Human Capital Links

Here are some loosely related links:

Ben Horowitz on Andreessen Horowitz’s strategy. The motivating force was his reaction to this:

< That excitement took a sharp downhill turn when one of the top partners said to me, in front of my co-founders, “When are you going to get a real CEO?”

I was completely stunned—the comment knocked the wind out of me. Our largest investor had basically called me a fake CEO in front of my team. I said, “What do you mean?”—hoping he would revise his statement and enable me to save face. Instead he pressed on: “Someone who has designed a large organization, someone who knows great senior executives and brings prebuilt customer relationships, someone who knows what they are doing.”

I could hardly breathe. It was bad enough that he undermined my standing as CEO, but to make matters worse, I knew that at some level he was right. I didn’t have those skills.

But Ben still feels that founding CEOs are still better equipped to run their companies than hired guns. So, as any good founder does, he set out to build a company that squares this circle:

As we set out to design a venture capital firm that would enable founders to run their own companies, we began by asking: In what ways are professional CEOs superior to founder CEOs?

Next, we asked: How might a venture capital firm help close those gaps?

Alex Tabarrok gives us this graph, which I’ll let speak for itself for the moment:

Finally, a discussion of consultants. Tyler Cowen gives an interesting take on the ‘why smart kids go into generalist fields’ discussion:

The age structure of achievement is being ratcheted upward, due to specialization and the growth of knowledge. Mathematicians used to prove theorems at age 20, now it happens at age 30, because there is so much to learn along the way. If you are a smart 22-year-old, just out of Harvard, you probably cannot walk into a widget factory and quickly design a better machine. (Note that in “immature” economic sectors, such as social networks circa 2006, young people can and do make immediate significant contributions and indeed they dominated the sector.) Yet you and your parents expect you to earn a high income — now — and to affiliate with other smart, highly educated people, maybe even marry one of them. It won’t work to move to Dayton and spend four years studying widget machines.

You will seek out jobs which reward a high “G factor,” or high general intelligence. That means finance, law, and consulting. You are productive fairly quickly, you make good contacts with other smart people, and you can demonstrate that you are smart, for future employment prospects.

The rest of the world is increasingly specialized, so the returns to your general intelligence, as a complementary factor, are growing too, in spite of your lack of widget knowledge. “Hey you, think about what you are doing! Are you sure? How about this?” often sounds bogus to outsiders but every now and then it pays off and generates a high expected marginal product.

Robin Hanson opens with this:

The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from kids fresh out of college, who spend only a few months studying an industry they previous knew nothing about. How could such quick-made advice from ignorant recent grads be worth millions? Why don’t firms just ask their own internal recent college grads?

Great questions, and he has some really interesting ideas:

My guess is that most intellectuals underestimate just how dysfunctional most firms are. Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions.

The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant.

To serve this function, management consulting firms need to have the strongest prestige money can buy. They also need to be able to quickly walk around a firm, hear the different arguments, and judge where the weight of reason lies. And they need to be relatively immune to accusations of bias – that their advice follows from interests, affiliations, or commitments.

I like this and it fits with the idea that most consulting isn’t really about giving new or interesting answers to problems. Rather it’s about fleshing out conclusions consistent with the instincts of highly experienced executives. You tend to tell them what they want to hear.

Ok, so here’s why I put all these in one post: I think of the most productive people in society being those with extremely narrow and deep skill sets. That’s where the human capital is. Yet think of many of the highest status folks in our society: the CEOs Ben Horowitz speaks of, the writers, politicians, actors and other professional communicators. They ‘produce’ only relational and cultural consumables and the odd tingly leg.

Nothing earth shattering about all that, I suppose, but many probably scoffed when Tyler Cowen said one solution to The Great Stagnation is to simply raise the status of scientists. Sounds like a good idea to me, if a bit of a long shot.

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