Business and Economics links, 1/12
David Chapman on cofounder relationships; Listener on Michael Saylor; me on economic metaphors; Hannah Ritchie on resource prices
Some venture capitalists say that startup success depends more on the cofounder relationship than any other factor. It can be their main reason for choosing to invest, or not, in a founding team. Conflicts between cofounders may be the most common reason for startup failure.
In Under the Radar, I dubbed this “the early divorce.” Co-founders can find themselves incompatible for a variety of reasons, and it is very hard for a start-up to survive if the relationship does not work.
Most cofounder relationship advice I’ve found is about moving from being driven by emotions and personal relationships …
Don’t let conflicts or resentments fester.
Fight fair; disagree constructively.
In 1994, I started a web business solo, so there was no early divorce. But two years in, I partnered with an existing non-web business. The CEO and I could not have been more different. I knew the tech and had a feel for Web users, but I had no skill at negotiating big deals with business customers. He knew nothing about the Web, but he was a strong salesman.
And, relative to this Chapman’s essay, my partner had already come up with what he called “the integrity agreement,” which was a method for handling conflict that he and I had to go through a couple of times. The idea was that when the other person does something that really grates on you, you schedule an appointment to talk about it. You don’t wait, and you don’t keep your feelings inside. You include a third party to monitor the conversation, to keep the discussion fair and constructive.
MSTR is issuing billions of dollars of convertible debt that pays 0% interest, then using that money to buy bitcoin. MSTR publicly proclaims that they have no intention of ever selling their bitcoin, and bitcoin has no cash flows. So how do you lend large amounts of money, (even at 0% interest!!), to a company for the explicit purpose of purchasing an asset with no cash flows that they never intend to sell?
The bonds go up in value as the stock price of Michael Saylor’s company goes up.
In 1999, the game was “pump and dump,” and Michael Saylor was one of the players. The new game sounds like “pump and pump.” Saylor pumps up the value of Bitcoin, which pumps up the value of his stock, so he can borrow more money to pump up the value of Bitcoin. Enjoy it while it lasts.
Recently, I was on an airplane, seated next to a woman who was reading a book about replacing capitalism with the principle of “solidarity.” I asked her to estimate how many people were involved in building the airplane. She quickly picked up on the fact that if one takes into account the subcontractors providing components, the steel manufacturers, the miners of materials, and so on, it would add up to very many people. I then pointed out that the coordination process involved was therefore very complex. You could not just get a small group together, discuss, and then go about building an airplane. She understood the point, but unfortunately, I do not think that she let go of her socialist persuasion.
…The key point to take away is that every attempt at economic analysis uses a metaphor. Whether the metaphor applies, and how to apply it, is contestable. We should expect disagreement. We should live with uncertainty.
Whenever the price was higher at the end of the decade than at the beginning, Ehrlich would have won — those segments of the line I have colored red. Simon would have won when the price fell between the beginning and the end of a decade — the line segments colored blue.
It’s a pretty even split. Simon and Ehrlich would both have won around half the time. But as I’ll explain, I think the long-term data tells us a slightly different story: one that’s more in line with Simon’s worldview than Ehrlich’s.
Pointer from Tyler Cowen. The famous bet concerned resource prices, and people on the right tend to make way too much of it. Ritchie’s piece is a useful corrective. If she had found a definite pattern that one side always wins over ten-year periods, this would suggest that speculators were missing profit opportunities. Most of you have not read my 2022 essay on the theory of resource price dynamics.
Re: "The key point to take away is that every attempt at economic analysis uses a metaphor. Whether the metaphor applies, and how to apply it, is contestable. We should expect disagreement. We should live with uncertainty."
My intuition is that disagreements in economic analysis mainly have causes other than reliance on metaphor.
Arnold's example of coordination involved in airplane production demonstrates that careful analysis and patient explanation can greatly reduce recourse to metaphor.
I would highlight two causes of persistence of disagreement in economic analysis:
1. It is hard to establish causality. Many mechanisms interact. Economists cannot isolate variables by rerunning history and changing just one variable. Comparative history is inadequate because any two examples differ in many ways. 'Natural experiments' usually are similarly imperfect at isolating causes. Controlled experiments typically involve low stakes and unrealistic settings. Causal density at every turn. For example, it is much harder to establish what causes poverty than to identify patterns of poverty.
2. People hesitate to change their minds insofar as rationality in belief-formation is Bayesian. As they say in Missouri, "Show me!" People update their beliefs at various margins, but hesitate to discard a belief that many of their other beliefs rest on. For example, to persuade the socialist sitting next to Arnold on the flight might require a kind of conversion, involving various core beliefs.
Dan Williams has a very interesting essay on G.A. Cohen's camping trip analogy, going beyond the usual economics-inspired criticisms.
"Cohen’s vision of socialism mistakes the self-deceptive stories we tell about cooperation for the motives that actually generate and sustain it. ... The main lesson is this: Like many others, Cohen assumes that capitalism is unusual and objectionable because it relies on human self-interest to sustain cooperation. However, this is the default mode of human cooperation, including cooperation that sustains highly egalitarian social worlds. Spontaneous order—forms of social organisation that result not from intentional design but from strategic interactions among self-interested individuals—is unavoidable. Capitalism is not unusual in featuring this incentive structure; it is unusual in making it undeniable."
https://www.conspicuouscognition.com/p/socialism-self-deception-and-spontaneous