InReview – Issue 45

Freakonomics: A Rogue Economist Explores the Hidden Side of Everythingg by Steven D. Levitt and Stephen J. Dubner; New York, Harper-Collins, 2005; xii, 240 pp.

Steven Levitt teaches economics at University of Chicago and was recently awarded the John Bates Clark medal, given every other year to the top American economist under age 40. Stephen Dunbar lives in New York City and writes for the New York Times and The New Yorker. He is the author of two other best selling books.

Freakonomics has been near the top of the best sellers list for most of 2005, and it is easy to see why. The book is engaging, intriguing, and timely. A top-flight economist and an excellent writer got together to give a popular view of how statistics can uncover hidden connections, and they explore these connections in a fun way.

For example, because of faulty measurement systems for the performance of teachers and sumo wrestlers, both have succumbed to a form of cheating that is made attractive by the measurements. And, in both cases, a careful look at the data clearly identifies the cheating. Other areas explored include the relationship between a person’s name and getting a job and how real estate agents and Ku Klux Klan members use and misuse information in similar ways.

For the business leader, the application of this work is obvious. Performance objectives should be examined carefully to uncover potential gaming that leads to both higher bonuses and poor performance. Hiring biases can be carried out in very subtle ways. And the list goes on.

Unfortunately, this book is seriously flawed in my view. The authors carefully lay out the case that correlation and causation are different; it is not enough to look at the statistics. But they often fall into this trap, claiming causal results without demonstrating them. Perhaps this is due to leaving out the details in order to appeal to a popular audience, but it may also be due to inaccurate results.

For example, they build elements of the case to claim that the drop in crime statistics in the past 15 years comes from abortion rather than economics or policy. Those who would have committed the crimes, coming from crime infested poor neighborhoods with broken family environments, were aborted. But they failed to present their case, and subsequent discussion of this topic at least casts doubt on the result.

In 1988, John Allen Paulos wrote Innumeracy, which exposes ignorance of mathematics bordering on illiteracy. He shows why things that seem amazing coincidences are really quite ordinary with a sound understanding of mathematics. I couldn’t help but think about this book as I read Freakonomics, hoping that those who read it would get a better treatment of the statistically strange world by turning to Innumeracy.

I would encourage the reading of Freakonomics for an introduction to some fascinating ideas presented in a fun way. Just don’t take it too seriously.

Reviewed by Al Erisman

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The Battle for the Soul of Capitalism by John C. Bogle; New Haven, Yale University Press, 2005; xxiv, 260 pp.

John Bogle is the founder of Vanguard, a mutual fund company, and its chief executive for more than 20 years. Time magazine named him one of the 100 most powerful and influential people in the world. He is a frequent commentator on radio and television.

This book is a thoughtful, well written, well documented commentary on what has gone wrong with American business. At the center of the breakdown in ethics in business, according to Bogle, is the loss of the voice of owners in the business, replaced by managers who are out to line their own pockets. The situation is aided by the financial analysts, whose commentary is tainted by their own special interests. It is further exacerbated by the mutual fund industry that fails to represent their customers in favor of self-interest.

Bogle offers two solutions directed at cleaning up business, the financial analysts, and the mutual fund communities: persuasive statements showing a different approach is really in their self-interest, and some recommended policy changes where required. One of Bogle’s key points is moving from a speculator’s perspective to an investor’s perspective through this combination of persuasion and policy. Investors who buy and hold stocks make more money than those who regularly trade. And if the data he shows won’t convince people, then tax laws and policies should be put in place to make the case more clear, he argues. The net of all this will move us toward markets that are considered long term for value rather than short term for speculation.

Along the way, Bogle takes shots at the lack of independence of boards, the excessive salaries of CEOs, and the short-term thinking of much of management that actually robs value from the companies, and hence their owners, while making money themselves.

There is much to like about this book. It is written with care, and with passion. It has detailed analysis and footnotes. Many of the key points are right on target.

Yet I was frustrated. There was a strong flavor of self-interest, arguing for doing things the Vanguard way. The comments on business were narrowly focused at viewing the business as a cash machine for the owners rather than a thriving organism with customers, employees, products, and markets. He is almost silent on all of these topics except as they related to making more money for the owners. In his argument in favor of owners over managers, he failed to point out that often (though not always) managers are owners, and moving more in this direction would help close the very gap that concerns him. And he ignores the greed that can come from owners in driving the company toward short-term results.

In the discussion of purpose of business, Bogle is clearly in the camp that believes the purpose of business is to make maximize the return to the shareholders. His approach is more thoughtful and longer term than most. He does occasionally mention the responsibility to the community or the employees, but only as a means to the end, rather than an end in itself.

In spite of my concerns about this book, I highly recommend it. The careful approach Bogle has taken provides great fodder for a discussion that needs to take place regarding business structure in America.

Reviewed by Al Erisman

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Our Endangered Values: America’s Moral Crisis by Jimmy Carter; New York, Simon & Schuster, 2005; x, 212 pp.

Jimmy Carter was the 39th president of the United States, and has been a prolific writer since leaving office in 1981. He was awarded the Nobel Peace Prize in 2002 for his humanitarian work at the Carter Center, founded with his wife Rosalynn. The Carter Center is a nonprofit organization that seeks to prevent and resolve conflicts, enhance freedom and democracy, and improve health around the world.

In this book, Carter raises the flag on what he considers the declining moral values in the United States. He raises concerns about the growth of fundamentalism, the distortion of American foreign policy, the approach to dealing with terrorism, issues of the environment, the challenges with poverty, and many other tough issues. A recurring theme is the loss of civility in dealing with those who differ from you, opting for confrontation or war rather than negotiation.

This book has more of an edge to it than other books I have read by Jimmy Carter. He expresses strong views on the direction of the nation, spelling out both his reason for concern and his suggested approach. In doing this, he talks straight, apparently not concerned about alienating himself from the left and the right — and he probably alienates both.

Ethics in any context is based on a foundation of values. Whether it is personal, business, or national values, the discussion is vital to personal, business, or national ethics. You don’t have to agree with Carter’s conclusions to appreciate the need to raise the conversation. This book is worth reading and discussing. It is good to see it on the best-seller list.

Reviewed by Al Erisman

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Leadership Is an Art by Max De Pree; New York, Doubleday, 1989; xxii, 136 pp.

Max De Pree was chairman of Herman Miller Inc. at the time he wrote this book. He was later (1991) elected to Fortune’s Business Hall of Fame. He retired from the board of Herman Miller in 1995. This is the first of many books he has written.

Of all the business books I have read, this classic stands in the top group. It can be read very quickly since it is only 136 pages, and each page is small with lots of space between the lines (he said this was to allow the reader to fill in the story). But it shouldn’t be read quickly. The stories and wisdom on each page should be carefully thought about and reread.

Here we see the foundations for many of the practices at Herman Miller Inc.: valuing people as individuals; servant leadership; looking for quality in relationships, as well as products; helping people achieve their potential; and communicating clearly even in tough times. It is not surprising that Herman Miller has been on the list of top places to work for a long time.

De Pree also challenges what he calls the “entropy” of an organization, the tendency for things to deteriorate. This happens when values become rules, when heroes become celebrities, when day-to-day problems push aside vision and risk. DePree also shows his wit. For example, in the chapter “pink ice in the urinals,” he talks about the tendency to look for superficial solutions to help you look good.

This book has been around for some years, so you may have already read it. Read it again. It’s a great investment.

Reviewed by Al Erisman