critique of 3 LAWS OF PERFORMANCE book

Hi David and Steve (the authors of “the Three Laws of Performance”),

4 U.S. Presidents. Former President Jimmy Cart...

4 U.S. Presidents. Former President Jimmy Carter (right), walks with, from left, George H.W. Bush (far left), George W. Bush (second from left) and Bill Clinton (center) during the dedication of the William J. Clinton Presidential Center and Park in Little Rock, Arkansas, November 18, 2004 (Photo credit: Wikipedia)

I found something interesting enough in the Three Laws of Performance book (on pages 120 & 121 in particular) that I am emailing you two. The basics are that your “distinguishing” of corporations from other organizations is… very incomplete, plus the explanation of the notable financial developments globally in 2008 is… something I intend to correct.

I am going to take some time to create this, expecting that you care at least as much as I do about the content below. First, thank for writing the book and everything involved in forwarding the conversation as you have.

Briefly introducing myself, I graduated from a Landmark Forum in late 2007. Prior to that, I was exploring the same issues you reference in your book. By the way, since you write in a context of global concern, I note that I also live in the U.S.

In early 2003, I published forecasts of the so-called “surprises” of 2008. In 2003, I focused exclusively on financial trends (primarily, the causal activities of lending, borrowing, buying, and selling, etc and the secondarily the resulting price changes). In 2004, I went beyond the basic data of the various causal trends of investing activities (and the resulting financial measurements of those activities called changes in “pricing”) and then focused on a core economic issue which I asserted as the “root cause” of the changes in patterns of human action (and thus patterns of price change).

That publication was “The Real U.S. Deficit: OIL.” The term “real” was used in contrast to the word “nominal” as in the phrase “nominal dollars.” “Nominal” dollar pricing ignores long-term changes in the purchasing power of the dollar currency. All dollar figures are actually measuring something else, such as the dollar cost of importing 14 million barrels of oil per day in 2011. We can measure the cost of 14 million barrels in “current dollars” or in “1985 dollars” (which were “more valuable”).

A single barrel of crude oil is a real, tangible, physical amount. It does not change from year to year. The purchasing power of a currency can change quite a bit in a decade or a century, while a 55-gallon barrel is still the same amount (and a gallon is still the same amount).

So, since 1970 when the US started using more oil than it produced, the trade deficit of importing more and more oil has gone up and up and up (as oil production levels in the US have also declined almost every year since then). By 2008, importing all that oil was getting so costly that some people and companies in the US began something quite radical: reducing consumption. Naturally, prices stopped rising and fell.

Borrowing from the phrase “the domino effect,” I titled a section of that 2004 publication “The DominOIL effect.” I asserted a simple, clear connection between (1) geological facts (how much oil was available) and (2) technological facts (how much oil had been located as accessible) and (3) behavioral facts (human trends in extraction, consumption, invasion, etc)  and (4) financial measures of price, and so on.
Here is a central focus of that article: “how many [US] dollars will it cost to buy a gallon of gasoline next year?” By the way, gasoline prices rose dramatically the next year, 2005.

In 1999, the pricing of oil (and gasoline) reversed a long-term downtrend of cheaper and cheaper fossil fuels overall. Again, that price trend ended in 1999, as predicted with varying degrees of precision by at least a few geologists and economic forecasters, perhaps most famously by US President Jimmy Carter in the late 1970s on a live TV broadcast (but also by Richard Nixon before him, and, most notably, a “heretical” USGS Geologist named M. King Hubbard in the 1950s).

So, by 2004, it was obvious that a long-term trend of rising prices of oil (and gasoline) would alter many behavioral patterns. First, as oil prices doubled from 1999 to 2000, the stock prices of the US airline sector index dropped 40%- starting almost an entire year prior to the collapse of the global tech bubble in 2000.


What happened? The predictable rise in fuel prices (which surprised most people) led to a predictable increase the expenses of airlines (which surprised most people). Further, as gasoline prices rose, many budgets tightened (of private households, businesses, and governments). With less cash available (after “predictably surprising” rises in fuel costs), there was less money to lend (like for real estate speculation) and less money to invest (like in stocks or in new business ventures or in cash purchases of real estate). With less money being borrowed and invested in to real estate and stocks, what was “surprisingly predictable?”

The US housing stock sector peaked in 2005 and has fallen 80% since then (shown above). Real Estate prices began to fall in regions that previously led the boom, such as Las Vegas and Phoenix (the area where I now live). By the way, similar developments in Europe recently have basically followed the similar pattern of Japan since 1989 (and, to a lesser extent, to the dissolving of the Soviet Union around the same time).

By 2007, US (and European) companies that were heavily exposed to real estate speculation began to adjust their balance sheets for more realistic reporting of current asset value/collateral value. That includes the financial insitutions that financed real estate speculation (like Fannie Mae, Countrywide, Bear StearnsMerrill Lynch and GMAC) as well as the many insurance companies that had contracted to immense liabilities beyond their cash capacity to perform, such as AIG, in “mortgage insurance” promises to protect the financial interests of the lender in the case of a default on a mortgage.

In other words, in 2007, the financial sector of the US stock market began to crash, falling over 80% in about 18 months. As I forecast in 2004, it was the spiking of oil prices that “popped the financial bubble” and by 2008, triggered (I assert) an accelerated decline in stock prices, but also a sudden 70% decline in oil prices in only a little over half of a year.

Generally, I call all of that “the DominOIL effect.” I detailed it generally in 2004 and continued to elaborate ever since then.

Now, let’s look at your sentence (from The 3 Laws of Performance) referencing the global shift in 2008: “The world became aware of the negative effects of externalization in the financial crisis of 2008, when bad debt created by corporations required government intervention to avoid economic collapse.” I’m now going to question and challenge basically all of the assumptions (“blindspots” ?) of that sentence. Again, I applaud you for raising the issue and for interpreting how you did- perhaps a perfect fit for the context in which it occcured for you.

Let’s start at the end. What is an economic collapse?

An example would be when farmers rely on a well for water, but then the water runs dry, the soil turns to dust, there is no harvest, and people starve to death. Those are all economic issues.

Another example of an economic collapse would be what happened to certain mining towns in Arizona now called “ghost towns” or to certain oil-producing regions of Texas that in the 1920 were booming, but then ran out of oil and became ghost towns as well. Economic collapses can be much larger though.

So, was an economic collapse avoided by government interventions in and after 2008? I say “no” and I will say more below.

First, in Japan in the 1990s, lots of government interventions were implemented, but Japan’s stock market is still down over 75% from it’s 1989 high. In the US in 2008, yes the government stepped in to rescue banking institutions and the US auto industry and shift the burden and risk away from shareholders to taxpayers. However, that redistribution of risk did not especially reduce risk.

If there was a rescue in 2008, it was not by a government agency, but by the Federal Reserve (a private corporation), which rescued AIG with a loan of $85 billion (as I recall), allowing for the US financial system to continue at least temporarily in much the same way as it had been previously- no major redistribution/re-organization/collapse. The Fed gambled on AIG and the long-term success of their gamble is still questionable, but let’s say it worked pretty well so far.

Note that I am generally skeptical of government interventions, and not just attempted socialist bail-outs like that of the failed USSR (or in Japan for the last 21 years). For instance, for many decades, government interventions to immediately put out wildfires in the US state of Arizona have produced a distinct condition: a forest with huge accumulations of fuel (dry twigs and other vegetable debris) as well as a very dense network of trunks all sucking water from about the same amount of annual rainfall, which means they are very dry and unhealthy and so most are infested with weevils, which the government agents might then intervene to kill.

So, decades of government interventions produce an “unmanageable” concentration of fuel, then a “normal” lightning fire can easily get “out of control.” I was a refugee of a 2002 wildfire that burned about 500,000 acres of northeast Arizona. (That experience is what indirectly led me to research trends and forecasting.) This very minute, an even larger wildfire is plaguing northeast Arizona. What can be learned from the “surprising” wildfire developments in 2002 and 2011 (which I assert were easily predicted by any competent forestry scientist)?

For decades previously, Forestry Science professors studied and predicted the wildfire danger in the Ponderosa Pine mountaintops of Arizona (and other similar regions) and, generally, were ignored (but still publicly funded). Similarly, geologists and some forecasters studied and predicted the “dominoil effect,” but were generally ridiculed and resisted, beginning with M. King Hubbard.

So, do government interventions avert economic collapses? Perhaps sometimes. Do government interventions ever produce predictable disasters- such as 2,000 degree forest fires- that were impossible without those government interventions? Perhaps sometimes!

Next, in 2008, was an economic collapse avoided and “transformed”- or just delayed/”changed”? The fundamental shift of power continues. The shift is away from the previously influential regions of Europe to, by the 20th century, the two regions that produced the most oil in the world (the US and USSR) and further to the regions now producing the most oil (the Oil Producing and Exporting Countries of O.P.E.C.).

I expect the EU to dissolve and collapse relatively soon, and the economies not just of Greece and Italy and Ireland, but basically all of Europe. I expect the US to follow in a huge long-term economic contraction, but distantly, rather like Japan has been. I expect the primary OPEC countries, including Saudi Arabia, which is now the #1 producer of oil in the world, to expand in geo-political prominence and economic affluence just as did the USSR and US when those two countries were the #1 (and #2) producers of oil.

Now, that doesn’t mean that your book and work should reflect the “probable almost certain future” as I see it. But it could reflect what I see, and that might make it much more relevant ten years and one hundred years from now.

By the way, I understand your reference to “externalization,” but I do not think it is especially relevant to what happened in 2008. Also, if it was just a matter of bad debt, then the debt could be discharged, then bankruptcy courts could sort out what to do with the relevant assets, and the overall economy would be largely unchanged- like in terms of barrels of oil consumed. Bad debt is just a financial and contractual and legal issue. Dry wells (whether of water or oil) is a major economic issue.

Externalization did not change the mining towns of Arizona in to ghost towns. Emptying of the mines naturally brought about the formation and growth of the towns, (bringing business activity to the area), and then once the mines were empty, the towns were abandoned. “Externalization” seems to me to be your pet demon, your convenient “make-wrong,” even a justification for government interventions to “protect” us from the morally evil corporate externalizations.

But interventionist government protections do not make an empty mine full again. In fact, interventionist governments sometimes produce uniquely unsustainable conditions, which PREDICTABLY resolve as huge wildfires.

Now, let’s turn to a point of potential trivia- because it is also potentially a clarification that will renew possibility. Let’s review the distinction between organizations in general and corporations in particular.

Let’ts review a few rather old organizations, such as Harvard University, the Dutch East India Company, The Roman Catholic Church, the Knights Templar, the Free Masons, and an organization generally known as China. India and Egypt are pretty old, too, right?

Do they all have the “right” to employ people? Yes. Legal rights, by the way, arise from the declaration in to being of governing operations called court systems. Court systems create stuff in language (or govern what others create in conversation) known as “legal rights.”

Do all of those organizations “own property?” Sure! Do they all engage in negotiations and contracts and lawsuits (and even wars)? Sure!

So, you did not really distinguish corporations at all, did you? Corporations exist explicitly to promote the interest of the interested parties (shareholders, creditors, employees, etc) and do so implicitly relative to the interest of “everyone else.” In other words, corporations are instruments of competition (as in conquest). Many of them can be traded. They do not discriminate based on language or sex or nationality or religious affiliation (except when they do).

Also, the legal definition of “person” just means a legally relevant identifying in language. The word person (and persona and personality) derive from the ancient Greek roots per-son, which is the same base root as sonar and sound. The word derives from the masks worn by actors in ancient Greek theatre, with different masks having different sound holes so that the sound or voice or vibe of the character was distinct, since in Greek theatre, a few actors would play multiple roles in a play.

There is nothing inconsistent with the legal definition of person and the ancient Greek roots of the word. In fact, consider that there is no such thing as inconsistency per se, just varying degrees of connectivity or consistency or causal significance.

Next, I note that I “do not like” the phrase “without integrity, nothing works.” When we say integrity as in “honoring word,” that is not about physical integrity but language, right?

I prefer this: responsibility about language gives access to powerful communication. (liken that to “communication: access to power” which I have taken). Further, powerful communication CAN create breakthroughs in performance. (liken that to: “communication: power to create” which I have not taken, but I think I assisted for it at least once a few years ago.)

Anyway, having studied organizations that prohibit and punish “transparent integrity” of certain kinds, such as the KGB or the US Army or the Free Masons, I respectfully question the phrasing “nothing works.” Nothing? Really!?!?   😉

So, let me recontextualize “the problem” at least in terms of finances and language and law. Masses of private investors own shares of corporations without any sense of accountability for the activities and performance of those corporations. Such ownership “lacks integrity” and markets might redistribute such ownership. Simple, huh?

Like when a real estate “flipper” owns 50% of the equity, but then suddenly the creditor owns 100% of the equity, that is just a redistribution of ownership. Or when Fidel, Che and the other armed revolutionaries of organized violence come in and say “our gang just overthrew your gang and now we control this whole island,” that is also a redistribution of “ownership” by the “declaring” of a new governing court system of organized violence (given that all governing courts are systems of organized violence).

As for “the problem” of the probable and almost certain “end of the fossil fuel age,” it’s not really a problem unless we relate to it as such. Yes, human civilization may radically alter… again. So what?

Do the US and EU have a problem in terms of maintaining their current “market share?” Yes. According to the US Government, the US currently has about 4.5% of the world’s population and uses almost 25% of the oil. Both of those figures may change radically, probably starting with the latter.

Change is not a problem. Change is a fact.

Alaska is a booming state, producing lots of oil. The province of Alberta Canada is also booming, and, by the way, producing (extracting) lots of oil. Mexican stock markets are surging, with Mexico producing and exporting lots of oil.

(Chart of Mexico stock index prices:)

Mexican stock markets are charted in green above, next to the US in red and Japan in blue.

However, once the oil wells dry up, economic collapse may follow. At some point, personal adaptiveness leads to adaptiveness of groups (and organizations). When that point arises for any particular person (human organism or legal corporation) may have something to do with the “relatedness” of that person’s conversations- the extent of the relatedness to what is relevant, which is more specific than “what is so.”

So, the subject line of this email says “proposal.” My proposal, first, is that I assert that I am correcting herein the lack of distinction re corporations and re the global shift underway.

Corporations, unlike governments, do not explicitly rely on organized coercion and also generally allow participation by publicly-traded shares, which may mean involvement is much more open than in most governments (or churches). However, that does not make corporations better (or worse)- just distinct.

As for the real issues of global economics- not just nominal financial issues and national political spins- the real issues are exceedingly simple, but perhaps quite unpopular in places like the US and the EU. Virtually no one wanted to hear Hubbard or Carter (or even Richard Heinberg, Michael Ruppert or me), at least not until they did.

But certain leaders in OPEC have long been very clear that in 2008, current members of OPEC would produce more oil than all the rest of the world combined, including the Former Soviet Union and US and Mexico and Canada. From here on, the percentage of oil produced by OPEC countries is expected to grow year by year and decade by decade, as more and more wells in the Russia and North America run dry.

Did, as you assert, something fundamental change about “corporate externalization” in 2008? Or did global power simply shift… again.

I propose that you did not already know what I have now presented to you clearly. I propose that you are not attempting to cover up and distract from the simple economic shift underway. You just will not relate to it powerfully… until you are.

I invite replies to this email. Again, thank you for your interest and your intelligence and your commitment.

Related articles
critique of 3 LAWS OF PERFORMANCE
First Published on: Jun 25, 2011

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6 Responses to “critique of 3 LAWS OF PERFORMANCE book”

  1. J R Fibonacci Hunn Says:

    June 25, 2011 at 7:20 pm
    Dave Logan (co-author) replied the next day:

    Hi J.R.,

    Thanks for the note. I’m not an economist, but I have co-taught many courses with economists, so I have at least a lay person’s understanding of what you wrote. (My area of expertise is corporate culture and general management.) You were clearly one of the few who called the downturn, so that gives you a lot of credibility in my world.

    We’ll take a look at that line, but please understand we did run it past several well-known people in the field, who said it’s generally accurate. The point of the line was simply to add weight to the argument we made that organizations often put profits ahead of broader concerns, and sometimes, the rules let them do so. I don’t take any of what you wrote to contradict that conclusion.

    To bring what you said to a wider audience, here’s a proposal: do you have what you wrote in a blog post? If so, I’ll do a blog post (at BNET, part of CBS) about it, bringing the issue to a wider group of people. Let’s see what others have to say about it.

    That work?

    Thanks again for writing.

    Dave

  2. J R Fibonacci Hunn Says:

    I wrote him this:

    Thanks Dave. I was not sure I would get a reply and that was pretty fast too.

    On Sat, Jun 25, 2011 at 10:20 AM, Dave Logan wrote:

    Hi J.R.,

    Thanks for the note. I’m not an economist, but I have co-taught many courses with economists, so I have at least a lay person’s understanding of what you wrote. (My area of expertise is corporate culture and general management.) You were clearly one of the few who called the downturn, so that gives you a lot of credibility in my world.

    We’ll take a look at that line, but please understand we did run it past several well-known people in the field, who said it’s generally accurate.

    JR:

    My assertion was not that it is so much inaccurate as that I was questioning the practical relevance. Mines that are emptied tend to result in ghost towns. People who are well-known economists, but cannot predict what will happen as the productivity of a mine slows and then stops, may say many irrelevant things. “Context is decisive.”

    DAVE:
    The point of the line was simply to add weight to the argument we made that organizations often put profits ahead of broader concerns, and sometimes, the rules let them do so. I don’t take any of what you wrote to contradict that conclusion.

    JR:
    So, I was not criticizing the “argument” or observation that organizations and organisms generally prioritize, and sometimes by putting profits (or even just financial solvency) ahead of other concerns (looking good, strict compliance with a particular law, ecological intelligence, etc). All laws are broken sometimes- but laws also change. All laws are enforced selectively, too.

    You mentioned that it was rare for a forecaster to call the downturn. It was a “minority position,” but lots “called” at least parts of the sequence, such as Elizabeth Warren, who wrote “the coming collapse of the middle class” several years ago.

    I mention her because she used to be the head of the SEC in the US [error: she was going to be the head of the Consumer Financial Protection Bureau, which she helped created, but she was actually never installed because of political opposition], but resigned indicating that the reality of politics did not allow her to enforce the laws as written, that is, that the “good ol’ boys network” had established their power and the laws were something of a smokescreen- and I am very loose in my paraphrasing here. So, it is not always just as you say… that the rules “let them do so [externalize],” but that the rules are just words. Sometimes, enforcement (the actual operations of organized coercion) is the issue, not words. Slightly related, here is a song with the lyrics: “words don’t make the green grass green.” http://www.youtube.com/watch?v=mAhL_smqZMo

    Now, in your email, you reference “organizations” as putting some interests in advance of others. In the book, you seem to focus (in a villifying way) on corporations as evil and governments as good, and generally ignore other organizations. It is a reasonable “binary” contrast, but given the economic reality (as distinct from politics and morality), I find it notable. For instance, do corporations have a monopoly of externalizing, or do governments also do that?

    Anyway, I assume that you have no “counter-correction” to my assertion that in the book (at least the edition I have), there is no useful distinguishing between “corporation” and any other type of “organization” or organizations in general. My latest point, bordering on morality but also a practical issue, is that corporations do not explicitly rely on violence as do governments. Corporations involve voluntary participation. Corporations operate in generally peaceful competition, though John Perkins (author of Economic Hit Man), might suggest that “peaceful” corporations are the ones who create and maintain governments to give the corporations monopolies on behaviors that for everyone else is punished as criminal.

    But I typically focus on less controversial perspectives, like for a general audience. To me, the “free market” measures the prioritizing of humans in general in a way that no other “instrument” can. It does not rely on violence, yet certainly does not exclude it.

    Governments certainly resort to organized violence in pursuit of resources like fossil fuel, as in some of the more obvious cases like the US currently in Iraq, or, not so well-known, on the islands of Diego Garcia. Note that I am not blankly criticizing governments for massive operations of organized violence. I am simply noting that there are disadvantages to destruction as a way of interacting with other people and the planet. I am not a pacifist, at least not as “significantly” as I have been in the past.

    We can say that corporations are bad because they spilled some oil and produiced industrial pollution. But governments have done things like drop atomic bombs on purpose on civilians. Which is more “innocent?” Which is more “dangerous?” What about the ecology of using atomic weapons?

    To me, the destruction might as well come from a tsunami- morality does not really matter, except how it does. From a “social engineering” perspective (akin to urban planning), it is important to me to recognize the massive violence conducted by the USSR, China, and many other governments in recent decades. Corporations build the missiles and such, but my focus is not big scale stuff anyway.

    I think people focus too much (for their own good) on corporations and governments and not enough on personal responsibility. Another way of putting that is that I favor focusing on personal responsibility and the results availabel through that focus.

    I look at big scale economic data to predict trends, then to consider personal adaptions that are prudent relative to major trends, then to group with others in adapting prudently, and on from there. Corporations and governments and churches and whatever organizations arise out of clarity and prudence and a commitment to personal adaption.

    The organizations that adapt most prudently, presumably, last and thrive. Same for individual organisms, whether of humans or oak trees.

  3. Listener Says:

    Brilliantly clean and simple analogy between forest management and economic intervention. I’m going to reference it, if you don’t mind.

    • jrfibonacci Says:

      Please do. I would love to have a link to the content so that I can participate in making a comment.

      Incidentally, I use wildfire analogies in several articles of mine because in 2002, I was a refugee from a half-million acre wildfire. [I see that I referenced that in this blog from last year, which I had forgotten as I typed this reply.] The wildfire interrupted my life as I knew it, forcing me not to work for a week or more. I searched online for some content that led to my studies of economic forecasting, which led directly to my first publication in early 2003 of forecasts of the emerging global credit crisis, real estate decline, and stock market re-valuation (crash).

      Prior to the wildfires, there were numerous warnings published about the fire danger and the easy ways to reduce it. They were largely ignored, then the fires happened- one apparently accidental and one apparently set by a forest fire fighter to give him and his crew some extra work- seriously- and then after huge expense and huge destruction, I was wondering if there would be any change in the political climate in the area, given that there were still millions of acres of forest with the exact same risk present.

      Instead of sparking a huge campaign for wildfire safety, my sense was that the local people generally were satisfied with casting blame at a few groups who opposed certain ecological interventions. However, there were several obvious ways to dramatically improve forest safety- not just one. To my knowledge, none of them were implemented.

      I was very disappointed. I had naively presumed that the local population was more “intelligent,” at least as I understood the term. Looking back on it though, I realize how presumptuous and naive I was- given lots of other experiences of the general intelligence of herds of people. I was an arrogant idealist. In fact, I’ve had the privilege of being humbled many times since 2002.

  4. Listener Says:

    Will do. I always appreciate comments. A point of some irritation – my blog has been gaining more and more readers, but I still rarely get comments or any real dialogue or debate occurring.

    It’s interesting how this somewhat traumatic event in your life precipitated this change in you… as if you needed to be shaken.

    It’s also interesting (and disappointing) how people are more satisfied laying blame than finding solutions. I believe it’s mostly an ego-protection mechanism. If the “other” caused this because of their incompetence or malice, the rest of us are absolved of responsibility. If all humans are inherently flawed, and the system we created (through support or complacency) allowed or caused the disaster, then we cannot deny we are at least partially at fault. The blame game (and the mass denial of the real problems) is about personal insecurity. I vaguely recall you discussing in another post how hate is related to fear… at its core, the behavior you witnessed has a similar ignorant & self-centered impetus. It’s manifest personal weakness & insecurity.

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