Edward Conrad and the Joy of Income Inequality

May 16, 2012

in Business Thinking

[This is a rough cut; to be edited so don’t complain.]

A colleague forwarded me a link to this article.  The piece is about conversations with ex-Bain Capital partner, Edward Conrad.  Bain is a Boston based company and I have a mentor and friend that used to work there many years ago.  So, Bain is close to home in a few ways.

“He looks, in particular, at agriculture, where, since the 1940s, the cost of food has steadily fallen because of a constant stream of innovations. While the businesses that profit from that innovation — like seed companies and fast-food restaurants — have made their owners rich, the average U.S. consumer has benefited far more. Conard concludes that for every dollar an investor gets, the public reaps up to $20 in value. This is crucial to his argument: he thinks it proves that we should all appreciate the vast wealth of others more, because we’re benefiting, proportionally, from it.

This steady decline in food cost – due to innovative practices – didn’t sound quite right to me.

And, taking food in isolation from other big costs like housing and healthcare seemed a bit odd; it seemed odd that Conrad chose food as the example.  The Atlantic had an interesting article in April that provides a bit of simpleminded data for people like me.  Household spending on food dropped from 30% to 13% between 1950 and 2003.  That looks pretty amazing to me at first glance and it seems to support Conrad’s position.  However, there are two factors that jumped out at me and indicate those numbers are not so shiny for driving innovation through higher compensation for the 1%.

First:  Average family size shrank from about 3.1 in 1950 to about 2.4 in 2003.  A 23% decline.

Second:  Housing costs rose from 28% of spending in 1950 to 33% in 2003.  A 15% increase.

Food costs per household declined by 230% during that 50-year period, while family size shrank by 23% so the cost per person has improved by about 56%.  Sounds like a big improvement, but it doesn’t end there.  When we include the cost of housing, the food cost benefits get nearly wiped away.  I think housing seems like a reasonable parallel to food; they’re both segments where technology and innovation can certainly be considered influential and paramount – and there’s got to be some 1-percenters in the housing field.  Housing destroys the food gains because the cost of housing increased by 15% while family size declined by 23%; therefore, cost per capita housing increased by 52%.

If we stack food and housing together in 1950, the total cost per household is 58%.  In 2003 the total is cost is 46%.  When we factor in the decline in individuals per household the actual cost per capita goes from 53% in 1950 to 52% in 2003.  It’s gotten marginally worse.  But wait, I think it’s worse than that.

If we also include the increase in healthcare costs per capita over that 50-year period, we’re definitely on the downward slide; not by much but it’s nothing like the picture Conrad paints.

Certainly there are a thousand other variables that affect this math:  calories per person has certainly increased over the past 60 years so the cost per calorie is lower than %; how people choose to live in housing also influences the numbers.

But I digress.

My colleague said this article was me; I’m paraphrasing.  I think she was referring to this quote, maybe:

“God didn’t create the universe so that talented people would be happy. It’s not beautiful. It’s hard work. It’s responsibility and deadlines, working till 11 o’clock at night […] It’s not serenity and beauty.”

I agree that it is hard work.  Well, I make it hard at least.  I certainly don’t do it for serenity or beauty.

Why do I do it?  To make a difference.  To do what’s not been done before.  To play a positive part in our future.  To do better today that I did yesterday.

I’ve started three businesses with no money in the bank.  And I’m in the alpha phase of beginning a fourth business – again with no money in the bank.  I’ve bootstrapped and persuaded a few people to invest a total of about $250,000 in these businesses over a 15 year period; this is a lot of money to me but not a lot of money to build a set of businesses that I hope will total $20 million before the end of the decade.

You don’t need money to make money.

Gwyn Jones once told me about one of his mentors:  he’d been a millionaire a number of times over, and lost everything a number of times over.  While I don’t with that on anyone, that idea of risking everything and understanding that it’s just money, has stuck with me.  Money is a tool to do good work.

At the same time, I take each business very seriously because it’s not my money that I’m messing with; People’s livelihoods are intertwined with each business on which I work.  Failure of a business would be a serious problem.  I take the work extremely seriously.

Money is not a motivator to me so it’s difficult to connect with Conrad’s idea that the incentives must be bigger.  Is $1 billion more incentivising than $500 million?  I don’t think so.  Is $60,00 more incentivising than $30,000?  From my experience with hundreds of co-workers over the years, I know it is.  It brings out drive, creativity, and focus.  Conrad is too high up the 1% ladder to see this, I think.

Conrad says, “People get very angry before they change their mind.”  Overall, I like this statement; maybe not quite angry but people do tend to get uncomfortable or defensive before agreeing with another’s perspective.


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