Labor and Capital

At various points in my schooling, I was taught that the factors of production are land, labor, and capital, and later, land, labor, capital, and entrepreneurship.

I now realize there is only labor and capital. Land is a form of capital and entrepreneurship is a form of labor.

We are all born with the ability to perform labor. I can show up at a job site and perform labor, but I'm just a guy. If I work, and consume less than I produce (i.e., I save), then eventually I can buy a hammer. Now, I'm a guy with a hammer, and hopefully I can earn a higher wage. If I continue to save (which should be easier at the higher wage), I will eventually be able to buy a saw. Now, I'm a guy with a hammer and a saw. These tools (capital) help to leverage my labor to make me more productive and therefore able to command a higher wage.

Of course, hammers and saws are not the only tools. Some other tools are education, relationships, experience, and character. Some tools that are quite valuable do not require much money to acquire.

There are Two Kinds of People

Takers and givers. A person's response to this choice fundamentally determines their character and (therefore) behavior.

The World is not Fair

Fairness is a human construct. The world, as it exists, is not fair. It is left to humans to create fairness, justice, and mercy.

Corollary to Problem with Measurement Focus

There is an interesting corollary to my view that the more important something is, the harder it is to measure. That corollary was stated here in an economic context:

There may be less here than meets the eye because of the application of what economists call Goodhart's Law, i.e. once an economic indicator itself becomes the object of policy, it losses the information content which qualifies it as an indicator. In the context of China's goal of maintaining GDP growth of at least 8%, this means that China will misallocate capital and pursue sub-optimal policies just to hit that target. This results in asset bubbles and wasted resources in the long-run.

These distortions are common in management as well. Engineers spend all of their time copying receipts for expense reports and filling out time cards, while the company lurches towards bankruptcy.

Software Development as Calvinball

"The only permanent rule in Calvinball is that you can't play it the same way twice!"

Calvinball, created by Bill Watterson in his comic strip Calvin and Hobbes (http://en.wikipedia.org/wiki/Calvin_and_Hobbes), involves combining aspects of many different games into a single chaotic game.

In many ways, software development resembles Calvinball, even when, and perhaps especially when, it is being done well. This leads to many discussions regarding the best ecosystem for software development. The best environment for software development depends on the current activities and the current participants.

For example, sometimes software development is like chess. It requires intense, uninterrupted concentration. During these periods, it is inappropriate to ask the developer to do anything that would be inappropriate to ask a chess player to do. It would be ludicrous to set a phone next to a chess player and ask him to answer it several times an hour (on the first ring!). It would also not make sense to play the game in a cubicle next to various sales people and purchasing agents who must spend much of their time on the phone and in conversation.

At a chess tournament, when a game ends, the players quietly leave the playing area and go elsewhere to converse and await their next game. They don't celebrate and disrupt the other people who are still engrossed in their games.

At other times, software development is like charades (http://en.wikipedia.org/wiki/Charades). The success of the task is dependent on spontaneous contributions from many individuals. The environment is boisterous and restrictions are kept to a minimum.

To maximize the effectiveness of a software development team, cultural norms and workspaces must be developed to allow the various aspects of software development to coexist as harmoniously as possible.

Software Developers Understand that People are not Machines

Some of the best ideas on management that I have read have come from the software development community. A large class of bad management practices insists that "what gets measured gets done" and assumes that management is as simple as measuring some variables and then tweaking the organization to get better numbers.

I wonder if the fact that software developers spend much of their time working with machines helps them see the differences between machines and people. If something is wrong with a program, I can attach a debugger and see what is going on. I have perfect information about the program and the program has no feelings as I inspect it and change it. For most programs, every time I run it with a certain set of inputs I get the same outputs.

All of this stands in stark contrast to working with people. The act of measurement itself has consequences even before the outcome is known.

I also wonder whether people in other fields that create or repair machines share the same insights. Maybe it is only people who don't work with machines that think people can be treated like machines.

How NOT to run a business

The Wall Street Journal has an article on How Bosses Stay in Charge. It describes how not to run a business. In this downturn, businesses have an opportunity to bring in very qualified people that they would otherwise not have a shot at. There is no such thing as overqualified. For a refreshing contrast, see this post. Relevant excerpt:

Phil Eagan recently reminded me of an investor meeting we did early in Viking’s history with one of our largest and most astute investors. I was asked about the commitment of Viking’s founders. I assured the investor that I was committed to our business. I also said that I believed that businesses must choose one of two paths. In the first path, the organization exists to serve the needs of the founders. In the second, the founders exist to serve the needs of the organization.

In the former, the founders maintain control. While they may delegate tasks, they make the key decisions. The founders may hire talented people to support them, but turnover will inevitably result as these individuals realize the limitations of their careers.

In the second path, the founders continually ask who in the organization is best able to fulfill each responsibility, without regard to title or tenure. As the talented new employees demonstrate their abilities, the founders will invite these individuals to share in the organization’s decision making process.

There is an irony in how these two paths are perceived by investors and other outside constituents. In the path where the organization revolves around the founders, constituents will take comfort in the perceived stability of the organization that, they believe, results from the consistency of the founders’ roles. But, I believe an outsider will underestimate the instability that exists at the levels below the founders.

In contrast, on the path where the founders exist to serve the organization, outsiders may perceive a level of instability. They will periodically be confronted with news that a founder has changed his role, ceded responsibility for some decision making, potentially reduced his work load or, possibly, left the organization altogether. However, if the organization has attracted talented individuals, helped to develop their skills and judgment, and established a process in which an individual’s merit determines the level of responsibility given, then the organization likely will endure. I believe Viking is this type of organization. I fully expect that, in the years to come, all of you will prove me right.

Seth Godin on Benefit of the Doubt

Seth Godin has a good post on when people give others the benefit of the doubt. While he discusses miscommunication, it can be extended to include the lack of communication. I read somewhere that when you don't communicate anything, people will make something up themselves to fill the void. Often, because most people will not give you the benefit of the doubt, what they make up is worse than the truth.

This is a key point for managers: communicate enough so that people do not have to make things up, but not so much that you are bugging people. Since people are individuals, learn over time how much information of various types your teammates desire and customize your communication style accordingly.

Punishing Loyal Customers

I am frequently surprised by companies that offer better deals to non-customers than they do to their existing customers. At Constant Wave, we have a policy that no one should be disadvantaged because they trusted us with their business or were an early adopter. When we run special discounts aimed at acquiring new customers, we offer the same discounts to existing customers.

This is another advantage to the SaaS (Software as a Service) model. Since our customers rent the software, we can easily apply a discount to the next month's fee. A sales model would require us to rebate a portion of the purchase price to existing customers.

You're Going to Make Mistakes

You're going to make mistakes, and that's okay. But what's not okay is failing to set up systems to tell you when you've made a mistake.