The Responsibilities of Leadership

The leadership of all organizations have two and only two responsibilities:

• Setting and Managing the organization's vision, mission, strategies, and processes.  The key method they use to manage the mission, strategies, and processes is investment in various types of resources.  The resources include investing in skilled personnel, tooling (mechanisms in the IDEF0 model), and inputs.  In terms of requirements, these are the "must perform" requirements of leadership.

• Governing and managing the organization's policies and standards.  Policies and standards include laws, regulations, and "business" rules.  In terms of requirements, these are the "must meet" (design constraint) type of requirements of leadership.

The military gets leadership right...lives depend on it.  In military organizational parlance units have "must perform" missions, strategies, processes, and "must meet" rules of engagement.

Also see "The Purpose of Governement"

Assembling Services: A Paradigm Shift in Creating and Maintaining Applications

Technically, the key difference in Service Oriented Architecture (SOA), from other IT architectures is that it assembles the applications using the process flow as the guide.  This requires separation of the functions from the process or work flow.

There are many advantages in splitting process flow from the functions.  Among these are:

1. Agility of the application - Simply by separating the functions from the process flow and "coding" them separately the application becomes more flexible.  The reason for this is that simply by changing the process flow (reordering the functions) the application (the service) becomes, affectively, a new application.  If the process flow engine is integrated with a rules engine and repository, and if the rules link directly to the organization's policies, then changing a policy or standard will also, affectively, create a new application (service).  Since neither of these changes requires an additional or recoding, then time to respond to a challenge or opportunity is greatly reduced; making application much more agile (for the definition of Agility see the post "What is Agility?"
2. Ability to insert new technology -  Because a service is assembled from a set of objects or "small applications" - also called Service Components - into a Composite Application (which is the code for the service), one function (one Service Component) can be upgraded without touching the rest of the application.  This greatly simplifies the ability to upgrade the application, also increasing its agility.
3. Enables effective modeling of the process flow - Because the process flow is separate from the functions, the System Architect can model both the current and any proposed or candidate process flows to better determine the optimality of both the process and the enabling and supporting service (Composite Application).  If this "(business) process modeling" is properly linked into the Service development and maintenance processes of an organization, it will greatly aid in optimizing the services even with unexpected challenges and opportunities.
4. Enables good policy enforcement - If, as noted above, the process flow engine is linked with a rules engine and repository, then there is "an automatic" enforcement point each time the process flow engine evokes a new function.  Additionally, when a rule changes, it is immediately reflected at the enforcement point in the process flow engine.
5. Measurement to ensure that the SLA's are met - Finally, since all Services use the process flow engine, it is simple to measure the throughput of each Service Component (function).  This enables good measurement of both the Business-SLA's and the OLAs, simpler root cause analysis when the SLA's are not met, and to feedback to the modeling of the process to help process optimization.

Life Only Occurs at the Nexus of Order and Chaos

Life can occur only a the nexus of order and chaos because, too much order enables a good existence, but does not allow for creativity, growth, and transformation; too much chaos and complexity, and life comes apart.  If grow and transformation is stiffled, then the person or organization begins to die.

Malcom's Question about Measurement in an Organizational Economic Model

What about designing an economic system that properly accounts for the environmental damage done in extracting materials and manufacturing things, finally followed by the removal, destruction or recyling of the expired/ broken/waste product. The price we pay for stuff never reflects the true cost to the earth system.

If you can create the proper organizational process architecture and if the metrics regarding the linkages from the vision and mission statements includes those costs, then there is no reason that the system cannot be more optimized.  Unfortunately, “more optimized” is not “optimized.”  Arrow’s paradox demonstrates that unless you only optimize on “clean water”, at the expense of education, health, air pollution, and most economic progress, etc., you will never completely clean the water.

In the 1980s and 1990s,  I was a member ofa technical committee of the Agility Forum, out of Lehigh University, that defined Key Needs for the Virtual Extended Enterprise.  One Key Need was to fully account for the lifecycle costs of a product during design—the lifecycle is as you describe, from shovel to shovel (design to disposal).  It was a retreaded “new” concept then and still is not integrated into financial management’s thinking.

The reason I’m so interested in organizational economics coupled with enterprise architecture is that it provides new ways, (other than simple financial metrics) for measuring value—at least a notional model of mine does; one that will take a long time to implement technically, and a much longer time, culturally—it really is a cultural paradigm shift.

Risk Defined

"A Risk is an Unknown". 

It is not an Issue.

The hardest thing is "To know what you don't know." meaning to be able to identify a risk. More on this in the Risk Management post coming soon.

When creating a new product or service, or when transforming an existing product or service, "a risk is an unknown in how to design, create, or implement the the product or service to meet the customer's requirements."

Also see my post "The Risk Management Process"

What is Agility?

One concept much tossed about, but little understood, is agility.  Some people tend to equate the agility of an organization with how lean it is.  Particularly finance personnel, the finance engineers, tend to equate the two, since they would like to get both into the organization (even though they do not understand the difference.) They are not aspects of the same process or organizational strategy.  I will compare and contrast the two in another post shortly.

Agility is "an organization's ability to respond effectively (quickly and successfully) to unexpected challenges and opportunities."

An agility organization or enterprise recognizes that both technology and environment external to the organization are constantly changing and that for the organization to survive and reach its vision and mission, it must adapt.

The Paradigm Shift of Service Oriented Architecture

Any migration from fragment or monolithic IT architecture to Service Oriented Architecture (SOA) is not so much a shift either in technology as a shift in thinking about the organizational use of the technology and a shift in thinking from "business" functions (e.g., engineeing, supply chain management, contracts, human resources), to thinking of processes for meeting the organization's strategies, mission, and vision.  This is a cultural paradigm shift.

In addition SOA to a new way to build IT systems--by assembly of components rather than coding.  This is the third time that there has been a shift in how applications are constructed.  The first, was the change from coding in "machine language" to assembler coding (circa 1942 or earlier to about 1958), the second, was to construct compilers like Fortran 1 and COBOL.  These languages enabled programmers to construct applications from code groups.  Shortly, libraries of these code groups were added to enable reuse.  Since then, not much as really changed.  The migration to Object Oriented came close, but is more a paradigm shift in the way of thinking about the coding than a fundamental change in the domain of IT.

There is a fundamental, and perhaps a nearly unrecognized and poorly understood, change in migrating to assembly from developing code that I will discuss in another post--shortly.

Asset and Enterprise Architecture Repository

In the near future, all economic and governmental organizations will need an Asset and Enterprise Architecture Repository to survive.

An Asset and Enterprise Architecture Repository is the content store for all data and information related to the organization's current assets (structured into an "as-is" architecture) and its "to-be" architecture.  The term assets might be limited to the organization's physical assets, but can additionally include its processes, strategies, mission, vision, and personnel (attributed with their skills and talents). 

In the case of SOA, the enterprise architecture must include its processes and might include its vision, mission, and strategies.  For organizations intent on using SOA, these inclusions shift the responsibilities for the processes  of the organization to the IT sub-organization and make Enterprise Architecture, as a decision-making process very important: a major process paradigm shift.

The Purpose of Government

There are three purposes for a government, the "control" function of an organization.

1. Security, both external and internal
2. Standards and Markets
3. Infrastructure, the creation of an environment for invention, innovation, and transformation necessary to create value for the citizens of the political organization.

A careful reading of the US Constitution demonstrates that the founding fathers intutitively understood this.

This is from the Book Organizational Economic: The Creation of Wealth

Also see "The Responsibilities of Leadership"

Creating the Enterprise Architecture Process and the AEAR

Currently, the implementation of an Enterprise Architecture process supporting IT and other investment decision-making, and supporting governance is difficult, at best.  There are two reasons for this. 

First, as discussed in an early post (Using Enterprise Architecture to Reduce the Federal Debt), changing organizational (governmental, and bureaucratic) culture is a slow painful process.  Any process that requires cultural change will create an enormous amount of organizational process friction (particularly from transactional management--the gatekeeper--managers that know the rules, enforce the rules, live by the rules, and thus do not like changes to the rules).  Additionally, it significantly limits the middle manager with a private agenda (the empire builder) to implement the private agenda.  Generally, this takes a champion, like the CEO of the organization to participate any change; then the middle managers will slow roll it.  Additionally, Subject Matter Experts may participate in this slow rolling, if they feel they will be out of a job, or if they feel they are in any other way threatened--Dr. Micheal Hammer speaks well to this overall topic.

Second, even if all of the cultural hurtles are overcome, the second reason for Enterprise Architecture losing any impact, is that Enterprise Architects feel the need for complete "as-is" architecture in the Asset and Enterprise Architecture Repository (AEAR) of the organization before they can start to use the process.  Consequently, they ask for large sums of money and years to create the repository.  The financial engineers of the organization and other looking for ways to cut the organization budget, look at this with jaundice eyes, as an appropriate cut, since there is no ROI apparent, only longer term VOI (Value On Investment).

However, there are ways to greatly reduce both the cost and time (to market) for creating the AEAR and ramping up the Enterprise Architecture process.  More on this in future posts

The Purpose of Laws, Regulations, Policies, and Standards

In organizations of every type, from two individuals, to entire countries, the purpose of laws, regulations, policies, and standards is to reduce the inter- and intra-organziational process friction.  Process friction reduces the effectiveness of the process while reducing the cost efficiency of the process.

Without an archtiecture of policies and standards, it is quite easy to end up with conflicting policies and standards, policies and standards instantiated with convoluted or unenforceable "business" rules and so on, which create more process friction than they reduce.

Systems Engineers use the laws, regualtions, policies, and standards as one category of design constraint requirement in implementing new and transforming old systems.  If these have defects or conflicts the system created or transformed will not operate optimally.  Additionally, it may cause the failure of the effort.

This is one reason that 90 cents of every dollar spent be the US Federal government programs and entitlements goes into overhead.

Types of Customer Requirements and the System Architecture Process

There are two types of customer requirements: functional and design constraints.

Functional requirements are the "must perform" requirements. 

• "The wing on an aircraft must provide 10 tons of lift when configured for takeoff." 
• "The refrigeration must keep food below 40 degrees, but above 32 degrees Fahrenheit."
• "The kitchen faucet must allow for convenient cleaning of large pots."

Design constraints are the "must meet" requirements. "

• "The USB port on the computer must meet the current USB port standards."
• "The application must have two factor authentication."
• "The electric motor must operate using standard 60 cycle, 110 volt current."

The System Architect decomposes the customer's functional requirements and derives the functions the tool or system needs.  Then structures and orders these functions into a System Architecture that may be called a functional design.  The System Architect subsequently allocates the tool's or system's functions to components.

However, the design constraints are not part of the system architecture.  Instead, the System Architect simply allocates these to the components at the time he or she allocation the functions.

Using this System Architecture process will greatly reduce the complexity of complex implementation and transformation efforts, which significantly reduces the probably of failure of the effort

The Hierarchy of Knowledge and Wisdom

There is a definite hierarchy knowledge (and wisdom).

• Data element (datum) - something measured
• Data (data set) - data elements organized around one or more measurable dimensions
• Information - an abstraction of a data set, frequently a mathimatically and/or pattern abstraction
• Knowledge - an abstraction of information, frequently a causal pattern
• Wisdom - the ability to understand the consequences of the application of knowledge

The Purpose of Tools (including IT Tools)

Most financial analysts, finance engineers, and managers forget that the purpose of a tools is that of a process multiplier, that is, make the process perform better, cheaper, faster or any and all of these three.  Finanically and department managers want to take all of the credit for any process improvement, while always attempting to make the tooling more "cost efficient" even at the expense of making the process less effective.

Thoughts on Solving the Federal Debt Issue

There is a straightforward, though culturally and politically difficult, way to reduce the US Federal debt.  It is through the proper application of process Enterprise Architecture as applied to the Federal Enterprise Architecture Framework (and embodied in DoDAF 2.0).  This is what the Clinger Cohn Act envisioned; but what hasn't panned out, so far.

Using Enterprise Architecture would spotlight where organization's have gone beyond their charter; sometimes well beyond, bureaucrat's that are spending on private agenda's, and many types of waste making the departments costly, ineffective or both.

There are two keys to effective use of Enterprise Architecture in this setting.  The first is in integrating Enterprise Architecture into the business processes of the organizations such that they have the power to more optimize the organizations processes and systems to meet their mission and/or charter.  Technically, this is relatively straightforward, and should be simple, except for the second key.  That key is to change the department, agency, or bureau's culture and the power of management to enable them to spend on private agendas, while having it seem to be part of the charter.  This is the hard part because of the threat to the power of the mid-level managers.

A second problem is getting the Enterprise Architecture with its associated Asset and Enterprise Architecture Repository set up and running.  More on this in a future post, "Using Enterprise Architecture to Reduce the Federal Debt".

Knowledge Value--From Organizational Economics: The Creation of Wealth

Knowledge is the third way an organization’s processes create value.  Knowledge is defined as “a result or product of knowing; information or understanding gained through experience; practical skill or ability.”[1]  The operative words to this definition are: “result”, ”product”, and “experience.”  Knowledge is an understanding of the patterns of information within a temporal stream of information.  It is skill gained through time.  As information is a transformation of data, so, knowledge is a transformation of information; and there is always a temporal element in the transformation of information into knowledge.  It takes time to see the patterns in the information and to understand them well enough to extrapolate knowledge from them.

(Also See posts: The Concept of Value, Capacity Value, and Political Value)

---

[1] Funk and Wagnalls Standard Desk Dictionary, vol. 1, (Funk and Wagnalls Publishing Co, Inc., 1969), p. 359.

Health economics –unnecessary treatment and economic costs of illness... and goodbye

This blog has been quiet lately.  The evidence is mounting in support of much of my earlier analysis of Australia’s housing market, while the Government attempts one more manoeuvre to bolster the market.  The supreme risks to the market are no longer a secret, and our chronic supply shortage has been receiving far less airtime.  There is very little for me to add to the current discussions.

One reason for the lack of posts is that I am studying for the GAMSAT test that one needs to pass before commencing a graduate degree in medicine.  Yes, my disillusionment with economics has driven me to seek a more useful profession. And despite my rational nature, I will give up quite a deal of income for it.  At least this economist knows that money doesn’t buy happiness.

In this final sign-off post it may be worthwhile taking a look at economic issues surrounding medicine and health care.  This is a burgeoning field, with demand growing for paper shufflers of this particular specialty, and universities eager to fill the void with a qualification.

My core argument in this field has been that increasing preventative health care, while having the benefits of a healthier and long life, often come at increased total lifetime health costs, rather than decreased costs as is often proposed.  Remember, we all die some day, and any potential cause of death postponed will allow another to take its place, which of course has its own health costs.  Alternatively, a more healthy existence may make us more productive for longer and lead to us contributing more in taxes over our lifetime than the potential increase in health costs which were paid through the tax system for our preventative care.

Governments, and subsequently economists, worry about these things because many health care costs are borne by others though tax revenue, yet the net economic effect is anything but straightforward.

In light of these concerns a cottage industry of economic analysis has developed pandering to the interests of particular interest groups involved in medical research.  Each disease these days seems to have a lobby group, and to ensure funding for further research it is necessary to argue in terms of economic costs and benefits of a cure or treatment. 

Over at Catallaxy Files there is an interesting take on the abuse of economics and shady use of statistics when consulting firms are asked to produce reports on the economic cost and impact of a particular disease. After prodding around the reports from one firm, the author notes that:

Adding up the estimated economic cost of all these conditions begins to exhaust the GDP, which suggests that the estimates of the economic costs are grossly exaggerated for a number of reasons.  This should not come as any surprise of course since the sole purpose of these studies – they have no academic credibility – is to provide RHETORIC  to bolster the case for the RENT SEEKERS who are attempting to prize out additional taxpayer monies to support their particular activities, worthy though they may be.

One of the real problems with these studies is the double/triple/…  counting associated with these studies as many people have multiple pathologies.  Moreover, the projections of the numbers afflicted by these conditions in the future should be treated with a grain of salt (probably box).

These studies also conflict with the findings of the Productivity Commission in their work undertaken in relation to the National Reform Agenda. In large part because most people with chronic conditions manage to continue their working life, the PC’s estimates of the cost of most chronic conditions (including mental illness) are not especially high.

The interesting work of Eric Crampton at the Canterbury University – great paper delivered at the Mont Pelerin Society – also shows that government studies of the economic costs of alcohol use are grossly exaggerated. There are typically  both conceptual and measurement mistakes.

I have a slight problem comparing the sum of a total cost of over time (total economic cost) with a flow of production in a single time period (GDP), but the general practices of double counting, including a potential undiagnosed population, and taking the extreme assumptions of the diseases impact and applying to every candidate, are intentionally misleading.

This is perhaps one reason why proponents of preventative medical treatments overstate the aggregate benefits to the community and subsequently the reduction in health cost borne by the taxpayer. Another reason preventative health care does not always provide net benefits can be explored at an individual level.

Movember have been a huge promotional success, yet at the heart of the charitable event is a desire to raise awareness of prostate cancer and promote early detection and preventative treatment.  However, this particular cancer is possible one case where the cure is worse than the disease at an individual level.

This article argues the case against early screening for prostate cancer.

They know that prostate cancer is overwhelmingly a disease that kills men late in life. The average age of death for prostate cancer in Australia is 79.8 years, while the average age for all male cancers combined other than prostate cancer is 71.5.

The average age of death for an Australian man is 76 so on average, men who die from prostate cancer actually live longer. In 2007, just 2.8 per cent (83 men) who died from the disease were under 60, and 10 (0.1 per cent) were in their 40s.

The author notes that the unnecessary treatment undertaken by many men as a result of early testing often leads to impotence and occasionally incontinence, when there was a very high probability that they would have died from another cause before the cancer severely impacted their health. 

Medical associations and governments try hard to examine these issues prior to funding and promoting preventive health care.  Where current screening techniques return too many false positives the chances of over treatment are severe. One the other hand, a screening technique returning a high number of false negatives may not be such a concern if the disease develops slowly and screening is recommended periodically.

In all, it seems that the health industry is not immune to manipulative economic analysis and rent seeking behaviour.  I am sure there are positive ways economics have been contributing to debates on public health, yet in the haze of spin it gets very little publicity. 

Thanks to all my readers for contributing ideas and thoughts on this blog in the past few years. 

Merry Christmas.

Cameron

What is Architecture?

One of those vexing questions of IT enterprise architecture is "What is architecture?"  It really hasn't made sense to most software designers and developers and it seems to have no role at all in business or organizational management, or in government.  Yet, for complex systems of every type, it's exceptionally important.

An architecture is the functional design of a system.

For example, a kitchen architect takes the customer's requirements, decomposes them and derives a set of functions for the kitchen.  For example, the kitchen will be used by a near professional chef, then the amount of preparation space, the size of the stove, oven, and refrigerator will be much greater, than for the typical bachelor, for whom the microwave is sufficient for most everything.  Therefore, the functions of the kitchen and the budget for redoing the kitchen will be much different.

However, the architect does much more than derive the functions, the architect looks at the space and "structures and orders" the functions with the space for the kitchen to optimize the utility of the functions.  This is the functional design.  It says nothing about the kind of countertops, or the type of stove or flooring.  That is the next step in which the architect "allocates" functions to components.

Likewise, IT system architecture derives, structures, and orders a functional design for the system and then allocates the functions to components, like service components in a Service Oriented Architecture.

While creating an architecture process is hardly ever ignored in building construction, never in aircraft development, and many other complex mechanical systems, it is hardly ever performed, or very poorly performed in software.  This is the reason for the adage: "If builders built building the way software developers developed applications, the first woodpecker to come along would destroy civilization."

Therefore:
"Architecture is also the process of taking the customer's requirements and through decomposing, deriving, structuring and ordering, allocating, and performing tradeoff studies creates the systems functional design and defines the components required to meet the customer's requirements."

That's awfully long for a definition of a process, but that is what all architects, in whatever field do.

Capacity Value--From "Organzational Economics: The Creation of Wealth"

"Capacity is the second way that an organization’s processes create value.  Capacity could be defined as “creating more of the same.”  If an organization is successful at developing a new product or service, they will need to produce more of the product.  They have two ways to do this. 

First, they can try to increase their own capability.  For example, suppose a person, who can make $150 per hour, needs the lawn to be mowed.  One way the person can get the lawn mowed more quickly is to buy a wide self-propelled mower.  This means fewer trips around the yard, and more time to make more money.  The person has increased his or her lawn mowing capacity.  

Second, they can purchase the capability from others with almost equivalent skills.  The first organization is purchasing capacity from the second.  For the person who needs his or her lawn mowed is to hire someone else to do the job.  By hiring the capacity at a lower cost per hour, if the person spends an equal amount of time working, the person ends up with more money.  This is the reason that one of today’s fastest growing industries is the “Temp” agency.  This industry provides temporary help, from clerks, to MBAs, to mechanical engineers, to theoretical physicists, so that growth is adding to the capacity of an organization to handle the current business or a current development effort."

(Also see posts: The Concept of Value, Knowledge Value--From "Organizational Economics: The Formation of Wealth", and Political Value--From "Organizational Economics: The Formation of Wealth")

The Definition of the Disciplines of Systems Engineering

I posit that the Systems Engineering discipline has three sub-disciplines:

1.       Systems Engineering – the role of the systems engineer is to work with the customer to identify the customer’s “system” and “programmatic” requirements and to ensure that the customer’s system requirements are met (the system has been validated.)

2.       System Architecture – the role of the system architect to:

a.       decompose the customer’s requirements and to derive the functions needed to meet those customer requirements,

b.      then structure and order the functions into a functional design or system architecture (what M. Griffin calls an elegant design), and

c.       finally to allocate the requirements to components using tradeoff studies to determine the actual components. The design is then handed off to the SMEs for detailed design and component verification

d.      The system architect the verifies the functions and works with the configuration manager to ensure that the system that is verified is the system that is migrated to the validation procedures

3.       Enterprise Architect – the role of the enterprise architect is to support the organization’s investment process to ensure that the funded projects and programs optimize the systems and tooling for the organization to meet its mission using its strategies.  Additionally, the enterprise architect supports the Governance and Policy Management process to ensure that the policies and standards minimize the intra-/inter-organizational process friction.

There is a good deal of detail I left out, like the fact the risk management ties the requirements to the design in multiple ways.

Most IT ignores most of System Architecture process completely, and goes directly from poorly identified customer requirements to components, creating systems with many redundant components, with many unnecessary components, with missing functions, and with gaps at interfaces among the components.  These the teams consider “design defects” which is probably right because the team did not take the time to perform system architecture to create the functional design.

Systems Engineer must identify the mission, strategies, and model the organization’s process, if they want to use SOA…otherwise, the SOA implementation will be a flat failure…I suspect this is true of most Cloud Computing, as well.  This steps beyond of the boundary of traditional IT into business process analysis…per Dr. Michael Hammer, and into the world of the virtual extended enterprise and the next generation manufacturing efforts, that I worked on in the early and middle 1990s under DoD and NSF grants.

My definition of the role of the Enterprise Architect is unique, as far as I can tell, even though it is based directly on concepts in the FEA/DoDAF 2.0.  This is well beyond traditional IT and into organizational management and decision-making.

Transformation and Development

For all transformations of existing or development of new products and systems there are only two processes; Requirements Identification, and Validation (RIV), and Design and Implementation (DI).  RIV works with the customer to identify the customer's system and programmatic requirements and ensure that the requirements are met.  This is the "what the customer wants."  The DI provides the "how the requirements will be met" by transforming and existing product or system, or by developing a new product or system.

Everything else is in getting the correct and complete requirements from the customer, and the details of design, like what subject matter is needed, and so on.

Ellinger's first rule of customers:  "Customers don't know what they want, but they do know what they don't want."

Political Value

There are two types of political value:  Mediation and Exploitive

• Mediation - sets policies and standards to reduce intra- or inter-organizational process friction.
• Exploitive - is gatekeeping, that is, I won't let you pass until you provide me with some value, whether it is getting all of the i's dotted and t's crossed or forking over the contents of your pockets (greasing the skids, so to speak.)

Mediation political value is one the key missions of any government, though, throughout history the majority have used exploitive political value.

(Also see posts: The Concept of Value, Knowledge Value, and Capacity Value)

Parkinson's Law

Work expands so as to fill the time available for its completion

Some might know Parkinson’s Law as it has been quoted above, yet the implications of this law are rarely acknowledged.  In bureaucracy this is especially the case. I have witnessed it firsthand.  Ironic, since the ever-expanding British bureaucracy was the focus of Parkinson’s original 1955 article.

Parkinson’s work may have been seen as mere parody, yet his insights appear to be consistently proven over time.  This very blog post was achieved under pressure of time, utilising this Law to my advantage.  Had I allowed myself and hour it would have taken an hour.  Since I allowed myself just 30 minutes, with a 3pm deadline, magically, I expect it to take that long.

Parkinson’s explains the theory behind his law starting at a position best summarised by this passage:

Granted that work (and especially paper work) is thus elastic in its demands on time, it is manifest that there need be little or no relationship between the work to be done and the size of the staff to which it may be assigned.

He finishes with this gem of a formula explaining the continuous growth in numbers of bureaucrats.

(Where k is the number of staff seeking promotion through the appointment of subordinates; p represents the difference between the ages of appointment and retirement; m is the number of man-hours devoted to answering minutes within the department; and n is the number of effective units being administered... and where y represents the total original staff)

Parkinson notes that this figure will invariably prove to be between 5.17 per cent and 6.56 per cent, irrespective of any variation in the amount of work (if any) to be done.

The figure for Australian States in the past decade was a measly 3.1% - still significantly faster than the rate of population growth.  Yes, government is outgrowing the country.

A further development of Parkinson’s ideas is his Law of Triviality, which suggests that organisations give disproportionate weight to trivial issues. Parkinson dramatizes his Law of Triviality with a committee's deliberations on a nuclear power plant, contrasting it to deliberation on a bicycle shed. A nuclear reactor is used because it is so vastly expensive and complicated that an average person cannot understand it, so they assume that those working on it understand it. Even those with strong opinions often withhold them for fear of being shown to be insufficiently informed. On the other hand, everyone understands a bicycle shed (or thinks he or she does), so building one can result in endless discussions because everyone involved wants to add his or her touch and show that they have contributed.

The Law of Triviality can be expanded to apply to the state of public debate surrounding important political decisions.  Debate over where to host the local Christmas carols often trumps the debate surrounding reform of the banking sector or our participation in wars in the Middle East.  Perhaps we simply prefer not to think about these big issues for fear of being overwhelmed.  

In all Parkinson's insights seem to be rarely used to our advantage.  

Concept of Value

"One person's junk is another's treasure".  That is, value is in the eye of the beholder.  In other words, anything is only as valuable as someone is willing to pay you for it.

There are three reasons that someone is willing pay someone else:

1. The supplier has knowledge that the customer doesn't have - i.e., Knowledge Value (see post on knowledge value)
2. The supplier can add to the capacity of the customer - i.e., Capacity Value (see post on capacity value)
3. The supplier has access to or can prevent access to knowledge or capacity - i.e., Political Value (see post on political value)

I will post examples of each in the future.

Organizational Economics: The Formation of Wealth

In this blog, I will present ideas and concepts from the of economics, coupled with history, geography, enterprise architecture, religion, political science, and ecology/evolution.  Most of the ideas and concepts come from my book Organizational Economics: The Formation of Wealth (c) 2009.  However, I will post other ideas and concepts for thought and comment.

As for the book, the introduction to Chapter 30, is a good start on the overall concept:

"In his book, Dragons of Eden, Carl Sagen, defined a concept called the hopeful dragon.[1]  The hopeful dragon is an outcome of a mutation.  Many times organisms—beasts—mutate.  Most of these mutations are dead ends; complete monsters that quickly die.  Occasionally, though, the mutation becomes a hopeful dragon.  A hopeful dragon is a beast that has mutated in some way that gives it the potential to be superior to other beasts currently inhabiting the territory.  He calls the beast a dragon, because it is different from the other beasts.  It is hopeful, because it is potentially superior in some way.  Nevertheless, hopeful also means that it has not reached anywhere near its full potential; it is only a start.

Currently, economic theory is a polyglot of many models and concepts.  The hopeful dragon of organizational economic model reduces this cacophony of competing models to the order of an evolutionary economic ecosystem, the knowledge-based organization.  Organizational economics is about the transformation of the traditional exploitive organization, throughout history into knowledge-based organizations.

There may be many holes remaining as it is intended that the knowledge-based organizational model presented is only as a theoretical framework, not a complete and elegant theory.  It probably suffers from the problems of the first instance.  That is, “The first instance of a superior principle is always inferior to a mature instance of an inferior principle."[2]  The organizational economic model has the potential to create a much more realistically representation of the way its domain works.  By opening up the “black box” of the organization and process, and by clearly defining the types of value and showing how the organization can grow value, the model has integrated a disjointed field of research.  It works both at the micro-economic level and at the macro-economic level.

This book has attempted to unify macro and micro-economics into a single useful theory by modeling both the internal and external components of the organization, organizational economics replaces the short-term metrics of return with longer-term metrics of the value of the organization.  By getting to the core of the value-producing engine, the process, the model focuses on the how to increase or optimize the organization’s ability to produce value.  In the process of unifying micro- and macro-economics, it has integrated economics with geography and history, that is, time and space.  Additionally, it has integrated diverse abstract concepts like consumer behavior models, organizational governance, exploitation, and scarcity versus abundance mentality.  Finally, it has looked at economics through the lens of a major shift from data storage on paper and using hand calculation methods to the use of automated systems interlinked through the Internet, that is, the coming “information age.”

The shifts in culture and business are incalculable at this time, though a great number have been put forth by “The World is Flat, Megatrends, etc. in popular literature.  Yet, the organizational cultural shift will be much more dramatic and pronounced than this literature hints."

---

[1] Carl Sagen, Dragons of Eden, (New York: Random House, 1977).

[2] Anonymous,  this is call the Law of Superiority

GDP only positive because of rain drenched agriculture

Today’s National Accounts figures were not a huge surprise - except, of course, to many of the mainstream economic commentators, some of whom continue to demonstrate their undying faith by stating that the decline is nothing to worry about.

Neither are the downward revisions to the June quarter figures worth a second look.  The June quarter growth trend down was revised down from 0.9% to 0.7%, and seasonally adjusted down from 1.2% to 1.1%.

And possibly my favourite lines from the ABS release –

In seasonally adjusted terms, Agriculture (up 21.5%) contributed 0.4 percentage points to GDP growth driven largely by strong forecasts for grain crops... GDP increased 0.2% in the September quarter, while non-farm GDP fell 0.2%

If it wasn’t for the surge in agriculture driven by last season’s strong rains, GDP growth for the quarter would have been negative, and for the year, just 2.3%.

Perhaps it is time to revisit some forecasts by our favourite economists back in September.

Peter Jolly, NAB - Our year ended GDP forecast has lifted to 3¼% from a little under 3%

Christopher Joye, Rismark - The economy is about to embark on a period of above-trend growth

Warren Hogan, ANZ - Hogan believes we are about to see a period of serious inflationary pressures thanks to the commodities boom's income wave

Michael Blythe, CBA - reckons the income surge will add 3 or 4 per cent to GDP over the next couple of years.

Yet the serious inflationary pressures and above trend growth seem to be a little hard to come by at the moment.

At least I can give myself a plug.  Heck, isn’t that what economists do?  My prediction from early September - Inflation and GDP will surprise on the low side in the September quarter.

Steve Kates explains much better how the data early in the year was deceptive due to the dramatic impact of fiscal stimulus, and that the private sector recovery is yet to appear. 

Mid-week links

Using the National Accounts to better estimate changes in well being (PPT link) – from the OECD Measuring Progress Agenda.  Aka - Why I don’t feel like I benefit of changes in GDP.

A better comparison of the cost of living in cities around the world?  Numbeo provides a user generated cost of living index for any city in the world, with prices updated continuously as users add price data. 

One interesting comparison - Consumer Prices in Munich are 14.65% lower than in Brisbane, and

Consumer Prices Including Rent in Munich are 5.13% lower than in Brisbane. 

Who desires a longer commute? Apparently a 7% of people desire an extra 5 minutes commuting time (from here) -

In one of their studies, Mokhtarian and Redmond examined the commute (i.e. the trip to and from work). They conducted a survey in the San Francisco Bay area which asked subjects what duration their ideal commute would be, and whether their current commute is the “right” length or not.

Counterintuitively, very few people expressed a desire for a commute of “zero.” The most frequent response put the ideal commute at 15-19 minutes, and almost a third of the sample actually said their ideal commute was over 20 minutes. Only 1.2 percent answered zero; this surprising result was largely borne out in follow-up focus groups, where subjects were prompted that zero was a permissible answer.

A comparison of respondents’ ideal commutes and their actual commutes revealed that while most (52 percent) wanted their journey to work to be shorter, 42 percent reported their commute was about the right length and seven percent (mostly those with short commutes) actually wished it would take them an additional five minutes or more longer to get to work. On average, people wanted a commute of around 16 minutes.

I suspect there may have been confusion from respondents about what the question was asking – Do you desire to live in a location where the commute is X (longer, shorter, zero etc)? Or, do you want the commute from your existing location to work to be X (longer, shorter, zero etc)? Or, what is the ideal commute time from your current location with current transport systems?

More on the Peltzman Effect - Night clubs are employing emergency medics to monitor the crowd, yet the Australian Medical association has concerns that it gives a false sense of security to revellers. I can just imagine the conversation – “If you want to experiment with new drug X, do it here because they have medical staff!”

Finally, from The Onion, a spoof economics and finance article that might just make it to the front page of an Australian daily newspaper.

WASHINGTON—Some sort of tax cut or earnings or money or something was reported in economic news this week in further evidence that a lot of financial- related things have been going on lately.

According to numerous articles and economics segments from major media outlets, experts on banks and such have become increasingly concerned over a new extension or rates or a proposal or compromise that could signal fewer investments, and dollars, and so on.

The experts confirmed that the stimulus has played a role.

"This is a clear sign of a changing cycle," some top guy at one of the big banks in New York said of purchasing power parity or possibly rate of return during a recent interview on CNN. "Which isn't to say that a sustained drop in wages couldn't still occur, even if the interest paid on reserves is lowered."

"In short, it's possible but not probable that growth could outpace our initial expectations," added the banking guy, who went on to say other money things, too. "It depends on investor sentiment."

The man, who also apparently mentioned the Nasdaq, the Dow, and the Japan one at some point or another, talked for a really long time about credit or reductions or possibly all these figures, which somehow relate to China.

Greece was also involved.

Prison, parenting, selection bias, and measuring success

In both parenting and the legal system one must carefully consider the role of punishment.  Recently, the discussion surrounding imprisonment has become focussed on rehabilitation, using recidivism rates inappropriately as a statistical measuring stick of success.  This seems to be the product of confusing success in parenting with success in crime prevention.

For seasoned criminals one must ask whether rehabilitation is genuinely the purpose of imprisonment.  Surely, a more effective way to rehabilitate offenders would to have a wholesome family adopt them into their home and demonstrate law abiding ways to live and prosper.  Imprisonment with other criminals for an extended period seems strongly counterproductive to a shift to a more law abiding lifestyle.

As one insightful commenter noted here, even low rates of recidivism would be not be a signal of the success of imprisonment  because they can be caused by factors other than reform or a desire ‘not to go back there.’

1.      Crime is committed mostly by young men. As a man gets older, he’s less likely to reoffend.

2.      Crime is sometimes committed as a one-off event (such as crimes of passion, or rare opportunity). These are unlikely to be repeated.

3.      Convicts are sometimes innocent. These people, too, are unlikely to reoffend

Clearly, the function of imprisonment is to act as a deterrent to all potential criminals, not just to those who have already been imprisoned. This is quite different to punishments set by parents for their children, where there purpose is twofold – prevention of initial offence of a single child (or few children), plus a deterrent to future offences, or what might be known as rehabilitation.

Recidivism rates after punishment are important for parents.  Repeat offences by children (it sounds odd to say it like that) signal that the punishment was not appropriate for either the initial prevention, or rehabilitation.  For parents to encourage appropriate behaviour in their children they need to adapt their punishments so that each child will respond to them.  There is usually no one-size-fits-all approach.

With criminals, punishment needs to be a one-size-fits-all approach, and if that is insufficient to prevent some crime, then those individuals will have to accept that punishment, often repeatedly. There is no room, unlike parenting, to adopt individual punishment regimes to rehabilitate the whole criminal populous. 

I want to leave you with a long excerpt on the inappropriate use of recidivism rates to evaluate the effectiveness of imprisonment from this article.

This is a peculiar objection to imprisonment—rather like complaining that your TV is not working because it does not defrost chickens. Reducing repeat offending is not the purpose of prison. Its purpose is to reduce offending. It does this in two ways: by deterring people from committing crimes and by positively preventing them from doing so while they are inside.

But doesn't the high recidivism rate show that prison is not an effective deterrent after all? It does not. Testing the deterrence effect of prison by observing the proportion of ex-prisoners who commit crimes is a bad case of the statistical error of "sample bias." Prisoners are, by hypothesis, people for whom the threat of prison is an insufficient deterrent to crime. That prison does not deter ex-prisoners tells us nothing about how much it deters the rest of the population, nor therefore by how much it reduces crime.

Once you think of criminal punishments as deterrents, 100% recidivism is unsurprising, because the first conviction is the most expensive for a criminal. This is when he incurs the one-off, irrecoverable costs of becoming a known criminal, such as diminished career and social prospects. If the chance of incurring these costs (in addition to the penal costs) did not deter him from committing a crime, then the inevitably lesser costs of subsequent convictions are unlikely to deter him. This is true whatever the legal penalty for crime—be it torture, prison or "community service"—and however effectively it deters first crimes. Recidivism is a red-herring.

Alas, those who complain about recidivism do not think of imprisonment as a deterrent. They think of it as being more like a medical treatment, aimed at "rehabilitating" people who have succumbed to a behavioral disease that they caught from our unhealthy society or, perhaps, from their genetic inheritance. Crimes are not the actions of people weighing costs and benefits; they are the symptoms of a condition, like the suppurating blisters of an impetigo sufferer. Criminals need to be cured, not punished.

To understand the mistake here, consider my misspent youth. I often achieved mediocre grades for my schoolwork. This would prompt my teachers to speak rudely to me, usually accusing me of being unacceptably lazy. Yet I noticed that when one of my notoriously stupid classmates achieved the same mediocre grades, praise was heaped upon him. This struck me as unfair because, as I pointed out to my teachers, I could no more help being lazy than he could help being stupid. And then they spoke rudely to me again.

Whatever the justice of it, my teachers' unequal treatment was justified. For, although we may all have dispositions that we did not choose, some of these dispositions still respond to incentives. Because I was lazy, I required more badgering than most pupils did. Nevertheless, enough badgering would make me work. We lazy people are not immune to incentives. No amount of badgering or other punishment, however, would have improved the mental powers of my stupid classmate. Because stupidity does not respond to incentives, scolding him for it would have been pointlessly cruel.

Many criminals may well have unchosen dispositions that incline them toward violence or disobedience, or that make it harder for them to find paid employment and hence incline them toward illegal sources of income. Discovering such causes of crime makes many people move into the anti-punishment camp. But it should not. Punishment would be misguided only if, like stupidity, such criminal dispositions did not respond to incentives.

Yet they obviously do. Imagine that some technological advance meant that every theft resulted in a correct arrest, and that the convicted thieves were brutally tortured. Can anyone doubt that thievery would go into sharp decline? Or, if you prefer real world examples, compare the amount of drug-related crime in the U.K., where convicted drug dealers are imprisoned, with the amount in Singapore, where they are executed.

The Australian Housing Fiasco

The Australian housing market has experienced a hiatus at this blog but has been the subject of intense debate elsewhere.  Time for an update on Shocking Tales, Government Intervention, Why we are different, A ridiculous publicity stunt, and Google predictions.

Shocking Tales

Some say the when he catches cold it takes a $40billion bail out to bring him back to health, and that he sneezes deflation, all we know is... that the Stig of Australian banking, insider ‘Deep Throat’, has provided spectacularly shocking insights into the world of banking and housing finance.  Consider the following comment about the use of automated valuation models to ratchet up home values on loan books.

So with roughly a revaluation of the property of 20% (ask any property spruiker, “That’s nothin’ mate!”) a bank can save itself $3.20 of capital per $100 of mortgage which can be recycled as capital to support another mortgage. Think about how that increase in both return on capital and funds allocated to another mortgagor slave is an absolute incentive for bankers to perpetuate the cycle up of house price valuations. Their reward? Huge bonuses based on what is in essence a positive reinforcement spiral where everyone pats each other on the back for what a great job they’re doing. Well at least, that is, until the money runs out

There are more shocking tales over at Delusional Economics, including a prescient story behind the latest intervention being considered by the Australian government to prop up the housing market and the banks.

Government Intervention

The proposed intervention involves extending a government guarantee to residential mortgage backed securities, ala Canada, essentially shifting risks taken by banks in the housing market to Australian tax payers in a bid to secure the ability of Australian banks to raise capital as asset values stagnate.  Welcome to the world of moral hazard that is banking.

What makes the whole fiasco so outrageous is that is has proceeded under the guise of increasing competition in banking and under the housing affordability banner more broadly.

Eager to spur competition in a banking industry dominated by National Australia Bank, Commonwealth Bank, Westpac and ANZ - now with rates higher than central bank policy - Canberra plans sweeping reforms to open up the mortgage market more widely to smaller lenders, by creating a bigger government-backstop to residential mortgage-backed securities. (here)

Regardless of whether we are following Canada into financial a black hole, the degree of continued government intervention is one reason why we are different, for now. Another is variable rate mortgages.

Why we are different

Australia’s love affair with variable interest rate mortgages has enabled monetary policy to be highly effective, unlike other countries that have suffered at the hands of the financial crisis. This gives government, via the RBA, plenty of ammunition to prop up house prices while appearing to act on affordability.  And it also makes our monetary policy far more effective than our counterparts in the US, Asia and Europe.

Of course the big dilemma is what is happening elsewhere in the economy. The dramatic drop in interest rates by the RBA in late 2008 failed to stimulate the housing market without the added assistance of the first home buyers boost.

Given this situation, and coupled with government’s obvious strong desire to see housing prices stabilise, one must be careful when entering into a bet on house prices.

A ridiculous publicity stunt

Australian property spruiker Chris Joye has challenged US fund manager Jeremy Grantham to bet on house prices. This comes as a result of Grantham’s scathing analysis of the extent of Australia’s housing bubble.

As others have remarked, it is a classic ‘heads I win, tails you lose’ bet.

This is the deal. Rismark believes it can facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index, which is universally regarded as the most accurate and timely house price benchmark in the market.

Mr Grantham’s investment would be structured as a very simple “delta-one” transaction: for every 1 per cent fall in the index, Mr Grantham would receive $1 million. Conversely, for every 1 per cent rise in the index, Mr Grantham would pay $1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk.

There are three main reasons why this is all publicity and no substance

1.      The nature of the index

...look at the index Joye wants to use, the RP Data-Rismark Index. You may recall I mentioned above that Joye was the Managing director of Rismark International? Talk about a conflict of interest. Joye wants Grantham to take a bet, the outcome of which is directly reliant on an index which doesn't allow public examination of their methodologies and further to this one that Joye's company is directly involved with? Surely he jests! (here)

Have I mentioned the hazy area of hedonic price indexes before?

2.      Exchange rates

I’m no genius, but if I was an American investor I would want my return in US dollars.  At current exchange rates (which are already dropping from their record highs), the bet in AUD would expose about US$98million to the AUD.  He would be paid AUD$1million for any 1% decline in the index.  Unfortunately a decline in the index will be accompanied by speculation of lower interest rates leading to a decline in the Aussie dollar.

Say the price index falls by 15% and as a result of renewed uncertainty about the strength of Australia’s economy the AUD declines to $0.75USD.  Grantham would win the bet, but lose financially.  He would now have AUD$115million, which is only USD$86.25million – a loss of 12%.

Assuming his position does not entail actually having AUD$100million, but is simply a gamble on the move of the index, he would still earn just USD$11.25million for that 15% move. Remember, the greater the decline in the house price index, the greater is the likely impact on the exchange rate, so Grantham effectively faces a limit to his gains.

3.      Australian government intervention

When the counter-party to your bet has a direct line to many political power brokers (Malcolm Turnbull, the Liberal Party treasurer, had known Joye as a family friend for 15 years), and the Australian government seems hell bent on doing whatever it takes to prop up house prices, I wouldn’t be too keen to put my money on the line.

Even after offering this outlandish challenge, Joye disclaims his position by saying that Australian dwelling prices will be placed under modest downward pressure over the next 12-18months.  This makes no sense, until you look at the following scenarios.

The bet is taken, Joye wins. Now Joye can claim that his index is superior and used by international fund managers and that his analysis is so great he won a bet against Grantham (although his actual prediction was wrong).

The bet is taken Joye loses. Again, a claim of the validity of the index and that his prediction of price movements was correct (ignoring that he lost the bet).

The bet is not taken.  Publicity, and a win whichever way the price index moves.  If it increases he would have won the bet.  If it decreases it is in line with his forecast. 

Google Predictions

I have mentioned before that the frequency of Google search terms was quite a good indicator of the peak of the US housing bubble (see final graph). What is interesting is that the new more refined Google Insights for Search shows a dramatic upward trend for the term ‘housing bubble’ from Australia.

Last week’s auction results from Brisbane confirm the findings from Google – 21 auctions, 2 sales, 8% clearance rate.