reallocate labor towards bottlenecks. The book is a deep, academic examination of the roots of lean production, and is a must read for any engineer who wants to get the Agile cultists to shut up and go away. I'm a hardcore believer in the ACTUAL Agile philosophy, which is rooted in lean, and I despise the cult of clerics that have risen up around it and turned it into management consulting BS. That book helps to know real agile from consultant billing hours agile.

kwertyoowiyop 5y ago

In the 80s and 90s it was called “unlocking value.”

015a 5y ago

I think his statement is that founder (and family) led businesses are the only businesses capable of building the shock absorbers necessary to weather hundred-year storms; not that they always will. By comparison, committee-appointed CEOs rarely, if ever, will, because they cannot.

The_Beta 5y ago
It's not that they cannot. They don't have an incentive to do it. If I'm being paid for my performance while I'm a CEO, why would I spend money today (and hurt my performance today) to fix a problem that MIGHT affect the company in 20 years
- ODILON_SATER 5y ago
  It just that it is more likely that founders genuinely care about their baby, so they have more incentive to make the company more resilient to long term risks. I don't think this is an absurd claim. It's not that every founder is the same, there are founders who behave just like most CEOs.
- jonas21 5y ago
  No, they literally cannot. Because if they try to, they will be fired by the board for failing to perform and replaced with someone who will undo their work.
- tuatoru 5y ago
  To align incentives, perhaps we should have a law specifying that executive stock options can only be exercised after a delay of 17 years or more.
- kansface 5y ago
  Because you aren't actually being paid for your performance as CEO. You are being "paid" by increasing the value of the company you mostly own. Its up to you to play the long game or the short game. Ivy MBAs don't even have the option.
tonyedgecombe 5y ago

philwelch 5y ago

I’m not sure this is the case. The problem is that RoE is a metric that can be gamed for short term gains while incurring long term risks. This is more likely to be an issue with short term career-oriented leadership. Founders are more likely to have a concern for the long-term success of the business. Simply put, founders are not the people sacrificing their own companies’ long term success in exchange for enhancing their personal careers. A lot of the JIT fashion came from Toyota, and yet Toyota doesn’t seem to suffer from these issues as much as others. I don’t think it’s any coincidence that most of the senior executives of Toyota have all been at Toyota for longer than many of us have been alive, and that the company president is the grandson of the company founder.

Invictus0 5y ago
JIT works nicely in isolation--when everyone relies on it is when it starts to break down. It basically offloads the responsibility of forecasting your inventory needs to the supplier, who has absolutely no knowledge of your inventory needs.
- andrekandre 5y ago
  > the supplier, who has absolutely no knowledge of your inventory needs. that would seem to assume a not close relationship with said supplier... ...doesnt jit work better if you have good relationships with them and they know well what your expectations are and can adjust accordingly?
darawk 5y ago
This is exactly right. It's about the term length of incentive alignment. Most founders have a long term reputational stake in the company they founded. Hired CEOs generally do not.
quartesixte 5y ago
Toyota has over the years adjusted how their JIT operates, and are now known to stockpile certain critical parts. This is pure speculation, but I also wonder if Japan’s geography + slightly more diverse economic landscape (lots of small businesses that do nothing but make components) help make their JIT more resilient to shocks. With Osaka, Tokyo, and Nagoya all within an area less than the length of California, it’s far easier to “in-time” material.

bobdosherman 5y ago

If I estimate a model to predict an anomaly using data that never has any realized anomalies, how well will that model do out-of-sample? While framing this as a bad unrestricted ROE maximization problem is a nice simplification, it's not clear that having everyone move to a restricted ROE maximization subject to keeping assets large enough to insure against some unforecastable shock is welfare enhancing. That could be a lot of wasted insurance. I will give him credit for cleverly spinning this logic all into a pitch to kill the unrealized cap gains tax proposal!

kbenson 5y ago

> He's wrong to suggest that the billionaire class and founders What? How did you get billionaire class and founders? He specifically says founder led companies and family owned businesses. Unless you reduce that group to the Waltons, how does family owned businesses equate to the billionaire class? "Only founder led companies and family owned businesses can stand up to the immense pressure from the dogmas of modern finance."[1] 1: https://twitter.com/typesfast/status/1453753942228160515 https://twitter.com/typesfast/status/1453753942228160515

paganel 5y ago

> I think economists call it rent-seeking. There was a book published a couple of years ago (before the pandemic) which was "demonstrating" (so to speak) that going back through history real financial/economic levelling at a reasonable scale only happened as a result of violent means (wars, revolutions etc). I think what those violent means do (among other, more nasty things like people getting killed) is that (in some cases) they obliterate the societal/institutional structures on which a specific rent-seeking system is based, which gives the majority of the people a chance to "level up" until a new rent-seeking system takes shape.

jonny_eh 5y ago
> violent means (wars, revolutions etc). Also plagues/disease. Currently relevant.
- jason0597 5y ago
  This would be true if lockdowns didn't happen. As it is most of the wealth-owning class was told to shut themselves inside, isolate, then we got the vaccine and they manage to live on and keep their wealth. So not even plagues can save us anymore.
  - jonny_eh 5y ago
    Plagues don't change society by killing the rich and powerful, similar to how war doesn't upend society by killing those people.
marvin 5y ago
Probably "The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century"
- spiralx 5y ago
  No, it's Piketty's controversial book, one of his points was his analysis of historical data showed that the only time the ratio of wealth between capital and labour R decreased was during wartime, especially the two World Wars when incredible amounts of wealth was destroyed, seized or simply reverted to states because there was nobody left who could claim it.

newbie789 5y ago

That part of the Twitter thread actually made me laugh out loud. In the middle of talking about how modern finance is messed up he has a kind of unprompted little aside about how “taxes are bad!!!” Dear lord the amount of smug “wE aRe ThE mOSt EfFicIEnt wAY Of AllOCaTinG CaPitAl” arguments from very wealthy founders that would prefer to become more wealthy is frankly ridiculous. I get it, you went to Stanford and they taught you some fancy words to trick people into giving you money instead of investing in public infrastructure and services.

parineum 5y ago
> “wE aRe ThE mOSt EfFicIEnt wAY Of AllOCaTinG CaPitAl” arguments from very wealthy founders "most" does a lot of work here since it's a relative term. I'm not sure I'd exactly call them efficient but I'm not sure there's a _more_ efficient way that I've seen.
jonny_eh 5y ago
Especially since it's easy for founders of such large companies to sell their shares, but give themselves fewer shares with greater voting rights… thereby maintaining control while spreading the wealth.

phkahler 5y ago

>> He's wrong to suggest that the billionaire class and founders will solve the problem if we only trust them and let them keep their money. He didn't say they'd solve the problem. He said they're the only ones who can be resilient in hard times. OK I think he said the ARE resilient, I say "can be" because it's still a choice. "I think economists call it rent-seeking." That's what the incumbents are after, and so are a lot of the startups - at least the startups seeking round after round of investment. If they're not seeking rent, they're trying to set up infrastructure (manufacturing or cloud this-or-that) and collecting returns (rent) on that investment. Nobody talks about profit on goods sold, they talk about return on capital (or RoE) and that seems a lot more like rent.

gruez 5y ago

> Founders have just as much incentive to optimize the excess out of the system, they just call it "disruptive innovation" by which they mean tweaking how the system works so that they can squeeze out profit for themselves. >I think economists call it rent-seeking. Are you saying all "disruptive innovation" rent-seeking? Or only certain kinds? If a founder was able to "optimize the excess out of the system" by providing a better consumer-facing experience (eg. amazon), why shouldn't they be rewarded with profits? Is there any room for profits without being called a rent-seeker?

TAForObvReasons 5y ago
There are genuine "disruptive innovations" that are not rent seeking, but by and large that is not what we've seen. Picking on Amazon for a moment, their original "innovation" was a sales and use tax dodge: based in Washington, they were able to sell books to California without having to charge the relevant sales tax upfront. That margin gave huge room to provide free shipping and other customer conveniences. Technically customers were supposed to pay a self-reported use tax but many did not. The relevant laws have changed since then, but the general point still stands. Does mere tax and legal arbitrage count as rent-seeking? Absolutely.
- gruez 5y ago
  >Picking on Amazon for a moment, their original "innovation" was a sales and use tax dodge: based in Washington, they were able to sell books to California without having to charge the relevant sales tax upfront. That margin gave huge room to provide free shipping and other customer conveniences. Sales tax in california was 7.25%. While not having to charge tax was a competitive advantage, I'm skeptical that was the defining factor that led to amazon's success. This is further compounded by how prices work in the US (taxes are not included), so I doubt this even made a conscious difference to most people. Finally, the exemption isn't limited to e-commerce sites. According to wikipedia, it includes "companies doing mail order, online shopping, and home shopping by phone". Why did amazon dominate while sears languished?
  - 5y ago

caust1c 5y ago

Yeah, this guy has clearly read about the theory of constraints but his pivot into criticizing the wealth tax on the basis "founders will lose control of their company" is simply bullshit.

JoshCole 5y ago

I think a lot of people just read emotional language and turn off their minds. So let's expand out what you said to make it a bit easier for others to reason about what you said. We're talking about founder owned companies owned by billionaires. So let's use an example of one: SpaceX. You're maligning "disruptive innovation" so let's expand out your claim with the specific example: an order of magnitude reduction in the cost of space flight and the introduction of competition in rural internet service. So you're saying enabling access to other planets and the moon while providing people in isolated areas with internet service is an example of squeezing out profits and you're saying that you think it is rent seeking. Rent seeking is defined as an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs. We already had programs to access space. They were an order of magnitude more expensive. We already had programs to provide internet. They didn't serve well the subset of people that are in remote areas. So in both cases it just isn't the case that the company is doing rent seeking. In other words, you are completely wrong when we use a specific example. This applies to more specific examples. Lets use the specific example of Flexport. It is owned by a founder and you're replying to things posted by them so it's even less of a reach than before. They are introducing computers to an industry that has competitors from the 1400s era. These competitors sometimes have legacy processes built on physical paper and for some of them excel is an example of the use of cutting edge technology. You're saying that doing better than that for people using modern technology is an example of rent seeking.

Agathos 5y ago

The billionaires' tax he mentioned is dead anyway, so that part of the discussion is moot. It was floated a couple of days ago as a possible addition to the reconciliation bill, but it's not in the framework announced this morning.

AussieWog93 5y ago

> Founders have just as much incentive to optimize the excess out of the system ... tweaking how the system works so that they can squeeze out profit for themselves. So do workers, to be fair. The goal of workers in purchasing departments and HR isn't to make the business more efficient but to propagate a cushy lifestyle for themselves and their mates. To an extent, that same misalignment exists in all classes of worker, including engineers. SWEs are probably the worst at this; so many of the problems that we solve don't have anything to do with squeezing the most performance out of the hardware or reducing technical debt. Instead, a huge chunk of our time is spent on man-made bullshit that sysadmins don't solve properly because otherwise they'd be out of a job.

ren_engineer 5y ago

why blame the players rather than the game? It's the government's job to prioritize long term health of the nation Plenty of people warned about the hazards of allowing these companies to outsource everything, government did nothing. Mostly because they are bought off by lobbyists. This could have pretty easily been prevented by putting tariffs on key industries to keep manufacturing here or at least in North America

andrekandre 5y ago
> tariffs on key industries to keep manufacturing here or at least in North America would businesses be ok with that? it seems alot of expensive investing at home when it could be done cheaper overseas... im pretty sure massive lobbying would incur... but maybe im not seeing the whole picture.

BenoitEssiambre 5y ago

>obsession with RoE is a big part of the problem Is this even still true in a super low interest rate environment? Yeah in the 80s and 90s, tying your resources into inventory would have cost a lot in terms of missed opportunity to invest the money elsewhere. But with financing rates near zero or even sometimes negative in real term, wouldn't even the wall street guy be like: sure keep some inventory, cash is cheap right now. This RoE argument seems very last century to me.

scottcodie 5y ago

Economists would say that companies are willing to accept higher risk, the 'return on equity' isn't the only driving force. The question here is who shoulders the risk, the company or the consumer. With JIT, the consumer may bear more of the risk. It may not be a bad thing either. New companies aren't all trying to be rent-seekers, they also try to dodge existing regulation or actually innovate.

deleted 5y ago

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panarky 5y ago

The problem isn't RoE itself, it's the focus on short-term RoE. You can juice RoE in the short term by removing slack and shock absorbers, because increasing the brittleness of the supply chain probably won't show up in this quarter's returns. The supply chain for fuel is brittle. There isn't sufficient inventory in tanks to buffer even short disruptions. A pipeline offline for a couple days is enough to make a crisis. People catch wind of the crisis and start filling their tanks at three-quarters full instead of one-quarter full, and the brittle supply chain breaks with the accelerated demand. Same thing we're seeing with the global supply chain which was already brittle, now individuals and companies are putting in bigger orders sooner to compensate, and it fails in the face of accelerated demand.