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, written by Jeremy. Read the commentary.

principles of economics, foresight

Timeless principles matter

I’ve been lucky and had good teachers. The best encouraged my natural interests. One of these passions, probably inspired by countless fantasy novels growing up, is the timeless and often ancient principles of art, architecture, literature, philosophy and, of course, economics.

It’s become a fascination, an almost unconscious drive as I fiddle through life. It comes out in favourite business models and business books. So, it’s no mystery why I found the following interview so compelling (it’s taken from an HBR article by David Gumpter, cited by Bo Burlingham).

This is a discussion with Fritz Maytag, CEO and Master Brewer of Anchor Steam Brewery. Anchor Brewing is one of the first, if not the first, microbreweries in North America. In this interview Maytag is discussing the early days of the American microbrewing renaissance:

“No other beer in the world, and certainly no group of beers, has anything like the theme we have. It is that we make everything as simply as we can with as few shortcuts … in a pure, traditional manner. Just as an example, all of our beers are made with malt. We don’t use corn or rice or sugars or sugar syrups or other grains. Almost all other brewers in this country and many overseas use them … There’s nothing wrong with it. It’s not cheating. It’s not evil… But we prefer to go back to the old way of making ale, the way it was done for thousands of years – with malted barely.

“That’s just one part of our theme. We also use nothing but whole hops – the little hop flowers. Traditionally, you pick these, dry them with warm air, pack them in a bag or bale, and take them to the brewery to put in copper kettles. Our brew kettles are copper, of course. Nowadays, most new breweries don’t use copper kettles. They use stainless steel. We wouldn’t dream of using stainless. Ask me why, I can’t really tell you. Copper looks good, it feels good. The old brewers say that it affects the flavor…

“The same with our air dried hops. We could use extract, which is what most brewers all over the world do now. Shipping and storing efficiency would be infinitely greater. Many breweries around the world also use a special treatment on the hops … almost doubles the yield. A little chemical trick. We wouldn’t dream of doing that.

“And there’s more. We ferment all of our beers in very strange, old-fashioned fermenters … and we cool the fermenting room with filtered San Francisco air. This apparently is the way beer was made in the old days on the West Coast before they had ice. They just used the cool night air. So here we are with these unusual fermenters and with the air cooled by San Francisco air …

“Why do we do it? Because it feels good … Part of the joy of Anchor Steam beer is that it comes from this funny old way of fermenting …”

Going back as a theme

Simplicity belies sufficiency. It’s tempting to over-complicate principles. Thankfully, Maytag didn’t give in to this urge while building Anchor Brewing.

Maytag centres his “theme” on principles. There’s nothing new in what he describes doing with his company. It’s actually the inverse of new – he’s gone old.

While there’s nothing new in what he’s said, it doesn’t take away from it’s significance. He takes old technologies that work, uses them deliberately in ways that leverage their strengths, and builds his business dead-centre in the middle of those advantages.

Maytag inverted the traditional technological tree when, for almost everyone else, newer is better.

Dogma less a principle

“Newer is better” is a dogma – an almost religious belief that most, by their actions, consider absolute truth. Maytag’s success is, in his discussion above, attributed to abandoning the current doctrine of his industry for the timeless principles that are its guide.

In similar ways economics has become over-run with dogmas. There is a fanatical faith that statistical models, characterized by mathematical assumptions, can guide national and global understanding. Obviously, given the shock on everyone’s faces when we plunged into the current recession, those models didn’t anticipate today’s recession.

There are some, like Nassim Nicolas Taleb, celebrated author of Black Swan, that would argue these events are 1) unpredictable and 2) a direct consequence of fool-hardy faith in economics. And, in almost every way, I would agree he’s right. But, I think he throws out a lot of value when he dismisses economics out of hand.

Despite today’s turmoil – the timeless principles of economics remain meaningful

“As to methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.” Ralph Waldo Emerson

Principles of Economics

When I was taught economics, my supervisor focused on the Austrian School – started in the 15th century. The school rejects statistical and hypothetical experiments in economics. They argue that the actions of people are too complex. Instead they focus on the logical processes of human action – the principles of choice.

These principles of choice are, the Austrian School argues, built on undeniable facts about human existence. They pivot on the axiom that humans take conscious action toward chosen goals.

For example, Austrian economists put great emphasis on the forward-looking nature of choice. Time is seen as the root of uncertainty. I might be certain my beer is here and cold right now – I am not near as certain that it will be here in three days. That uncertainty erodes the value of drinking beer in three days. So I drink it now.

This issue of uncertainty is a small and subtle shift from the traditional view of time in economics. Traditional economics would argue that I might be willing to take a rain check on that cold beer if I were paid some kind of interest rate to wait. A bit of cash might overwhelm my impatience to down a pint right now, while idling on my deck. And that might be true – if I were certain the beer would be there later (and that the sun would be out, and that my kids would be sleeping, and that I was mid-stride in a lavish 1.5 month holiday as is the case now).

This is all well and good when it comes to beer – but what of real things such as, say, mortgages? Traditional economics would say I’d accept a mortgage rate that reflects my time preference for housing. From this perspective, we might say my threshold is somewhere around six percent. Anything above that and I’d rather rent. But from an Austrian economists view the mortgage rate isn’t really the main issue – it’s more one of uncertainty. I can handle the rate today. I know that. I’m not be sure of the rate nor my ability five years from now. If I’m going to jump, I’d better go now – future rates be damned.

Both of these are arguments based on rationality. The problem is that rationality depends on where you start from. To a traditional economist paying nine percent on a $350,000 mortgage while holding down a $75,000 per year mortgage seems irrational. No one would do it. But to an Austrian economist, looking at the uncertainty of the future, this might make more “sense”. The goal would drive the action – own a home today, worry about tomorrow when it gets here.

Toss the dogma, not the principle

That economics has failed, in general, to anticipate the future does not mean that economics, in general, is of no value. There are many worthwhile perspectives derived from an economic paradigm.

Though today’s unexpected recession might mean that economists can no longer claim a privileged view of what’s next – prediction was never the point.

The point of economics is understanding that people choose with goals in mind. These goals define their actions. Understanding those goals is of value when making decisions.

This perspective of economics – that it describes choice and human action rather than predicts the future – makes it deeply relevant in today’s context. It’s as meaningful today as it ever was.

Commentary

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