Saturday, October 23, 2010

Who Wants To Be A Billionaire? (and Archimedean Theorem V)


Over the past three weeks, I have had the good fortune of wading through the gutter of our society’s delusional view of “innovation” and “exploration” and its illusory association with wealth creation. After learning that one of his venture capital backed technologies was not unique (just a mirage created by the technical amnesia of a faux “inventor”), a duped investor said, “Well, I don’t think any of us expected the invention would make us billionaires.” A few days later, in a meeting with an engineering firm I learned that they routinely have charlatan inventors present technologies to them thinking that they’re worth “billions of dollars”. I’ve been reviewing the history of one of the world’s largest mining deals and am once again struck by the asymmetry of speculation – a few million dollars of “exploration” entitles one organization to claim $16 billion dollars worth of control of a nation’s minerals! And for some mysterious reason, the sign that keeps flashing on my dashboard of conscience says: “Warning: Objects in the mirror may be closer than they appear.” Recently, I’ve been working on multi-billion dollar projects and still going about life pretty much the same way. I’m still bouncing around the world working like I have for 20 years. I’m still coming home and helping my son Zach clean out his pet du jour tank (this time a turtle named Squirt).

And I’m reflecting on the half-life of the perception of big. Just ten years ago, when I was still working with developing policies to govern technology transfer from universities in the U.S. and Japan, I remember hearing people say, “These professors think that their inventions will make them the next millionaire,” with disbelief and distain. In ten years, we somehow went from million to billion. And I think that in the process, something far more important happened. I think that on the way into the troposphere of our imagination we became more isolated and detached from our capacity to engage with genuine, meaningful endeavors. Note that, in 2007 and early 2008, ICAP traded over $1.3 trillion dollars in counterparty risk instruments a day every day! In a complex global roulette game, betting on the downside of a non-transparent financial market, the greatest notional value traded were bets AGAINST humanity’s honoring its commitments. While Inverted Alchemy readers have known this for two years, the perfect storm of municipal bond defaults, pension illiquidity, and slowdown in over-leveraged consumption finally made international “news” this week when the financial press finally said that we’re at least $3 trillion underfunded in reported state pension obligations which the public is required to pay – saying nothing of the crater in funding for corporate and social security entitlements which make $3 trillion a drop in the bucket.

I am intrigued by the callousness with which we throw around numbers. Did life in the U.S. or around the world improve by an order of magnitude in the past 10 years? Did we create an order of magnitude of value in the past 10 years? And, why, given our recent opportunity to learn the lessons of the ills of excess in our on-going Great Recession, have we chosen to extol the virtues of ever-bigger illusion? Is it not the case that we’ve instead become an order of magnitude less connected to our humanity? Have we not become an order of magnitude more insulated from the consequence of our actions on the rest of the world?

I was lucky. Last weekend, I got to take part in a reality check. Coming off a week of international deals and cross-border trade negotiations, I was invited to the house of Zach’s girlfriend’s family in the foothills of the Blue Ridge Mountains. Every year, April’s family gets together in October (like many other families in rural Virginia) to make apple butter. Sitting above a small fire was a huge copper cauldron into which a heaping bushel of apples was placed. Starting at 2 AM, the apples boiled into applesauce and gradually thickened into a dark, syrupy sauce. The stirring paddle – a two meter pole with a large slotted paddle affixed to the end – constantly mixed the sauce making certain that no part of the cauldron was allowed to burn or stick. Zach got there at the crack of dawn. Katie and I showed up fashionably late around noon. We were immediately welcomed and given the opportunity to stand next to the boiling inferno and have the mix of smoke and apple steam burn our eyes.

Next to the apple butter contraption was Great Grandfather. He sat – mostly silent – save the moments when we’d ladle out a bit of sauce onto the plate for him to check the moisture content. If any juice still separated out of the dollop, it was more stirring, more smoke in the eyes. When the apple reduction was suitably thick, it was time to add sugar. We had 110 pounds of sugar in the sugar bin – 11 ten pound bags. “Start with five,” was the sagely advice from Great Grandfather. With bubbling apple concentrate burning my hands, I poured in 50 pounds of sugar while Katie, Tammy and others mixed the pot. Fully mixed, another test dollop. “Add two more bags.” In went 20 more pounds. Another test dollop. “I think that that’s about right,” reported Great Grandfather. “Oh no! Grandmom’s butter was much sweeter – we need more sugar!” protested one of the family. So in went another bag. And then, it was perfect. A bit of cinnamon, a touch of cloves and, voila, dark brown apple butter. The only thing lacking was Colleen’s homemade oatmeal bread… but that had to wait for three long days!

What I found particularly noteworthy was the comment that was made as I was cleaning the gooey, apple sugar mess off the stirring paddle after the last embers had died on the fire and after the last of 88 quarts of apple butter had been sealed. “That paddle has been around for about 100 years.” One hundred years of the same ritual on a crisp October morning! Amazing! Even more profound, however, was the story in the sugar. You see, over 100 years, wisdom had deduced that somewhere between 50 and 110 pounds of sugar is the range in which the “perfect” apple butter is produced. And in 100 years, the variability in this amount was governed by the sweetness of the apples (a function of nature’s rain and sun), the discerning palate of the eldest member of the family and the boisterous lobbying of the next generation who argued for 10 more pounds to evoke the sweetness of Grandmom. More sugar, you see, doesn’t make better apple butter. The perfect amount exists within a known, constant range. And while some of you, jaded by post-modernism will argue that this is just a Norman Rockwell anachronism in the Virginia country-side, I would suggest that we could benefit a lot from the lesson of the apple butter.

Human scale is not measured in logarithms and scientific notation. It’s measured in discerning dynamic ranges within which perfection is manifest. The pathologic obsession which celebrates perpetual growth infects incentives with an untenable mandate for ever larger, ever bigger, ever greater MORE. However, as academics like UVA’s Darden Business School Dean Robert Bruner and financial consultants like KPMG report, bigger not only is not better – in as much as 83% of M&A transactions, value is destroyed! Mind you, to the swindlers that promote them (aka Investment Bankers), they’re quite lucrative as they generate immense commissions. However if these same promoters were ever held accountable for their compulsive misrepresentations, the market would wake up and realize that there is a limit to growth and there’s a point at which we need to conclude that enough is, well… enough.

Which brings me to Archimedean Theorem V (yes, another one of these). If more than 6 zeros are at the end of any number associated with investment or transaction, insufficient accountability is most likely present. Precision is not an antiquated value – it’s vital to regaining a sense of integrity. If our “fudge factor” is over two orders of magnitude, we should go back to our assumptions and get them more carefully focused. I would welcome each of you to become critical consumers of zeros and realize that when they’re thrown carelessly about, it’s your time that is being wasted.


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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave