Book Review: Bourgeois Dignity

Warning: Similar to her first book in this series, The Bourgeois Virtues, Bourgeois Dignity is an extremely difficult—even painful at times—read. It’s dense; long (450 pages); packed with scholarly citations; it rambles, and wanders, sometimes aimlessly, with 41 pages of footnotes that take you even farther afield; it probably should have been cut in half by the editor; not to mention in places it will give you an incredible migraine.

It’s also brilliant. I loved it.

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But I dread trying to summarize the argument because it’s so complex and expansive in scope. For, as usual, McCloskey has looked at the hypothesis from every possible angle. This is the second book in a planned six-book series, which sets out to answer this question:

What caused the spectacular growth in the economy from the late 18th century to the present day, going from an income of approximately $1 to $3 per day to $137 today?

It’s even larger than that if you take into account the quality of goods and services available today versus then. One simple example is antibiotics. Simple infections that once killed incredibly wealthy people can now be cured with $5 and a trip to the drugstore.

Estimates put the growth in the quality of goods and services at a factor of 40 to 190—I believe even that is an understatement.

In 1875, the average family spent 74% of its income on food, clothing and shelter. In 1995 they spent 13%. This is one reason why my colleague Ed Kless says he’d rather be poor anywhere in the world today than in 1800.

This is an incredible accomplishment, and historians, economists, sociologists, poets, along with many others, have offered a plethora of explanations to explain it. McCloskey explores them all, but she reaches a totally different conclusion than most economists. In fact, the subtitle of the book is “Why economics can’t explain the modern world.”

McCloskey believes that economic change depends on what people believe—their talk, their ethics, and their ideas, especially as related to dignity and innovation. It’s what Alexis de Tocqueville called “habits of the mind.”

Yet “ideas about ideas are unscientific” and largely ignored by economists who naturally gravitate towards materialist explanations for growth and dynamism. McCloskey writes:

To be able to detect the dark matter we will need a new, more idea-oriented economics, which would admit for example that language shapes an economy.

Words Matter

One of our favorite lines discovered recently is Werner Erhard’s “All transformation is linguistic. If we want to change our culture, we need to change our conversation.”

McCloskey’s argument is this on steroids. In other words, our conversations about dignity and liberty changed, launching the Industrial Revolution. Here’s how McCloskey expresses this phenomena:

A big change in the common opinion about markets and innovation, I claim, caused the Industrial Revolution, and then the modern world. The change occurred during the seventeenth and eighteenth centuries in north-western Europe. More or less suddenly the Dutch and British and then the Americans and the French began talking about the middle class, high or low—the “bourgeoisie”—as though it were dignified and free. The result was modern economic growth.

That is, ideas, or “rhetoric,” enriched us. The cause, in other words, was language, that most human of our accomplishments.

McCloskey here is using the word rhetoric in its ancient sense, “the means of [unforced] persuasion,” which includes logic and metaphor, fact and story. She’s written many books on this topic, criticizing economists for not telling better stories, two of which I thoroughly enjoyed: The Rhetoric of Economics, and If You’re So Smart: The Narrative of Economic Expertise.

In the spirit of words being crucial, she’s attempting to rid the world of the dreaded “Capitalism,” preferring “Innovation” instead to explain the wonders of a free market.

Not the Cause

The heart of the book is a deep analysis of why all the traditional explanations of the Industrial Revolution fail to explain the caus. To contrast these viewpoints, consider the book by William J. Bernstein, The Birth of Plenty. This is a fairly representative example of how most commentators explain the origins of the Industrial Revolution, though McCloskey doesn’t cite this work.

Bernstein, like McCloskey, concludes it’s not geography, climate, exposure to microbiological agents (as Jared Diamond has argued in his books), but rather four factors:

  1. Property rights
  2. Scientific rationalism (positing and falsifying theories)
  3. Capital markets
  4. Improvements in transportation and communication

Which of the four was most important? All of them are like ingredients to a cake, all are equally important to produce a just dessert. It’s not physical objects (materialism) that matters, but rather institutions, according to Bernstein.

This sounds very plausible, but not to McCloskey, and she debunks every one of these factors. In chapter after chapter, she definitively falsifies the following list of reasons often cited as the cause of the Industrial Revolution:

  • The Weber Thesis—The Protestant (particularly Calvinism) ethic
  • Michael Porter’s thesis of competitive strategy of nations (this is deftly ripped apart by McCloskey, and R.I.P. as far as I’m concerned)
  • Rise of rationality
  • The exchange of ideas. Ideas having sex, in Matt Ridley’s apt phrase from The Rational Optimist. It helps, but it’s simply not large enough to have caused the Industrial Revolution
  • Education. In fact, too much education can impair growth. An interesting discussion is provided by McCloskey, and Thomas Sowell’s work as well
  • Thrift (savings accumulation)
  • Investment (capital accumulation)
  • Economies of scale
  • Division of labor
  • Greed
  • Expropriation or imperialism
  • Human capital. Not that this is unimportant, but McCloskey would argue (using our lingo) that social capital—specifically, our conversations and beliefs—are more important. I think Rabbi Lapin would call this “spiritual capital”
  • Transportation
  • Foreign trade. This simply reshuffles goods and services, it doesn’t discover or lead to innovation
  • Geography. Jared Diamond’s thesis is thoroughly shot down
  • Natural resources. McCloskey believes there’s no such thing as a natural resource, except the imagination of man
  • Unions
  • Eugenics
  • Institutions. No doubt important, but no way did they cause the spectacular growth, and mostly were formed afterwards
  • Property rights. Again, they are important, but they existed in all sorts of places prior to Great Britain (China, e.g.)
  • Science. This is more a result, not a cause

Thankfully, she also takes down the happiness literature that’s beginning to sprout up in economics, which is just so much hokum.

One discussion that runs through the narrative is the “California School”—why so many scholars (who tend to be disproportionately located in California universities) believe that numerous discoveries were originally from China, giving error to the idea of European exceptionalism.

McCloskey is more and more convinced of the findings of this school of thought, and so will you after reading about it.

Bowing to her colleagues, who love to express economics in mathematics, McCloskey offers this rather innovative “model” (not a theory) to explain the function for national product:

Q = I (D, B, R) • F (K, sL)

In which I is the Innovation function, depending on D, the dignity accorded innovators, and on B, the liBerty of innovators (the letter L is need for labor), and on R, the rent or profit to innovation.

The innovation function multiplies a conventional neoclassical production function, F, depending on ordinary physical capital and land, K, and on raw labor, L, multiplied by an education-and-skill coefficient, s.

It was anticipated by [Adam] Smith, whose Theory of Moral Sentiments (1759) treats the D variable of dignity, and whose Wealth of Nations (1776) treats the B variable of liberty (amongst a great deal also about F(.)).

And as example of how erudite this book is, where else could you read about Frédéric Bastiat’s idea of a “negative railroad.” Bastiat is on of my favorite economic thinkers because he takes arguments, especially those advocating protectionism, to their logical and absurd extreme.

In 1845 he wrote a petition of the candle makers against the unfair competition (think “dumping”) of the light of the sun, arguing that the law should require curtains to be drawn during the day.

He also argued that if exports would good and imports bad (think our completely meaningless “balance of trade” deficit, which describes accounting, not economics), then countries should sink their ships at sea, creating exports with no imports. Brilliant!

He was probably among the best thinkers to explain that job creation is not the purpose of an economy. In another spoof, he argued that the King should cut off everyone’s right arm, since then it would take twice as long to accomplish any task, create all sorts of jobs, and wealth.

Well, the “negative railroad” is just as funny, and only politicians would be dumb enough to fall for it (think “Wright Amendments” for flying out of Texas). Here’s how McCloskey explains it:

A railroad was proposed in the early 1840s from Paris to Madrid. The city of Bordeaux, at a third of the distance, demanded that the railroad break there, on the argument that the break would “create jobs” for porters and hotels and cabs [big cities like Paris, London and Chicago have always had the trains go into them and end].

Bastiat noted that according to such “job-creating” logic every town along the route should see its opportunity and take it. Every few kilometers, at every country village, the railroad on the way to Madrid would end at a Gare du Nord to be resumed as a Gare du Sud, after job-creating expenditure for freight and travelers en route.

All the national income of France and Spain would come to be “generated” by the Paris-to Madrid railroad, at the cost of all other forms of production and consumption. Jobs would be “created.” It would be a negative railroad, a triumph of protectionism and industrial planning achieved through what economists would later call “rent seeking” by the politicians of Bordeaux or Ablon-sur-Seine.

Think Obama’s “investment” in Solyndra to “create” green jobs.

In the final chapter, she summarizes the “Bourgeois Deal”:

Give a woman some rice, and you save her for a day. Give a man some seed and you save him for a year. That’s the plan of investment in capital, tried for decades in foreign aid, without much success.

But give a man and a woman the liberty to innovate, and persuade them to admire enterprise and to cultivate the bourgeois virtues, and you save them both for a long life of wide scope, and for successively wider lives for their children and their grandchildren, too. That’s the Bourgeois Deal, which paid off in the Age of Innovation.

Does the idea of conversation, words, and talk, changing the course of civilization sound too simplistic? Think about this: Why have out-of-wedlock births skyrocketed in the past 50 years?

Even during the worst years of slavery, the black family was largely intact. And, as Charles Murray documents in Coming Apart, out-of-wedlock births are increasing dramatically among the white population.

Why? What changed? Was it our conversation about this issue? Removing the stigma and shame associated with “bastard” children?

If not, what? Even Murray doesn’t completely blame the welfare state, concluding it exacerbated and enabled, not caused.

I find McCloskey’s work compelling, and it certainly has changed my worldview on the causes of the Industrial Revolution. It truly gives weight to the saying “all transformation is linguistic.”

If you’d like to follow this line of thought, you can visit her site here.

The planned six-book series is as follows:

  1. The Bourgeois Virtues
  2. Bourgeois Dignity
  3. Bourgeois Revaluation, how innovation became virtuous 1600-1845, where she will attempt to measure dignity, and even liberty
  4. Bourgeois Rhetoric
  5. Bourgeois Enemies, mostly intellectuals (no surprise there, see Thomas Sowell’s Intellectuals and Society)
  6. Bourgeois Times, present day views on topics such as globalization, environmentalism, etc.

I look forward to each of these works, even though I know I will be in for a McCloskey headache.

Innovation is the antithesis of efficiency

“Creativity is the residue of time wasted.” —Albert Einstein

3M is the third most innovative company in the world, behind Apple and Google. It sells fifty-five thousand different products—giving it a nearly 1:1 product-to-employee ratio—and generates 30 percent of its annual revenue from products that didn’t exist 5 years ago.

The essential feature of 3M’s innovation is its “flexible attention policy.” Instead of requiring constant concentration, and working to improve efficiency ratios, it encourages people to make time for activities that are unproductive—going for a walk, reading, etc.

Have you ever seen Lean Six-Sigma promote such a concept? I haven’t.

Innovation is the antithesis of efficiency.

Guest Blog: David Vilensky of BBV

David Vilensky, managing partner of BBV in Perth, Australia, and a Trailblazer, recently responded to an article in Lawyers Weekly, “Clients falling back on ‘safe’ hourly rates.”

Have you ever read such laughable crap. Clearly Mallesons have got a better PR machine that anyone else. Talk about vested interests.

As is well documented, these big firms survive on billable hours—the alternative is a slow death.

I recently posted a comment on Linkedin about the concept of “nobody’s money”. Why would the CEO or CFO of Woodside, or Rio, or NAB, or QBE, or whoever, give a toss about the amount of legal fees being spent when they are not actually paying? It’s shareholders money being used (nobody’s money) and when a company has $15m in the bank who cares if the lawyers bill is $20k or $50k or $100k.

But wait until the CFO gets divorced and goes to a family law lawyer who bills by the hour (as most do)—then they sing a different tune. Why? Because they are paying with their own money.

Regarding in house counsel, it’s the same story really. Most come from the big firms and are now working for former clients of their old firms. Clients that use “nobody’s money” to pay their legal bills.

I look forward to the day when the CEO of a large public company calls in his team of in house counsel and says to them that their bonuses will be based on the amount of legal fees they can SAVE the company. Watch them then!

Ron, this reminds me of your statement (BRW a month or so ago) which said “If you’re afraid of change you’re really not going to like irrelevance.”

Yes, big firms will be the last to change for sure.

I couldn’t agree more. Thanks, David.

Atticus Webinar on Value Pricing in Law Firms

Last Thursday I had the pleasure of doing a Webinar for Atticus, with VeraSage Practicing Fellows Mark Chinn and Christopher Marston, along with Lonny Balbi, a family lawyer in Calgary, Canada.

The call was moderated by Steve Riley.

The program runs one hour and you can find the link here.

On Subscription Pricing and Being a Firm of the Future

On April 4th, Ron Baker and I did a webinar for Sage Partners entitled Subscription Pricing on the Journey to Becoming a Firm of the Future.

If you were unable to attend or would like to review what was shared, you can view a recording of the session. This webcast is part of the new Sage Transformation Journey Webcast Series. In these sessions, myself and other members of the Sage Partner Advantage team present relevant and timely information on how to develop the business practice of selling subscription pricing and improving the customer experience.

Thank you to those of you who attended the April 4 webcast session. If you were unable to attend or would like to review what was shared, you can view a recording of the session.

If you would like to learn more about becoming a Firm of the Future, please register for the full two-day Firm of the Future Symposium. The next symposium is being held April 24-25 in Southern California!

In addition to the Irvine dates we also have upcoming Symposia in  Vancouver, May 23-24 and Boston July 17-18.

Click here to download the agenda for this event.

Sage partners can register for any of these events today at www.sage.com/partners. Once you login, select Academies & Workshops an then Mid-Market ERP.

If you are not a Sage partner and would like to attend, please contact me or PartnerPrograms@Sage.com.

Vortex Blog Post

[Here’s the latest from our G. Robert Newhart Non-Value-Added Fellow, Gregory Kyte].

I’ve always been doughy. Different levels of doughiness, but always doughy.

My two best friends in college had full-ride swimming scholarships—not doughy. These guys swam six hours per day and could wash down a trip to Golden Corral with a bag of Double Stuf Oreos and loose two pounds from all the chewing.

I always thought it would be awesome to have the time (and willpower) to exercise so much that I didn’t have to worry about—or feel guilty about—eating things like the Coronary Bypass Burger served at The Vortex Bar & Grill in Atlanta.

I was there last week, performing at the Laughing Skull Comedy Festival, hosted by the Laughing Skull Lounge (I know—weird coincidence), which is located within The Vortex Bar & Grill. So when I got to the club 90 minutes before my show, having eaten little more than Southwest Airlines’ pretzels, I was ready to throw down.

Of course the Coronary Bypass Burger caught my eye (a big half-pound sirloin patty topped with a fried egg, three slices of American cheese, and four slices of bacon, with plenty of mayo), as did the Double Coronary Bypass Burger (double everything plus grilled cheese sandwiches used in place of normal hamburger buns), the Triple Coronary Bypass Burger (don’t ask), and the Carnivorgasm (seriously, don’t ask).

But what really caught my eye were their pricing disclosures. Obviously, The Vortex doesn’t bill by the hour like Bob’s Barbecue. The menu is (as all menus are) a type of fixed price agreement. If you want to eat the Carnivorgasm, it’s going to cost $16.25 which includes one side item and should be ready in approximately 20 minutes (as clearly explained on page one of the menu).

The thing that gave me a VeraSage boner, however, was a section of their menu titled “Special Orders & Extras.” It reads, “The Vortex is a true short-order kitchen. We will gladly prepare special orders whenever it is possible. If you order something that is not on our menu, and we do make it for you, we’ll charge you whatever damn price we want to, and you’ll thank us for it.” Hells, yes! A restaurant with a clearly stated change order policy!

To add even more punch, there’s another section titled “Read Our Menus” that says, “Everything you need to know about our food and beverage selection is printed somewhere within our menus. Please read them thoroughly. If you ask us stupid questions we will be forced to mock you, mercilessly.”

In addition, throughout the menu they make it clear that if you don’t like the way they do things, then get the hell out. For instance, “if you’re acting like an idiot, we’ll be sure to let you know, right before we toss your silly ass out,” and “The Vortex is not politically correct. If you are easily offended, there’s a good chance you’ll be offended here. Consider yourself warned.” The Vortex knows what it wants in a customer; they hope bad customers will weed themselves out, and if not, the Vortex will grab a bottle of Scotts Round Up® and do its own weeding.

Is it hard to implement value pricing? Is it hard to fire clients that aren’t a good fit? Yes. They’re probably some of the hardest things you’ll do at your firm. But a goddam bar did it beautifully. And I get it, menu pricing is different than value pricing. And charging “whatever damn price you want” for a change order is akin to “billing and ducking.”

But the biggest thing I’m taking away from the Vortex menu is how powerful upfront communication with your customers can be. Clearly define and communicate the scope of your work. Give them power by giving them choices. Make sure they know that they have the freedom to change their mind, and consequently you’ll have the freedom to change your price.

The second thing I’m taking away from the Vortex menu is that, when properly and thoughtfully executed, clearly defining how you do business (value pricing) and who you want to do business with will create the culture that you’ve always wanted. Communicate through as many channels as possible, “Here at Hayek Hayek & Nienbach we don’t bill by the hour. Mostly because hourly rates piss people off and make us want to blow our f***ing brains out. Rather, we’ll give you a custom fixed price agreement for every job we do, and you’ll thank us for it. But if you prefer that we bill you by the hour, then don’t let the door hit you in the ass.”

The customers that you want will be cheering. The ones you don’t want will have doors hitting them in the ass.

The last couple of takeaways: the Coronary Bypass Burger is the second best burger I’ve ever had in my whole damn life, and those two swimmers are now in their late thirties and doughy.

Book Review: The Wiki Man

Regular followers of VeraSage will already know we are huge fans of Rory Sutherland, Vice-Chairman, Ogilvy Group, in the UK, where he’s been working since 1988.

We’ve been showing his Zeitgeist talk all over the USA, Australia, and Canada. It is simply one of the most profound talks we’ve seen in at least a decade.

Rory was the president of IPA in the UK, where he made it his platform to spread behavioral economics into advertising agencies.

He is a devotee of Austrian economics; Ludwig von Mises is his hero.

Rory has published an eBook, The Wiki Man, I believe only available on Amazon Kindle.

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It’s not really a book. It’s a long interview, then a collection of articles he’s written over the years. But what a short and sweet read it is.

It’s difficult to write a review of his book, since, like his Zeitgeist talk, he moves a mile a minute, tossing out an incredible range of erudite thoughts, topics, and funny lines.

The best I can do is to arrange some of his more cogent thoughts into categories.

On Economics

How did Rory get so deep into economics?

I got interested in economics just because I was ill for a few days and ended up reading a few books—one very good one by Steven Landsburg called Armchair Economist. It’s a really, really good read.

I also credit Landsburg for providing me with an incredible education in price theory, and this book is on my Top 100 Best Business Books of all time.

He goes on to discuss the concept of “Satisfice,” from the economist Herbert Simon.

“Satisfice” is the combination of suffice and satisfy.

I don’t think you can really understand brands without understanding satisficing.

[It’s] killer blow for market research—when you are put in a group of people and you’re researched, you behave like a maximiser because we want to be seen as one. Everybody says they obviously want to find the best television they can within their price bracket.

Most people, in most fields of consumption, NOT maximisers at all.

The vast bulk of the money in any market at any time is in the hands of satisficers. Self-image being a more stubborn force than self-interest.

Before the iPod most important thing with any sound system was of course sound quality. Then the iPod, and sound quality isn’t all that great.

[But it] satisfices, that’s the point.

On Behavioral Economics

It’s not mass hysteria that really frightens me, it’s mass rationality. Spend just as much time working on how you can reduce consumer transaction costs as you do trying to reduce manufacturing costs.

Maybe you only need the hard sell because your product isn’t easy to buy. All airport car parks should have a number of parking spaces, which are three times more expensive than any others.

We do not stand a chance of selling them—or of seeing them happen. And the reason for this is simple: these are all behaviour changing ideas, not attitude shifting ideas. And the job of an agency is now just to do the attitude stuff…

[It’s a] dangerous assumption that behavioral change is the product of attitudinal change: in reality it happens more often the other way.

On Advertising Agency Value

…agencies have so overplayed the “brand” justification for their activities that they have sometimes disqualified themselves from adding value to clients anywhere else.

[The] job of anyone in marketing is to turn human understanding into business advantage or social advantage, okay? That’s the only job.

I think there are really only two types of people in advertising agencies. Good people and crap people. It’s more important to have good people than to obsess about what they. Incidentally our business of charging by the hour makes it difficult to hire except by specialism, which is a problem.

As one creative (Chris Wilkins?) remarked to a planner: “You and I both drink from the same well of inspiration. The difference is that you get to piss in it first.”

Incidentally, one way to get your own bloody clients to do it is to get their competitors to do it; they’re bloody lazy most of these organisations, and they only actually do anything when their competitor does it.

How true is this last line!

On Brands

[The] best way to build a brand is to set out to build a brand. I really don’t believe this. I think if you set out to build a great business, you’ll stand a fair chance of building a great brand. I am not equally confident that someone aspiring to build a great brand will build a great business.

Great brands are often built obliquely, a by-product of something (ideals, vision, focus) and not a product of anything.

Andy Warhol’s beautiful insightful comment: “What I like about Coke is that the President of the United States can’t get a better Coke than the bum on the street.” Do you think the Prime Minister drinks the same wine as the local wino?

Great brands are like great pubs. One of the requirements is that they cross a demographic divide. Who is the typical Google user?

Ordinary people do not demand rigorous sequential logic from their friends; do they want it from their brands?

I suggest it is by far the more valuable economic role that brands play: not to be a promise of ultimate superiority but a cast iron assurance of pretty dependable non-shitness.

Jack Welch said, “Shareholder value is an outcome—it’s not a strategy.” Maybe greed isn’t bad for business. It’s certainly bad for brands.

On Advertising

We too often forget the power of advertising to alienate. Our first reaction is often to find a reason to reject it.

To decide that young people are the only audience which matters, we lose the largest and richest swathe of the population. Remove anything that enabled a recipient to go: “obviously not for me.”

On Wine

Wine does defy logic in one sense—in nearly everything else we buy we value consistency. If one in three bottles of whisky we bought, or one in three pints of beer we bought in the pub were total shit, we would never go to that pub again, and yet one in three glasses of wine we try are just rubbish, and yet we persist in trying to drink wine, and I genuinely don’t quite know why it is.

On Second Homes

[A] second home is not a necessary investment. [Who] really wants these encumbrances now they are no longer rising in value? Do you want to spend your precious fortnight’ holiday practising the Italian for “My septic tank appears to have exploded.”

On Efficiency vs. Effectiveness

Rory has the same disdain for the mindless pursuit of efficiency at the expense of effectiveness that we do.

The most dangerous technology is the spreadsheet. Metrics or values invariably override any conflicting human judgment.

“The Arithmocracy,” a powerful left-brained administrative caste which attaches importance only to things which can be expressed in numerical terms or on a chart. Holocaust and the Soviet famine were both the product of meticulous government officials in dutiful pursuit of numerical targets.

We have an economic system that is much better at delivering efficiency than it is at inspiring affection.

We have probably spent quite long enough trying to make this industry leaner and more efficient. We should try to make it jammier instead.

How, in their endless, dogged pursuit of a false efficiency, organisations can be rendered slightly useless. And stupid. (Remember that the word “dogged” is derived from the word “dog” meaning “energetic and stupid”).

[A] belief in false efficiency is very simple; it comes from the belief that improvement comes from the elimination of apparent waste. [The] problem with this approach. It fails to pay any tribute to luck.

If you look at all the really important breakthroughs made in any field, what you will find is that the unplanned, unintended or fortuitous connection plays just as great a role as the planned, the processed and the organised.

A Perfect Mess details how a messy desk and the accidental juxtaposition of two apparently unrelated papers led to a Nobel prize.

Are we trying too hard to mimic our clients obsession with efficiency (not effectiveness, which is something different) when we should be making the case for chance? Is payment by the hour making us too focused? Too dogged when we should be “catted”?

Henry Ford’s reaction to a consultant who questioned why he paid $50,000 a year to someone who spent most of his time with his feet on his desk. “Because a few years ago that man came up with something that saved me $2,000,000,” he replied. “And when he had that idea his feet were exactly where they are now.”

Be sure to watch Rory’s Zeitgeist talk, and read this book. As he says, it’s a great book for the loo.

Follow him on Twitter @rorysutherland, where his bio reads: “Fat bloke at Ogilvy, IPA; The Wiki Man.

Firm of the Future Down Under

Thanks to our senior fellow, John Chisholm, and many of our friends Down Under—Jessica Hadley, Matthew Tol and the entire Team at mta optima, Matthew Burgess, Michael Stewart, Michael Bradley, Toby Jenkins, Steve Major, Jenny Watson, and others I’m not leaving out intentionally—we’ll be holding three Firm of the Fuutre symposiums throughout Australia.

You can learn more about the program, sponsorship opportunities, cities and dates at the Firm of the Future Website.

Thanks to everyone for their hard in putting this tour on. It’s going to be great fun!

Ed and Ron Presenting at Professional Pricing Society

Thrilled to announce that Ed Kless and I will be presenting at the 23rd ANNUAL SPRING PRICING WORKSHOPS & CONFERENCE, at the InterContinental Chicago O’Hare Airport Hotel, in Chicago, IL.

The conference runs from May 8th—May 11th, 2012, and our all-day workshop will be held on May 9th.

We’re excited about this program since we will be discussing the Austrian economics approach to pricing, competitive analysis, and human action.

If you plan on attending the PPS conference, please stop by and say hello.

If you’ve never attended a PPS conference in the past, we highly recommend. It’s the best pricing education in the world.

Book Review: Baker’s Dozen Best Business Books 2011

Someone recently asked me which were the best business books I read last year. Since we here at VeraSage are inveterate readers, I’d love to know your best books from last year.

Tom Hood recently posted his, so I thought I’d share my Baker’s Dozen.

Some of these books I’ve already reviewed elsewhere, so will limit my remarks to books not previously discussed.

I’ve also noted my absolute Top Choices, so if you only read a few from this list, start with these.

Also, as always, you can access my shelf at shelfari.com for my complete library, my Top 100 Best Business Books of all time (see tag “bbb” underneath the shelf).

Business Books

Peter Drucker. Technology, Management and Society. Read full review here.

Jim Rains. Target Cost Management. Read full review here.

Top Choice: Thomas Alexander. Stanley Marcus: The Relentless Reign of a Merchant Prince.

He was called “America’s Merchant Prince,” and “the melancholy Plato of retailing.” I consider Stanley Marcus the grandfather of Total Quality Service.

Here’s a man who understood the value of each and every customer, long before CRM and Lifetime Value became management fads.

The founders of Neiman Marcus also certainly understood their “Why” (see Simon Sinek’s Start with Why).

Stanley wrote four books during his lifetime, but this is one of the only ones I’ve seen written about him by an insider, Thomas E. Alexander, who met Stanley in 1965 and served nearly 20 years as his executive vice president of marketing.

This was an incredibly demanding job, since Marcus was the consummate marketer, and many previous men failed in this role. Alexander obviously did something right that made Marcus keep him around that long.

Alexander gives you an insider’s view of the famous Neiman Marcus Fortnights, a Dallas institution until they were discontinued in 1986.

There are many fantastic pictures and other inside stories of how Marcus conducted business, treated customers, his team, and foreign government officials. Many of the pictures come from the Stanley Marcus Collection at South Methodist University, DeGolyer Library.

You’ll read about the first out-of-state store in Bal Harbour, Florida, opened in January 1971, and also the controversy of the San Francisco store opening at Union Square.

The columnist Herb Caen was an vocal critic of Neiman Marcus opening there, and the irony was that Stanely Marcus was farther to the left than Caen ever dreamed of being.

One very amusing anecdote about Marcus are the two things that exceeded his expectations, which were very high. One was Sophia Loren, and the other was the Bohemian Grove in San Francisco.

In the final chapter, “Saying Goodbye,” Alexander tells of Marcus, age 95, reflecting: “Without change, there is no challenge, and without challenge there is only the status quo but no progress.”

Wise words. Stanley Marcus was an amazing man, and his story is compelling on many levels. This book adds another dimension to a man who has left an indelible legacy on the culture. Well worth reading after you read Marcus’s own, Minding the Store, the best book ever written on customer service.

Robert Kanigel. The One Best Way. Read full review here.

Bob Lutz. Car Guys vs. Bean Counters. Read full review here.

Top Choice: Howard Hansen and Steven Geske. Healing Leadership. [Kindle Edition only].

I had the honor of writing the foreword to this book, but it doesn’t change the fact that this book had a profound influence of my thinking. Here is an excerpt from that foreword:

They say any writer should be able to sum up the purpose of their book on the back of a business card. I can do that for this book by using another author’s book:

The colossal misunderstanding of our time is the assumption that insight will work with people who are unmotivated to change. If you want your child, spouse, client, or boss to shape up, stay connected while changing yourself rather than trying to fix them.

As with most ideas and relationships, it is no coincidence that the above was written by Edwin H. Friedman, in his masterful book A Failure of Nerve: Leadership in the Age of the Quick Fix.

Healing Leadership takes a totally different approach, and one that is not very comfortable for those of us used to reading business books. How many books on leadership have you read where the central message is you can’t succeed at affecting change in the people you lead? That you need to get out of the business of needing others to change? The authors even admit they won’t get rich by dispensing this type of advice.

Rather than assaulting the reader with endless platitudes and checklists of “do this and don’t do that,” this book advocates a “way of being,” recognizing that leadership is an emotional process, not a mechanistic science that treats humans like machines.

You are about to explore some very profound, powerful, and simple concepts. But please don’t confuse simple with simplistic. Virtuoso bass player, accomplished pianist, bandleader, and composer Charles Mingus said: “Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that’s creativity.”

Three creative concepts from Healing Leadership have permanently altered not only my worldview, but my behavior. The authors present the “Energy Management Model,” which teaches how we could have greater success in achieving our goals if we tried not so much to control time—an impossibility, as it is outside us—and instead tried to control energy—eminently possible, as it is within us.

You’ll learn the difference between episodic and chronic anxiety, along with the 10 telltale signs of someone who is chronically anxious, and what to do about it.

Finally, the concept of Emotional Triangles—what the authors call “the weather of human relationships.” This framework ties everything in the book together, while offering an enormously effective way to lower your anxiety. After reading about Emotional Triangles you’ll wish you had understood them in elementary school.

But don’t confuse simple with easy. These frameworks are very counterintuitive, and they will no doubt cause some confusion. Don’t despair. That’s a leading indicator that your understanding is deepening. You simply must wrestle with the concepts in this book if you want to achieve real change—transformations that will truly make a difference in your life.

One of my favorite definitions of the role of leaders comes from business consultant Peter Block: “The real task of leadership is to confront people with their freedom.” In Healing Leadership, Steven and Howard do exactly this. It’s not comfortable, it’s vexing, and it goes against everything you were taught in business school. The difference is: it works.

John Kay. Obliquity.

John Kay is an economist who has written many books I highly recommend. He does a good job blending economic theory with business strategy.

This book is all about obliquity, which he defines as “Goals are often best achieved without intending them.” Achieving complex objectives indirectly rather than directly. The real world isn’t like Sudoku, where you can arrive at your objective directly.

Citing many different examples of this concept, Kay does an excellent job of applying it to business. A couple of example of the obliquity route: cities. Jane Jacobs despised the urban planners who believe they can directly create a great city. Great cities flourish when they are unplanned, which leads to creativity.

Creating shareholder value (which Jack Welch called one of the dumbest ideas) is an example of a direct objective, but it’s obtained indirectly by creating great products (think Apple). No one works to maximize shareholder value.

We do so more in line with Simon Sinek’s Start With Why. Kay does a good job dispelling the notion that business is based on greed: “A corporate culture that extols greed cannot, in the end, protect itself against its own employees.”

He talks about how measurements can cloud judgment. Using [Benjamin] “Franklin’s Rule” (drawing up a list of Pro and Con to make rational decisions), Kay illustrates that real decisions aren’t made this way—though we think they should be.

Robert McNamara’s tragic management of the Vietnam war by the numbers illustrates the flaw in this thinking.

Kay also discusses the “teleological fallacy,” which infers causes from outcomes, and how it’s one of the oldest mistakes people make. Today we call it the Halo Effect.

Kay explains why business autobiographers can describe their success, but not explain it. Sort of like John Paul Getty’s advice: “Strike oil.”

Kay also explains why it’s more important to be right rather than consistent (unlike, say, in legal matters, where precedent is more important).

The book validates much of my own thinking in Measure What Matters to Customers, especially the Seven Moral Hazards of Measurements.

Numbers give a false sense of precision and it’s no way to build a great business. Think Six Sigma when Kay writes: “The process in which well-defined and prioritized objectives are broken down into specific states and actions whose progress can be monitored and measured is not the reality of how people find fulfillment in their lives, create great art, establish great societies or build good businesses.”

Top Choice: Tim J. Smith. Pricing Strategy.

I met Tim Smith at the Professional Pricing Society conference in Chicago in April 2011. He told me he read my book (Pricing on Purpose) while in Prague, which kept him from getting into trouble…LOL.

He does cite my book in his, as a justification for pricing discrimination. Although this book is more like a textbook, and is very quantitative, it’s still very readable and enjoyable.

He’s got plenty of thought-provoking exercises (there’s a companion workbook for this text). Smith understands that pricing is not just about the numbers; that it’s more art than science, but he does discuss both, and even has a chapter on behavioral economics.

Overall, this book needs to be in every serious pricer’s library.

William Taylor. Practically Radical.

I enjoyed William Taylor’s other book, Mavericks at Work.

This book is also good, with three major themes: 1) Transforming your company; 2) shaking up your industry; and 3) challenging yourself.

A lot of it is profiles of change agents from a wide swath of sectors, some of whom you’ll find fascinating. Most change fails because it focuses too much on what’s wrong while undervaluing what’s right.

The book advises not to benchmark your competitors for new ideas (stop looking in the same places) and gather as many “zero-gravity” thinkers as you can—folks who are not weighed down by the baggage of industry expertise.

Taylor also understands the importance of a company’s “Why” or purpose, and provides many thought-provoking examples and research supporting this concept.

He’s wrong about the housing crisis at the start of the book, but other than that, this is good journalism, along with some important lessons. If you enjoy reading about entrepreneurs and change agents, this is well written and very interesting.

Dan S. Kennedy and Jason Marrs. No B.S. Price Strategy. Read full review here.

Andreas Widmer. The Pope & The CEO.

This is a great book by a former Swiss Guard, who are charged with guarding the Vatican.

Adreas Wedmer spent two years (1986-88) in his early 20s guarding Pope John Paul II, and this book discusses the leadership lessons he learned, which helped him become a successful entrepreneur.

He met Ronald Reagan at the Vatican in June, 1987, two days before Reagan delivered his “Tear down this wall” speech in Berlin. There’s a great discussion of ethics in the book, with the point being made that utilitarianism is the framework behind pornography.

Also, how firms are not moral agents because they have no soul. Hence, a person-centric framework is what the Pope espoused. Other lessons from the Pope apply to business as well, since business and faith go together.

I found the inside look at the Swiss Guards fascinating. A very worthwhile read.

Joseph Maciariello and Karen Linkletter. Drucker’s Lost Art of Management.

This is an incredibly deep book, which contains a wonderful idea: Management is really a liberal art—not a science or a profession—and should be a humanities discipline.

This would lead to a more humane and moral society. The idea that business is a science has always seemed strange to me, since we are dealing with human beings, not machines. This is an idea Matthew Stewart discusses in his excellent book, The Management Myth.

A liberal art is defined more by what it’s not: vocational training. Its purpose is to educate citizens to be society’s leaders, by emphasizing judgments and values.

Drucker first mentioned this idea in 1988, but he didn’t clearly define it. The two authors of this book both knew Drucker personally, and they are scholars, one from business and the other a historian.

They have researched all of Drucker’s writings on this link between liberal arts and management, shedding light on how this could be accomplished.

Drucker defined himself as a social ecologist—someone who creates and maintains a society of functioning organizations that anticipate change, and manage both continuities and discontinuities.

The book is a deep look at which philosophers, political scientists, economists, and other thinkers influenced Drucker’s worldview. It discusses his concept of the knowledge economy and knowledge workers. It’s a bit long, but still a very worthwhile read.

I now believe society would be better off closing its business schools and folding them back into the humanities. On average, I rather be led by someone with a liberal arts degree than an MBA.

Inder Sidhu. Doing Both.

Why do we build such beautiful bridges, such as the Golden Gate? After all, the military build utilitarian bridges all the time, capable of handling extreme loads. It’s costly to achieve the aesthetic appeal of the Golden Gate, so why bother, especially since the Bay Bridge right across the way does the job just as well without the flocks of visitors or suicide jumpers.

The premise of Inder Sidhu in this book is you can do both most of the time. He’s a veteran of Cisco, the 1984 startup that is now the 14th most valuable brand in the world, according in Intrabrand, and part of the Dow Jones Industrial Average.

This book was recommended to me by a colleague who suggested it would shed light on the “efficiency vs. effectiveness” that we have been engaged in over at VeraSage for years. It didn’t really help settle that issue, but actually reinforced the view that effectiveness everywhere and always trumps efficiency. But it’s an interesting book nonetheless.

Doing both is not a balanced compromise between two objectives but rather a mutually reinforcing multiplier. Each chapter provides an example in broad categories, such as:

Sustaining and Disruptive Innovations. A company doesn’t have to choose between one or the other, but should strive for both.

Multiple business models. Cisco embraces new business models either by acquisition or internal development. This is not easy, but it’s often necessary in order to capture new markets and not be cannibalized. Software as a Service and Subscription based pricing, as with WebEx, are examples of how they have changed their business model.

From volume to value with partners. Cisco evaluates its 55,000 partners not based on volume, but on value contributed—new customers, solving difficult technical problems, entering new vertical markets, etc. Rather than just providing discounts that can be used by bigger partners against smaller ones, Cisco changed the criteria to evaluating value, a great idea.

Excellence and Relevance. “By zeroing in on what matters most to customers, Cisco became excellent by focusing on customer pain points. But it became relevant by moving from customer frustrations to their aspirations.”

Superstars and winning teams. You can have both in your company. I think this one is tougher to achieve than the author leads us to believe.

Westpoint and Woodstock. This deals with the governance model of authoritative vs. democratic leadership. Cisco has both types, and it is a very interesting model, including councils, boards and working groups for decentralized management, and the traditional functions, geography and countries for centralized management. This has potential for professional firms as well.

Overall, this is a short book and a good read. But I still remain convinced that efficiency and effectiveness cannot be “balanced” as they are different things, and this book supports that view.

Honorary Mentions

Two of my VeraSage colleagues wrote books that I read in 2011.

Tim Williams. Positioning for Professionals.

Even with all my bias, this is a fantastic book—a concentrated, yet cogent, look at how professional knowledge firms can position themselves based upon value creation.

Tim dispels many myths in this work, from size being the path to profit, and why going broad is not really as profitable as going narrow.

Tim also takes on “commodity” thinking, debunking this myth as well. As he writes, “Service is a commodity. Smart thinking is not.”

If you are a leader of a PKF, you will profit immensely from Tim’s intellectual capital on how to position and differentiate your firm. As Tim argues persuasively, this is the only way to capture more of the value you create and command premium pricing. A fantastic read.

Jay Shepherd. Firing at Will.

This is an excellent guide to everything an employer needs to know in protecting its legal rights, and avoiding costly litigation and other legal issues. Written beautifully, and very non-lawyerly, it’s easily accessible to everyone. You will get the benefit of Jay’s 17 years of practicing law on the management side. Indispensable. (Ignore the foreword).