Archive for the ‘Lean thinking’ Category

Excerpts and Notes from Goldberg’s “Billions of Drops…”

December 23, 2015

Goldberg, S. H. (2009). Billions of drops in millions of buckets: Why philanthropy doesn’t advance social progress. New York: Wiley.

p. 8:
Transaction costs: “…nonprofit financial markets are highly disorganized, with considerable duplication of effort, resource diversion, and processes that ‘take a fair amount of time to review grant applications and to make funding decisions’ [citing Harvard Business School Case No. 9-391-096, p. 7, Note on Starting a Nonprofit Venture, 11 Sept 1992]. It would be a major understatement to describe the resulting capital market as inefficient.”

A McKinsey study found that nonprofits spend 2.5 to 12 times more raising capital than for-profits do. When administrative costs are factored in, nonprofits spend 5.5 to 21.5 times more.

For-profit and nonprofit funding efforts contrasted on pages 8 and 9.

p. 10:
Balanced scorecard rating criteria

p. 11:
“Even at double-digit annual growth rates, it will take many years for social entrepreneurs and their funders to address even 10% of the populations in need.”

p. 12:
Exhibit 1.5 shows that the percentages of various needs served by leading social enterprises are barely drops in the respective buckets; they range from 0.07% to 3.30%.

pp. 14-16:
Nonprofit funding is not tied to performance. Even when a nonprofit makes the effort to show measured improvement in impact, it does little or nothing to change their funding picture. It appears that there is some kind of funding ceiling implicitly imposed by funders, since nonprofit growth and success seems to persuade capital sources that their work there is done. Mediocre and low performing nonprofits seem to be able to continue drawing funds indefinitely from sympathetic donors who don’t require evidence of effective use of their money.

p. 34:
“…meaningful reductions in poverty, illiteracy, violence, and hopelessness will require a fundamental restructuring of nonprofit capital markets. Such a restructuring would need to make it much easier for philanthropists of all stripes–large and small, public and private, institutional and individual–to fund nonprofit organizations that maximize social impact.”

p. 54:
Exhibit 2.3 is a chart showing that fewer people rose from poverty, and more remained in it or fell deeper into it, in the period of 1988-98 compared with 1969-1979.

pp. 70-71:
Kotter’s (1996) change cycle.

p. 75:
McKinsey’s seven elements of nonprofit capacity and capacity assessment grid.

pp. 94-95:
Exhibits 3.1 and 3.2 contrast the way financial markets reward for-profit performance with the way nonprofit markets reward fund raising efforts.

Financial markets
1. Market aggregates and disseminates standardized data
2. Analysts publish rigorous research reports
3. Investors proactively search for strong performers
4. Investors penalize weak performers
5. Market promotes performance
6. Strong performers grow

Nonprofit markets
1. Social performance is difficult to measure
2. NPOs don’t have resources or expertise to report results
3. Investors can’t get reliable or standardized results data
4. Strong and weak NPOs spend 40 to 60% of time fundraising
5. Market promotes fundraising
6. Investors can’t fund performance; NPOs can’t scale

p. 95:
“…nonprofits can’t possibly raise enough money to achieve transformative social impact within the constraints of the existing fundraising system. I submit that significant social progress cannot be achieved without what I’m going to call ‘third-stage funding,’ that is, funding that doesn’t suffer from disabling fragmentation. The existing nonprofit capital market is not capable of [p. 97] providing third-stage funding. Such funding can arise only when investors are sufficiently well informed to make big bets at understandable and manageable levels of risk. Existing nonprofit capital markets neither provide investors with the kinds of information needed–actionable information about nonprofit performance–nor provide the kinds of intermediation–active oversight by knowledgeable professionals–needed to mitigate risk. Absent third-stage funding, nonprofit capital will remain irreducibly fragmented, preventing the marshaling of resources that nonprofit organizations need to make meaningful and enduring progress against $100 million problems.”

pp. 99-114:
Text and diagrams on innovation, market adoption, transformative impact.

p. 140:
Exhibit 4.2: Capital distribution of nonprofits, highlighting mid-caps

pages 192-3 make the case for the difference between a regular market and the current state of philanthropic, social capital markets.

p. 192:
“So financial markets provide information investors can use to compare alternative investment opportunities based on their performance, and they provide a dynamic mechanism for moving money away from weak performers and toward strong performers. Just as water seeks its own level, markets continuously recalibrate prices until they achieve a roughly optimal equilibrium at which most companies receive the ‘right’ amount of investment. In this way, good companies thrive and bad ones improve or die.
“The social sector should work the same way. .. But philanthropic capital doesn’t flow toward effective nonprofits and away from ineffective nonprofits for a simple reason: contributors can’t tell the difference between the two. That is, philanthropists just don’t [p. 193] know what various nonprofits actually accomplish. Instead, they only know what nonprofits are trying to accomplish, and they only know that based on what the nonprofits themselves tell them.”

p. 193:
“The signs that the lack of social progress is linked to capital market dysfunctions are unmistakable: fundraising remains the number-one [p. 194] challenge of the sector despite the fact that nonprofit leaders divert some 40 to 60% of their time from productive work to chasing after money; donations raised are almost always too small, too short, and too restricted to enhance productive capacity; most mid-caps are ensnared in the ‘social entrepreneur’s trap’ of focusing on today and neglecting tomorrow; and so on. So any meaningful progress we could make in the direction of helping the nonprofit capital market allocate funds as effectively as the private capital market does could translate into tremendous advances in extending social and economic opportunity.
“Indeed, enhancing nonprofit capital allocation is likely to improve people’s lives much more than, say, further increasing the total amount of donations. Why? Because capital allocation has a multiplier effect.”

“If we want to materially improve the performance and increase the impact of the nonprofit sector, we need to understand what’s preventing [p. 195] it from doing a better job of allocating philanthropic capital. And figuring out why nonprofit capital markets don’t work very well requires us to understand why the financial markets do such a better job.”

p. 197:
“When all is said and done, securities prices are nothing more than convenient approximations that market participants accept as a way of simplifying their economic interactions, with a full understanding that market prices are useful even when they are way off the mark, as they so often are. In fact, that’s the whole point of markets: to aggregate the imperfect and incomplete knowledge held by vast numbers of traders about much various securities are worth and still make allocation choices that are better than we could without markets.
“Philanthropists face precisely the same problem: how to make better use of limited information to maximize output, in this case, social impact. Considering the dearth of useful tools available to donors today, the solution doesn’t have to be perfect or even all that good, at least at first. It just needs to improve the status quo and get better over time.
“Much of the solution, I believe, lies in finding useful adaptations of market mechanisms that will mitigate the effects of the same lack of reliable and comprehensive information about social sector performance. I would even go so far as to say that social enterprises can’t hope to realize their ‘one day, all children’ visions without a funding allociation system that acts more like a market.
“We can, and indeed do, make incremental improvements in nonprofit funding without market mechanisms. But without markets, I don’t see how we can fix the fragmentation problem or produce transformative social impact, such as ensuring that every child in America has a good education. The problems we face are too big and have too many moving parts to ignore the self-organizing dynamics of market economics. As Thomas Friedman said about the need to impose a carbon tax at a time of falling oil prices, ‘I’ve wracked my brain trying to think of ways to retool America around clean-power technologies without a price signal–i.e., a tax–and there are no effective ones.”

p. 199:
“Prices enable financial markets to work the way nonprofit capital markets should–by sending informative signals about the most effective organizations so that money will flow to them naturally..”

p. 200:
[Quotes Kurtzman citing De Soto on the mystery of capital. Also see p. 209, below.]
“‘Solve the mystery of capital and you solve many seemingly intractable problems along with it.'”
[That’s from page 69 in Kurtzman, 2002.]

p. 201:
[Goldberg says he’s quoting Daniel Yankelovich here, but the footnote does not appear to have anything to do with this quote:]
“‘The first step is to measure what can easily be measured. The second is to disregard what can’t be measured, or give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what can’t be measured easily isn’t very important. This is blindness. The fourth step is to say that what can’t be easily measured really doesn’t exist. This is suicide.'”

Goldberg gives example here of $10,000 invested witha a 10% increase in value, compared with $10,000 put into a nonprofit. “But if the nonprofit makes good use of the money and, let’s say, brings the reading scores of 10 elementary school students up from below grade level to grade level, we can’t say how much my initial investment is ‘worth’ now. I could make the argument that the value has increased because the students have received a demonstrated educational benefit that is valuable to them. Since that’s the reason I made the donation, the achievement of higher scores must have value to me, as well.”

p. 202:
Goldberg wonders whether donations to nonprofits would be better conceived as purchases than investments.

p. 207:
Goldberg quotes Jon Gertner from the March 9, 2008, issue of the New York Times Magazine devoted to philanthropy:

“‘Why shouldn’t the world’s smartest capitalists be able to figure out more effective ways to give out money now? And why shouldn’t they want to make sure their philanthropy has significant social impact? If they can measure impact, couldn’t they get past the resistance that [Warren] Buffet highlighted and finally separate what works from what doesn’t?'”

p. 208:
“Once we abandon the false notions that financial markets are precision instruments for measuring unambiguous phenomena, and that the business and nonproft sectors are based in mutually exclusive principles of value, we can deconstruct the true nature of the problems we need to address and adapt market-like mechanisms that are suited to the particulars of the social sector.
“All of this is a long way (okay, a very long way) of saying that even ordinal rankings of nonprofit investments can have tremendous value in choosing among competing donation opportunities, especially when the choices are so numerous and varied. If I’m a social investor, I’d really like to know which nonprofits are likely to produce ‘more’ impact and which ones are likely to produce ‘less.'”

“It isn’t necessary to replicate the complex working of the modern stock markets to fashion an intelligent and useful nonprofit capital allocation mechanism. All we’re looking for is some kind of functional indication that would (1) isolate promising nonprofit investments from among the confusing swarm of too many seemingly worthy social-purpose organizations and (2) roughly differentiate among them based on the likelihood of ‘more’ or ‘less’ impact. This is what I meant earlier by increasing [p. 209] signals and decreasing noise.”

p. 209:
Goldberg apparently didn’t read De Soto, as he says that the mystery of capital is posed by Kurtzman and says it is solved via the collective intelligence and wisdom of crowds. This completely misses the point of the crucial value that transparent representations of structural invariance hold in market functionality. Goldberg is apparently offering a loose kind of market for which there is an aggregate index of stocks for nonprofits that are built up from their various ordinal performance measures. I think I find a better way in my work, building more closely from De Soto (Fisher, 2002, 2003, 2005, 2007, 2009a, 2009b).

p. 231:
Goldberg quotes Harvard’s Allen Grossman (1999) on the cost-benefit boundaries of more effective nonprofit capital allocation:

“‘Is there a significant downside risk in restructuring some portion of the philanthropic capital markets to test the effectiveness of performance driven philanthropy? The short answer is, ‘No.’ The current reality is that most broad-based solutions to social problems have eluded the conventional and fragmented approaches to philanthropy. It is hard to imagine that experiments to change the system to a more performance driven and rational market would negatively impact the effectiveness of the current funding flows–and could have dramatic upside potential.'”

p. 232:
Quotes Douglas Hubbard’s How to Measure Anything book that Stenner endorsed, and Linacre and I didn’t.

p. 233:
Cites Stevens on the four levels of measurement and uses it to justify his position concerning ordinal rankings, recognizing that “we can’t add or subtract ordinals.”

pp. 233-5:
Justifies ordinal measures via example of Google’s PageRank algorithm. [I could connect from here using Mary Garner’s (2009) comparison of PageRank with Rasch.]

p. 236:
Goldberg tries to justify the use of ordinal measures by citing their widespread use in social science and health care. He conveniently ignores the fact that virtually all of the same problems and criticisms that apply to philanthropic capital markets also apply in these areas. In not grasping the fundamental value of De Soto’s concept of transferable and transparent representations, and in knowing nothing of Rasch measurement, he was unable to properly evaluate to potential of ordinal data’s role in the formation of philanthropic capital markets. Ordinal measures aren’t just not good enough, they represent a dangerous diversion of resources that will be put into systems that take on lives of their own, creating a new layer of dysfunctional relationships that will be hard to overcome.

p. 261 [Goldberg shows here his complete ignorance about measurement. He is apparently totally unaware of the work that is in fact most relevant to his cause, going back to Thurstone in 1920s, Rasch in the 1950s-1970s, and Wright in the 1960s to 2000. Both of the problems he identifies have long since been solved in theory and in practice in a wide range of domains in education, psychology, health care, etc.]:
“Having first studied performance evaluation some 30 years ago, I feel confident in saying that all the foundational work has been done. There won’t be a ‘eureka!’ breakthrough where someone finally figures out the one true way to guage nonprofit effectiveness.
“Indeed, I would venture to say that we know virtually everything there is to know about measuring the performance of nonprofit organizations with only two exceptions: (1) How can we compare nonprofits with different missions or approaches, and (2) how can we make actionable performance assessments common practice for growth-ready mid-caps and readily available to all prospective donors?”

p. 263:
“Why would a social entrepreneur divert limited resources to impact assessment if there were no prospects it would increase funding? How could an investor who wanted to maximize the impact of her giving possibly put more golden eggs in fewer impact-producing baskets if she had no way to distinguish one basket from another? The result: there’s no performance data to attract growth capital, and there’s no growth capital to induce performance measurement. Until we fix that Catch-22, performance evaluation will not become an integral part of social enterprise.”

pp. 264-5:
Long quotation from Ken Berger at Charity Navigator on their ongoing efforts at developing an outcome measurement system. [wpf, 8 Nov 2009: I read the passage quoted by Goldberg in Berger’s blog when it came out and have been watching and waiting ever since for the new system. wpf, 8 Feb 2012: The new system has been online for some time but still does not include anything on impacts or outcomes. It has expanded from a sole focus on financials to also include accountability and transparency. But it does not yet address Goldberg’s concerns as there still is no way to tell what works from what doesn’t.]

p. 265:
“The failure of the social sector to coordinate independent assets and create a whole that exceeds the sum of its parts results from an absence of.. platform leadership’: ‘the ability of a company to drive innovation around a particular platform technology at the broad industry level.’ The object is to multiply value by working together: ‘the more people who use the platform products, the more incentives there are for complement producers to introduce more complementary products, causing a virtuous cycle.'” [Quotes here from Cusumano & Gawer (2002). The concept of platform leadership speaks directly to the system of issues raised by Miller & O’Leary (2007) that must be addressed to form effective HSN capital markets.]

p. 266:
“…the nonprofit sector has a great deal of both money and innovation, but too little available information about too many organizations. The result is capital fragmentation that squelches growth. None of the stakeholders has enough horsepower on its own to impose order on this chaos, but some kind of realignment could release all of that pent-up potential energy. While command-and-control authority is neither feasible nor desirable, the conditions are ripe for platform leadership.”

“It is doubtful that the IMPEX could amass all of the resources internally needed to build and grow a virtual nonprofit stock market that could connect large numbers of growth-capital investors with large numbers of [p. 267] growth-ready mid-caps. But it might be able to convene a powerful coalition of complementary actors that could achieve a critical mass of support for performance-based philanthropy. The challenge would be to develop an organization focused on filling the gaps rather than encroaching on the turf of established firms whose participation and innovation would be required to build a platform for nurturing growth of social enterprise..”

p. 268-9:
Intermediated nonprofit capital market shifts fundraising burden from grantees to intermediaries.

p. 271:
“The surging growth of national donor-advised funds, which simplify and reduce the transaction costs of methodical giving, exemplifies the kind of financial innovation that is poised to leverage market-based investment guidance.” [President of Schwab Charitable quoted as wanting to make charitable giving information- and results-driven.]

p. 272:
Rating agencies and organizations: Charity Navigator, Guidestar, Wise Giving Alliance.
Online donor rankings: GlobalGiving, GreatNonprofits, SocialMarkets
Evaluation consultants: Mathematica

Google’s mission statement: “to organize the world’s information and make it universally accessible and useful.”

p. 273:
Exhibit 9.4 Impact Index Whole Product
Image of stakeholders circling IMPEX:
Trading engine
Listed nonprofits
Data producers and aggregators
Trading community
Researchers and analysts
Investors and advisors
Government and business supporters

p. 275:
“That’s the starting point for replication [of social innovations that work]: finding and funding; matching money with performance.”

[WPF bottom line: Because Goldberg misses De Soto’s point about transparent representations resolving the mystery of capital, he is unable to see his way toward making the nonprofit capital markets function more like financial capital markets, with the difference being the focus on the growth of human, social, and natural capital. Though Goldberg intuits good points about the wisdom of crowds, he doesn’t know enough about the flaws of ordinal measurement relative to interval measurement, or about the relatively easy access to interval measures that can be had, to do the job.]

References

Cusumano, M. A., & Gawer, A. (2002, Spring). The elements of platform leadership. MIT Sloan Management Review, 43(3), 58.

De Soto, H. (2000). The mystery of capital: Why capitalism triumphs in the West and fails everywhere else. New York: Basic Books.

Fisher, W. P., Jr. (2002, Spring). “The Mystery of Capital” and the human sciences. Rasch Measurement Transactions, 15(4), 854 [http://www.rasch.org/rmt/rmt154j.htm].

Fisher, W. P., Jr. (2003). Measurement and communities of inquiry. Rasch Measurement Transactions, 17(3), 936-8 [http://www.rasch.org/rmt/rmt173.pdf].

Fisher, W. P., Jr. (2005). Daredevil barnstorming to the tipping point: New aspirations for the human sciences. Journal of Applied Measurement, 6(3), 173-9 [http://www.livingcapitalmetrics.com/images/FisherJAM05.pdf].

Fisher, W. P., Jr. (2007, Summer). Living capital metrics. Rasch Measurement Transactions, 21(1), 1092-3 [http://www.rasch.org/rmt/rmt211.pdf].

Fisher, W. P., Jr. (2009a). Bringing human, social, and natural capital to life: Practical consequences and opportunities. In M. Wilson, K. Draney, N. Brown & B. Duckor (Eds.), Advances in Rasch Measurement, Vol. Two (p. in press [http://www.livingcapitalmetrics.com/images/BringingHSN_FisherARMII.pdf]). Maple Grove, MN: JAM Press.

Fisher, W. P., Jr. (2009b, November). Invariance and traceability for measures of human, social, and natural capital: Theory and application. Measurement (Elsevier), 42(9), 1278-1287.

Garner, M. (2009, Autumn). Google’s PageRank algorithm and the Rasch measurement model. Rasch Measurement Transactions, 23(2), 1201-2 [http://www.rasch.org/rmt/rmt232.pdf].

Grossman, A. (1999). Philanthropic social capital markets: Performance driven philanthropy (Social Enterprise Series 12 No. 00-002). Harvard Business School Working Paper.

Kotter, J. (1996). Leading change. Cambridge, Massachusetts: Harvard Business School Press.

Kurtzman, J. (2002). How the markets really work. New York: Crown Business.

Miller, P., & O’Leary, T. (2007, October/November). Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, Organizations, and Society, 32(7-8), 701-34.

New Opportunities for Job Creation and Prosperity

August 17, 2011

What can be done to create jobs and revive the economy? There is no simple, easy answer to this question. Creating busywork is nonsense. We need fulfilling occupations that meet the world’s demand for products and services. It is not easy to see how meaningful work can be systematically created on a broad scale. New energy efficiencies may lead to the cultivation of significant job growth, but it may be unwise to put all of our eggs in this one basket.

So how are we to solve this puzzle? What other areas in the economy might be ripe for the introduction of a new technology capable of supporting a wave of new productivity, like computers did in the 1980s, or the Internet in the 1990s? In trying to answer this question, simplicity and elegance are key factors in keeping things at a practical level.

For instance, we know we accomplish more working together as a team than as disconnected individuals. New jobs, especially new kinds of jobs, will have to be created via innovation. Innovation in science and industry is a team sport. So the first order of business in teaming up for job creation is to know the rules of the game. The economic game is played according to the rules of law embodied in property rights, scientific rationality, capital markets, and transportation/communications networks (see William Bernstein’s 2004 book, The Birth of Plenty). When these conditions are met, as they were in Europe and North America at the beginning of the nineteenth century, the stage is set for long term innovation and growth on a broad scale.

The second order of business is to identify areas in the economy that lack one or more of these four conditions, and that could reasonably be expected to benefit from their introduction. Education, health care, social services, and environmental management come immediately to mind. These industries are plagued with seemingly interminable inflationary spirals, which, no doubt, are at least in part caused by the inability of investors to distinguish between high and low performers. Money cannot flow to and reward programs producing superior results in these industries because they lack common product definitions and comparable measures of their results.

The problems these industries are experiencing are not specific to each of them in particular. Rather, the problem is a general one applicable across all industries, not just these. Traditionally, economic thinking focuses on three main forms of capital: land, labor, and manufactured products (including everything from machines, roads, and buildings to food, clothing, and appliances). Cash and credit are often thought of as liquid capital, but their economic value stems entirely from the access they provide to land, labor, and manufactured products.

Economic activity is not really, however, restricted to these three forms of capital. Land is far more than a piece of ground. What are actually at stake are the earth’s regenerative ecosystems, with the resources and services they provide. And labor is far more than a pair of skilled hands; people bring a complex mix of abilities, motivations, and health to bear in their work. Finally, this scheme lacks an essential element: the trust, loyalty, and commitment required for even the smallest economic exchange to take place. Without social capital, all the other forms of capital (human, natural, and manufactured, including property) are worthless. Consistent, sustainable, and socially responsible economic growth requires that all four forms of capital be made accountable in financial spreadsheets and economic models.

The third order of business, then, is to ask if the four conditions laying out the rules for the economic game are met in each of the four capital domains. The table below suggests that all four conditions are fully met only for manufactured products. They are partially met for natural resources, such as minerals, timber, fisheries, etc., but not at all for nature’s air and water purification systems or broader genetic ecosystem services.

 Table

Existing Conditions Relevant to Conceiving a New Birth of Plenty, by Capital Domains

Human

Social

Natural

Manufactured

Property rights

No

No

Partial

Yes

Scientific rationality

Partial

Partial

Partial

Yes

Capital markets

Partial

Partial

Partial

Yes

Transportation & communication networks

Partial

Partial

Partial

Yes

That is, no provisions exist for individual ownership of shares in the total available stock of air and water, or of forest, watershed, estuary, and other ecosystem service outcomes. Nor do any individuals have free and clear title to their most personal properties, the intangible abilities, motivations, health, and trust most essential to their economic productivity. Aggregate statistics are indeed commonly used to provide a basis for policy and research in human, social, and natural capital markets, but falsifiable models of individually applicable unit quantities are not widely applied. Scientifically rational measures of our individual stocks of intangible asset value will require extensive use of these falsifiable models in calibrating the relevant instrumentation.

Without such measures, we cannot know how many shares of stock in these forms of capital we own, or what they are worth in dollar terms. We lack these measures, even though decades have passed since researchers first established firm theoretical and practical foundations for them. And more importantly, even when scientifically rational individual measures can be obtained, they are never expressed in terms of a unit standardized for use within a given market’s communications network.

So what are the consequences for teams playing the economic game? High performance teams’ individual decisions and behaviors are harmonized in ways that cannot otherwise be achieved only when unit amounts, prices, and costs are universally comparable and publicly available. This is why standard currencies and exchange rates are so important.

And right here we have an insight into what we can do to create jobs. New jobs are likely going to have to be new kinds of jobs resulting from innovations. As has been detailed at length in recent works such as Surowiecki’s 2004 book, The Wisdom of Crowds, innovation in science and industry depends on standards. Standards are common languages that enable us to multiply our individual cognitive powers into new levels of collective productivity. Weights and measures standards are like monetary currencies; they coordinate the exchange of value in laboratories and businesses in the same way that dollars do in the US economy.

Applying Bernstein’s four conditions for economic growth to intangible assets, we see that a long term program for job creation then requires

  1. legislation establishing human, social, and natural capital property rights, and an Intangible Assets Metrology System;
  2. scientific research into consensus standards for measuring human, social, and natural capital;
  3. venture capital educational and marketing programs; and
  4. distributed information networks and computer applications through which investments in human, social, and natural capital can be tracked and traded in accord with the rule of law governing property rights and in accord with established consensus standards.

Of these four conditions, Bernstein (p. 383) points to property rights as being the most difficult to establish, and the most important for prosperity. Scientific results are widely available in online libraries. Capital can be obtained from investors anywhere. Transportation and communications services are available commercially.

But valid and verifiable means of representing legal title to privately owned property is a problem often not yet solved even for real estate in many Third World and former communist countries (see De Soto’s 2000 book, The Mystery of Capital). Creating systems for knowing the quality and quantity of educational, health care, social, and environmental service outcomes is going to be a very difficult process. It will not be impossible, however, and having the problem identified advances us significantly towards new economic possibilities.

We need leaders able and willing to formulate audacious goals for new economic growth from ideas such as these. We need enlightened visionaries able to see our potentials from a new perspective, and who can reflect our new self-image back at us. When these leaders emerge—and they will, somewhere, somehow—the imaginations of millions of entrepreneurial thinkers and actors will be fired, and new possibilities will unfold.

Creative Commons License
LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
Based on a work at livingcapitalmetrics.wordpress.com.
Permissions beyond the scope of this license may be available at http://www.livingcapitalmetrics.com.

Science, Public Goods, and the Monetization of Commodities

August 13, 2011

Though I haven’t read Philip Mirowski’s new book yet (Science-Mart: Privatizing American Science. Cambridge, MA: Harvard University Press, 2011), a statement in the cover blurb given at Amazon.com got me thinking. I can’t help but wonder if there is another way of interpreting neoliberal ideology’s “radically different view of knowledge and discovery: [that] the fruits of scientific investigation are not a public good that should be freely available to all, but are commodities that could be monetized”?

Corporations and governments are not the only ones investing in research and new product development, and they are not the only ones who could benefit from the monetization of the fruits of scientific investigation. Individuals make these investments as well, and despite ostensible rights to private ownership, no individuals anywhere have access to universally comparable, uniformly expressed, and scientifically valid information on the quantity or quality of the literacy, health, community, or natural capital that is rightfully theirs. They accordingly also then do not have any form of demonstrable legal title to these properties. In the same way that corporations have successfully advanced their economic interests by seeing that patent and intellectual property laws were greatly strengthened, so, too, ought individuals and communities advance their economic interests by, first, expanding the scope of weights and measures standards to include intangible assets, and second, by strengthening laws related to the ownership of privately held stocks of living capital.

The nationalist and corporatist socialization of research will continue only as long as social capital, human capital, and natural capital are not represented in the universally uniform common currencies and transparent media that could be provided by an intangible assets metric system. When these forms of capital are brought to economic life in fungible measures akin to barrels, bushels, or kilowatts, then they will be monetized commodities in the full capitalist sense of the term, ownable and purchasable products with recognizable standard definitions, uniform quantitative volumes, and discernable variations in quality. Then, and only then, will individuals gain economic control over their most important assets. Then, and only then, will we obtain the information we need to transform education, health care, social services, and human and natural resource management into industries in which quality is appropriately rewarded. Then, and only then, will we have the means for measuring genuine progress and authentic wealth in ways that correct the insufficiencies of the GNP/GDP indexes.

The creation of efficiently functioning markets for all forms of capital is an economic, political, and moral necessity (see Ekins, 1992 and others). We say we manage what we measure, but very little effort has been put into measuring (with scientific validity and precision in universally uniform and accessible aggregate terms) 90% of the capital resources under management: human abilities, motivations, and health; social commitment, loyalty, and trust; and nature’s air and water purification and ecosystem services (see Hawken, Lovins, & Lovins, 1999, among others). All human suffering, sociopolitical discontent, and environmental degradation are rooted in the same common cause: waste (see Hawken, et al., 1999). To apply lean thinking to removing the wasteful destruction of our most valuable resources, we must measure these resources in ways that allow us to coordinate and align our decisions and behaviors virtually, at a distance, with no need for communicating and negotiating the local particulars of the hows and whys of our individual situations. For more information on these ideas, search “living capital metrics” and see works like the following:

Ekins, P. (1992). A four-capital model of wealth creation. In P. Ekins & M. Max-Neef (Eds.), Real-life economics: Understanding wealth creation (pp. 147-15). London: Routledge.

Fisher, W. P., Jr. (2009). Invariance and traceability for measures of human, social, and natural capital: Theory and application. Measurement, 42(9), 1278-1287.

Hawken, P., Lovins, A., & Lovins, H. L. (1999). Natural capitalism: Creating the next industrial revolution. New York: Little, Brown, and Co.

Latour, B. (1987). Science in action: How to follow scientists and engineers through society. New York: Cambridge University Press.

Latour, B. (2005). Reassembling the social: An introduction to Actor-Network-Theory. (Clarendon Lectures in Management Studies). Oxford, England: Oxford University Press.

Miller, P., & O’Leary, T. (2007). Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, Organizations, and Society, 32(7-8), 701-34.

Creative Commons License
LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
Based on a work at livingcapitalmetrics.wordpress.com.
Permissions beyond the scope of this license may be available at http://www.livingcapitalmetrics.com.

Debt, Revenue, and Changing the Way Washington Works: The Greatest Entrepreneurial Opportunity of Our Time

July 30, 2011

“Holding the line” on spending and taxes does not make for a fundamental transformation of the way Washington works. Simply doing less of one thing is just a small quantitative change that does nothing to build positive results or set a new direction. What we need is a qualitative metamorphosis akin to a caterpillar becoming a butterfly. In contrast with this beautiful image of natural processes, the arguments and so-called principles being invoked in the sham debate that’s going on are nothing more than fights over where to put deck chairs on the Titanic.

What sort of transformation is possible? What kind of a metamorphosis will start from who and where we are, but redefine us sustainably and responsibly? As I have repeatedly explained in this blog, my conference presentations, and my publications, with numerous citations of authoritative references, we already possess all of the elements of the transformation. We have only to organize and deploy them. Of course, discerning what the resources are and how to put them together is not obvious. And though I believe we will do what needs to be done when we are ready, it never hurts to prepare for that moment. So here’s another take on the situation.

Infrastructure that supports lean thinking is the name of the game. Lean thinking focuses on identifying and removing waste. Anything that consumes resources but does not contribute to the quality of the end product is waste. We have enormous amounts of wasteful inefficiency in many areas of our economy. These inefficiencies are concentrated in areas in which management is hobbled by low quality information, where we lack the infrastructure we need.

Providing and capitalizing on this infrastructure is The Greatest Entrepreneurial Opportunity of Our Time. Changing the way Washington (ha! I just typed “Wastington”!) works is the same thing as mitigating the sources of risk that caused the current economic situation. Making government behave more like a business requires making the human, social, and natural capital markets more efficient. Making those markets more efficient requires reducing the costs of transactions. Those costs are determined in large part by information quality, which is a function of measurement.

It is often said that the best way to reduce the size of government is to move the functions of government into the marketplace. But this proposal has never been associated with any sense of the infrastructural components needed to really make the idea work. Simply reducing government without an alternative way of performing its functions is irresponsible and destructive. And many of those who rail on and on about how bad or inefficient government is fail to recognize that the government is us. We get the government we deserve. The government we get follows directly from the kind of people we are. Government embodies our image of ourselves as a people. In the US, this is what having a representative form of government means. “We the people” participate in our society’s self-governance not just by voting, writing letters to congress, or demonstrating, but in the way we spend our money, where we choose to live, work, and go to school, and in every decision we make. No one can take a breath of air, a drink of water, or a bite of food without trusting everyone else to not carelessly or maliciously poison them. No one can buy anything or drive down the street without expecting others to behave in predictable ways that ensure order and safety.

But we don’t just trust blindly. We have systems in place to guard against those who would ruthlessly seek to gain at everyone else’s expense. And systems are the point. No individual person or firm, no matter how rich, could afford to set up and maintain the systems needed for checking and enforcing air, water, food, and workplace safety measures. Society as a whole invests in the infrastructure of measures created, maintained, and regulated by the government’s Department of Commerce and the National Institute for Standards and Technology (NIST). The moral importance and the economic value of measurement standards has been stressed historically over many millennia, from the Bible and the Quran to the Magna Carta and the French Revolution to the US Constitution. Uniform weights and measures are universally recognized and accepted as essential to fair trade.

So how is it that we nonetheless apparently expect individuals and local organizations like schools, businesses, and hospitals to measure and monitor students’ abilities; employees’ skills and engagement; patients’ health status, functioning, and quality of care; etc.? Why do we not demand common currencies for the exchange of value in human, social, and natural capital markets? Why don’t we as a society compel our representatives in government to institute the will of the people and create new standards for fair trade in education, health care, social services, and environmental management?

Measuring better is not just a local issue! It is a systemic issue! When measurement is objective and when we all think together in the common language of a shared metric (like hours, volts, inches or centimeters, ounces or grams, degrees Fahrenheit or Celsius, etc.), then and only then do we have the means we need to implement lean strategies and create new efficiencies systematically. We need an Intangible Assets Metric System.

The current recession in large part was caused by failures in measuring and managing trust, responsibility, loyalty, and commitment. Similar problems in measuring and managing human, social, and natural capital have led to endlessly spiraling costs in education, health care, social services, and environmental management. The problems we’re experiencing in these areas are intimately tied up with the way we formulate and implement group level decision making processes and policies based in statistics when what we need is to empower individuals with the tools and information they need to make their own decisions and policies. We will not and cannot metamorphose from caterpillar to butterfly until we create the infrastructure through which we each can take full ownership and control of our individual shares of the human, social, and natural capital stock that is rightfully ours.

We well know that we manage what we measure. What counts gets counted. Attention tends to be focused on what we’re accountable for. But–and this is vitally important–many of the numbers called measures do not provide the information we need for management. And not only are lots of numbers giving us low quality information, there are far too many of them! We could have better and more information from far fewer numbers.

Previous postings in this blog document the fact that we have the intellectual, political, scientific, and economic resources we need to measure and manage human, social, and natural capital for authentic wealth. And the issue is not a matter of marshaling the will. It is hard to imagine how there could be more demand for better management of intangible assets than there is right now. The problem in meeting that demand is a matter of imagining how to start the ball rolling. What configuration of investments and resources will start the process of bursting open the chrysalis? How will the demand for meaningful mediating instruments be met in a way that leads to the spreading of the butterfly’s wings? It is an exciting time to be alive.

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The Moral Implications of the Concept of Human Capital: More on How to Create Living Capital Markets

March 22, 2011

The moral reprehensibility of the concept of human capital hinges on its use in rationalizing impersonal business decisions in the name of profits. Even when the viability of the organization is at stake, the discarding of people (referred to in some human resource departments as “taking out the trash”) entails degrees of psychological and economic injury no one should have to suffer, or inflict.

There certainly is a justified need for a general concept naming the productive capacity of labor. But labor is far more than a capacity for work. No one’s working life should be reduced to a job description. Labor involves a wide range of different combinations of skills, abilities, motivations, health, and trustworthiness. Human capital has then come to be broken down into a wide variety of forms, such as literacy capital, health capital, social capital, etc.

The metaphoric use of the word “capital” in the phrase “human capital” referring to stocks of available human resources rings hollow. The traditional concept of labor as a form of capital is an unjustified reduction of diverse capacities in itself. But the problem goes deeper. Intangible resources like labor are not represented and managed in the forms that make markets for tangible resources efficient. Transferable representations, like titles and deeds, give property a legal status as owned and an economic status as financially fungible. And in those legal and economic terms, tangible forms of capital give capitalism its hallmark signification as the lifeblood of the cycle of investment, profits, and reinvestment.

Intangible forms of capital, in contrast, are managed without the benefit of any standardized way of proving what is owned, what quantity or quality of it exists, and what it costs. Human, social, and natural forms of capital are therefore managed directly, by acting in an unmediated way on whomever or whatever embodies them. Such management requires, even in capitalist economies, the use of what are inherently socialistic methods, as these are the only methods available for dealing with the concrete individual people, communities, and ecologies involved (Fisher, 2002, 2011; drawing from Hayek, 1948, 1988; De Soto, 2000).

The assumption that transferable representations of intangible assets are inconceivable or inherently reductionist is, however, completely mistaken. All economic capital is ultimately brought to life (conceived, gestated, midwifed, and nurtured to maturity) as scientific capital. Scientific measurability is what makes it possible to add up the value of shares of stock across holdings, to divide something owned into shares, and to represent something in a court or a bank in a portable form (Latour, 1987; Fisher, 2002, 2011).

Only when you appreciate this distinction between dead and living capital, between capital represented on transferable instruments and capital that is not, then you can see that the real tragedy is not in the treatment of labor as capital. No, the real tragedy is in the way everyone is denied the full exercise of their rights over the skills, abilities, health, motivations, trustworthiness, and environmental resources that are rightly their own personal, private property.

Being homogenized at the population level into an interchangeable statistic is tragic enough. But when we leave the matter here, we fail to see and to grasp the meaning of the opportunities that are lost in that myopic world view. As I have been at pains in this blog to show, statistics are not measures. Statistical models of interactions between several variables at the group level are not the same thing as measurement models of interactions within a single variable at the individual level. When statistical models are used in place of measurement models, the result is inevitably numbers without a soul. When measurement models of individual response processes are used to produce meaningful estimates of how much of something someone possesses, a whole different world of possibilities opens up.

In the same way that the Pythagorean Theorem applies to any triangle, so, too, do the coordinates from the international geodetic survey make it possible to know everything that needs to be known about the location and disposition of a piece of real estate. Advanced measurement models in the psychosocial sciences are making it possible to arrive at similarly convenient and objective ways of representing the quality and quantity of intangible assets. Instead of being just one number among many others, real measures tell a story that situates each of us relative to everyone else in a meaningful way.

The practical meaning of the maxim “you manage what you measure” stems from those instances in which measures embody the fullness of the very thing that is the object of management interest. An engine’s fuel efficiency, or the volume of commodities produced, for instance, are things that can be managed less or more efficiently because there are measures of them that directly represent just what we want to control. Lean thinking enables the removal of resources that do not contribute to the production of the desired end result.

Many metrics, however, tend to obscure and distract from what need to be managed. The objects of measurement may seem to be obviously related to what needs to be managed, but dealing with each of them piecemeal results in inefficient and ineffective management. In these instances, instead of the characteristic cycle of investment, profit, and reinvestment, there seems only a bottomless pit absorbing ever more investment and never producing a profit. Why?

The economic dysfunctionality of intangible asset markets is intimately tied up with the moral dysfunctionality of those markets. Drawing an analogy from a recent analysis of political freedom (Shirky, 2010), economic freedom has to be accompanied by a market society economically literate enough, economically empowered enough, and interconnected enough to trade on the capital stocks issued. Western society, and increasingly the entire global society, is arguably economically literate and sufficiently interconnected to exercise economic freedom.

Economic empowerment is another matter entirely. There is no economic power without fungible capital, without ways of representing resources of all kinds, tangible and intangible, that transparently show what is available, how much of it there is, and what quality it is. A form of currency expressing the value of that capital is essential, but money is wildly insufficient to the task of determining the quality and quantity of the available capital stocks.

Today’s education, health care, human resource, and environmental quality markets are the diametric opposite of the markets in which investors, producers, and consumers are empowered. Only when dead human, social, and natural capital is brought to life in efficient markets (Fisher, 2011) will we empower ourselves with fuller degrees of creative control over our economic lives.

The crux of the economic empowerment issue is this: in the current context of inefficient intangibles markets, everyone is personally commodified. Everything that makes me valuable to an employer or investor or customer, my skills, motivations, health, and trustworthiness, is unjustifiably reduced to a homogenized unit of labor. And in the social and environmental quality markets, voting our shares is cumbersome, expensive, and often ineffective because of the immense amount of work that has to be done to defend each particular living manifestation of the value we want to protect.

Concentrated economic power is exercised in the mass markets of dead, socialized intangible assets in ways that we are taught to think of as impersonal and indifferent to each of us as individuals, but which is actually experienced by us as intensely personal.

So what is the difference between being treated personally as a commodity and being treated impersonally as a commodity? This is the same as asking what it would mean to be empowered economically with creative control over the stocks of human, social, and natural capital that are rightfully our private property. This difference is the difference between dead and living capital (Fisher, 2002, 2011).

Freedom of economic communication, realized in the trade of privately owned stocks of any form of capital, ought to be the highest priority in the way we think about the infrastructure of a sustainable and socially responsible economy. For maximum efficiency, that freedom requires a common meaningful and rigorous quantitative language enabling determinations of what exactly is for sale, and its quality, quantity, and unit price. As I have ad nauseum repeated in this blog, measurement based in scientifically calibrated instrumentation traceable to consensus standards is absolutely essential to meeting this need.

Coming in at a very close second to the highest priority is securing the ability to trade. A strong market society, where people can exercise the right to control their own private property—their personal stocks of human, social, and natural capital—in highly efficient markets, is more important than policies, regulations, and five-year plans dictating how masses of supposedly homogenous labor, social, and environmental commodities are priced and managed.

So instead of reacting to the downside of the business cycle with a socialistic safety net, how might a capitalistic one prove more humane, moral, and economically profitable? Instead of guaranteeing a limited amount of unemployment insurance funded through taxes, what we should have are requirements for minimum investments in social capital. Instead of employment in the usual sense of the term, with its implications of hiring and firing, we should have an open market for fungible human capital, in which everyone can track the price of their stock, attract and make new investments, take profits and income, upgrade the quality and/or quantity of their stock, etc.

In this context, instead of receiving unemployment compensation, workers not currently engaged in remunerated use of their skills would cash in some of their accumulated stock of social capital. The cost of social capital would go up in periods of high demand, as during the recent economic downturns caused by betrayals of trust and commitment (which are, in effect, involuntary expenditures of social capital). Conversely, the cost of human capital would also fluctuate with supply and demand, with the profits (currently referred to as wages) turned by individual workers rising and falling with the price of their stocks. These ups and downs, being absorbed by everyone in proportion to their investments, would reduce the distorted proportions we see today in the shares of the rewards and punishments allotted.

Though no one would have a guaranteed wage, everyone would have the opportunity to manage their capital to the fullest, by upgrading it, keeping it current, and selling it to the highest bidder. Ebbing and flowing tides would more truly lift and drop all boats together, with the drops backed up with the social capital markets’ tangible reassurance that we are all in this together. This kind of a social capitalism transforms the supposedly impersonal but actually highly personal indifference of flows in human capital into a more fully impersonal indifference in which individuals have the potential to maximize the realization of their personal goals.

What we need is to create a visible alternative to the bankrupt economic system in a kind of reverse shock doctrine. Eleanor Roosevelt often said that the thing we are most afraid of is the thing we most need to confront if we are to grow. The more we struggle against what we fear, the further we are carried away from what we want. Only when we relax into the binding constraints do we find them loosened. Only when we channel overwhelming force against itself or in a productive direction can we withstand attack. When we find the courage to go where the wild things are and look the monsters in the eye will we have the opportunity to see if their fearful aspect is transformed to playfulness. What is left is often a more mundane set of challenges, the residuals of a developmental transition to a new level of hierarchical complexity.

And this is the case with the moral implications of the concept of human capital. Treating individuals as fungible commodities is a way that some use to protect themselves from feeling like monsters and from being discarded as well. Those who find themselves removed from the satisfactions of working life can blame the shortsightedness of their former colleagues, or the ugliness of the unfeeling system. But neither defensive nor offensive rationalizations do anything to address the actual problem, and the problem has nothing to do with the morality or the immorality of the concept of human capital.

The problem is the problem. That is, the way we approach and define the problem delimits the sphere of the creative options we have for solving it. As Henry Ford is supposed to have said, whether you think you can or you think you cannot, you’re probably right. It is up to us to decide whether we can create an economic system that justifies its reductions and actually lives up to its billing as impersonal and unbiased, or if we cannot. Either way, we’ll have to accept and live with the consequences.

References

DeSoto, H. (2000). The mystery of capital: Why capitalism triumphs in the West and fails everywhere else. New York: Basic Books.

Fisher, W. P., Jr. (2002, Spring). “The Mystery of Capital” and the human sciences. Rasch Measurement Transactions, 15(4), 854 [http://www.rasch.org/rmt/rmt154j.htm].

Fisher, W. P., Jr. (2011, Spring). Bringing human, social, and natural capital to life: Practical consequences and opportunities. Journal of Applied Measurement, 12(1), in press.

Hayek, F. A. (1948). Individualism and economic order. Chicago: University of Chicago Press.

Hayek, F. A. (1988). The fatal conceit: The errors of socialism (W. W. Bartley, III, Ed.) The Collected Works of F. A. Hayek. Chicago: University of Chicago Press.

Latour, B. (1987). Science in action: How to follow scientists and engineers through society. New York: Cambridge University Press.

Shirky, C. (2010, December 20). The political power of social media: Technology, the public sphere, and political change. Foreign Affairs, 90(1), http://www.foreignaffairs.com/articles/67038/clay-shirky/the-political-power-of-social-media.

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LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
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Parameterizing Perfection: Practical Applications of a Mathematical Model of the Lean Ideal

April 2, 2010

To properly pursue perfection, we need to parameterize it. That is, taking perfection as the ideal, unattainable standard against which we judge our performance is equivalent to thinking of it as a mathematical model. Organizations are intended to realize their missions independent of the particular employees, customers, suppliers, challenges, products, etc. they happen to engage with at any particular time. Organizational performance measurement (Spitzer, 2007) ought to then be designed in terms of a model that posits, tests for, and capitalizes on the always imperfectly realized independence of those parameters.

Lean thinking (Womack & Jones, 1996) focuses on minimizing waste and maximizing value. At every point at which resources are invested in processes, services, or products, the question is asked, “What value is added here?” Resources are wasted when no value is added, when they can be removed with no detrimental effect on the value of the end product. In their book, Natural Capitalism: Creating the Next Industrial Revolution, Hawken, Lovins, and Lovins (1999, p. 133) say

“Lean thinking … changes the standard for measuring corporate success. … As they [Womack and Jones] express it: ‘Our earnest advice to lean firms today is simple. To hell with your competitors; compete against perfection by identifying all activities that are muda [the Japanese term for waste used in Toyota’s landmark quality programs] and eliminating them. This is an absolute rather than a relative standard which can provide the essential North Star for any organization.”

Further, every input should “be presumed waste until shown otherwise.” A constant, ongoing, persistent pressure for removing waste is the basic characteristic of lean thinking. Perfection is never achieved, but it aptly serves as the ideal against which progress is measured.

Lean thinking sounds a lot like a mathematical model, though it does not seem to have been written out in a mathematical form, or used as the basis for calibrating instruments, estimating measures, evaluating data quality, or for practical assessments of lean organizational performance. The closest anyone seems to have come to parameterizing perfection is in the work of Genichi Taguchi (Ealey, 1988), which has several close parallels with Rasch measurement (Linacre, 1993).  But meaningful and objective quantification, as required and achieved in the theory and practice of fundamental measurement (Andrich, 2004; Bezruczko, 2005; Bond & Fox 2007; Smith & Smith, 2004; Wilson, 2005; Wright, 1999), in fact asserts abstract ideals of perfection as models of organizational, social, and psychological processes in education, health care, marketing, etc. These models test the extent to which outcomes remain invariant across examination or survey questions, across teachers, students, schools, and curricula, or across treatment methods, business processes, or policies.

Though as yet implemented only to a limited extent in business (Drehmer, Belohlav, James, & Coye, 2000; Drehmer & Deklava, 2001;  Lunz & Linacre, 1998; Salzberger, 2009), advanced measurement’s potential rewards are great. Fundamental measurement theory has been successfully applied in research and practice thousands of times over the last 40 years and more, including in very large scale assessments and licensure/certification applications (Adams, Wu, & Macaskill, 1997; Masters, 2007; Smith, Julian, Lunz, et al., 1994). These successes speak to an opportunity for making broad improvements in outcome measurement that could provide more coherent product definition, and significant associated opportunities for improving product quality and the efficiency with which it is produced, in the manner that has followed from the use of fundamental measures in other industries.

Of course, processes and outcomes are never implemented or obtained with perfect consistency. This would be perfectly true only in a perfect world. But to pursue perfection, we need to parameterize it. In other words, to raise the bar in any area of performance assessment, we have to know not only what direction is up, but we also need to know when we have raised the bar far enough. But we cannot tell up from down, we do not know how much to raise the bar, and we cannot properly evaluate the effects of lean experiments when we have no way of locating measures on a number line that embodies the lean ideal.

To think together collectively in ways that lead to significant new innovations, to rise above what Jaron Lanier calls the “global mush” of confused and self-confirming hive thinking, we need the common languages of widely accepted fundamental measures of the relevant processes and outcomes, measures that remain constant across samples of customers, patients, employees, students, etc., and across products, sales techniques, curricula, treatment processes, assessment methods, and brands of instrument.

We are all well aware that the consequences of not knowing where the bar is, of not having product definitions, can be disastrous. In many respects, as I’ve said previously in this blog, the success or failure of health care reform hinges on getting measurement right. The Institute of Medicine report, To Err is Human, of several years ago stresses the fact that system failures pose the greatest threat to safety in health care because they lead to human errors. When a system as complex as health care lacks a standard product definition, and product delivery is fragmented across multiple providers with different amounts and kinds of information in different settings, the system becomes dangerously cumbersome and over-complicated, with unacceptably wide variations and errors in its processes and outcomes, not to even speak of its economic inefficiency.

In contrast with the widespread use of fundamental measures in the product definitions of other industries, health care researchers typically implement neither the longstanding, repeatedly proven, and mathematically rigorous models of fundamental measurement theory nor the metrological networks through which reference standard metrics are engineered. Most industries carefully define, isolate, and estimate the parameters of their products, doing so in ways 1) that ensure industry-wide comparability and standardization, and 2) that facilitate continuous product improvement by revealing multiple opportunities for enhancement. Where organizations in other industries manage by metrics and thereby keep their eyes on the ball of product quality, health care organizations often manage only their own internal processes and cannot in fact bring the product quality ball into view.

In his message concerning the Institute for Healthcare Improvement’s Pursuing Perfection project a few years ago, Don Berwick, like others (Coye, 2001; Coye & Detmer, 1998), observed that health care does not yet have an organization setting new standards in the way that Toyota did for the auto industry in the 1970s. It still doesn’t, of course. Given the differences between the auto and health care industries uses of fundamental measures of product quality and associated abilities to keep their eyes on the quality ball, is it any wonder then, that no one in health care has yet hit a home run? It may well be that no one will hit a home run in health care until reference standard measures of product quality are devised.

The need for reference standard measures in uniform data systems is crucial, and the methods for obtaining them are widely available and well-known. So what is preventing the health care industry from adopting and deploying them? Part of the answer is the cost of the initial investment required. In 1980, metrology comprised about six percent of the U.S. gross national product (Hunter, 1980). In the period from 1981 to 1994, annual expenditures on research and development in the U.S. were less than three percent of the GNP, and non-defense R&D was about two percent (NIST Subcommittee on Research, National Science and Technology Council, 1996). These costs, however, must be viewed as investments from which high rates of return can be obtained (Barber, 1987; Gallaher, Rowe, Rogozhin, et al., 2007; Swann, 2005).

For instance, the U.S. National Institute of Standards and Technology estimated the economic impact of 12 areas of research in metrology, in four broad areas including semiconductors, electrical calibration and testing, optical industries, and computer systems (NIST, 1996, Appendix C; also see NIST, 2003). The median rate of return in these 12 areas was 147 percent, and returns ranged from 41 to 428 percent. The report notes that these results compare favorably with those obtained in similar studies of return rates from other public and private research and development efforts. Even if health care metrology produces only a small fraction of the return rate produced in physical metrology, its economic impact could still amount to billions of dollars annually. The proposed pilot projects therefore focus on determining what an effective health care outcomes metrology system should look like. What should its primary functions be? What should it cost? What rates of return could be expected from it?

Metrology, the science of measurement (Pennella, 1997), requires 1) that instruments be calibrated within individual laboratories so as to isolate and estimate the values of the required parameters (Wernimont, 1978); and 2) that individual instruments’ capacities to provide the same measure for the same amount, and so be traceable to a reference standard, be established and monitored via interlaboratory round-robin trials (Mandel, 1978).

Fundamental measurement has already succeeded in demonstrating the viability of reference standard measures of health outcomes, measures whose meaningfulness does not depend on the particular samples of items employed or patients measured. Though this work succeeds as far as it goes, it being done in a context that lacks any sense of the need for metrological infrastructure. Health care needs networks of scientists and technicians collaborating not only in the first, intralaboratory phase of metrological work, but also in the interlaboratory trials through which different brands or configurations of instruments intended to measure the same variable would be tuned to harmoniously produce the same measure for the same amount.

Implementation of the two phases of metrological innovation in health care would then begin with the intralaboratory calibration of existing and new instruments for measuring overall organizational performance, quality of care, and patients’ health status, quality of life, functionality, etc.  The second phase takes up the interlaboratory equating of these instruments, and the concomitant deployment of reference standard units of measurement throughout a health care system and the industry as a whole. To answer questions concerning health care metrology’s potential returns on investment, the costs for, and the savings accrued from, accomplishing each phase of each pilot will be tracked or estimated.

When instruments measuring in universally uniform, meaningful units are put in the hands of clinicians, a new scientific revolution will occur in medicine. It will be analogous to previous ones associated with the introduction of the thermometer and the instruments of optometry and the clinical laboratory. Such tools will multiply many times over the quality improvement methods used by Brent James, touted as holding the key to health care reform in a recent New York Times profile. Instead of implicitly hypothesizing models of perfection and assessing performance relative to them informally, what we need is a new science that systematically implements the lean ideal on industry-wide scales. The future belongs to those who master these techniques.

References

Adams, R. J., Wu, M. L., & Macaskill, G. (1997). Scaling methodology and procedures for the mathematics and science scales. In M. O. Martin & D. L. Kelly (Eds.), Third International Mathematics and Science Study Technical Report: Vol. 2: Implementation and Analysis – Primary and Middle School Years (pp. 111-145). Chestnut Hill, MA: Boston College.

Andrich, D. (2004, January). Controversy and the Rasch model: A characteristic of incompatible paradigms? Medical Care, 42(1), I-7–I-16.

Barber, J. M. (1987). Economic rationale for government funding of work on measurement standards. In R. Dobbie, J. Darrell, K. Poulter & R. Hobbs (Eds.), Review of DTI work on measurement standards (p. Annex 5). London: Department of Trade and Industry.

Berwick, D. M., James, B., & Coye, M. J. (2003, January). Connections between quality measurement and improvement. Medical Care, 41(1 (Suppl)), I30-38.

Bezruczko, N. (Ed.). (2005). Rasch measurement in health sciences. Maple Grove, MN: JAM Press.

Bond, T., & Fox, C. (2007). Applying the Rasch model: Fundamental measurement in the human sciences, 2d edition. Mahwah, New Jersey: Lawrence Erlbaum Associates.

Coye, M. J. (2001, November/December). No Toyotas in health care: Why medical care has not evolved to meet patients’ needs. Health Affairs, 20(6), 44-56.

Coye, M. J., & Detmer, D. E. (1998). Quality at a crossroads. The Milbank Quarterly, 76(4), 759-68.

Drehmer, D. E., Belohlav, J. A., & Coye, R. W. (2000, Dec). A exploration of employee participation using a scaling approach. Group & Organization Management, 25(4), 397-418.

Drehmer, D. E., & Deklava, S. M. (2001, April). A note on the evolution of software engineering practices. Journal of Systems and Software, 57(1), 1-7.

Ealey, L. A. (1988). Quality by design: Taguchi methods and U.S. industry. Dearborn MI: ASI Press.

Gallaher, M. P., Rowe, B. R., Rogozhin, A. V., Houghton, S. A., Davis, J. L., Lamvik, M. K., et al. (2007). Economic impact of measurement in the semiconductor industry (Tech. Rep. No. 07-2). Gaithersburg, MD: National Institute for Standards and Technology.

Hawken, P., Lovins, A., & Lovins, H. L. (1999). Natural capitalism: Creating the next industrial revolution. New York: Little, Brown, and Co.

Hunter, J. S. (1980, November). The national system of scientific measurement. Science, 210(21), 869-874.

Linacre, J. M. (1993). Quality by design: Taguchi and Rasch. Rasch Measurement Transactions, 7(2), 292.

Lunz, M. E., & Linacre, J. M. (1998). Measurement designs using multifacet Rasch modeling. In G. A. Marcoulides (Ed.), Modern methods for business research. Methodology for business and management (pp. 47-77). Mahwah, New Jersey: Lawrence Erlbaum Associates, Inc.

Mandel, J. (1978, December). Interlaboratory testing. ASTM Standardization News, 6, 11-12.

Masters, G. N. (2007). Special issue: Programme for International Student Assessment (PISA). Journal of Applied Measurement, 8(3), 235-335.

National Institute for Standards and Technology (NIST). (1996). Appendix C: Assessment examples. Economic impacts of research in metrology. In C. o. F. S. Subcommittee on Research (Ed.), Assessing fundamental science: A report from the Subcommittee on Research, Committee on Fundamental Science. Washington, DC: National Standards and Technology Council [http://www.nsf.gov/statistics/ostp/assess/nstcafsk.htm#Topic%207; last accessed 18 February 2008].

National Institute for Standards and Technology (NIST). (2003, 15 January). Outputs and outcomes of NIST laboratory research. Retrieved 12 July 2009, from http://www.nist.gov/director/planning/studies.htm#measures.

Pennella, C. R. (1997). Managing the metrology system. Milwaukee, WI: ASQ Quality Press.\

Salzberger, T. (2009). Measurement in marketing research: An alternative framework. Northampton, MA: Edward Elgar.

Smith, R. M., Julian, E., Lunz, M., Stahl, J., Schulz, M., & Wright, B. D. (1994). Applications of conjoint measurement in admission and professional certification programs. International Journal of Educational Research, 21(6), 653-664.

Smith, E. V., Jr., & Smith, R. M. (2004). Introduction to Rasch measurement. Maple Grove, MN: JAM Press.

Spitzer, D. (2007). Transforming performance measurement: Rethinking the way we measure and drive organizational success. New York: AMACOM.

Swann, G. M. P. (2005, 2 December). John Barber’s pioneering work on the economics of measurement standards [Electronic version]. Retrieved http://www.cric.ac.uk/cric/events/jbarber/swann.pdf from Notes for Workshop in Honor of John Barber held at University of Manchester.

Wernimont, G. (1978, December). Careful intralaboratory study must come first. ASTM Standardization News, 6, 11-12.

Wilson, M. (2005). Constructing measures: An item response modeling approach. Mahwah, New Jersey: Lawrence Erlbaum Associates.

Womack, J. P., & Jones, D. T. (1996, Sept./Oct.). Beyond Toyota: How to root out waste and pursue perfection. Harvard Business Review, 74, 140-58.

Wright, B. D. (1999). Fundamental measurement for psychology. In S. E. Embretson & S. L. Hershberger (Eds.), The new rules of measurement: What every educator and psychologist should know (pp. 65-104 [http://www.rasch.org/memo64.htm]). Hillsdale, New Jersey: Lawrence Erlbaum Associates.

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LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
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Questions about measurement: If it is so important, why…?

January 28, 2010

If measurement is so important, why is measurement quality so uniformly low?

If we manage what we measure, why is measurement leadership virtually nonexistent?

If we can’t tell if things are getting better, staying the same, or getting worse without good metrics, why is measurement so rarely context-sensitive, focused, integrated, and interactive, as Dean Spitzer recommends it should be?

If quantification is valued for its rigor and convenience, why is no one demanding meaningful mappings of substantive, additive amounts of things measured on number lines?

If everyone is drowning in unmanageable floods of data why isn’t measurement used to reduce data volumes dramatically—and not only with no loss of information but with the addition of otherwise unavailable forms of information?

If learning and improvement are the order of the day, why isn’t anyone interested in the organizational and individual learning trajectories that are defined by hierarchies of calibrated items?

If resilient lean thinking is the way to go, why aren’t more measures constructed to retain their meaning and values across changes in item content?

If flexibility is a core value, why aren’t we adapting instruments to people and organizations, instead of vice versa?

If fair, just, and meaningful measurement is often lacking in judge-assigned performance assessments, why isn’t anyone estimating the consistency, and the leniency or harshness, of ratings—and removing those effects from the measures made?

If efficiency is valued, why does no one at all seem to care about adjusting measurement precision to the needs of the task at hand, so that time and resources are not wasted in gathering too much or too little data?

If it’s common knowledge that we can do more together than we can as individuals, why isn’t anyone providing the high quality and uniform information needed for the networked collective thinking that is able to keep pace with the demand for innovation?

Since the metric system and uniform product standards are widely recognized as essential to science and commerce, why are longstanding capacities for common metrics for human, social, and natural capital not being used?

If efficient markets are such great things, why isn’t anyone at all concerned about lubricating the flow of human, social, and natural capital by investing in the highest quality measurement obtainable?

If everyone loves a good profit, why aren’t we setting up human, social, and natural capital metric systems to inform competitive pricing of intangible assets, products, and services?

If companies are supposed to be organic entities that mature in a manner akin to human development over the lifespan, why is so little being done to conceive, gestate, midwife, and nurture living capital?

In short, if measurement is really as essential to management as it is so often said to be, why doesn’t anyone seek out the state of the art technology, methods, and experts before going to the trouble of developing and implementing metrics?

I suspect the answers to these questions are all the same. These disconnects between word and deed happen because so few people are aware of the technical advances made in measurement theory and practice over the last several decades.

For the deep background, see previous entries in this blog, various web sites (www.rasch.org, www.rummlab.com, www.winsteps.com, http://bearcenter.berkeley.edu/, etc.), and an extensive body of published work (Rasch, 1960; Wright, 1977, 1997a, 1997b, 1999a, 1999b; Andrich, 1988, 2004, 2005; Bond & Fox, 2007; Fisher, 2009, 2010; Smith & Smith, 2004; Wilson, 2005; Wright & Stone, 1999, 2004).

There is a wealth of published applied research in education, psychology, and health care (Bezruczko, 2005; Fisher & Wright, 1994; Masters, 2007; Masters & Keeves, 1999). To find more search Rasch and the substantive area of interest.

For applications in business contexts, there is a more limited number of published resources (ATP, 2001; Drehmer, Belohlav, & Coye, 2000; Drehmer & Deklava, 2001; Ludlow & Lunz, 1998; Lunz & Linacre, 1998; Mohamed, et al., 2008; Salzberger, 2000; Salzberger & Sinkovics, 2006; Zakaria, et al., 2008). I have, however, just become aware of the November, 2009, publication of what could be a landmark business measurement text (Salzberger, 2009). Hopefully, this book will be just one of many to come, and the questions I’ve raised will no longer need to be asked.

References

Andrich, D. (1988). Rasch models for measurement. (Vols. series no. 07-068). Sage University Paper Series on Quantitative Applications in the Social Sciences). Beverly Hills, California: Sage Publications.

Andrich, D. (2004, January). Controversy and the Rasch model: A characteristic of incompatible paradigms? Medical Care, 42(1), I-7–I-16.

Andrich, D. (2005). Georg Rasch: Mathematician and statistician. In K. Kempf-Leonard (Ed.), Encyclopedia of Social Measurement (Vol. 3, pp. 299-306). Amsterdam: Academic Press, Inc.

Association of Test Publishers. (2001, Fall). Benjamin D. Wright, Ph.D. honored with the Career Achievement Award in Computer-Based Testing. Test Publisher, 8(2). Retrieved 20 May 2009, from http://www.testpublishers.org/newsletter7.htm#Wright.

Bezruczko, N. (Ed.). (2005). Rasch measurement in health sciences. Maple Grove, MN: JAM Press.

Bond, T., & Fox, C. (2007). Applying the Rasch model: Fundamental measurement in the human sciences, 2d edition. Mahwah, New Jersey: Lawrence Erlbaum Associates.

Dawson, T. L., & Gabrielian, S. (2003, June). Developing conceptions of authority and contract across the life-span: Two perspectives. Developmental Review, 23(2), 162-218.

Drehmer, D. E., Belohlav, J. A., & Coye, R. W. (2000, Dec). A exploration of employee participation using a scaling approach. Group & Organization Management, 25(4), 397-418.

Drehmer, D. E., & Deklava, S. M. (2001, April). A note on the evolution of software engineering practices. Journal of Systems and Software, 57(1), 1-7.

Fisher, W. P., Jr. (2009, November). Invariance and traceability for measures of human, social, and natural capital: Theory and application. Measurement (Elsevier), 42(9), 1278-1287.

Fisher, W. P., Jr. (2010). Bringing human, social, and natural capital to life: Practical consequences and opportunities. Journal of Applied Measurement, 11, in press [Pre-press version available at http://www.livingcapitalmetrics.com/images/BringingHSN_FisherARMII.pdf].

Ludlow, L. H., & Lunz, M. E. (1998). The Job Responsibilities Scale: Invariance in a longitudinal prospective study. Journal of Outcome Measurement, 2(4), 326-37.

Lunz, M. E., & Linacre, J. M. (1998). Measurement designs using multifacet Rasch modeling. In G. A. Marcoulides (Ed.), Modern methods for business research. Methodology for business and management (pp. 47-77). Mahwah, New Jersey: Lawrence Erlbaum Associates, Inc.

Masters, G. N. (2007). Special issue: Programme for International Student Assessment (PISA). Journal of Applied Measurement, 8(3), 235-335.

Masters, G. N., & Keeves, J. P. (Eds.). (1999). Advances in measurement in educational research and assessment. New York: Pergamon.

Mohamed, A., Aziz, A., Zakaria, S., & Masodi, M. S. (2008). Appraisal of course learning outcomes using Rasch measurement: A case study in information technology education. In L. Kazovsky, P. Borne, N. Mastorakis, A. Kuri-Morales & I. Sakellaris (Eds.), Proceedings of the 7th WSEAS International Conference on Software Engineering, Parallel and Distributed Systems (Electrical And Computer Engineering Series) (pp. 222-238). Cambridge, UK: WSEAS.

Rasch, G. (1960). Probabilistic models for some intelligence and attainment tests (Reprint, with Foreword and Afterword by B. D. Wright, Chicago: University of Chicago Press, 1980). Copenhagen, Denmark: Danmarks Paedogogiske Institut.

Salzberger, T. (2000). An extended Rasch analysis of the CETSCALE – implications for scale development and data construction., Department of Marketing, University of Economics and Business Administration, Vienna (WU-Wien) (http://www2.wu-wien.ac.at/marketing/user/salzberger/research/wp_dataconstruction.pdf).

Salzberger, T. (2009). Measurement in marketing research: An alternative framework. Northampton, MA: Edward Elgar.

Salzberger, T., & Sinkovics, R. R. (2006). Reconsidering the problem of data equivalence in international marketing research: Contrasting approaches based on CFA and the Rasch model for measurement. International Marketing Review, 23(4), 390-417.

Smith, E. V., Jr., & Smith, R. M. (2004). Introduction to Rasch measurement. Maple Grove, MN: JAM Press.35.

Spitzer, D. (2007). Transforming performance measurement: Rethinking the way we measure and drive organizational success. New York: AMACOM.

Wilson, M. (2005). Constructing measures: An item response modeling approach. Mahwah, New Jersey: Lawrence Erlbaum Associates.

Wright, B. D. (1977). Solving measurement problems with the Rasch model. Journal of Educational Measurement, 14(2), 97-116 [http://www.rasch.org/memo42.htm].

Wright, B. D. (1997a, June). Fundamental measurement for outcome evaluation. Physical Medicine & Rehabilitation State of the Art Reviews, 11(2), 261-88.

Wright, B. D. (1997b, Winter). A history of social science measurement. Educational Measurement: Issues and Practice, 16(4), 33-45, 52 [http://www.rasch.org/memo62.htm].

Wright, B. D. (1999a). Fundamental measurement for psychology. In S. E. Embretson & S. L. Hershberger (Eds.), The new rules of measurement: What every educator and psychologist should know (pp. 65-104 [http://www.rasch.org/memo64.htm]). Hillsdale, New Jersey: Lawrence Erlbaum Associates.

Wright, B. D. (1999b). Rasch measurement models. In G. N. Masters & J. P. Keeves (Eds.), Advances in measurement in educational research and assessment (pp. 85-97). New York: Pergamon.

Wright, B. D., & Stone, M. H. (1999). Measurement essentials. Wilmington, DE: Wide Range, Inc. [http://www.rasch.org/memos.htm#measess].

Wright, B. D., & Stone, M. H. (2004). Making measures. Chicago: Phaneron Press.

Zakaria, S., Aziz, A. A., Mohamed, A., Arshad, N. H., Ghulman, H. A., & Masodi, M. S. (2008, November 11-13). Assessment of information managers’ competency using Rasch measurement. iccit: Third International Conference on Convergence and Hybrid Information Technology, 1, 190-196 [http://www.computer.org/portal/web/csdl/doi/10.1109/ICCIT.2008.387].

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LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
Based on a work at livingcapitalmetrics.wordpress.com.
Permissions beyond the scope of this license may be available at http://www.livingcapitalmetrics.com.