Incentives – Page 13 – artdiamondblog.com

Concrete Used in Pyramids

T.W. Schultz used to emphasize that the level of technology in an economy depended more on the incentives and institutions for adoption and diffusion, and less on the invention of the technology, which he thought was a shorter hurdle than usually thought. The Antikythera Mechanism is one historical technology that dramatically supports Schultz’s view. If it survives scrutiny, the following article would provide an additional example supporting Schultz.

(p. A18) Reporting the results of his study, Michel W. Barsoum, a professor of materials engineering at Drexel University in Philadelphia, concluded that the use of limestone concrete could explain in part how the Egyptians were able to complete such massive monuments, beginning around 2550 B.C. They used concrete blocks, he said, on the outer and inner casings and probably on the upper levels, where it would have been difficult to hoist carved stone.

”The sophistication and endurance of this ancient concrete technology is simply astounding,” Dr. Barsoum wrote in a report in the December issue of The Journal of the American Ceramic Society.

Dr. Barsoum and his co-workers, Adrish Ganguly of Drexel and Gilles Hug of the National Center for Scientific Research in France, analyzed the mineralogy of samples from several parts of the Khufu pyramid, and said they found mineral ratios that did not exist in any known limestone sources. From the geochemical mix of lime, sand and clay, they concluded, ”the simplest explanation” is that it was cast concrete.

For the full story, see:

JOHN NOBLE WILFORD. "Study Says That Egypt’s Pyramids May Include Early Use of Concrete." The New York Times (Fri., December 1, 2006): A18.

For Better Jobs, Immigrants Voluntarily Line Up to Learn English

In Mount Vernon, New York, Maria de Oliveira (center) waited three months for an opening in this English class. Source of photo: online version of the NYT article quoted and cited below.

In the United States, other things equal, those who speak English earn more than those who do not. So there is a substantial incentive for immigrants to learn English, even in the absence of the much-debated proposed laws to mandate English in various ways. Consider the evidence in the article excerpted below:

(p. A1) MOUNT VERNON, N.Y. — Two weeks after she moved here from her native Brazil, Maria de Oliveira signed up for free English classes at a squat storefront in this working-class suburb, figuring that with an associate’s degree and three years as an administrative assistant, she could find a good job in America so long as she spoke the language.

The woman who runs the classes at Mount Vernon’s Workforce and Career Preparation Center added Ms. Oliveira’s name to her pink binder, at the bottom of a 90-person waiting list that stretched across seven pages. That was in October. Ms. Oliveira, 26, finally got a seat in the class on Jan. 16.

“I keep wondering how much more I’d know if I hadn’t had to wait so long,” she said in Portuguese.

. . .

Luis Sanchez, 47, a Peruvian truck driver for a beer distributor in New Brunswick, has been in this country (p. C14) 10 years — and on the waiting list for English classes in Perth Amboy five months. “You live from day to day, waiting to get the call that you can come to class,” Mr. Sanchez said in Spanish, explaining that he knew a little English but wanted to improve his writing skills so he could apply for better jobs. “I keep on waiting.”

. . .

In Newburgh, N.Y., an Orange County town where one in five of the 29,000 residents are immigrants, Blanca Saravia has amassed an impressive portfolio of odd jobs since arriving from Honduras in 2004: gas station attendant, office janitor, cook’s helper, and, for the last 14 months, packager at a local nail-polish factory. Speaking in her native Spanish, Ms. Saravia said that she has been able to get by with co-workers’ translating, but that “when the boss gives orders, I don’t understand.”

. . .

. . . Ahmed Al Saidi, 49, who works at a gas station and moved from Yemen in 1994, said in halting English that he wants to learn the language “for better work and to talk to people when I go to the store.”

Ms. Oliveira, the immigrant from Brazil, said she still knows too little English to venture into the marketplace; her husband, who is American born and supports the couple financially, encouraged her to enroll in the classes, held five mornings a week.

“I hope that when I’m speaking a little better, I’ll be able to find a job where I can use the English I learned here and the skills I have from back home,” she said in Portuguese. “When I was on the waiting list, there were times I thought this time would never come.”

For the full story, see:

FERNANDA SANTOS. "Demand for English Lessons Outstrips Supply." The New York Times (Tues., February 27, 2007): A1 & C14.

(Note: ellipses added.)

Source of graphic: online version of the NYT article quoted and cited above.

A Case Against “Network Neutrality”

Today there is much praise for YouTube, MySpace, blogs and all the other democratic digital technologies that are allowing you and me to transform media and commerce. But these infant Internet applications are at risk, thanks to the regulatory implications of "network neutrality." Proponents of this concept — including Democratic Reps. John Dingell and John Conyers, and Sen. Daniel Inouye, who have ascended to key committee chairs — are obsessed with divvying up the existing network, but oblivious to the need to build more capacity.

To understand, let’s take a step back. In 1999, Yahoo acquired Broadcast.com for $5 billion. Broadcast.com had little revenue, and although its intent was to stream sports and entertainment video to consumers over the Internet, two-thirds of its sales at the time came from hosting corporate video conferences. Yahoo absorbed the start-up — and little more was heard of Broadcast.com or Yahoo’s video ambitions.

. . .

. . . Broadcast.com failed precisely because the FCC’s "neutral" telecom price controls and sharing mandates effectively prohibited investments in broadband networks and crashed thousands of Silicon Valley business plans and dot-com dreams. Hoping to create "competition" out of thin air, the Clinton-Gore FCC forced telecom providers to lease their wires and switches at below-market rates. By guaranteeing a negative rate of return on infrastructure investments, the FCC destroyed incentives to build new broadband networks — the kind that might have allowed Broadcast.com to flourish.

. . .

Messrs. Lessig, Dingell and Conyers, and Google, now want to repeat all the investment-killing mistakes of the late 1990s, in the form of new legislation and FCC regulation to ensure "net neutrality." This ignores the experience of the recent past — and worse, the needs of the future.

. . .

Without many tens of billions of dollars worth of new fiber optic networks, thousands of new business plans in communications, medicine, education, security, remote sensing, computing, the military and every mundane task that could soon move to the Internet will be frustrated. All the innovations on the edge will die. Only an explosion of risky network investment and new network technology can accommodate these millions of ideas.

For the full commentary, see:

BRET SWANSON. "COMMENTARY; The Coming Exaflood." The Wall Street Journal (Sat., January 20, 2007): A11.

(Note: ellipses added.)

Real-Time Pricing Results in More Efficient Electricity Generation

Real-time electricity meters in a building in Central Park West behind resident Peter Funk, Jr. Source of photo: online version of the NYT article cited below.

The article excerpted below gets some of the story right. It should emphasize more that the main benefit from real-time pricing would be that it would reduce the peak load. Generation plants need to be built to handle peak-load. The last generating plants to go on line are the least efficient. if the need for such inefficient, peak-load, plants can be reduced, the costs of generating electricity can be enormously reduced.

There is talk of market competition in the states that have deregulated their electric utility industries. But it should be remembered that even where most deregulated, the result is a long way from a paradigmatic free market. The main point is hinted at in the article below. The ultimate suppliers of electricity to the home remain government-protected monopolies.

If we wanted a truly free market, maybe we should actually allow multple companies to connect to homes, the way we allow multiple television and internet companies to connect their cables to the home. Then some low-cost Wal-Mart of electricty would arise, and blow the stick-in-the-muds away.

(p A1) Ten times last year, Judi Kinch, a geologist, got e-mail messages telling her that the next afternoon any electricity used at her Chicago apartment would be particularly expensive because hot, steamy weather was increasing demand for power.

Each time, she and her husband would turn down the air-conditioners — sometimes shutting one of them off — and let the dinner dishes sit in the washer until prices fell back late at night.

Most people are not aware that electricity prices fluctuate widely throughout the day, let alone exactly how much they pay at the moment they flip a switch. But Ms. Kinch and her husband are among the 1,100 Chicago residents who belong to the Community Energy Cooperative, a pilot project to encourage energy conservation, and this puts them among the rare few who are able to save money by shifting their use of power.

Just as cellphone customers delay personal calls until they become free at night and on weekends, and just as millions of people fly at less popular times because air fares are lower, people who know the price of electricity at any given moment can cut back when prices are high and use more when prices are low. Partici-(p. A14)pants in the Community Energy Cooperative program, for example, can check a Web site that tells them, hour by hour, how much their electricity costs; they get e-mail alerts when the price is set to rise above 20 cents a kilowatt-hour.

If just a fraction of all Americans had this information and could adjust their power use accordingly, the savings would be huge. Consumers would save nearly $23 billion a year if they shifted just 7 percent of their usage during peak periods to less costly times, research at Carnegie Mellon University indicates. That is the equivalent of the entire nation getting a free month of power every year.

. . .

Under either the traditional system of utility regulation, with prices set by government, or in the competitive business now in half the states, companies that generate and distribute power have little or no incentive to supply customers with hourly meters, which can cut into their profits.

Meters that encourage people to reduce demand at peak hours will translate to less need for power plants — particularly ones that are only called into service during streaks of hot or cold weather.

In states where rates are still regulated, utilities earn a virtually guaranteed profit on their generating stations. Even if a power plant runs only one hour a year, the utility earns a healthy return on its cost.

In a competitive market, it is the spikes in demand that cause prices to soar for brief periods. Flattening out the peaks would be disastrous for some power plant owners, which could go bankrupt if the profit they get from peak prices were to ebb significantly.

. . .

The smart metering programs are not new, but their continued rarity speaks in part to the success of power-generating companies in protecting their profit models. Some utilities did install meters in a small number of homes as early as three decades ago, pushed by the environmental movement and a spike in energy prices.

For the full story, see:

DAVID CAY JOHNSTON. "Taking Control Of Electric Bill, Hour by Hour." The New York Times (Mon., January 8, 2007): A1 & A14.

(Note: ellipses added.)

Graph showing the range of variation in hourly electricity rates in different months. Source of graphic: online version of the NYT article cited above.

The Mere Threat of “Hillary-Care” Reduced Investment in Drug R&D

CEO of drug company Eli Lilly. Source of image: online version of WSJ artcle cited below.

NEW YORK — Is the future of your health riding on what happens in Washington? Sidney Taurel thinks it might be. The Eli Lilly CEO ticks off a list of former "death sentences" being cured or turned into chronic conditions — "AIDS, leukemia, Hodgkins, hopefully solid tumors within the next few years. The potential for medical research is unlimited. We just need to make sure we don’t interdict it by the wrong policies."

And what might those "wrong policies" be? Anything, it would appear, that reduces the financial incentives for drug companies to invest in research and development. Mr. Taurel points without hesitation to the mere threat of HillaryCare in the early 1990s as an episode that reduced investment in R&D, as drug makers, including his own, redirected money toward the purchase of pharmacy benefit management companies. As another example, he offers the anti-drug industry crusade of Sen. Estes Kefauver in the late 1950s and early ’60s:

"At that point companies started to diversify. We bought Elizabeth Arden, we went into animal health and agricultural chemical products, later on in medical instruments and so forth. All other companies did similar things. And for a while after that we saw fewer new products. When this threat subsided the companies focused again on R&D and we saw a golden era in the ’80s and ’90s with a lot of new products and breakthroughs."

For the full interview, see:

ROBERT L. POLLOCK. "THE WEEKEND INTERVIEW with Sidney Taurel; Of Politics and Pills." The Wall Street Journal (Sat., December 2, 2006): A8.

Incentives Influence Doctors’ Choice of Prostate Therapy

(p. A1) The nearly 240,000 men in the United States who will learn they have prostate cancer this year have one more thing to worry about: Are their doctors making treatment decisions on the basis of money as much as medicine?

Among several widely used treatments for prostate cancer, one stands out for its profit potential. The approach, a radiation therapy known as I.M.R.T., can mean reimbursement of $47,000 or more a patient.

That is many times the fees that urologists make on other accepted treatments for the disease, which include surgery and radioactive seed implants. And it may help explain why urologists have started buying multimillion-dollar I.M.R.T. equipment and software, and why many more are investigating it as a way to increase their incomes.

. . .

(p. C7) The one certainty about I.M.R.T. is that for doctors who own the technology, it can be much more lucrative than alternative treatments. Medicare and other insurers typically pay urologists only $2,000 or less for performing surgery to remove the prostate or for implanting radioactive seeds. The insurers say the much higher I.M.R.T. payments, which in some cases exceed $50,000, are based on the technology’s cost.

For the full story, see:

STEPHANIE SAUL. "Profit and Questions as Doctors Offer Prostate Cancer Therapy." The New York Times (Fri., December 1, 2006): A1 & C7.

“Atlas May Actually Decide to Shrug”

(p. A16) During the recent off-year elections, the president repeatedly pointed to the booming economy and noted that his tax cuts were responsible. With growth strong and unemployment low despite the ending of the stock-market bubble, terrorist attacks and the war in Iraq, he had every reason to be proud. Moreover, both economic theory and the actual timing of the economic revival support his claims regarding the tax cuts.

That is why it is so odd that rumors swarm around Washington that the president may be willing to raise taxes as part of a "deal" on entitlement reform. In particular, the rumors suggest the president might be willing to get rid of the provision that caps the income level used to compute Social Security taxes and benefits. These rumors aren’t without substance; last year the president would not rule out raising the cap when asked.

Doing so would raise the marginal tax rate on the entrepreneurs that Mr. Bush credits for having led the economic recovery by more than 10 percentage points. The new effective rate would be five percentage points above the level when he took office. Moreover, in 2011, the rate would go up a further 4.3 percentage points to an effective 53% marginal rate on entrepreneurial income. The president would thus be not just raising taxes on entrepreneurs to well above the levels that prevailed in the Clinton administration, but to a rate higher than that which prevailed in the Carter administration. Most of the improved incentives for entrepreneurship and work brought about under Reagan would be repealed.

. . .

Last year an entrepreneur similar to me would have paid federal taxes equal to 33.9% of total income.

. . .

Don’t make it too tough on him, or Atlas may actually decide to shrug.

For the full commentary, see:

LAWRENCE B. LINDSEY. "Compromised." Wall Street Journal (Mon., November 20, 2006): A16.

(Note: the ellipses are added.)

The last line of the commentary is a not-so-veiled allusion to:

Rand, Ayn. Atlas Shrugged. New York: Random House, 1957.

Without Incentives, the Energetic become Lazy

Wise words from Frederick W. Taylor, who is known as the father of scientific management:

(p. B1) "When a naturally energetic man works for a few days beside a lazy one," Mr. Taylor wrote, "the logic of the situation is unanswerable. ‘Why should I work hard when that lazy fellow gets the same pay I do and does only half the work?’ "

As quoted in:

CYNTHIA CROSSEN. "DEJA VU; Early Industry Expert Soon Realized a Staff Has Its Own Efficiency." Wall Street Journal (Mon., November 6, 2006): B1.

For Major Changes, CEOs Need to Change Who “Calls the Shots”

Some of the best advice in Gerstner’s book concern ‘execution’ issues of rewards, incentives, and who has the power to make which decisions. Consider:

(p. 249) If a CEO thinks he or she is redirecting or reintegrating an enterprise but doesn’t distribute the basic levels of power (in effect, redefining who "calls the shots"), the CEO is trying to push string up a hill. (p. 250) The media companies are a good example. If a CEO wants to build a truly integrated platform for digital services in the home, he or she cannot let the music division or movie division cling to its existing technology or industry structure—despite the fact that these traditional approaches maximize short-term profits.

. . .

I knew we could not get the integration we needed at IBM without introducing massive changes to the measurement and compensation system. I’ve already explained that the group executives who ran IBM’s operating businesses were not paid bonuses based on the unit’s performance. All their pay was derived from IBM’s total results.

When a CEO tells me that he or she is considering a major reintegration of his or her company, I try to say, politely, "If you are not pre-(p. 251)pared to manage your compensation this way, you probably should not proceed."

The reference for the book is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

(Note: ellipsis added.)

The Missing Pillow: A Lack of Incentives Leaves an Obvious ‘Job’ Undone

In late July, I had an appointment for a treadmill stress-test at Omaha’s Methodist Hospital. They told me the process would be over in an hour, but it took about two hours, due to another patient having some sort of crisis during their stress-test.

They had me put on a gown, they stuck an I-V "dye" drip in back of my hand, and they pasted about six electrodes to my chest, after shaving and applying something like sand paper to the parts of the chest where the electrodes were attached. Then they had me lie on my side on a hard table, to wait. It was very uncomfortable. The first nurse said that there was supposed to be a pillow on the table, but did nothing to obtain one. Every several minutes some technician or nurse would stop in to ask if I was ready for them. (I was always ready.) But it turned out that someone needed to do something to me first, and that person was, I guess, taking care of the crisis next door. At least one of these visitors also mentioned that I was supposed to have a pillow, but did nothing to acquire one. If memory serves, the first nurse came back in, and again mentioned that I was supposed to have a pillow, but again did nothing to obtain one.

These people were all pleasant and friendly. For example, they had a lot of friendly chats amongst themselves, that I could not help but over-hear. (One of them was pregnant with twins, but did not know the genders of the babes-to-be, and so had not yet spent the time to come up with names.)

But two hours later, when the whole process was over, I still did not have a pillow.

A week or two after the test, I received a several page survey from Methodist Hospital asking a bunch of questions about how I thought they had done during the test. You see they really "care" about my opinion. (They also run frequent, slick TV ads about how much they "care.")

Marketers, and management gurus, say that organizations need to invest in surveys and the like to figure out what the customer wants and needs. And Clayton Christensen advocates spending resources to figure out what "job" the customer needs to have done. And maybe, sometimes, it does take surveys and research.

But sometimes it is obvious that the customer needs a pillow.

What is missing is not a survey, or statistical analysis.

What is missing is the incentive for someone to go get the pillow.

P.S. You may wonder, then, if it is simply a mistake for the hospital to send out the survey? I suspect that those who send out the survey are not making a mistake, but are trying to get a different job done than the one that appears to be intended. It appears that they are trying to find out what customers want and need. But maybe they already know that. Maybe they are mainly sending out the survey so that if anyone asks if they are "customer-oriented" they can whip out the survey to prove that yes-indeed, they sure are. In other words, the point of the survey is not to learn about customers; it is to cover rear-ends.