Republican Presidents and Jobs

The graphics with this New York Times Op-Ed piece are the most direct and convincing evidence I've seen about the effects that Republican Presidents have historically had on jobs, and comparing Bush's results with Obama's.  Romney has not given any changes that he would make to Bush's policies, nor criticized them in any way that I am aware of.

http://nyti.ms/NfQshn

Either Romney is lying through his teeth when he criticizes Obama's handling of the economy, is abysmally ignorant of economics, and/or cares only about the economy of the richest Americans, rather the economy that 99% of us live in.

More reporters should do this kind of research, rather than taking his outrageous claims at face value.

How fast are the very rich getting richer at the expense of the rest of us?

It's rather hard to visualize the magnitude of the transfer of wealth that is taking place.

Here are some graphics developed by Forensic Accounting that help in the visualization:


Created by: www.ForensicAccounting.net

The Top 8 Reasons Not to Talk to Cops

I found this video to be most fascinating. James Duane, a professor at Regent Law School and a former defense attorney, tells his class why no one should ever agree to be interviewed by the police without their lawyer present. This segment is primarily relevant to those who are innocent and have nothing to hide.

A second video gives equal time to a police detective. He basically agrees that everyone should stand by their Fifth Amendment rights and never waive the protections mentioned in the "Miranda warning." It is primarily relevant to those who are not entirely innocent or do have something to hide.

Each video is half an hour. Prof. Duane comes across as a fast-talking smoothy who could prosper selling vegetable slicers on late night television, but his argument seems comprehensive and well-founded.

I found these via a blog post by Pascal Meunier, which is also well worth a read.

Computer Science Outside the Box

Although the "outside the box" metaphor has become overworked, don't let that stop you from reading Ed Lazowska's post on the CCC Blog. I won't quote from it here, because it's pretty short, and worth reading in its entirety.

The "Curb Cuts" approach to computing

Very thoughtful blog post on As Your World Changes about how accommodation of various disabilities can benefit us all.

Curb cuts for wheelchairs also guide blind persons into street crossings and prevent accidents for baby strollers, bicyclists, skateboarders, and inattentive walkers. The “curb cuts” principle is that removing a barrier for persons with disabilities improves the situation for everybody. This hypothesis suggests erasing the line that labels some technologies as assistive and certain practices as accessibility to maximize the benefits for future users of all computer-enabled devices. This paradigm requires a new theory of design that recognizes accessibility flaws as unexplored areas of the design space, potential harbingers of complexity and quality loss, plus opportunities for innovation in architectures and interfaces.

"The economy is fundamentally sound."

Déjà vu (history, comments and contemporary quotations):

12/31: New York Times Industrials close at 331.



June
New York Times Industrials gain 52 to close at 391.



July
New York Times Industrials gain 25 to close at 416.



August
New York Times Industrials gain 33 to close at 449.



September
9/3: New York Times Industrials close at 452.
In retrospect, the great bull market of the decade comes to an end.

9/5: Market unevenness, with a slight downward trend, starts and continues until mid-October.



October
Tuesday 10/15: “The industrial condition of the United States is absolutely sound, … and nothing can arrest the upward movement… The markets generally are now in a healthy condition … values have a sound basis in the general prosperity of our country.” —Charles E. Mitchell, President of National City Bank

“Stock prices have reached what looks like a permanently high plateau… There may be a recession in stock prices, but not anything in the nature of a crash… I expect to see the stock market a good deal higher than it is today within a few months.” — Prof. Irving Fisher of Yale

Friday 10/18: New York Times Industrials close down 7.

Saturday 10/19: New York Times Industrials close down 12.

Sunday 10/20: The newspapers agree, and this is also the informed view on Wall Street, that the worst is over. And it is predicted that tomorrow the market will begin to receive organized support… Never was there a phrase with more magic than “organized support.” Almost immediately it was on every tongue and in every news story about the market.

Yet the Sabbath pause had a marked tendency to breed uneasiness and doubts and pessimism and a decision to get out on Monday.

Monday 10/21: A very poor day. Things were bad, but still not hopeless. Toward the end of Monday’s trading the market rallied and final prices were above the lows for the day. The net losses were considerably less than on Saturday.

“The decline represents only a shaking out of the lunatic fringe.” —Irving Fisher

Tuesday 10/22: New York Times Industrials close at 415. A somewhat shaky gain.

“The decline has gone too far.” —Charles E. Mitchell

Wednesday 10/23: New York Times Industrials close down 31 at 384.
That afternoon and evening thousands of speculators decided to get out while—as they mistakenly supposed—the getting was good.

There was also one bit of cheer. It was predicted that on the morrow the market would surely begin to receive “organized support.”

Thursday 10/24: New York Times Industrials close down 12 at 372.
The first of the days which history—such as it is on the subject—identifies with the panic… In New York at least the panic was over by noon.

This was it. The bankers, obviously, had moved in. The effect was electric. Fear vanished and gave way to concern lest the new advance be missed. Prices boomed upward… In its own way, the recovery on Black Thursday was as remarkable as the selling that made it so black… Many had good reason to be grateful to the financial leaders of Wall Street.

Representatives of thirty-five of the largest wire houses assembled at the offices of Hornblower and Weeks and told the press on departing that the market was “fundamentally sound” and “technically in better condition than it has been in months.” It was the unanimous view of those present that the worst had passed. The host firm dispatched a market letter which stated that “commencing with today’s trading the market should start laying the foundation for the constructive advance which we believe will characterize next year.”

“The trouble is purely technical and fundamentals remained unimpaired.” —Charles E. Mitchell

“There is nothing in the business situation to justify any nervousness.” —Eugene M. Stevens, President of the Continental Illinois Bank

“There has been no fundamental change in the oil business to justify concern.” —Walter Teagle

“The steel business has been making fundamental progress toward stability and this fundamentally sound condition is responsible for the prosperity of the industry.” —Charles M. Schwab [“Talk to Chuck”]

“The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.” —President Herbert Hoover

“It is undoubtedly beneficial to the business interests of the country to have the gambling type of speculator eliminated.” —Howard C. Hopson, head of Associated Gas and Electric

“There has been a lot of short selling, a lot of forced selling, and a lot of selling to make the market look bad.” —Wall Street Journal

Friday 10/25: Heavy trading, prices slightly up.

Saturday 10/26: New York Times Industrials close at 367.
Heavy treading, prices slightly down

Sunday 10/27: “The financial community now feels secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence of panic… and has relaxed its anxiety.” —New York Times

Almost everyone believed that the heavenly knuckle-rapping was over and that speculation could be now resumed in earnest. The papers were full of the prospects for next week’s market. Stocks, it was agreed, were again cheap and accordingly there would be a heavy rush to buy.

Monday 10/28: New York Times Industrials close down 49 at 318.
Volume was huge, losses were more severe. On this day there was no recovery.

The bankers assembled once more at Morgan’s… They were described as taking a philosophical attitude, and they told the press that the situation “retained hopeful features,” although these were not specified.

Tuesday 10/29: New York Times Industrials close down 43 at 275.
This was the most devastating day in the history of the New York stock market, and it may have been the most devastating day in the history of markets.

The losses would have been worse had there not been a closing rally.

In the first week the slaughter had been of the innocents. During this second week there is some evidence that it was the well-to-do and the wealthy who were being subjected to a leveling process comparable in magnitude and suddenness to that presided over a decade before by Lenin.

“President Hoover has said that the ‘fundamental business of the country’ is sound… The main point which I want to emphasize is the fundamental soundness of the great mass of economic activities.” —Dr. Julius Klein, Assistant Secretary of Commerce

Wednesday 10/30: New York Times Industrials close up 31 at 306.
Why this recovery occurred no one will ever know.

“General business conditions are unquestionably fundamentally sound.” —Waddill Catchings of Goldman, Sachs

“Believing that fundamental conditions of the country are sound … my son and I have for some days been purchasing sound common stocks” —John D. Rockefeller

Thursday 10/31: New York Times Industrials close up 21 at 327.



November
“A severe depression like that of 1920-21 is outside the range of probability.” —Harvard Economic Society Forecast

Saturday 11/2: Over the weekend the financial community had almost certainly been persuaded by its own organized and spontaneous efforts at cheer.

“Business is sound.” — Alfred P. Sloan, Jr., President of General Motors

“The present recession, both for stocks and business, is not the precursor of business depression.” —Harvard Economic Society

Sunday 11/3: “It was the psychology of panic. It was mob psychology, and it was not, primarily that the price level of the market was unsoundly high … the fall in the market was very largely due to the psychology by which it went down because it went down.” —Irving Fisher

Everyone was feeling cheerful but the public. As before and later, the weekend had been a time of thought, and out of thought had come pessimism and a decision to sell. So, as on other Mondays, no matter how cheerful the superficial portents, the selling orders poured in in volume.

Monday 11/4: New York Times Industrials close down 22.
“It is our belief and conviction that the general industrial and business condition of the country is fundamentally sound and it is essentially unimpaired.” —advertisement by the Commercial National Bank and Trust Company in the New York Times

Tuesday 11/5: Markets closed for election day.

Wednesday 11/6: New York Times Industrials close down 37.
Another sickening slide.

Thursday 11/7: Steady.

Friday 11/8: New York Times Industrials close at 274.
A small drop.

Monday-Wednesday 11/11-13: New York Times Industrials lose 50 to close at 224.

11/30: “Herbert Hoover is easily the most commanding figure in the modern science of ‘engineering statesmanship.’” —Philadelphia Record

“The nation is now aware that it has at the White House a man who believes not in the philosophy of drift, but in the dynamics of mastery.” —Boston Globe



December
“The steps we have taken re-established confidence.” —President Herbert Hoover

12/21: “A depression seems improbable; we expect recovery of business next spring, with further improvement in the fall.” —Harvard Economic Society



1930



March
“The worst effect of the crash on unemployment will be ended in sixty days.” —President Herbert Hoover



May
“We have now passed the worst and with continued unity of effort shall rapidly recover.” —President Herbert Hoover

“Business will be normal by fall.” —President Herbert Hoover



October
10/15: “Persons high in Republican circles are beginning to believe that there is some concerted effort on foot to utilize the stock market as a method of discrediting the Administration. Every time an Administration official gives out an optimistic statement about business conditions, the market immediately drops.” —Simeon D. Fess, Chairman of the Republican National Committee.



1932
7/8: New York Times Industrials close at 58.
No one any longer suggested that business was sound, fundamentally or otherwise.



1937
US unemployment temporarily drops below 8 million.



1938
One person in five is still out of work.



1941
The dollar volume of US production first returns to the level of 1929.



Observations, comments, and could it happen again?

There were many ways of making money in 1928. Never had there been a better time to get rich, and people knew it. 1928, indeed, was the last year in which Americans were buoyant, uninhibited, and utterly happy. It wasn’t that 1928 was too good to last; it was only that it didn’t last.

Only in the case of the rarest individuals can speculation be a part-time activity. Money for most people is far too important.

Perhaps it was worth being poor for a long time to be so rich for just a little while.


I am not given to prediction; one’s foresight is forgotten, only one’s errors are well remembered. But there is here a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that sends prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more. Then, for reasons that will endlessly be debated, comes the end. The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way.


Always when markets are in trouble, the phrases are the same: “The economic situation is fundamentally sound” or simply “The fundamentals are good.” All who hear these words should know that something is wrong.

Preventive incantation required that as many important people as possible repeat as firmly as they could that it wouldn’t happen. This they did. They explained how the stock market was merely the froth and that the real substance of economic life rested in production, employment, and spending, all of which would remain unaffected. No one knew for sure that this was so. As an instrument of economic policy, incantation does not permit of minor doubts or scruples.

Perhaps never before or since have so many people taken the measure of economic prospects and found them so favorable as in the two days following the Black Thursday disaster. The optimism even included a note of self-congratulation. Colonel Ayres in Cleveland thought that no other country could have come through such a bad crash so well. Others pointed out that the prospects for business were good and that the stock market debacle would not make them any less favorable. No one knew, but it cannot be stressed too frequently, that for effective incantation knowledge is neither necessary nor assumed.


The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recorded 12,894,650 shares sold on October 24; precisely the same number were bought.) The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.

If one has been a financial genius, faith in one’s genius does not dissolve at once… Men have been swindled by other men on many occasions. The autumn of 1929 was, perhaps, the first occasion when men succeeded on a large scale in swindling themselves.


One of the oldest puzzles of politics is how is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is how is to make wise those who are required to have wisdom.


Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped.


There seems little question that in 1929, modifying a famous cliché, the economy was fundamentally unsound… Five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are:

1) The bad distribution of income. In 1929 the rich were indubitably rich… It seems certain that the 5 per cent of the population with the highest incomes in that year received approximately one third of all personal income… This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both…

2) The bad corporate structure… American enterprise in the twenties had opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, impostors, and frauds…

3) The bad banking structure… When one bank failed, the assets of others were frozen while depositors elsewhere had a pregnant warning to go and ask for their money. Thus one failure led to other failures, and these spread with a domino effect… It would be hard to imagine a better arrangement for magnifying the effects of fear…

4) The dubious state of the foreign balance…

5) The poor state of economic intelligence… It seems certain that the economists and those who offered economic counsel in the late twenties and early thirties were almost uniquely perverse. In the months and years following the stock market crash, the burden of reputable economic advice was invariably on the side of measures that would make things worse.

The sound and responsible adviser urged that the budget be balanced… The balanced budget was not a subject of thought. Nor was it, as often asserted, precisely a matter of faith. Rather it was a formula… Mass unemployment in particular had altered the rules. Events had played a very bad trick on people, but almost no one tried to think out the problem anew… The rejection of both fiscal (tax and expenditure) and monetary policy amounted precisely to a rejection of all affirmative government economic policy. The economic advisors of the day had both the unanimity and the authority to force the leaders of both parties to disavow all the available steps to check deflation and depression. In its own way, this was a marked achievement—a triumph of dogma over thought. The consequences were profound.


In some respects, the chance for a recurrence of a speculative orgy remains good No one can doubt that the American people remain susceptible to the speculative mood—to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share.

The market will not go on a speculative rampage without some rationalization. But during any future boom some newly rediscovered virtuosity of the free enterprise system will be cited. It will be pointed out that people are justified in paying the present prices—indeed, almost any price—to have an equity position in the system. Among the first to accept these rationalizations will be some of those responsible for invoking the controls. They will say firmly that controls are not needed. The newspapers, some of them, will agree and speak harshly of those who think action might be in order. They will be called men of little faith.


Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.

-----

If you've stayed with me this far, you should know that all the data, quotations, and opinions above were extracted from John Kenneth Galbraith's The Great Crash 1929 (published in 1955), and rearranged by me to stress the chronology. I highly recommend that you read this book, in its entirety (it's only 194 pages), before next weekend.

[The reason for the erratic presentation of the New York Times Industrial index data is that the book frustratingly sometimes gives the closing value, and at others just the day's rise or fall.]

Jim Horning

It's a start

Google has taken an interesting step in the quest to reverse the decline in students majoring in computer science--especially students in under-represented groups, where the decline is even more precipitous.

At a time when more and more digital technologies are becoming indispensable to millions of people, the field of computer science (CS) is in trouble. Enrollment and retention of CS students, particularly those historically underrepresented in the field (women, African-Americans, Native-Americans, and Hispanics) has declined sharply. According to the Computing Research Association, CS enrollment in the U.S. was at its peak in 2000, with 15,958 undergrads. By 2006, enrollment declined by roughly half: 7,798 undergrads. And enrollment among already-underrepresented groups has dropped even more sharply.

We hope to address this problem (and potential shortage) with a variety of programs beyond our scholarship initiatives. Recently, our educational outreach group, University Programs, and Diversity and Talent Inclusion teams joined forces to create the Computer Science Summer Institute (CSSI). This special institute included an interactive and collaborative CS curriculum, as well as a living-learning residential experience for student networking. We chose 17 college sophomores, all aspiring computer scientists, to attend the all-expenses-paid CSSI in Mountain View from August 3–15.

Kudos to Google for recognizing the problem and doing something innovative and concrete to address it. Of course, 17 students is a drop in the bucket compared to the shortfall, but hopefully other companies will follow their lead.

Learning to Write by Listening

Fascinating blog post by my onetime colleague Susan Gerhart about dealing with the challenges to writing and editing imposed by steeply declining vision. One of the things I found most interesting is how many of her suggestions seemed to be things that would help a sighted writer or editor do a better job.

From invention to a billion-dollar industry

Bill Buxton has an interesting article in Business Week called "The Long Nose of Innovation."

Any technology that is going to have significant impact over the next 10 years is already at least 10 years old... Here's the message to be heeded: Innovation is not about alchemy. In fact, innovation is not about invention. An idea may well start with an invention, but the bulk of the work and creativity is in that idea's augmentation and refinement.

Is America Falling off the Flat Earth?

New free book from the National Academies Press.

The aviation and telecommunication revolutions have conspired to make distance increasingly irrelevant. An important consequence of this is that US citizens, accustomed to competing with their neighbors for jobs, now must compete with candidates from all around the world. These candidates are numerous, highly motivated, increasingly well educated, and willing to work for a fraction of the compensation traditionally expected by US workers.

If the United States is to offset the latter disadvantage and provide its citizens with the opportunity for high-quality jobs, it will require the nation to excel at innovation—that is, to be first to market new products and services based on new knowledge and the ability to apply that knowledge. This capacity to discover, create and market will continue to be heavily dependent on the nation’s prowess in science and technology.

Indicators of trends in these fields are, at best, highly disconcerting. While many factors warrant urgent attention, the two most critical are these: (1) America must repair its failing K-12 educational system, particularly in mathematics and science, in part by providing more teachers qualified to teach those subjects, and (2) the federal government must markedly increase its investment in basic research, that is, in the creation of new knowledge.

Only by providing leading-edge human capital and knowledge capital can America continue to maintain a high standard of living—including providing national security—for its citizens...

Fran Allen's A.M. Turing Award address now online

ACM's A.M. Turing Award is the field's highest honor, often called "the Nobel Prize of computing." This year's winner was Frances E. Allen. A video of her Turing Award address is now available online.

HOPL III and a tipping point

Last Saturday and Sunday I attended ACM's third History of Programming Languages conference (part of the Federated Computing Research Conference running this week). HOPLs only come along every 15 years or so (1977, 1993, 2007).

It was a wonderful conference. It was great to meet again so many old friends and to meet and learn from so many language designers I knew of, but didn't know, and hear how their languages came into being and what had influenced them. There were clear differences in assumptions, but members of all the different camps were respectful of each other. (Perhaps the most potentially fraught session was the one consisting of Niklaus Wirth speaking on "Modula-2 and Oberon" and Bjarne Stroustrup on "Evolving a language in and for the real world: C++ 1991-2006.")

Let me mention just one other somewhat unusual aspect of the conference: When I registered, I was given the usual conference tote bag, with room for a laptop and a few 10-lb proceedings volumes. Then I was handed the conference papers--in the form of a thumb drive. It contained all the papers for HOPL III, but also, since that consumed only 11MB on a 256MB drive, they threw in as a bonus the final proceedings (including transcripts of the actual presentations and of the question and answer sessions) for both HOPL and HOPL II. Unfortunately, the drive does not contain Fran Allen's Turing Award address (which followed HOPL III), but it was carefully videotaped and I expect ACM to make it available somehow soon; there were a couple thousand people in the audience. (The HOPL II proceedings and HOPL III papers are all available in the ACM Digital Library.)

It seems to me that we have now passed a tipping point in scientific publication; it will become routine to distribute, not just conference papers, but also the previous proceedings (perhaps even all the referenced papers), to conference attendees. And pretty soon they'll stop handing out those tote bags...

Knowledge Accounting: Inventory, Capital, Depreciation

Rummaging through my files, I came across a white paper dated Feb. 10, 1981, while I was at Xerox PARC. Some of the ideas in it still intrigue me, and I've never gotten much feedback on them. I've resisted the temptation to update the memo here, or explain the Xerox internal references from that distant time.

I have long been troubled by the fact that accountants regard Research as a "cost center," rather than a "profit center," but I had no reasonable alternative to offer.

* * *

Paul Strassman's talk last Thursday--with its discussion of the characteristics of Tribal, Agricultural, Industrial, and Information Societies--reminded me of something I read a long time ago about the conditions that enabled the emergence of industrial society.

THE CLAIM WAS that a key enabling factor in the "invention" of the industrial firm was the development of modern (double-entry) bookkeeping, particularly the understanding of the key concepts of inventory, capital, and depreciation.

- Prior to double-entry booking, accounting was essentially on a "cash flow" basis (much like we use for our personal checkbooks). There was no way to record the differing effects of differing forms of expenditure. E.g., cash spent to purchase assets showed up as a "loss"; later sales showed up as pure "profit," unconnected with that "loss."

- Without the intermediate concepts of inventory and capital, accounting cannot trace the connection between an expenditure and the income it generates. The books will always look worse in periods of net investment, and better during periods of "living off capital." There is just no way to do rational evaluation of planning of investment (expenditure in one period in the expectation of increased income in a future period) within such an accounting scheme.

- The distinction between inventory and capital is equally important. Imagine GM trying to evaluate its financial position while accounting for sheet metal and metal presses on the same basis. Inventory gets "used up," while capital gets "used." Of course, capital goods don't last forever; the concept of depreciation accounts for their finite lifetime.

- The bookkeeping of assets neither "creates" nor "destroys" money, it merely helps to keep track of its flow, and the relation of cause and effect. For a firm in steady state (or if we integrate over the entire lifetime of a firm) there is no particular difference between the financial position determined by cash flow accounting and by double-entry bookkeeping; however, in dynamic situations the latter gives a far more meaningful evaluation.

- Of course, the "net book value" of an asset (either inventory or capital) is only a first approximation to its actual value, which may be difficult to measure or even intangible. However, book value provides an adequate starting point for more sophisticated analyses, such as Return on Investment or Payback Interval.

* * *

A KEY FACTOR in the development of an information society may well be the adoption of accounting methods that treat knowledge as an asset with a "book value," just like industrial goods or real estate. High-technology firms are precursors of this society because they have already reached the point where a significant portion of their assets is not represented in their balance sheets.

- Trying to budget rationally for knowledge acquisition with present accounting techniques is as frustrating as trying to budget for the acquisition of a new industrial plant on a cash flow basis. The entire expenditure is accounted as an expense, and the result does not appear on the balance sheet at all. Since there is no measure of a firm's real assets, evaluation and planning are ad hoc.

- With present accounting methods, investment in knowledge acquisition will always appear less profitable than draining down existing knowledge capital. This emphasizes short-term results over investment, such as product development or research.

- No firm can totally ignore investment in knowledge. Since "profit and loss" is so misleading in the short term, firms use arbitrary budgetary guidelines instead. (E.g., spend 5% of gross revenues on research and development.) These make no more sense than corresponding guidelines for capital investment. (E.g., spend 8% of sales on investment in plant.)

- The basic problem is not the lack of a tangible "knowledge base," (consider patents, trade secrets, designs, formulae, software, accounting records), but rather the failure to treat this knowledge base as a valuable asset.

[This can lead to substantial anomalies: E.g., Xerox could afford to "invest" millions in speech recognition technology (by purchasing Kurzweil--certainly not for the book value of its assets) at the same time it could not afford the "expense" of a major speech recognition research program.]

- As long as a firm's knowledge assets are fairly static (or can be treated as proportional to other assets), knowledge accounting will not significantly change the picture. However, if they are dynamic (e.g., if the firm is investing in new technology or relying on technology with a finite lifetime), then the picture can be significantly distorted by any accounting method that ignores them.

* * *

BOTH AS a high-technology firm, and as a hopeful purveyor of the systems that will form the basis of the Information Society, Xerox should be in the vanguard in treating knowledge as an accountable asset, and developing the appropriate bookkeeping techniques.

- To start, there must be a distinction between single-use knowledge (inventory) and knowledge capital (which must be depreciated over its expected useful lifetime).

- Such accounting techniques could provide a starting point for the study of the productivity of "knowledge workers." Until it is recognized that they produce something of value, this is hard to do. Just as the "value added" by a production line is the difference betwen the price of the input and the price of the output, the "value added" by an office is the difference between the price of its knowledge input and the price of its knowledge output. A production line or an office is profitable to the extent tht its value added exceeds its cost of labor plus its depreciation.

- Just as internal "transfer prices" must be established for goods flowing among different profit centers within a firm, there must be transfer prices for knowledge flowing among different profit centers. The accuracy required depends both on the amount of net flow and the extent to which the various center are to be evaluated separately.

- Most present "cost centers" will become "profit centers" when it is recognized that they are adding value to the firm's knowledge assets. (See the note later on about paperclips and the cost of accounting for small knowledge transactions.)

* * *
OBJECTIONS
[Constructed by myself for rhetorical purposes.]

1. We lack accurate measures of what knowledge is really worth.

A. Nor do we always have accurate measures of the value of other assets. We can adopt the same accounting basis for knowledge: Use the cost of acquisition as the initial book value.

- Even nominal values would provide a starting point for a rational analysis of expected Return on Investment for different research areas, for planning Technology Investment Profiles, and estimating the value of various types of technology transfer within the firm.

2. We don't have accurate measures of when (and for how long) knowledge will pay off.

A. Again, we don't always have them for traditional assets. Single-use knowledge can be accounted as inventory, and charged out when used. We can assign nominal depreciation rates for broad categories of capital knowledge.

Comments: Research generally depreciates less rapidly than development; it may be appropriate to depreciate basic and applied research at different rates.

- One problem with traditional accounting methods is that product development is an "up front" expense; the better the firm's capital of emerging products, the worse its balance sheet is likely to look.

- Product development should be depreciated according to expected product lifetime. Present accounting methods do not adequately distinguish between long-life products (e.g., 8-12 years for reprographics) and short-life products (e.g., 3-5 years for electronic systems).

[This may explain some of the leisurely corporate pace in exploiting the knowledge capital acquired by PARC. Business planners might have acted differently three years ago had the books shown that the technology demonstrated at Boca Raton was depreciating at $10,000,000 a year.]

3. Knowledge isn't destroyed or lost by being used.

A. Neither is metal press. However, in both cases, one can project a finite useful lifetime, as a basis for depreciation. (Note that depreciation is generally independent of use.)

4. The cost of knowledge may have little relationship to its value. The most surprising things can pay off handsomely, while "sure things" can turn out disappointingly.

A. The same problem exists with traditional assets. Changes in plans or market conditions may leave a firm with capital (plant, goods, or knowledge) that is no longer relevant to its needs, or that is unexpectedly valuable. "Good business judgement" is the ability to ensure that the latter situation predominates.

- Accountants have learned to cope with changes in the value of assets. "Net book value" is a useful baseline, and there are established mechanisms for adjusting it when it is SIGNIFICANTLY out of line. (Many small errors will tend to cancel out.)

- Firms that consistently manage to extract values exceeding costs prosper; those that persist in acquiring goods or knowledge at costs exceeding their business value tend to go bankrupt.

5. There are so many knowledge transactions that the cost of keeping track of them could exceed the value of doing so.

A. This is the "paperclip" argument. There are well-established mechanisms for accounting for large quantitites of industrial goods with low unit value (e.g., charge them in aggregate to overhead, estimate charges on the basis of a statistical sample, aggregate charges through the "petty cash" mechanism).

- Just as it may make sense to charge the cost of the paper in a telephone directory to overhead, rather than charging for each book individually, so it may make sense to charge the cost of the knowledge in the directory to overhead; that does not make it "free," just differently accounted.

- Overhead goods tend to be supplied centrally, and consumed throughout the firm. In many cases, overhead knowledge transations are in the other direction: the knowledge is supplied throughout the firm, and consumed centrally. At present, those who consume knowledge that comes from outside their immediate area may have no idea how much it costs to provide it.

- Accounting records are themselves knowledge assets. Accounting them as such would give us (at last!) a rational method for determining the value of recording various kinds of transactions. "Unprofitable" accounting could be identified and dropped, just like other unprofitable operations.

- As more knowledge transactions are mediated electronically, the cost of automatically recording them will drop dramatically.

6. But a lot of knowledge is carried around in people's heads.

A. Exactly. A significant portion of the firm's knowledge capital is associated with individual employees. (How many times have you heard "Our people are our greatest asset"? How often have you seen this asset on the balance sheet?)

- This would make it convenient to account rationally for a variety of good practices:

Employee education can be treated as a capital expense.

The cost of losing an employee will show up on the books; the cost of employee benefits can then be compared rationally with the value of expected reductions in employee turnover.

When an employee moves between profit centers within a firm, his "book value" provides a reasonable estimate of the "transfer price" that should be associated with the transaction.

- Annual employee "appraisals" can take on an entirely new significance.

7. What about taxes?

A. Legal tax avoidance already creates an accounting tension between accurately reflecting the firm's financial position and minimizing taxes. (Consider accelerated depreciation schedules for investment tax credit.) If present accounting methods are understating the corporation's assets, and net income before taxes, by 20%, then the tax consequences should be thoroughly understood before converting to more accurate methods.

8. Such a deviation from established accounting practice would never be tolerated by auditors, the SEC, etc.

A. The benefits are huge compared to the cost of a research grant to a respectable management school or consulting firm to develop a complete, workable accounting method that includes knowledge assets.

9. This sounds too sensible to ever be adopted.

A. What can I say?

The McNamara Fallacy

The first step is to measure whatever can be easily measured. This is okay as far as it goes.

The second step is to disregard that which can't be measured or give it an arbitrary quantitative value. This is artificial and misleading.

The third step is to presume that what can't be measured easily really isn't very important. This is blindness.

The fourth step is to say that that which can't be easily measured really doesn't exist. This is suicide.

Daniel Yankelovich, quoted by Adam Smith in Supermoney.

Hey, we beat Iceland! (and the UK)

BBC News has a story saying that the US is "no longer technology king."

The US has lost its position as the world's primary engine of technology innovation, according to a report by the World Economic Forum.

The US is now ranked seventh in the body's league table measuring the impact of technology on the development of nations.

A deterioration of the political and regulatory environment in the US prompted the fall, the report said.

The top spot went for the first time to Denmark, followed by Sweden.

Countries were judged on technological advancements in general business, the infrastructure available and the extent to which government policy creates a framework necessary for economic development and increased competitiveness.

A map of cyberspace

Ever wonder about the connections between Google and eBay, or Yahoo and Microsoft? It's all pulled together in this map, which makes finding connections as easy as finding your way around the subway.

A challenge for algorithm designers

This post inspired by one on Freedom to Tinker.

Every year the national collegiate football championship is a matter of much discussion and bitter dispute. The Bowl Championship Series invariably produces a title game that many vocal partisans object to, saying that it fails to match the top two teams in the country. And every year the formula for selecting the top two teams is modified in response to complaints about the results of the previous year's formula. (Talk about generals always preparing to fight the last war!)

Even if we assume that there is a single "best" college football team each year, determining objectively which team that is presents major problems. Especially in games between nearly equal teams, there is always a factor of chance, i.e., the best team does not always win ("but that's the way to bet"). So what is available is a limited number of not-guaranteed-accurate comparisons between teams ("the regular season") plus the opportunity to stage an even more limited number of chosen, but also not-guaranteed-accurate comparisons (the bowl games).

The challenge is to

1. Define what it would mean to generate an optimal bowl schedule and an optimal post-bowl ranking of the top teams.
2. Supply an algorithm that is either provably optimal, or provably within some small epsilon of optimum, to generate a schedule and a ranking.

Security Absurdity - Feedback

Thanks to Gene Spafford for a pointer to a post by Noam Eppel responding to the responses to his earlier post: Security Absurdity: The Complete, Unquestionable, and Total Failure of Information Security.

There's too much in these posts for me to reasonably summarize (beyond the subtitle), other than to say that he provides a ton of evidence that the security sky really is falling, and that it is up to security professionals to lead the rescue (if there is to be a rescue).

If one is going to write an article claiming a "total failure" of information security, one should expect some strong feedback. I was not sure what to expect - total disregard, complete agreement, outrage, or indifference. Thankfully, the majority of responses have been very positive. Whether or not you believe there has been a "total failure", there seems to be almost unanimous agreement that things are pretty bad out there, and the security community faces some significant challenges. It has been six months since my article was posted and sadly the security situation is only getting worse. The Cyberworld has progressed merely from the Wild West to the 1920s mob-controlled urban centers. Shortly after my Security Absurdity article was posted online, we witnessed a remarkable series of events when cybercriminals forced Blue Security, an innovative anti-spam security company, out of business. This incident demonstrated quite dramatically that cybercriminals are indeed currently winning the battle.

[Other Sources]

Chaordic Leadership

I just encountered this term in one of Joe McCarthy's Gumption blog posts. According to Smart Leadership's article, " 'Chaordic' is a combination of two words: chaos and order. Hock coined the term to describe any organization, system or business that is 'self-organizing, self-governing, adaptive, nonlinear, and complex, and which harmoniously combines the characteristics of both chaos and order.' "

What I realized reading the Gumption post is that it is probably the best written description I have seen of the leadership style of Robert W. (Bob) Taylor (of NASA, ARPA, Xerox PARC, and DEC/SRC)--the best research manager I have been close to.

I won't repeat the blog post here, and I've just ordered the books that it's based on. I'll just say that I watched closely for nearly 20 years at PARC and DEC/SRC, and it really works. Bob got the best out of a fantastically talented bunch of computer researchers, and the computer industry (indeed, the country) is much the richer for it.

Privacy Guidelines from Microsoft

I confess that I'm generally pretty skeptical of Microsoft's dedication to the rights and interests of consumers. However, I've just read their Privacy Guidelines for Developing Software Products and Services, Version 2.1, dated October 10, 2006, and I have to say that they've done a pretty good job. If all software products and services followed these guidelines, cyberprivacy would be in much better shape than it is now.

This is a very pragmatic document that starts from user concerns and the business case for addressing them, moves on to general principles and specific definitions, and finally gives fairly detailed guidelines for nine representative scenarios. I find it credible and sensitive to most of my concerns about electronic privacy.

Protecting customer privacy is critically important. In many areas of the world, privacy is considered a fundamental human right. Additionally, protecting customer privacy can increase loyalty and be a market differentiator.

Customers are getting increasingly frustrated with software and Web sites that do not clearly communicate the behaviors that impact customer privacy and the controls available to them. Currently, there are no industry-wide practices to help standardize the user experience and the software development process. For some, ignoring this growing frustration has led to an erosion of trust, negative press, and even litigation.

The software industry as a whole would benefit from establishing a higher bar for respecting customer privacy. Giving customers more information about how their privacy may be impacted (i.e., transparency) coupled with improved controls can empower customers and raise their level of trust. At the same time, it is important not to annoy customers with a barrage of notices that ultimately may be ignored.

The purpose of this document is to propose a baseline for establishing this higher bar. It offers guidance for creating notice and consent experiences, providing sufficient data security, maintaining data integrity, offering customer access, and supplying controls when developing software products and Web sites. These guidelines are based on the core concepts of the Organization for Economic Co-operation and Development (OECD) Fair Information Practices and privacy laws such as the EU Data Protection Directive, the U.S. Children's Online Privacy Protection Act of 1998 (COPPA), and the U.S. Computer Fraud and Abuse Act (as amended 1994 and 1996). In the interest of developing a common set of industry best practices for privacy, we invite the community and other interested parties to participate in an open dialogue...

The core principle driving these guidelines is:

Customers will be empowered to control the collection, use, and distribution of their personal information.

For customers to have control over their personal information, they need to know what personal information will be collected, with whom it will be shared, and how it will be used. In addition:

• Customers must provide consent before any personal information is transferred from their computer.
• If a customer's personal information is transferred over the Internet and stored remotely, they must be offered a mechanism for accessing and updating the information.

Before collecting and transferring personal information, you, as the entity requesting the information, must have a compelling business and customer value proposition. A value proposition that benefits customers may create a natural incentive for them to entrust you with their personal information. Only collect personal information if you can clearly explain the net benefit to the customer. If you are hesitant to tell customers "up front" what you plan to do with their information, then do not collect their data. This applies to data collected and stored locally on the customer's machine or transferred over the Internet...

One of the best ways to protect a customer's privacy is to not collect his or her User Data in the first place. The questions that should constantly be asked by architects, developers, and administrators of data collection systems include:

• "Do I need to collect this data?"
• "Do I have a valid business purpose?"
• "Will customers support my business purpose?"

The answers must explicitly address both the primary use of the customer's data (such as providing the feature or service the customer is requesting) and any planned secondary use (such as marketing analysis). Only collect data for which there is an immediate planned use. In addition, only transfer data that is absolutely necessary to achieve the business purpose, reduce the sensitivity of the data retained (e.g., aggregate data where possible), and delete data that is no longer needed for the business purpose.

Another important area to consider is how customers will react to the collection of their data. For example, while one customer may appreciate product recommendations derived from his or her purchase history, another may see such personalization as an invasion of his or her privacy...

The longer data is retained, the higher the likelihood of accidental disclosure, data theft, and/or data growing stale. User Data should be retained for the minimum amount of time necessary to support the business purpose or to meet legal requirements. Any User Data stored by a company should have a retention policy that states how long the data should be kept and the manner in which it should be removed from all data stores...

All products and services that collect User Data and transfer it must provide an explanation ("give notice") to the customer. The customer must be presented with a choice of whether to provide the information, and consent must be obtained from the customer before PII can be transferred from the customer's system. The type of notice and consent required depends on the type of User Data being collected and how it will be used...

Security is an essential element of privacy. Reasonable steps should be taken to protect PII from loss, misuse, unauthorized access, disclosure, alteration, and destruction. Preventive measures include access controls, encryption in transfer and storage, physical security, disaster recovery, and auditing. Security requirements vary depending on the type of User Data collected and whether it will be stored locally, transferred, and/or stored remotely. When storing Sensitive PII on a customer's system, it must be stored using appropriate security mechanisms to prevent unauthorized access (e.g., file permissions and encryption). Sensitive PII transferred to or from a customer's system over the Internet must be transferred using a secure method that prevents unauthorized access...

[My thanks to Cameron Wilson of USACM for a pointer to this document.]