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The Real Story Behind the College Admissions Scandal – Skin in the Game

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Our first article about the college admissions scandal focused on third party payers and how they destroy the pricing mechanism for four year college admission. Instead of the consumer voting with their wallet as they would in a free market, third parties like government grants, student loans, scholarship funds, and other forms of financial aid bid up the prices colleges will charge for tuition. The article also mentioned two other factors that contribute to this fraud – college administrators who have no skin in the game and the federal government’s fractional reserve banking (fiat currency) system. Here we focus on the lack of institutional accountability; the next article will focus on the government money spigot, and the fourth one will highlight their unholy alliance.

Merchandising Virtue

In his book Skin in the Game, Nassim Taleb writes, “It is immoral to be in opposition to the market system and not live in a hut or a cave isolated from it. It is much more immoral to claim virtue without fully living with its direct consequences.” The essence of this hubris is illustrated in The Ohio State University’s 2016 Operating Budget:

The University’s move to eminence will continue to be founded in the University’s three discovery themes of Health and Wellness, Food Production and Security, and Energy and Environment. Through these discovery themes, Ohio State will focus its resources and activities on finding durable solutions to issues of global as well as regional importance.

Ohio State’s abandonment of the market system for its core academic mission is evidenced by the “Strategic Finance” part of their budget:

We have launched a number of successful initiatives to increase the resources available to support the core academic mission. Revenue generation initiatives have included the establishment of unique partnerships and collaborations such as affinity agreements, innovative financing strategies, and asset monetization strategies.

As economist Jesus Huerta de Soto discovered about socialist planning schemes and their econometric models, Ohio State is substituting the ethics of markets with the complexity worship of data analytics.

Data analytics is a process of collecting, organizing, integrating and examining vast amounts of information in order to extract insight. With today’s increasingly large, complex, and diverse data sets, problem-solving is more data driven than ever.

All of this guarantees an even larger bureaucracy of unaccountable elites who produce nothing. It makes sense that a public university that added “The” to its legal name would assume the mantle of ethical purity and hire administrators who consider for-profit education as mercenary. The only discovery themes that matter are the efficient allocation of resources inherent in free markets and the morality of capitalism. But they can’t have that, it would render them irrelevant.

The Real Mercenaries

According to the Merriam-Webster online dictionary, the definition of mercenary is “serving merely for pay or sordid advantage.” Speaking of sordid advantage, according to economist Walter Williams,

Only 37 percent of white high school graduates tested as college-ready but colleges admitted 70 percent of them. Roughly 17 percent of black high school graduates tested as college-ready but colleges admitted 58 percent of them. To deal with ill-prepared students, professors dumb down their courses so that students can get passing grades.

Why would these institutions of “higher learning” do this, meaning admit students who are not prepared, or whose ambitions are poorly served by college matriculation in the first place?  It pays, and the way to insure the sustainability of their unearned wealth is to create, out of thin air, degreed programs that cater to the mass market of unprepared high school graduates who are being manufactured by the progressive left’s compulsory public schools.

And this is entirely predictable. The founder of this system, John Dewey, believed that “There is no obvious social motive for the acquirement of mere learning, there is no clear social gain in success thereat.” For too many of these kids, their purpose in life is some vague notion of social justice or saving the planet. The motivation of the college administrators who serve up worthless degrees rooted in social justice was summed up best by Governor LePetomane in the Mel Brooks 1974 classic Blazing Saddles, “We’ve gotta protect our phoney baloney jobs, gentlemen!”

Unfortunately, those in academia who have the mercenary opinion of entrepreneurship are uninformed about the morality of the profit motive and the justice of the price mechanism. Much worse, they will not experience the consequences of their fraud. They will not outlive the pensions and benefits funded by the private sector that they condemn.

The Trillion Dollar Money Dump

When the federal government took over the student loan industry in 2010, there was about $900 billion in outstanding debt. Today, that number is $1.5 trillion. That’s a $600 billion dollar increase, 67% in 8 years. With the rising costs of attending college, and the fraudulent nature of the value they offer, student loan debt growth is triple that of auto loan growth over the last ten years, and student loan default rates are rising.

Nassim Taleb sums up the fallacy of the postmodern college administrator best:

In any type of activity or business divorced from the direct filter of skin in the game, the great majority of people know the jargon, play the part, and are intimate with the cosmetic details, but are clueless about the subject.

The subject is conducting business with morally defensible principles – trading value for value. Entrepreneurs have skin in the game. They rely on human action and rational thinking and don’t hide behind data analytics, complexity and sanctimony. The public university system elites, like higher-ups in any government or corporate hierarchy, do not risk their own hides, they always get paid. They have no skin in the game. You do.

 

 

Social Justice Begets Poetic Justice – Be Careful What You Wish For.

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Poetic justice, according to the Merriam-Webster online dictionary, is “an outcome in which vice is punished and virtue rewarded usually in a manner peculiarly or ironically appropriate” (Webster’s is using the situational definition of irony, not the Socratic or the dramatic meaning). In literature, it is an ideal form of justice. Poetic justice is used by authors to convey moral principles, and they reward or punish their characters in a spontaneous twist of fate, not courts of law. In summary, poetic justice is the consequence of reality. It rewards rational behavior and long-term thinking, ethics being a primary building block for civilization.

Social justice is the opposite. Virtue is sacrifice, reality is different for everyone, and none of it is spontaneous. As Hunter Hastings has written in his Mirage of Social Justice series, social justice is irrational, meaning it “is a dishonest insinuation that one ought to agree to a demand of some special interest which can give no real reason for it.” Instead of self-determination, “the governing elites believe it is in their power to design and determine future outcomes.” And central to social justice is equality – its sacred and surreal, yet it can’t be won. So short of that, the high time preference of immediate gratification must be turned into a right. Or else.

Social justice is top down, forced, and contrived for the benefit of identity groups. Poetic justice is bottom up, organic, and derived. Like English common law, poetic justice is an emergent phenomenon, and about the individual.

Equality and Inequality

Equal justice under the law is a hallmark of western civilization and enshrined in the US Constitution. But for the social justice crowd, this is obsolete, there must be equality of outcomes. As defined by Webster’s, social justice is “a state or doctrine of egalitarianism.” That is further defined as “a belief in human equality especially with respect to social, political, and economic affairs.” One example of social equality is the push for gender neutral pronouns on college campuses. Politically, Cuba is frequently endorsed as an ideal. And certain political elites maintain that “renewable energy” is a necessary solution for the economic well-being of the poor. To prove it, a new system of social economic benefits has been invented.

No conversation about equality would be complete without talking about inequality, a favorite theme of all social justice protest mobs. But the most destructive form of inequality has to do with risk. In his book Skin in the Game, Nassim Taleb refers to inequality as asymmetry, and he identifies several groups of people who either benefit from asymmetry, or suffer because of it. Those who benefit are the ones who assume little risk for their ideas or decisions. They transfer those risks to innocent people who bear the costs while the perps retain all benefits.

Examples of risk inequality (groups of people who don’t suffer the consequences of their bad ideas) include analysts in the media, Keynesian economists, diversity consultants, government funded scientists, politicians, teachers’ unions, and crony corporate executives. At the top of the list for lack of accountability are high level civil servants, tenured professors, and legacy media executives. It makes perfect sense that these last three groups of muckety-mucks are the most powerful thought leaders for the entire social justice franchise.

The Poetic Justice Warrior

The poetic justice warrior engages her capacity for reason, develops a purpose for her life, and is confident in her abilities. While the social justice warrior needs intimidation backed by force to satisfy their immediate demands, the poetic justice warrior is patient and peaceful. In both cases, reality will dispense rewards and punishments, and for the social justice warrior it could be quick. Politics provides a stark example. The most prolific social justice warrior of 21st century America is President Barack Obama; and in an extraordinary example of poetic justice, he handed the keys to the White House over to President Donald Trump.

But President Trump is not a poetic justice warrior, he’s a pragmatist. So who is? Or as Nassim Taleb might ask, who has skin in the game? In Trump’s case, it’s the average citizen who voted for him. People who were tired of being patsies for the political, media, banking, and education elites. People who take care of their families, their customers, and their communities. They think long-term and generally don’t get involved in the activism of politics unless reality beckons. For them, poetic justice is not immediate, only inevitable.

Besides the taxpayer-voter-citizen, those with skin in the game include local governments, field scientists, merchants, artisans, athletes, inventors, investors, and school teachers.  While bureaucracies separate unaccountable decision makers from the consequences of their mediocrity and hubris, decentralization and networks keep risks and rewards where they belong. And the connectivity of technology has the capacity for producing ever more poetic justice warriors – people with a romantic sense of life. Perhaps the finest example of this is the entrepreneur. As Steve Jobs explained:

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition.

At Halloween, Watch Out For Regulatory Wolves Wearing Sheep’s Clothing.

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One week before Halloween, the Wall Street Journal reported that the New York State Attorney General’s office is suing Exxon for failing to make certain accounting disclosures related to climate change. The article’s opening sentence reads, “accusing the oil giant of misleading investors about the risks that climate-change regulations pose to its business.” Let that one sink in. The regulators are complaining that Exxon’s projections about compliance costs are not as damaging as the damage the regulators intended to inflict.

Notice it doesn’t say that Exxon is not in compliance with the regulations. And it doesn’t say that Exxon’s compliance is not having the intended environmental benefit. They can’t even go there; it’s impossible to know if regulatory compliance will have any such benefit, ever.

The Goonies of New York

The lawsuit says only that Exxon’s cost estimates about the future do not fully recognize the power of the state to inflict harm. According to the NY Attorney General Barbara Underwood, “Exxon built a façade to deceive investors into believing that the company was managing the risks of climate-change regulation to its business when, in fact, it was intentionally and systematically underestimating or ignoring them, contrary to its public representations.”

And Exxon spokesman Scott Silvestri responded as follows: “These baseless allegations are a product of closed-door lobbying by special interests, political opportunism and the attorney general’s inability to admit that a three-year investigation has uncovered no wrongdoing.”

Regardless of whether or not Exxon’s accounting methods were intentionally deceptive, or whether this is merely environmentalist political grandstanding, the message is clear. Government wants the harm it inflicts to be respected publicly, or else. Or as the Wall Street Journal’s editorial board commented on October 25, 2018:

Ms. Underwood is charging Exxon under New York’s notorious Martin Act, which doesn’t require evidence of intent to prove fraud in civil cases. She may be hoping that Exxon agrees to settle and pay a fine so she can declare victory. Yet in this case there’s not even evidence of fraudulent conduct, much less intent. The only party guilty of misrepresentation in this lawsuit is the New York AG.

The attorney general’s suit claims that Exxon was intentionally misleading its investors, but the real deception is that the New York AG has any concern for the welfare of Exxon shareholders. For proof, the lawsuit demands that Exxon fully recognize the financial damage that their climate change regulations were intended to inflict. But what if Exxon were to inflate the climate change compliance costs and mislead investors about management’s ability to integrate those costs, would the AG sue? In reality, the justification for the suit is cynical, and the whole thing is merely a highly predictable ploy to assuage the environmental lobby and garner public support.

A Pound Wise and A Foolish Euro

Also on October 24th, Bloomberg reported that CEO Andrew Bailey of the Financial Conduct Authority (FCA), which is the financial markets regulator in the United Kingdom, is investigating the relationship certain hedge funds have with private polling companies. In order to legitimize the investigation, the relationships between the hedge funds and their pollsters are being labeled as secret, with the implication being that the hedge fund managers were leveraging inside information.

Of course bottom-up fundamental market research, is well, fundamental to the business of running your own company, or investing in someone else’s company. The question at hand was the surprisingly successful referendum in the UK to remove Britain from the European Union (EU) in 2016, and the subsequent sharp decline in the British Pound on foreign currency exchanges. It turns out several hedge funds reaped big profits by betting against the British Pound in futures market exchanges. They put their capital at risk based on their speculation that the vote would be successful, with help from private exit polling data, and that the Pound would drop sharply as a result.

It’s bad enough that British voters rejected the administrative state that is the EU, then some clever capitalists made money off of the EU’s embarrassment, and that the hedge funds did it in a market that is the creation of their sacred central banks! And this is where it gets interesting.

Is it ethical for anyone to hire pollsters to conduct exit polling studies? And is it legal? Of course it’s illegal to publicly disclose the results of exit polling results while polls remain open. Accordingly, the results were secret, election laws require it. So the question becomes, is it ethical for investors to have access to exit polling data they pay for? And would the FCA investigate if the exit polling data was wrong or the hedge fund investors lost money? If it is determined that the hedge funds had access to illegal insider information, who should be entitled to their own exit polling data? And who gets to decide, under what authority? Or does the FCA, which has no authority on this, impose a gag order on every voter under penalty of law?

Unmasking the Trick or Treaters

But a much more important question is – why did the results of a political referendum have such a drastic impact on a country’s currency market valuations? And should it? In an ostensibly free society, the answer is absolutely not. So how did this happen? Or better yet, why do we have foreign exchange markets in the first place? As Saifedean Ammous describes in his book The Bitcoin Standard, foreign exchange markets are a huge waste of capital. They exist because of government monopoly fiat currencies issued by central banks. A gold standard for all currencies would eliminate all of this nonsense. It is precisely the contrived complexity of mixed economies (capitalism and the regulatory state) that create the incentives for market participants to seek an advantage.

The New York Attorney General and the Financial Conduct Authority have a lot in common. They claim to be protecting investors while they loot the private business interests of anyone in their crosshairs, for the public good. Personally, they have no skin in the game, they will never bear the risks or share in the costs of their bad ideas. They can safely return to the comfort of their homes, take off their sheep’s costumes, and enjoy a bag full of goodies.

 

How You Can Be An Entrepreneurial Employee.

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In Skin In The Game: Hidden Asymmetries In Daily Life, Nassim Nicholas Taleb has some scary things to say about employment, i.e. working for a firm or a corporation with which your relationship is full time payroll employee.

He relates employment to slavery, in a chapter entitled How To Legally Own Another Person.

Every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom. How do you own these people? First, by conditioning and psychological manipulation; second, by tweaking them to have some skin in the game, forcing them to have something significant to lose if they disobey authority.

Taleb describes the company person, “impregnated with the stamp his firm wants to give”. His evidence includes dressing the part, using the language the company expects, socializing with other company people and spouses, and sharing company jokes. Not the tiniest amount of idiosyncratic attribute is permitted – because there is “something huge to lose” if the individual does not behave as a company person.

In return, the firm is bound by a pact to keep the company person on the books as long as feasible. Except it doesn’t work that way any more. Technological innovations and financial and structural changes in corporations have ended the tenure of the company person.

But even worse, says Taleb, is the requirement that people who are no longer owned by the corporation must remain employable. They fear not only upsetting their employer, but also other potential employers.

Is it possible to live the entrepreneurial life when employed by a firm? Yes (despite what Taleb believes) because the entrepreneurial life is an attitude and a style and a way of managing the future that you can bring to any context.

Here are our guidelines:

Reinforce Your Own Uniqueness.

The entrepreneurial life is to serve a customer need in a unique and better way. If you are employed, you have chosen your employer as your customer, the one who buys your productive output. Serve your customer well, understand their needs, and deliver in a way that is superior to any other supplier of productive services to that employer. That may require accumulating and demonstrating unique skills, or acquiring unparalleled knowledge about a particular issue, or product, or process. There are many pathways to uniqueness.

Focus on indispensability.

Uniqueness that is dispensable will not get you long-term employment security. The entrepreneurial way is to develop deep insight into the needs of the customer, and to be able to identify those needs that are currently unmet and high enough on the value scale that a new solution to them will be perceived as highly compelling. Treat your employer exactly as you would a customer. Identify the need, do your research to make sure it’s a compelling need, imagine a future state where that need is fully met, and then deploy your personal resources to implement the new solution. Develop metrics to measure the results of your initiative. And your metric should not be a qualitative job assessment by a person of higher rank in the organization. That person is your competitor.

A couple of highly valued and measurable fields for indispensability are demonstrable individual contribution to the profit of the company, demonstrable individual contribution to the topline revenue of the company, and individual ownership of external important relationships. Traders in energy companies, financial companies and commodity companies can show direct contribution to profits. Sales executives who manage relationships with key customers can show direct contribution to revenues. And similar important external revenues might be attributed to financial reporting executives who help determine external analysts’ evaluation of the company’s stock price. Try to find your indispensable role.

Broaden your engagement.

Entrepreneurs, once they have developed an idea for a business offering, and have proven that there is a positive response to their offering among at least a small segment of the market, proceed to broaden their niche by attracting more customers, and/or adding new service line extensions. The principle can be applied as an employee: once your uniqueness is established, apply it more broadly. For example, the ability to cross internal company boundaries between departments and organizational silos is highly valued. Volunteer to contribute unique knowledge on cross-functional teams and then demonstrate your ability to lead the team, or to be a catalyst to team energy and team collaboration.

Don’t be afraid of losing.

Ultimately, you lose your entrepreneurial spirit when you become afraid of losing your job or losing out in the race for promotion. The employment game can be a lottery. GE and IBM, just to pick two examples, have discarded large numbers of employees in layoffs in recent years. You might have joined one of these companies and expected a long career path to eventual retirement, and been disappointed. No-one should put themselves in a position where their well-being depends on a lottery and they’re fearful of losing. So don’t develop a fear of losing. Establish your uniqueness, broaden your engagement and take whatever risks you need to in order to increase your value to your employer.

Or, decide to exit employment and become a true entrepreneur.

 

 

Uncertainty, Chaos, And Skin In The Game: Attributes Of A Meaningful Life.

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Economists use the term uncertainty in reference to future conditions that are unknown and unknowable. The economic system consists of trillions of interactions between individuals, and, in each one, both buyers and sellers are making a creative choice. Shall I buy this or that? At what price? Shall I sell this or that? At what price? If I modify my offer slightly, will there be a different result? I felt good about this possible purchase yesterday, but now I am not so sure. Should I check out this new competitor first? I didn’t expect it to rain, so maybe now I should buy an umbrella instead of lunch. I didn’t expect electric cars. I didn’t expect artificial intelligence.

Bearing The Weight Of Uncertainty.

Those same economists say that the people who bear the weight of this future uncertainty the most in the economy are the entrepreneurs. They bear it eagerly on behalf of the rest of us. Entrepreneurs have a special relationship with the future. They make a deal with the future. It is their domain. They imagine a future that is better than today, and they believe that they can bring it about. They sacrifice in order to do so, because while they are assembling and deploying their resources, they are not earning current rewards. Rather, they are hoping for future rewards – and those future rewards are uncertain. They may bet wrong. Some competitor may be imagining the same future and doing a better job of investing and implementing.

For the consumer, the uncertainty of the future is a positive sum. They are going to be offered something new and better. For the entrepreneur, it could be positive or negative.

The Psychic Rewards Of Sacrifice.

Importantly, however, the entrepreneur’s incentive for bearing uncertainty is not only financial. There is considerable psychic reward on offer. Different entrepreneurial personalities may experience the psychic reward in different ways – the exhilaration of taking on the unknown, the joy of self-reliant action, the fulfillment of pursuing one’s own intuition, the sense of achievement in assembling resources in a new and unique way.

In his book 12 Rules For Life: An Antidote To Chaos, Dr. Jordan B. Peterson spends a lot of time talking about entrepreneurial sacrifice: the proposition “that something better might be attained in the future by giving up something of value in the present”. In other words, sacrifice now to gain later. The difference between successful people and unsuccessful people is the successful sacrifice. The courage to undertake this sacrifice gives you more security and strength than any short-sighted concentration on your own safety. It’s living properly, it’s discovering meaning. Meaning, for Dr. Peterson, is the antidote for chaos and suffering.

Honesty And Authenticity.

Another take on the importance of entrepreneurial uncertainty comes from Nassim Nicholas Taleb in his book, Skin In The Game. Taking responsibility, including moral and ethical responsibility as well as financial responsibility, for the downside risk of one’s entrepreneurial efforts (Taleb would call these “trades”) is what holds society together. It is transparency and honesty and authenticity. It is the honorable life, the only one worth living.

Beware Of Those Who Don’t Have Skin In The Game.

According to Taleb, those who don’t have skin in the game include:

Bureaucrats: Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.

Governments: government interference in general tends to remove skin in the game.

Academics: in academia, there is no difference between academia and the real world; in the real world, there is.

Administrators: Administrators, everywhere on the planet, in all businesses and pursuits, and at all times in history, have been the plague.

Take Action. Do Something Heroic.

The people with skin in the game are doers. They act. They take risks. And they are prepared to accept the consequences if they take the wrong risk, or the risk does not work out. Taleb includes entrepreneurs in this group: Entrepreneurs are heroes in our society. They fail for the rest of us.

For economists, the market is a process of learning and discovery in the context of uncertainty. For Dr Peterson, entrepreneurial sacrifice is courage and meaning. For Nassim Nicholas Taleb, skin in the game is authenticity and an honorable life.

In all cases, the entrepreneurial life is the one that reaps the greatest rewards, both psychic and (potentially) financial.

 

 

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