Archive for January, 2010


Monday, January 18th, 2010

There are some words that when you hear them you just want to say, “Wow! What a good word.” Disintermediation is one of those words. It came into use in the late 60s and then languished in obscurity until it experienced a Renaissance during the dot com boom in the late 90s. In its new incarnation it took on the generic meaning of removing the middle man from transactions. If you have a higher standard of living now than you did 20 years ago this is one of the words you have to thank.

Disintermediation is one of the hallmarks of the internet revolution. It has caused amazing effects on society along with other socioeconomic phenomenon such as improved logistics, commoditisation of goods leading to effective marginal costs of zero, and instant information. My view is that these byproducts of technical growth are all interrelated, have vastly improved our standard of living, and have some frightening implications for economic cycles.

Moore’s Law has the effect of giving us ever faster computers at ever lower costs. But it was the internet that precipitated an inflection point in society. Before the internet we had telecommunications. Businesses leveraged their computing resources by connecting locations point-to-point. There were exceptions, but fast data transfer was non-existent and slow data transfer was expensive.

The internet turned this on its head. Suddenly anyone could connect to anyone. Data transfer was relatively cheap. Bit rates exploded. Better communication led to better logistics. Data transfer itself became a commodity. Information became instantly available, anywhere. And disintermediation came into its own.

New electronic exchanges popped up, improving existing exchanges or replacing traditional wholesalers. Ebay savaged newspaper revenue models by making classifieds old fashioned and slow in comparison. Amazon did not so much cut the middle man out as replace the traditional bookstore. Online brokerage firms skimmed knowledgeable investors from traditional houses and opened up trading to a whole new class of people.

In all of these cases disintermediation improved the velocity of transactions. They occurred faster and with less cost than by traditional methods. One of the general effects of reduced costs though are reduced margins, in absolute terms if not also in relative terms. To survive companies must compensate by having greater sales volume. A traditional book seller may make $1 on a book. Amazon may make $.05. Amazon is going to sell a bazillion of them though because consumers can save $.95 by buying from Amazon.

I would guess that Amazon is responsible for increasing the overall market for books. But still, that market pie has to be divided up. Because Amazon tends to be more efficient and cheaper than a bricks and mortar store it has fundamentally changed the market place and many less efficient retailers have gone out of business or altered their business models. Barnes & Nobles has both invested in online distribution and closed physical outlets. This is representative of many industries: fewer, more efficient players and lower margins.

The benefits are obvious: lower costs. But are there negative implications for society? In many industries there has been a proliferation of smaller players serving niche markets, many that were probably underserved prior to the internet. However, in many industries, particularly those selling real goods there has been consolidation of vendors. Lower margins and higher volume means that fewer players can survive. This can mean less choice for consumers. The real effect has been a greater scarcity of specialty goods in retail outlets at “reasonable” prices.

MegaMart sells a can of tomatoes $.15 cheaper than any of its competitors, but it does not carry your favorite specialty item. Pop’s, who used to carry that specialty item that you bought twice a year has gone out of business because everyone buys their commodities at MegaMart. Pop’s cannot match MegaMart’s commodity prices and it cannot charge enough on specialty items to survive. Your specialty item can probably be found online somewhere, but it will cost you dearly.

As a further consequence since your specialty item is now only available online fewer people see it. It may be available to 330 million people in the United States, but that does not mean that they will see it. And even if they do see it, will they buy it? You might be willing to take a chance on a new item or choose it as a substitute while standing in the grocery isle, but will you be as adventurous while surfing the internet? I think probably not and the market for your specialty item shrinks again, leading to less variety in the marketplace.

Economies fluctuate between growth and recession. Ideally the growth part of the curve tends to be greater than the recession part. I predict larger fluctuations occurring at more frequent intervals or bigger recessions more often. The big cause of this is disintermediation. But disintermediation has been one of the driving factors of growth over the last 10 years. How could it make recessions worse or cause them to occur more often?

Disintermediation has accelerated our growth by removing the fat from our institutions. It has made them more efficient. That efficiency has a side effect though. Removing the fat has reduced buffering capacity. The term comes from chemistry. In general it is the ability of a system to absorb change without it causing a significant fluctuation in the system. As inefficiencies are removed from economic systems it makes them more vulnerable to smaller changes and more likely to react more violently.

Consider the town of 30 years ago. The mom and pop stores may have had a profit margin of 20%. If they have a bad year they hold off on buying that new car. They stay in business and just tighten the belt a little. What about now? That same store may be operating with a margin of 8%. They were not going to be able to buy a new car anyway. If they have a bad year, they are out of business. There is just less fat, less inefficiency, less buffering capacity in the system now. Smaller changes in initial conditions effect larger changes on the system. Fluctuations occur more often and at a faster pace.

Disintermediation. It has brought us growth and a higher standard of living. But, I assert that it has brought us less effective choice in our selection of daily consumables and will contribute to deeper recessions, more often. I do not like to be wrong. In this case I hope I am shown to be a fool.

My Three Words for 2010

Tuesday, January 5th, 2010

My intent for this blog is to post something once a week. But when I saw this topic on another blog it fit so well with the time of year and my blog subheading that I had to go ahead and slide one in early. Look for “Disintermediation” next. Props to Brian Russell for the topic.

1.)  Think.  It seems that many of us go through life on auto-pilot. We live our daily lives with little consideration of the bigger issues affecting our existence. The Christmas season can be hectic. Sometimes we are overwhelmed and we do not have the time or energy to contemplate bigger ideas or abstract thoughts. That is the very time when we should take a few moments and muster the effort to really think about things.

“Why?”, is a question familiar to all of us with children. But why do our kids use it all the time? It is because they are trying to understand their world. They need a framework in which to integrate their new experiences. Maybe we should ask the same question of ourselves. We might find that it helps us to put what is going around us in perspective.

This year I am going to think. I am going to think about quantum physics. I am going to think about philosophy. I am going to think about topics related to my vocation. I am going to think about biotechnology. I hope I am going to think about things I do not even know I do not know today. And this time next year I will understand my world, and my place in it, a little better.

2.)  Do.  Thinking is wonderful, but if you do not do anything with it the effort is not wasted, but certainly could be more beneficial. It is kind of like eating a steak flavored puffed rice cake.

This is not a resolution. I am going to try to use what I am learning in a constructive manner. I have already started a blog. I am spending 15 minutes a day doing laundry every day. My life is less cluttered and more organized and less stressful after only two weeks of that. If you do not do anything there is zero chance you can succeed at it.

3.)  Be better.  And finally, in the midst of doing I am going to make sure that my doing is focused in the right direction. I am not going to mindlessly do for the sake of doing. I am not going to be better for the sake of more money, or a better job, or a nicer car. I am going to be better because the older I get the more I realize that I am who I am because I choose to be that way. And I want to be better.

My three words for 2010. I will think, do, and be better. And hopefully I will drag some of you along with me.

The Search for Significance

Friday, January 1st, 2010

I am about to begin reading, “The Search for Significance“. Before I began I wanted to quantify my thinking on the subject and try to provide a structured framework into which I could integrate the material. It works out well that this is the inaugural post for my blog since it is, in some respects, an attempt to validate my worth.

Am I significant? Do I have significance? I can answer those questions affirmatively. But only anecdotally, I am not sure that I have a philosophical framework to justify that belief. However, I am a subset of the superset of everyone. If everyone is significant then it follows that I must be. That I think I can justify easily in a couple of ways.

From the perspective of personal belief as a Christian I accept that “For God so loved the world, that he gave his only begotten Son“. God thought that the whole world, every person, was valuable enough to redeem. Everyone is significant to God. Therefore everyone is significant. Therefore I am significant.

From a sociological perspective I assert that there is universal altruism. Whether altruism is truly selfless, based on universal egoism, or a biological evolutionary imperative makes little difference. In any case helping someone else is “good” or has value.

But is the act of helping valuable? I do not think so. Any act of helping another requires the expenditure of resources. There is a cost associated with an action and hence a value somewhere. Rational beings do not exchange something for worthlessness. If the action has no intrinsic value then it follows that the object of the action must have value else we would not perform a costly action. Altruism is universal. Therefore everyone has value, i.e. is significant. Therefore I am significant.

So, already I intellectually accept that I have significance. What can I expect to learn from the book? Perhaps other justifications for this belief. Maybe ways to internalize that belief or practical applications that can help me to change the way I act. But just this initial exercise has led me to the conclusion that not only I, but all others are significant.

This has some far reaching implications for my personal life. By this reasoning if I accept that I am significant, then I must accept that everyone is significant. Creed, color, or socioeconomic status does not change that. Are you significant? How will that change how you deal with others today?