Business and human capital
A reply to Michael Vassar, picking apart something he had said earlier — that doing well in business is “80% selling.” If that’s right, where does the standard claim about long-term human capital and culture, of the sort the economist Thomas Sowell makes, come in? Alyssa works through the chain of reasoning step by step and ends up at the conclusion that what really drives prosperity is finding ways to produce things more cheaply.
Wait a minute. If business is 80% selling, then where does this “long-term human capital” stuff that Sowell talks about come from? Sowell never actually explains the mechanism by which this human capital stuff translates into an improved standard of living. Breaking it down: Our assessment of how good a culture is is highly correlated with the standard of living of the people in it.
The standard of living of a people is mostly determined by their ability to produce goods and services.
Goods and services are mostly produced by businesses.
You asserted earlier that doing well in business was 80% good salesmanship.
Salesmanship depends a lot upon experience and training, but it isn’t the sort of thing you culturally inherit, because it’s largely about manipulating human-universal brainware. Most well-known propaganda techniques would be just as effective two thousand years ago. Hence, the fields that depend most on being a good salesman, like politics and entertainment, have a much higher proportion of “rags to riches” than, say, physics does.
Hence, you would naively expect to see little correlation between a people’s accumulated cultural, knowledge and scientific capital and their living standards. Instead, you would expect societies to prosper based on the degree to which salesmanship was coupled in individuals to the ability to produce larger amounts of better goods more efficiently, through whatever mechanisms. And that the US would do better if the government required everyone to pass some combined IQ/knowledge test before starting a company. This is obviously not what we see.
The obvious model here is that science can be treated as a sort of magical externality: businesses mostly don’t win by being better, but scientists do their magical science stuff, which does depend on cultural capital, which then helps to make every business better.
A flaw in this theory: science has effectively been international for a really long time now. The Brazilians can read American science journals as well as we can, but their GDP per capita is 20% of ours. Why, then, don’t the Brazilians read our science journals and bring their GDP up to American levels?
Perhaps, then, we need to break down this mysterious thing called “business” into components.
Doing well in business consists of making lots of money for yourself.
You make lots of money for yourself by having high income and low expenses.
There are three ways to do this: you can sell more goods, or you can sell each good for a higher price, or you can make each good more cheaply.
Consider the first one. Suppose you are running a business with $20M gross income and $2M profit. You want to sell twice as many goods at the same profit margin and make $4M in profit. To sell more goods, you need to produce more goods, which requires building more factories, which requires obtaining more capital. The person who can sell the most goods, then, is the person who can get the most capital. This means either (1) selling to investors, or (2) having sufficient profit margin to be able to re-invest lots of money in the company. But (1) doesn’t seem to depend much on cultural capital; most investors nowadays know almost exactly nothing about the things they invest in (hence Madoff and Blacklight and other obvious scams), and you can’t get less than zero knowledge about anything. (I suppose in a sufficiently primitive society you don’t have investors, but everywhere outside of Africa is already past that point.) (2), of course, is self-referential.
Consider the second. To sell each good for a higher price, you need to be able to trick consumers into paying more, which is mostly about (1) selling, or (2) spending a ton of money on advertising and marketing campaigns, which then cancels out the return from the increased profit margin.
Hence, we are left with the third: making a given good more cheaply, which is done at the business’s end and not at the consumer’s end, and so doesn’t involve selling to anyone (in some cases anyway). This is an excellent result; it implies that all of human progress depends on finding ways to do stuff more cheaply, which fits nicely with the available evidence. Apple made computers more cheaply than anyone else. And Henry Ford made cars more cheaply than anyone else. Eli Whitney made cotton more cheaply than anyone else. Etc., etc., etc.