Confessions of a Supply-Side Liberal

A Partisan Nonpartisan Blog

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Rich People Who Believe in Behavioral Economics

From Harvard Magazine, July-August 2014:

… the [Harvard] Faculty of Arts and Sciences disclosed a $17-million donation from the Pershing Square Foundation—founded by Bill (William A.) Ackman ‘88, M.B.A. ‘92, CEO of the Pershing Square Capital Management hedge fund, and Karen Ackman, M.L.A. ‘93—for a “foundation of human behavior” initiative grounded in behavioral economics and other disciplines. That gift provides for three new professorships and a research fund.

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Clay Christensen, Jerome Grossman and Jason Hwang on the Three Basic Types of Business Models


In The Innovator’s Prescription, Clay Christensen, Jerome Grossman and Jason Hwang make good use of a typology of business models laid out by C. B. Stabell and Øystein Fjeldstad in their May, 1998 Strategic Management Journal article “Configuring Value for Competitive Advantage: On Chains, Shops and Networks." Modifying Stabell and Fjeldstad’s terminology a bit for clarity, Clay and his coauthors call the three types of business models solutions shops, value-adding processes, and facilitated networks. Clay, Jerome and Jason argue that these three types of business models are so different that it is difficult to efficiently house them under one roof. They give these definitions for these three types of business models (from about location 360):

Solution Shops 

These “shops” are businesses that are structured to diagnose and solve unstructured problems. Consulting firms, advertising agencies, research and development organizations, and certain law firms fall into this category. Solution shops deliver value primarily through the people they employ—experts who draw upon their intuition and analytical and problem-solving skills to diagnose the cause of complicated problems. After diagnosis, these experts recommend solutions. Because diagnosing the cause of complex problems and devising workable solutions has such high subsequent leverage, customers typically are willing to pay very high prices for the services of the professionals in solution shops. 

The diagnostic work performed in general hospitals and in some specialist physicians’ practices are solution shops of sorts. …

Value-Adding Processes

Organizations with value-adding process business models take in incomplete or broken things and then transform them into more complete outputs of higher value. Retailing, restaurants, automobile manufacturing, petroleum refining, and the work of many educational institutions are examples of VAP businesses. Some VAP organizations are highly efficient and consistent, while others are less so.

Many medical procedures that occur after a definitive diagnosis has been made are value-adding process activities….

Facilitated Networks

These are enterprises in which people exchange things with one another. Mutual insurance companies are facilitators of networks: customers deposit their premiums into the pool, and they take claims out of it. Participants in telecommunications networks send and receive calls and data among themselves; eBay and craigslist are network businesses. In this type of business, the companies that make money tend to be those that facilitate the effective operation of the network. They typically make money through membership or user fees.

Networks can also be an effective business model for the care of many chronic illnesses that rely heavily on modifications in patient behavior for successful treatment. Until recently, however, there have been few facilitated network businesses to address this growing portion of the world’s health-care burden. …

Clay, Jerome and Jason’s central idea is that medicine will be more efficient if there is one medical institution designed for inherently expensive “solution shop” activities such as difficult diagnoses, other much more convenient and inexpensive clinics for the routine treatment of well-diagnosed diseases, and online networks for patients to discuss their contribution as patients to disease management with others who have the same disease. What wouldn’t survive would be the current hospital model where the solution shop aspect of what they do confers high expense on many other activities that don’t have to be so expensive. Here is the way Clay, Jerome and Jason say it: 

The two dominant provider institutions in health care—general hospitals and physicians’ practices—emerged originally as solution shops. But over time they have mixed in value-adding process and facilitated network activities as well. This has resulted in complex, confused institutions in which much of the cost is spent in overhead activities, rather than in direct patient care. For each to function properly, these business models must be separated in as “pure” a way as possible.

This is not just a matter of static efficiency:

The health-care system has trapped many disruption-enabling technologies in high-cost institutions that have conflated two and often three business models under the same roof. The situation screams for business model innovation. The first wave of innovation must separate different business models into separate institutions whose resources, processes, and profit models are matched to the nature and degree of precision by which the disease is understood. Solution shops need to become focused so they can deliver and price the services of intuitive medicine accurately. Focused value-adding process hospitals need to absorb those procedures that general hospitals have historically performed after definitive diagnosis. And facilitated networks need to be cultivated to manage the care of many behavior-dependent chronic diseases. Solution shops and VAP hospitals can be created as hospitals-within-hospitals if done correctly.

Further Musings: Even apart from this application to health care, I have found the typology of solution shop, value-adding process and facilitated network very interesting to think about for understanding my own work life (as a complement to the kind of analysis I talked about in my post "Prioritization").  

I work at the University of Michigan. Universities combine research—which is quintessentially a solution shop activity—with teaching, which has a big component of value-adding processes. And of course, Tumblr, Twitter and Facebook, where I put in effort as a blogger, are facilitated networks.

The idea of a value-adding process highlights the gains to be had from routinizing something. It is good to periodically ask oneself if there is anything in my daily activities that I can make more routine and streamlined.  

The idea of a facilitated network highlights the gains to be had by having users do a lot of the work. That in turn is related both to the benefits of laissez faire under a decent system of rules and the idea of delegation, which typically involves giving up some control at the detailed level.  

I find for me, however, that I love the “solution-shop” aspect of life so much that I think I resist routinization. I don’t know if this is what I should be doing, but I would rather keep thinking about how I am doing things than have everything fade into the background of routine. That does cost me extra time, as I do things inefficiently because I am thinking too much about them as I do them.  

Here is a link to a sub-blog of all of my posts tagged as being about Clay Christensen’s work

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Math Camp in a Barn


Image created by Miles Spencer Kimball. I hereby give permission to use this image for anything whatsoever, as long as that use includes a link to this post. For example, t-shirts with this picture (among other things) and on them would be great! :)

I like Naomi Schefer Riley’s account in the Wall Street Journal of Ben Chavis’s math camp in North Carolina’s poorest county: "Math Camp in a Barn: Intensive Instruction, No-Nonsense Discipline" (googling the title of a Wall Street Journal article jumps over the paywall, so my link is to the search page). Naomi’s article illustrates two related principles I have written about. First, almost anyone can learn math with enough hard work and a can-do attitude, as Noah Smith and I write in “There’s One Key Difference Between Kids Who Excel at Math and Those Who Don’t.” Second, a key element of learning is simply time spent learning, as I write about in "Magic Ingredient 1: More K-12 School." Lengthening the school year is one of the most straightforward ways to increase learning, especially in hard subjects. Naomi points out the arithmetic of math instruction: 

From 8:30 a.m. to 4 p.m. Monday through Friday the children learn math, interspersed with some reading, physical education and lunch. Each gets 120 hours of instruction during the three weeks, equivalent to what they would get in a year at a typical public school.

Among many other serious problems with education in the United States, our attachment to the idea of summer vacation is an important one. 

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John Stuart Mill’s Rejection of Anarcho-Capitalism


British policemen in Manchester (illustrative photo credit: Wikimedia Commons)

The Anarcho-Capitalism of Murray Rothbard does not recognize the legitimacy of taxation even to fund police protection. John Stuart Mill has a broader view of what a state can legitimately do. In On LibertyChapter IV, “Of the Limits to the Authority of Society over the Individual” paragraphs 1-3, he writes:

What, then, is the rightful limit to the sovereignty of the individual over himself? Where does the authority of society begin? How much of human life should be assigned to individuality, and how much to society?

Each will receive its proper share, if each has that which more particularly concerns it. To individuality should belong the part of life in which it is chiefly the individual that is interested; to society, the part which chiefly interests society.

Though society is not founded on a contract, and though no good purpose is answered by inventing a contract in order to deduce social obligations from it, every one who receives the protection of society owes a return for the benefit, and the fact of living in society renders it indispensable that each should be bound to observe a certain line of conduct towards the rest. This conduct consists first, in not injuring the interests of one another; or rather certain interests, which, either by express legal provision or by tacit understanding, ought to be considered as rights; and secondly, in each person’s bearing his share (to be fixed on some equitable principle) of the labours and sacrifices incurred for defending the society or its members from injury and molestation. These conditions society is justified in enforcing at all costs to those who endeavour to withhold fulfilment. Nor is this all that society may do. The acts of an individual may be hurtful to others, or wanting in due consideration for their welfare, without going the length of violating any of their constituted rights. The offender may then be justly punished by opinion, though not by law.

John’s argument that “every one who receives the protection of society owes a return for the benefit” is one that Elizabeth Warren has been echoing to argue for the legitimacy of taxation to support a wide range of government activities. E. J. Dionne’s review of her book A Fighting Chance  in the Washington Post offers these quotations from the book:

1. “There is nobody in this country who got rich on his own,” she said. “Nobody. You built a factory out there? Good for you. But I want to be clear: You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for.” …

2. “There’s nothing pro-business about crumbling roads and bridges or a power grid that can’t keep up,” she writes. “There’s nothing pro-business about cutting back on scientific research at a time when our businesses need innovation more than ever. There’s nothing pro-business about chopping education opportunities when workers need better training.”

Although her specific examples of government action in these quotations sound fairly benign, the way Elizabeth is using the argument that ”every one who receives the protection of society owes a return for the benefit” does not provide any obvious principle for putting a bound on what the government can legitimately raise taxes for. I suspect that, if magically revived in the modern world, John Stuart Mill would argue for a more limited government than the one Elizabeth Warren advocates. (And it is clear from the passage in On Liberty quoted above that he would not go along with her invocation of a “social contract.”)     

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Bruce Bartlett on Access to Research Results

Bruce Bartlett, who also appears in the post "Bruce Bartlett on Careers in Economics and Related Fields" gave this reaction to my presentation "On the Future of the Economics Blogosphere":

I think you missed an opportunity to criticize academic journals for excessive cost and severe paywall constraints. The inability of many readers to access the underlying research is a major problem for blogs to advance serious debate. While in many cases, working paper versions can be located, this applies to only a fraction of the research that is out there. You should criticize academics who don’t post their work in places like SSRN or on personal web sites. My understanding is that unless you literally sign away your rights, you have the right to post your own work on your own web site.

In other words, each of us who produces published research has a lot of discretion to make the results of our research available inexpensively. Let’s do it. 

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Clay Christensen, Jerome Grossman and Jason Hwang on Intuitive Medicine vs. Precision Medicine


I found the passage below from The Innovator’s Prescription (location 333), by Clay Christensen, Jerome Grossman and Jason Hwang especially insightful. It puts diagnosis at the center of medicine, especially when viewing medicine from a business point of view. Better and better diagnosis opens up the possibility of more cost-efficient treatments for those diseases that are precisely identified. But that possibility must be seized.

Our bodies have a limited vocabulary to draw upon when they need to express that something is wrong. The vocabulary is comprised of physical symptoms, and there aren’t nearly enough symptoms to go around for all of the diseases that exist—so diseases essentially have to share symptoms. When a disease is only diagnosed by physical symptoms, therefore, a rules-based therapy for that diagnosis is typically impossible—because the symptom is typically just an umbrella manifestation of any one of a number of distinctly different disorders.

The technological enablers of disruption in health care are those that provide the ability to precisely diagnose by the cause of a patient’s condition, rather than by physical symptom. These technologies include molecular diagnostics, diagnostic imaging technology, and ubiquitous telecommunication. When precise diagnosis isn’t possible, then treatment must be provided through what we call intuitive medicine, where highly trained and expensive professionals solve medical problems through intuitive experimentation and pattern recognition. As these patterns become clearer, care evolves into the realm of evidence-based medicine, or empirical medicine—where data are amassed to show that certain ways of treating patients are, on average, better than others. Only when diseases are diagnosed precisely, however, can therapy that is predictably effective for each patient be developed and standardized. We term this domain precision medicine.

… disruption-enabling diagnostic technologies long ago shifted the care of most infectious diseases from intuitive medicine (when diseases were given labels such as “consumption”) to the realm of precision medicine (where they can be defined as precisely as different types of infection, different categories of lung disease, and so on). To the extent that we know what type of bacterium, virus, or parasite causes one of these diseases—and when we know the mechanism by which the infection propagates—predictably effective therapies can be developed—therapies that address the cause, not just the symptom. As a result, nurses can now provide care for many infectious diseases, and patients with these diseases rarely require hospitalization. Diagnostics technologies are enabling similar transformations, disease by disease, for families of much more complicated conditions that historically have been lumped into categories we have called cancer, hypertension, Type II diabetes, asthma, and so on.

When I was a kid, we talked about “curing cancer” as the prototypical world-shaking accomplishment. The reason there is no one “cure for cancer” is that cancer is not one disease but hundreds of different diseases involving different genes going awry in the direction of too much growth. A cure needs to be found for each one of those diseases in order for there to be a cure for the amorphous notion of “cancer.” Many of these diseases have been cured and others are well on their way to being cured. But other diseases under the general heading of “cancer” have not even been identified yet (in the sense of carefully distinguishing them from other diseases with similar symptoms). Once they have been identified at the level of the particular gene that goes awry to produce that particular disease, they will be halfway to being cured.

The term “personalized medicine” is sometimes used for what I would call “treating the disease someone actually has instead of some other disease.” A better phrase for that is the phrase Clay, Jerome and Jason use: “precision medicine.”    

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