Business Blog: Hoover’s Business Insight Zone

(Please bear with a little bit of roundabout Friday-afternoon philosophizing here. And please share your opinions in the comments.)

In a 1986 lecture, computer scientist Richard Hamming talked about his work at Bell Labs during the early days of digital computing. There was never enough computing power available for all the projects that the Bell Labs scientists and engineers wanted to do, so they had to get clever about how to optimize their programs to run better with less horsepower. Much the same thing happened in the Soviet Union during the Cold War, where good computing hardware was often available only for top-secret projects tied to nuclear weapons or the Soviet space program. (Even then, the state of the art for Soviet computer hardware would often stagnate for years or decades at a time. ) But just like their contemporaries at Bell Labs, Soviet computer scientists were very clever, so they learned to optimize what they could — namely, the code running on the machines.

The contrast to modern computing is clear. Increases in the performance of components, especially microprocessors and memory devices, mean that the laptop on which I’m writing this has more computing power than anything Richard Hamming ever got to use during his heyday. But it also means that I need not be very clever about which files to keep and discard, since there’s plenty of hard-drive space for everything, and it also means that Microsoft, Adobe, Mozilla, and the other software makers whose programs run on this machine need not worry much about “bloat” in their applications. In other words, when more microprocessor cycles and memory space can typically be had on the cheap, software writers don’t need to put much of a premium on efficiency in their code.

Something similar has prevailed in the recent history of energy. Coal and oil have been so cheap for so long that no great emphasis has been placed on efficiency. There have been exceptions, as when Toyota, Honda, and other makers of fuel-efficient cars became more popular in the US market after the oil shocks of the 1970s. Sometimes, external factors like regulation to promote efficiency or to limit pollution have led manufacturers — of cars, washing machines, power plants, or what have you — to improve the efficiency of their products. But for much of recent business history, cheap energy has been so abundant that its users have not needed to worry about conserving it.

Some of this logic still prevails. Coal remains cheap and abundant, and consumers have come to expect ubiquitious availability of cheap electricity. That’s why both the US and China continue to see so many new coal-fired power plants. And despite strains in the world’s system of producing oil, it’s clear there are many billions of barrels of reserves still to be pumped. There’s increasing debate about exactly how long our stocks of coal and oil will last, but under any likely scenario the answer is measured in decades or centuries.

This is different, though, from asking how long our stocks of energy will be cheap — and it pays to remember that it’s the historic cheapness of energy that has profoundly shaped Western standards of living over the past hundred-plus years.

Here, then, is the $64-trillion-dollar question:

What consequences unfold if the price of energy rises high enough that no one sees energy as a commodity that they can afford to waste?

You tell me.

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(Vacuum tube photo by Marcin Wichary. Oil rig photo by jurvetson — yes, that Jurvetson.)

Environmental journalist Bill McKibben gave a talk at this year’s SXSW Interactive conference about climate change, and about his new online aimed to combat it, 350.org.

The choice of “350″ requires some explaining, which McKibben did in his plainspoken lecture. The number refers to 350 parts per million (ppm) of carbon dioxide in the earth’s atmosphere, which many climate scientists view as a safe upper limit to stave off climate-driven human disasters. The bad news is that the atmosphere currently has 385 ppm of CO2 in it.

McKibben and his 350.org colleagues want to promote awareness of the number 350 so that citizens around the world will influence their governments to support 350 ppm of atmospheric CO2 as an official target in their policies.

In his talk, McKibben explained that, since he first wrote about global warming in The End of Nature 20 years ago, there have been three major periods in terms of our understanding of climate change:

1. In 1988, global warming was “in the nature of a hypothesis” — Read more
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In May of last year the Wall Street Journal ran an interesting interview* with George David, the highly regarded chief executive of United Technologies Corporation:

Transformer in Transition

(Note that the whole story is available only to WSJ subscribers.)

David is one of the all-stars of the corporate world: in the fifteen years that he’s run UTC, the company’s value has grown tenfold. Today its offerings include everything from Pratt & Whitney aircraft engines to Otis elevators.

One of the things that struck me in David’s comments was his insistence on the importance of energy efficiency and conservation.

I think the solution to the energy problem is actually not alternative energy. To me, the solution immediately is conservation by greater efficiency. Too much in the mind of the public is this idea that conservation means deprivation. You’ve got to be cold at night, shut off the lights, stuff like that. That’s simply not true. The bottom line is that energy is wasted in the world to a phenomenal extent. There’s enormous energy savings potential in the conservation agenda where you do it by efficiency. In our own internal operations, we dropped the energy consumption at UTC by 19% over a decade at the same time the company doubled its size. All of America can drop its energy consumption by 20% in a decade easily. We’re now working with the World Business Council for Sustainable Development to come up with a building that uses zero net energy.

This is music to my ears, especially considering its source. I happen to think that the solution to our energy problems must also include alternative sources of energy, but I also welcome mass adoption of David’s views about the current level of waste in our human operations.

The truth is, an abundance of cheap energy over the past century, while enabling huge strides in technology, global travel, and trade, has also instilled an ethic of waste in many of us. It has become incredibly easy and cheap, relative to the prior course of human history, to make more things, to ship them quickly, and then to whisk away the leavings. In other words, it has been incredibly easy to build pockets of waste into our systems simply out of habit, or for want of better forethought. It has become normal to waste. Indeed, in some cases it seems like we’ve come to see wasteful habits as our birthright.

George David isn’t buying it. He sounds like he wants a revolution in efficiency.

Mr. David: You can’t walk through life with a trained eye and not see the opportunities for productivity. Every time you sit in traffic, that’s a productivity loss. Every time you go to the doctor and fill out a bunch of forms and he refers you to somebody else and you fill out the same forms all over again, that’s a loss of productivity. Whenever you wait for something, that’s waste. I believe you can have 10 times more. I really do.

WSJ: Ten times more of what?

Mr. David: Everything. Everything. Just look at the differences in personal productivity between people, educated versus not educated. Or people in good, really productive labor environments, versus people who are kind of struggling because they’re in disorganized or ineffective companies.

Why am I thinking of this? Because this morning I pulled up to a light that had just turned red. Ah, well, what’s the rush, right? Then I waited . . . and waited . . . and waited while no more than a handful of cars passed on the cross street. It’s a busy street at rush hour, but not at the time I was trying to cross it — yet the technology we’re using so far isn’t smart enough to tell the difference. More sophisticated timing in the lights or, even better, sensor-based technology that tells the light when it should change patterns, would mean less wasted time all around.

If it were just me, and if it were only a couple of extra minutes in the car, it would be no big deal. But the truth is that it’s not just me, and the problems of waste extend far beyond the time, productivity, and fuel wasted sitting in traffic. As George David suggests, we surround ourselves with patterns of waste and call it normal. But it doesn’t have to be that way.

What’s the biggest source of waste you face every day?

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UPDATE, Thursday morning: I forgot that, back in May, my friend Dan Markovitz wrote something in the same vein in response to my initial thoughts on the subject:

The Normalcy of Waste

Worth a read.

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* Does it seem strange to anybody else that the date of the story doesn’t show anywhere on that page?

[Photo by Rivertay.]

That’s the verdict of Eric Janszen’s provocative cover story in the current Harper’s magazine:

The next bubble:
Priming the markets for tomorrow’s big crash

Online access is limited to Harper’s subscribers, but here are two choice tidbits:

Our economy is in serious trouble. Both the production-consumption sector and the FIRE [finance, insurance, real estate] sector know that a debt-deflation Armageddon is nigh Read more

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This is a first crack at a larger idea that’s been sitting in my head, which I’ll summarize thus:

Over time, our concepts of what we can afford to waste change radically. We’d be silly to think they won’t keep changing.

Examples of what I mean:

• Back in the old days, natural gas was considered a waste product in the process of drilling for oil. Drillers would set up special pipes to flare off the natural gas at the wellhead. I once read a story about a man who worked in the oil fields of West Texas, back in the heyday of Permian Basin drilling in the mid-20th century: after work, he would read his newspaper . . . by the light of the gas flares. These days, flaring off gas = burning free money. But back then, there wasn’t a market for it, so why not burn it off?
• If you compare early integrated circuits with the current state of the art, you can be forgiven for thinking that they’re entirely different animals. In fact, though, generations of electrical engineers have been applying many of the same basic concepts over time, but continuously revising downward the standards on how much space on an IC can afford to be “wasted” by having no circuits on it. And it’s not that the earlier engineers didn’t know what they were doing — just that they were working at a different level of miniaturization.
• Edison’s light bulb was an amazing invention, not just for its time but in the century-plus since then. But it wastes a large part of the electricity that flows into it. For a long time that was fine, but increasingly light-bulb users aren’t willing to put up with that.
• Smokestack emissions and other factory effluents have long been seen as unavoidable byproducts of production processes. But quite a few years ago now Pasquale Pistorio, who was then head of STMicroelectronics, made a push in his company to think of effluents as indicators of inefficient manufacturing processes. The company became a leader among chip makers in pollution control — as an economic move, not just an environmental one.
• Prosaic and obvious, but germane: if gasoline costs $1.50 per gallon, you’ll use it differently than if it costs $4.50 per gallon. If you have a 3,000-square-foot house, you can afford to waste more closet space hoarding old clothes and tchotkes than you can if you live in a 350-square-foot apartment.

Maybe I should call this “Attack of the Obvious” Friday — but sometimes the obvious bears repeating.

My estimate is that coming years will see us substantially alter our views on what constitutes “acceptable” waste in terms of water, petroleum, electricity, and many other things we tend to take for granted. In many cases, for many of us, these alterations will be driven much more by economic pressures than by any sort of environmental consciousness.

Happy New Year! Here are some short items I’ve been thinking about as I ease back into the saddle of regular posting.

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Climate alarmism.

In the interests of fair (I don’t say “balanced) coverage, I offer this John Tierney column from the New York Times as a counterpoint to my own comments in two recent posts (here and here).

In 2008, a 100 Percent Chance of Alarm

If Tierney is a little backhanded with his treatment of climate alarmists in the media, they themselves are a little underhanded with their opportunistic reporting, which Tierney rightly derides.

Better than overwrought alarmism, or overwrought rejectionism, about climate change would be a more sober assessment of the whole issue. If the climate is, indeed, changing as a whole and over the long-term, then seemingly contrary data points (Antarctic cooling, the fact that it’s snowing outside my window, whatever) don’t change that. And if it is changing over time, the fact that you or I do or don’t “like” Al Gore doesn’t change anything, either.

The media critic in me isn’t too optimistic that we’ll see this balance anytime soon — and especially not in a presidential election year.

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Will Smith strikes again.

Last month we talked about Will Smith’s “sickening” work ethic — which is tied to serious insight into how the movie business works. After seeing the so-so I, Robot on cable over the holidays, I was newly impressed by Smith’s ability to carry a showy but insubstantial picture.

Like each of Smith’s last four pictures, his current release I Am Legend has grossed more than $300 million worldwide, this despite some pretty harsh pans. (My favorite comes from David Denby, whose snippet review opens like this: “In 1973, when ‘Day of the Dolphin’ opened, Pauline Kael wrote that it was ‘the most expensive Rin Tin Tin picture ever made.’ Alas, this is no longer true.”)

Smith has earned his fair share of good reviews over the years, especially for his work in Ali, but in general it seems he won’t go down as a great dramatic (or comedic) actor. But he surely will go down in movie history as a huge box-office success.

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Clutter isn’t a storage problem; it’s a thinking problem.

That’s the lesson — which ties in with what I said the other day about information overload — of this NYT piece:

A Clutter Too Deep for Mere Bins and Shelves

. . . But experts say the problem with all this [shopping for new organizing bins, shelving, etc.] is that many people are going about it in the wrong way. Too often they approach clutter and disorganization as a space problem that can be solved by acquiring bins and organizers.

Measures like these “are based on the concept that this is a house problem,” said David F. Tolin, director of the anxiety disorders center at the Institute of Living in Hartford and an adjunct associate professor of psychiatry at Yale.

“It isn’t a house problem,” he went on. “It’s a person problem. The person needs to fundamentally change their behavior.”

I’ve heard people say that the big problem with their e-mail overload is that they need more disk space — not that they need to recalibrate how they think about their stuff altogether. And there are plenty of businesses that look for technological solutions to problems that are really problems in their organizational culture or psychology.

The more I look, the more convinced I become that individual and institutional psychoses are often the same problems — not just similar, but exactly the same, merely expressed at different scales.

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The Hawaii Warriors get seats at the grown-ups’ table — where they are promptly served their own heads.

This follows up our earlier bowl-season commentary: I have friends in Hawaii who have rooted all year for the University of Hawaii football team to go undefeated. The Warriors carried that off until they ran aground of the University of Georgia in the Sugar Bowl last night. For “ran aground of,” you could substitute something like “got run over by” or “got beat up by.” The Bulldogs shut down the Warriors totally, winning 41-10.

Give credit to star Hawaii quarterback Colt Brennan, who admitted flat-out that Georgia “was the fastest team I’ve probably ever seen.”

Football fans can hope that someday there will be a true national playoff that will allow all the Hawaiis of the country to see how they stack up against the big programs of the SEC, the Big Ten, the Big XII, and the Pac-10 — whether that means beatings like these or the shocking upset victory that Hawaii’s conference-mate Boise State pulled off last year against Oklahoma.

But — since this is a business blog — I’ll advise you not to hold your breath for that. Because the powers-that-be who run, and profit from, the various bowls don’t want to upset the apple cart that now brings them so much money every year, even if doing so would satisfy fans across the country.

The other day a commenter took issue with a post of mine on an environmental topic; his comment included the assertion that “The climate-predicting models are flawed, and the science is rotten.”

You can read that comment thread for my specific reply, but here I’ll add my more general view that climate science has been far too politicized over the past three decades, which has led us down the fruitless path of debating climate science as a matter of conservative versus liberal views (or pro-corporate versus anti-corporate etc.), rather than allowing us to step back and think of climatic changes in truly scientific terms.

Whatever the case, the insurance business is surely taking climate change seriously, as reflected in this MarketWatch story:

Catastrophe losses reach $75 billion in 2007

LONDON (MarketWatch) — The insurance industry faced $75 billion of losses from natural catastrophes during 2007, up 50% from last year despite a lack of “megacatastrophes,” German reinsurer Munich Re said Thursday.

The losses rose from $50 billion in 2006, though this was still well short of the $220 billion reached in 2005 when Hurricane Katrina ravaged New Orleans and the U.S. Gulf Coast.

Still, the number of natural catastrophes tallied 950 this year, up from 850 in 2006 and the highest figure since 1974, when Munich Re began tabulating such events. . . .

The trend in respect of weather extremes shows that climate change is already taking effect and that more such extremes are to be expected in the future. We should not be misled by the absence of megacatastrophes in 2007.” . . .

“These events cannot, of course, be attributed solely to climate change, but they are in line with the pattern that we can expect in the long term: severe storms, more heavy rainfall and a greater tendency toward flooding, including in Germany,” said Peter Hoppe, head of Munich Re’s geo risks-research department.

Put it another way: Munich Re doesn’t care what I think about climate science. They don’t care what a blog commenter who calls the science “rotten” thinks about it. They care about what they see in their underwriting books. And what they see, from a financial point of view, is sustained effects from climate change.

To me, that’s a key philosophical question raised by this post from the environmentalist blog Gristmill:

Throw the book at him

Sickening. Kevin John Moran of Camano Island, Wash., was just convicted of illegally cutting down 27 old-growth cedars on public land. They were between 400 and 700 years old. And they were dry-side trees, even rarer than the Northwest’s west-slope titans. . . .

The blogger, Eric de Place, notes that the maximum penalty Moran faces is 10 years in prison and a fine of $250,000. The charge is “theft of Government property,” there being no specialized penalty — so far as I know — for egregious damage to an ecosystem or the country’s natural heritage.

Now, there are plenty of folks who will read “10 years in prison and a fine of $250,000″ and think that it’s more than enough for cutting down some trees. But at some point, doesn’t a thing stop being a thing that can be valued strictly in economic terms? Outraged or no, de Place seems to be making the point that there ought to be some charge worse than theft — maybe something like “wanton destruction” — to cover offenses like this one.

Economics would say that the oldness of the trees, their magnificience, their role in their ecosystem, or what have you are “externalities” from a financial perspective. The point is that Moran took public property that didn’t belong to him, and that property was in the form of trees. Period.

Yet if the threat of global warming is as bad as many scientists fear, and if deforestation continues around the world as it has done lately, I expect that at some point penalties for wrongfully cutting down trees — especially big and old ones — will run much stiffer.

That’s the takeaway message from the WSJ Energy Roundup item quoted below, which discusses Lafarge’s $12.9 billion deal to buy the cement operations of Orascom Construction Industries.

For a while I covered the Egyptian beat for Hoover’s, and became fascinated with the Sawiris family that controls Orascom. (Naguib Sawiris, who runs Orascom Telecom, is particularly interesting.) I’m also intrigued by any deal that merges environmental-green benefits with dollar-green ones. That appears to be the case with this deal, since Orascom’s cement ops run more efficiently than Lafarge’s European plants.

Green Cement in Egypt

. . . Why the rush to clean up? Cement makers aren’t any more altruistic than the next guy. But it takes a lot of energy to fire up kilns to 2,000 degrees Centigrade, and energy accounts for between one-quarter and one-third of the industry’s costs. To stay competitive, cement makers have to trim energy consumption and make their plants as clean as possible.

Precisely. Over the years, companies across many industries have become accustomed to the idea of a certain amount of waste in their operations as being inevitable. That works for a while, but only until a new wave of technology — or of new market entrants with different ideas — upsets the apple cart. Then you have to get leaner and make your operations (or your products) more efficient.

We’ve seen this in industry after industry, whether it’s cars (American makers responding to fuel-efficient imports) or lighting (consumers realize they can get much more cost-effective lighting using technologies besides Edison’s bulb) or mutual funds (Vanguard undercuts the rest by keeping such a low fee structure).

More and more we’ll be seeing this in heavy industry, as manufacturers come to embrace the mandate that has driven the semiconductor business for decades: eliminate more waste every year, or else get out of the business.

Today I was lucky enough to attend a lunchtime talk sponsored by Fast Company that featured Angela Nahikian, manager of global environmental strategy for Steelcase, the world’s top maker of office furniture. After the attendees had chatted over lunch, Nahikian spoke for a little while about Steelcase’s environmental commitments, then fielded questions from the audience. Afterwards I got to talk with Nahikian, and with Fast Company senior writer Chuck Salter, who moderated the event. I came away impressed with Steelcase’s actions.

Nahikian’s talk focused on how Steelcase has shifted environmental responsibility from being a “core belief” to being an “intentional behavior” that drives the company. She said that for many years Steelcase Read more