Joi Ito's conversation with the living web.

Most recently in the Business and the Economy Category


A conversation with Robleh Ali, the former head of the the Digital Currencies team at the Bank of England. It was a wide ranging conversation about Bitcoin, economics and the role of central banks and regulators.

Audio of the conversation is available on SoundCloud and iTunes.


I recently visited and had a conversation with Limor "Lady Ada" Fried and Phil Torrone of Adafruit. I first met them about ten years ago at SxSW.

Limor is an MIT grad that we're super-proud of and Phil is an amazing pioneer in communications, hacking and many other things. Phil and Limor are two of my most favorite people and I aways get giddy just getting a chance to hang out with them. We discussed making, electronics, business, manufacturing, hacking, live video and more.

They've been doing live video daily for the last 10 years or so and are real pioneers in this medium as well. We used their setup to stream the video to Facebook Live and Periscope and posted the recordings on YouTube and the audio on SoundCloud and iTunes.


Seth Godin has taught me so much about communications, leadership, publishing and life that I thought that it was important to stream my conversation with Seth. As usual, it was a great conversation.

Seth is on the Media Lab Advisory Council.

I streamed it to Facebook Live and posted the video to YouTube and audio to SoundCloud and iTunes.

Accounting underlies finance, business, and enables the levying of taxes for raising armies, building cities, and managing resources at scale. In fact, it is the way that the world keeps track of almost everything of value.

Accounting predates money, and was originally used by ancient communities to track and manage their limited resources. There are accounting records from Mesopotamia dating back more than 7,000 years, listing the exchange of goods. Over time, accounting became the language and information infrastructure for trade. Accounting and auditing enabled the creation of vast empires, such as those built by the Egyptians and the Romans.

As accounting scaled, it made sense to go from counting sheep, bushels of grain, and cords of wood, to calculating and managing resources using their exchange value in terms of an abstract unit: money. In addition to exchange, money allowed for recording and managing obligations. So where earlier bookkeeping just kept records of promises and exchanges between individuals (Alice lent Bob a goat on this date), money opened up a new realm of accounting by dramatically simplifying the management of accounts and allowing markets, companies, and governments to scale. However, through the centuries, this once powerful simplification has a resulted in a surprising downside-a downside made worse in today's digitally connected world.

Defining Value

While companies today use enterprise resource planning (ERP) systems to keep track of widgets, contractual obligations, and employees, the accounting system-and the laws that support it-require us to convert just about everything into monetary value, and enter it into a ledger system based on the 700-year-old double-entry bookkeeping method. This is the very same system used by the Florentine merchants of the 13th century and described by Luca Pacioli, the "father of accounting," in his book Summa de Arithmetica, Geometria, Proportioni et Proportionalità, published 1494.

When you take, for instance, a contract that pays out $1 million if it rains tomorrow, and put it into your accounts, you will be required to guess the chance of rain-maybe 50 percent-and value that asset at something like $500,000. The contract will actually never pay out $500,000; in the end, it will either be worth zero (no rain) or $1 million (rain). But if you were forced to trade it today, you'd probably sell it for something close to $500,000; so for tax and management purposes, you "value" the contract at $500,000. On the other hand, if you are unable to sell it because there are no buyers, it might actually be valued at zero today by regulators interested in liquidity, but then suddenly valued at $1 million tomorrow if it rains.

Basically, a company's accounts are an aggregate of cells in various ledgers with numbers that represent a numerical value denominated in some currency-yen, dollars, euros, etc.-and those numbers are added up and organized into both a balance sheet and an income statement that show the health of the company to management and investors. They are also used to calculate profits and the amount of tax owed to governments. This balance sheet is a list of assets and liabilities. If you looked in the assets column, you'd have a number of items that you would be reporting as having value, including things like printing presses, lines of code, intellectual property, obligations from people who may or may not pay you in the future, cash in various countries' currencies, and best guesses on things like the future prices of a commodity or the value of another company.

As an auditor, investor, or trading partner, you might want to drill down and try to test the assumptions that the company is making and see what would happen if those were incorrect at the time they were recorded, or turned out to be wrong sometime in the future. You might also want to understand how buying another company would change your own company based on the way your obligations and bets interacted with theirs. You could rack up millions of dollars in auditor fees to "get to the bottom" of any number of assumptions. The process would involve manually reviewing the legal contracts, and also the assumptions made in every cell of every spreadsheet. That's because standard accounting is a very "lossy" process that reduces complex and context-dependant functions and transforms them into static numbers at every step. The underlying information is somewhere, but only exposed with a lot of manual digging.

The modern complex financial system is full of companies that have figured out ways to guess when investors and the companies themselves have made mistakes in their assumptions. These companies bet against a company with inaccurate pricing or take advantage of the gap in information to convert this into financial returns for themselves. When these mistakes are duplicated across the system, it can cause fluctuation amplification that also allows companies to make more money both as markets rise, as well as fall, if they can successfully predict those fluctuations. In fact, as long as the whole system doesn't collapse, smart traders make more money on fluctuation than on stability.

Just like rodent exterminators aren't excited about the idea of rodents being completely eliminated because they would no longer have jobs, those financial institutions that make money by "making the system more efficient and eliminating waste" don't really want a stable system that isn't wasteful.

Right now, the technology of the financial system is built on top of a way of thinking about money and value that was designed back when all we had were pen and paper, and when reducing the complexity of the web of dependencies and obligations was the only way to make the system functionally efficient. The way we reduce complexity is to use a common method of pricing, put elements into categories, and add them up. This just builds on 700­-year­-old building blocks, trying to make the system "better" by doing very sophisticated analysis of the patterns and information without addressing the underlying problem of a lossy and oversimplified view of the world: a view where everything of "value" should be as quickly as possible recorded as a number.

The standard idea of the "value" of things is a reductionist view of the world that is useful to scale the trading of commodities that are roughly of equal worth to a large set of people. But, in fact, most things have very different values to different people at different times, and I would argue that much-if not most-things of value can't and probably shouldn't be reduced to numbers on a spreadsheet. Financial "value" has a very specific meaning. A home clearly has "value" because someone can live in it and it's useful. However, if no one wants to buy it and no one is buying similar homes on the market, you can't set a price for it; it is illiquid and it is impossible to determine its "fair market value." Some contracts and financial instruments are nonnegotiable, may not have a "fair market value," and may even have no value to you if you needed money (or an apple) RIGHT NOW. Part of the confusion comes from the difficulty of describing legal and mathematical ideas in plain English, and the role of context and timing.

One example is exchange rates. My wife moved to Boston from Japan several years ago, but still converts prices into yen. She sometimes comments on how expensive something has gotten because the value of the yen has diminished. Because most of our earnings and spending are in dollars, I always have to remind her, the "value" in yen is irrelevant to her now, although not irrelevant to her mother, who is in Japan.

We have become accustomed to the notion that things have a "price," and that "price" is equivalent to its "value." But an email from you to me about a feeling that you had about our last conversation is probably valuable to me at a particular time and probably not valuable to most people. A single apple is worth a lot more to a hungry person than the owner of an apple orchard. Context is everything.

"Can't Buy Me Love" - The Beatles

The economics notion of consumers making financial decisions to maximize "utility" as a kind of proxy for happiness is another example of how the notion of a universal system of "value" oversimplifies its complexity-so much so that the models that assume that humans are "economically rational" actors in a marketplace simply don't work. The simplest version of this model would mean that the more money you had, the happier you would be, which Daniel Kahneman and Angus Deaton argue is true up to about $75,000 a year in annual income.[1]

Today, we have the technology and the computational power to create a system of accounts that could retain and deal with a lot of the complexity that the current system was designed to avoid. There is, for example, no reason that every entry in our books needs to be a number. Each cell could be an algorithmic representation of the obligations and dependencies that it represents. In fact, using machine learning, accounts could become sophisticated probabilistic models for what might happen depending on how things around them change. This would mean that the "value" of any system would change depending on who was asking, their location, and the time parameters.

Today, when a bank regulator conducts a stress test, it gives a bank a scenario-changes in the credit markets or the prices of certain things. The bank is then required to return a report on whether it would crash or remain solvent. This requires a lot of human labor to go through the accounts and run simulations. But what if the accounts were all algorithmic, and instead you could instantly run a program to provide the answer to the question? What if you had a learning model that could answer a more important question: "What sets of changes to the market WOULD make it crash, and why?" That's really what we want to know. We want to know this not just for one bank, but the whole system of banks, investors, and everything that interacts.

When I'm buying something from a company-let's say a credit default swap from your company, AIG-what I would want to know is whether, when the day comes to pay the obligation, in the unlikely chance that the AA mortgage-backed bonds that I was betting against defaulted, would your company be able to pay? Right now, there is no easy way to do this. However, what if all of the obligations and contracts, instead of being written on paper and recorded as numbers, were actually computable and "visible"? You'd immediately be able to see that, in fact, in the scenario in which you'd have to pay me, you'd actually have no money since you'd written similar contracts to so many people that you'd be broke. Right now, even the banks themselves can't see this unless an internal investigator thinks to look for this ahead of time.

Rethinking the Fundamentals of Accounting

With cutting edge cryptography like zero-knowledge proofs and secure multiparty computation, there are ways we might be able to keep these accounts open to each other without compromising business and personal privacy. While computing every contract as a cell in a huge set of accounts, every time anyone asked a question it would exceed even today's computing capacity. But with machine learning and the creation of models, we might be able to dampen, if not stabilize, the massive amplifications of fluctuations. These bubbles and collapses occur today, in part, because we are building our whole system on an oversimplified house of cards, with the handlers having an incentive to make them fragile and opaque in order to introduce inefficiencies they can exploit later to make money for themselves.

I think the current excitement about Bitcoin and distributed ledgers has created a great opportunity to take advantage of its flexible and reprogrammable nature, allowing us to rethink the fundamental system of accounts. I'm much more interested in this than in apps for banks, or even new ideas in finance, which will address some of the symptoms without taking a shot at eliminating one of the root causes of the impossibly complex and outdated system that we've built on a 700 year old double-entry bookkeeping method-the very same system used by the Florentine merchants of the 13th century. It feels like we are using integers when we should be using imaginary numbers. Reinventing accounting should be more like discovering a new number theory than tweaking the algorithms, which is what I feel like we've been doing for the last several hundred years.

--

Originally posted on PubPub.ito.com. Please read and post comments there.

References

[1]Daniel Kahneman and Angus Deaton. "High Income Improves Evaluation of Life But Not Emotional Well-Being". Proceedings of the National Academy of Sciences. (2010).

By

Add international money transfers to my list of activities that are now easier
online than in the "real" world.

I had always found bank transfers a pain because they generally required a
visit to the bank with stacks of forms to fill in. If lucky, my money disappeared
for up to eight working days before arriving in the destination bank at a horrible exchange rate.

Recently I wrote about my experiences using an online foreign currency exchange service that was easier, cheaper and faster than the bank.

Since it is easy to transfer small amounts, I now find the service a lifesaver.

What other new Web-based services could be useful for people who live abroad?


Note: I may cross-post comments on the IHT blog and they may be reproduced in the paper for publication.

Posted by Thomas Crampton

Got an early exclusive look at a fascinating survey by ACNielsen about online shopping worldwide.

The study of 21,000 web users in 38 countries, to be made public later today, found that online shopping habits vary radically by country.

The US is way behind Europe in the amount of online shopping (ranking 11 worldwide), perhaps because mall shopping is so much easier than shopping in a European city. This encourages Europeans to shop online.

What people purchase online is very different country-by-country. In South Korea one third of online shoppers purchase nutritional/cosmetic goods, while the global average is just 10 percent.

Payment for online shopping - not surprisingly - are dominated by credit card (visa) and bank transfer globally.

BUT cash on delivery is the second most popular way to pay for purchases in Europe!

I was surprised by Europe's cash on delivery preference, but affirmed it last night at a dinner in Paris. French people at the supper said they do not trust the web so prefer to see the goods before paying. They also said their lack of trust makes them very reluctant to use eBay!

Similar to cellphones, the technology of online shopping may be uniform, but the way in which people interact with it varies by country.

Anyone come across other differences of usage of an identical platforms?

Posted by Thomas Crampton

My experiences in changing cities five times and continents three times in the last 18 months have given me an insight into the shallowness of certain aspects of globalization from a consumer perspective.

(My experiences are used merely as example I know well, not because I think they are of world significance. )

I first had an American Express card in Hong Kong, then in the US and now in France. When I applied for the new Amex card in the US and in France, I was assured that my membership date would go back to when I first joined.

Each time I got the card, however, (my French card just arrived) they considered me a new member. A longer term of membership can confer benefits.

When I complained to the French Amex yesterday, the customer service person explained that American Express in Hong Kong is not the same as American Express in France. Funny, because that is not what their advertising seems to imply.

I had a similar experience with HSBC. Their Hong Kong service has been excellent (great website), so I checked out the bank in the US and then here in France. Each time I was informed that although they market the bank as HSBC in these different places, each bank is fairly independent country-by-country. They said this is partly due to banking legislation that varies in each jurisdiction.

What generalizations can be drawn? Products (McDonalds burgers, Coke, etc) globalize more quickly than services?

Posted by Thomas Crampton

Wrote a story in today’s paper about the new section of Charles de Gaulle airport being built for the A380, the world’s largest airliner.

Turns out that the aircraft is so big that it requires a reconfiguration of terminal and in some ways it could be good. The second floor of the aircraft, for example, means that you can have two almost entirely separate sections. For people flying business and first class – not me! - they would walk into a separate part of the airplane that could have separate style of reception.

The airport created a first-ever virtual visit of the new section for us to put on our website.

I wonder what other innovations could come of having such a large number of passengers in the sky? Massive online gaming within the aircraft?

My blog uses a "by/2.0" Creative Commons license. This means that anyone can use anything from my blog and copy or create derivative works without asking permission as long as they give me attribution. NEC has gotten into blogging and wanted to use the content from my blog. Unfortunately, I write mostly in English. I have tried translating posts myself as well as using a number of volunteer translators. The problem is, translation is not very fun and I would rather write another post in English than spend time translating. The combination of NEC's desire to use my content and my Creative Commons license allows NEC to pay a translator to translate my blog into Japanese and use the content on their blog. I don't get paid, but now my words are available in Japanese too.

NEC tells me that after a six month period, they will release the Japanese content under and Creative Commons by-nc-sa/2.1/jp license which will allow me to copy the the translations back to my blog after this period.

Translations are essential for building bridges between cultures. One big problem is that translation sometimes cost MORE than the cost of writing the original work. It's also more boring. Using CC to allow people to create business models to pay translators seems like a great idea to me. Thanks NEC!

NEC's Japanese Joi Ito's Web

Rebecca blogs about the first BloggerCorps success story. BloggerCorps is project to try to hook up local bloggers with important local projects who need help from bloggers. It's a great idea which just needs a bit more momentum I think. It ties in well with the Global Voices stuff. (The first version of the manifesto is done.)

eBay Acquires Minority Interest in craigslist

SAN FRANCISCO & SAN JOSE, Calif.--(BUSINESS WIRE)--Aug. 13, 2004--eBay, The World's Online Marketplace (Nasdaq:EBAY) (www.ebay.com), and craigslist, an online community featuring classifieds and forums (www.craigslist.org), announced today that eBay has acquired a preexisting minority ownership interest in craigslist of approximately 25%. The resulting relationship will allow eBay and craigslist to share expertise, resources, and creativity on behalf of online communities everywhere.

Craig shares his account of this about it on his blog. Craig mentions on his blog that it was a former employee who sold his shares to eBay and that the company was not sold or money invested into craigslist.

I can imagine some people complaining about this, but I think this is a good direction for craigslist to go. Congrats to all involved. I look forward to seeing how these communities will interact and how eBay helps craigslist and vice versa.

A Business 2.0 article did a very good job describing Creative Commons and the "sharing economy" which they believe is a multi-billion dollar industry. As I approach companies about trying to adopt creative commons, free software or investment in basic open research and innovation, I am struck by the lack of understanding of the value of sharing and contributing to the commons. It makes a lot of sense to me, but I wonder if it might be useful to try to collect material and generate some addition material that describes the benefits of sharing from a business and economics perspective.

Lawrence Lessig describes the argument very well in Free Culture, but I think that a rigorous business treatment would help the business guys a lot. The think the argument can be made that open protocols such as TCP/IP and http have enabled a great deal of business to happen and if either had been "owned" or patented, we would not have the Internet today. I'm sure IBM can make a strong case about the value of Linux which it has embraced so wholeheartedly. I recently met business researchers in St. Gallen who were displacing management consultants by allowing companies to participate in academics studies about their management that would be contributed to open research. I think there are many arguments about contributing to the commons and how the commons creates a foundation upon which we can build.

I'm going to try to collect papers and articles about this. If anyone has any good references or ideas, please add them to the wiki page I just set up.

Are there any good books about this? I think this is such an important topic that if I had time to write a book, this is what I would want to write it about...

I will be on a panel at a conference in Helsinki on June 10. It is the Annual Meeting of the International Network of Private Business Organizations - COMPETITIVENESS THROUGH CREATIVITY. I will be representing the Keizai Doyukai (The Japan Association of Corporate Executives) and will be speaking about "Creativity and Innovation - Rare Virtue or New Standard?". I'm not sure who they're inviting to participate, but if you're going, please let me know.

The Financial Times
Google considers online IPO auction

By Richard Waters in San Francisco

Google is considering holding a massive online auction of shares early next year in an initial public offering that investment bankers predict could value the internet search-engine company at more than $15bn.

Holy cow. Does anyone have any more information on this?

I wonder if it's going to be a Dutch Auction IPO?

Philip Greenspun blogs about the idea that stocks are going up in the US because more and more public domain is moving into the hands of large corporations. He gives the example of Disney being the beneficiary of the the copyright extension and the restriction on flying thru the airspace over Disneyland.

Thanks to rvr and bluehaze on #joiito.

Brian Barry writes in The Economist about how little Japan has leveraged IT and how this is still the source of inefficiency. He also gives some examples of companies that are using IT to change Japan. I agree with him totally and think that in addition to unwiding some of the big companies that don't make sense anymore, improving the cost performance of the exisiting companies can greatly increase the profitability of Japanese companies which is key.

I feel self-conscious about quoting my one quotes after that parody of this site but:

A tour of the
business-class lounges at Narita airport, says Joichi Ito, an internet entrepreneur, reveals how senior managers feel about information technology: "In United's lounge everyone has their laptop out; in the Japan Airlines lounge they are all drinking beer."
Actually, someone else pointed this out to me a long time ago and I have since observed it myself and have used it as one of my favorite examples.

PS Having a meal with TWO Brian B's in Tokyo this week was very confusing for my calendar...

PPS The Economist site link is "premium content". blah.

Tim Oren also seems to think that the buzz is back and that we've hit a bottom.

Gave a talk on March 19 at the MIT Enterprise Forum in Tokyo hosted at the Nikkei BP office. I tried to tie a bunch of things together. I started out by saying that at a macro level, I was very depressed, but that at a micro level, I was extremely excited. I talked first about the lack of entrepreneurs in Japan, the problem with the economy and democracy in Japan. Then I talked about the nature of risk and why risk/return is broken in Japan. Then I talked about weblogs and about how excited I was about the political, media, social, communications and tool building aspects of weblogs. I closed by talking about open standards and the impact that open standards could have on consumer electronics. I promised to upload the slides so here they are in a 16.2mb pdf file and a1.2mb QT file. I don't have any notes on the slides, so by themselves, they're pretty useless, but...I promised. I used keynote, which was a true pleasure. I also fixed up some of the slides so the images are newer than the presentation date.

Generally good response. Blogging seemed to be new to people so the blow-by-blow of how a blog works seemed to be useful. The democracy issue was very interesting to some, irrelevant to others. ;-)

031903algore.jpgAl Gore and Apple sure picked an interesting day to announce this. I wonder if they are going to declare war on Microsoft?

CNet
Al Gore joins Apple's board
By Ian Fried
Staff Writer, CNET News.com
March 19, 2003, 1:38 PM PT


Apple Computer on Wednesday named former Vice President Al Gore to its board of directors.

I did an interview about IT and venture businesses in Japan for Glocom. Video streams just went online.

I was talking to a fairly well known CEO of a securities firm. He told me that the Nikkei would hit the 8000 range last year. Today he said that he thought foreign investors were going to dump Japanese stocks and that it might hit 6000 in the next 3 months and that it would probably most definitely hit 7000. He said that the branch manager of a fairly large branch of Nomura Securities told him that 10 of his top 20 accounts recently liquidated ALL of their equity holdings. He also said that many of the major banks would probably soon come under government protection/control through the Bank of Japan. Argentina, here we come!

The Japan Times
MINISTRY SECRECY DRAWS SPOTLIGHT Even victimized divided on death penalty

By KAHO SHIMIZU
Staff writer

Masaharu Harada was stunned when he found out that the man who murdered his younger brother had been executed on Dec. 27 in Nagoya.

He wondered why authorities felt they had to kill such a remorseful man.

Toshihiko Hasegawa was one of two convicts hanged in December. He was convicted of killing Harada's brother and two other people in a murder-for-insurance scheme between 1979 and 1983. His death sentence was finalized in 1993.

Harada had petitioned the Justice Ministry on Hasegawa's behalf to stay his execution. He believed letting Hasegawa live so he could express remorse was the only way for him to atone for his crime.


This issue about lack of transparency and the debate about capital punishment are important and something that should be part of a public debate, but one thing that I noticed was that the crime committed by this "remorseful man" was another "murder-for-insurance" crime. There have been a quite a few of these crimes and I'm beginning to wonder if it such crimes might be committed by people who are driven to this from debt. The Japanese prime interest rate are very low, but the consumer loan business booms with interest rates in the 15-20+ percent range. There has been a crackdown on loan sharking, but I think the interest rates for consumer loans is higher than the US for instance. Many of the taxi drivers I talk to are driving taxis because of loan/debt problems.

Mainichi Interactive
Indebted man charged for ex-lover's murder 2002.08.18

TSURUGA, Fukui -- A indebted man has been slapped with charges of murdering the former girlfriend he is detained for having illegally buried her body, police said Sunday.

Yoshiyuki Senda, 23, a resident of Hirakata, Osaka Prefecture, admitted to having stabbed Yoshiko Yamaguchi, 23, a company employee of Suita, Osaka Prefecture, whose charred body was found in Tsuruga, according to investigators.

"I owe about 1.1 million yen to eight consumer credit companies. I have no money (to repay my debts) because I lost my job in June. I murdered her to get her money," he was quoted as telling police.


It would be interesting to see the relationship between consumer loan interest rates and crime...

So what does this Worldcom thing mean? Many people saw it coming. I've been hearing about this possibility for a long time.

Many people are aruging that this is the beginning of the end for telecom because Moore's law applies to telecom and although bandwidth gets cheaper and cheaper, demand has slowed down.

There is an interesting comment from Professor Gerald Faulhaber on David Farber's list. His point is that we should be apalled by the Enron/Andersen of it all and that isn't directly related to the problem with the business model.

Having been through the bankruptcy of PSINet as a former CEO of the PSINet Japan, I have my own theories. I think part of it was the telephone companies trying to gobble up the ISP's that are a threat to their voice business and choking on their acquisitions while at the same time trying to use regulators to make it difficult for ISP's to compete directly with phone companies. The cool thing is that regulators in Japan haven't figured it out or NTT isn't good at lobbying them and Yahoo is providing voice over IP broadband and really starting to be a pain in the neck for NTT.

I heard a rumor that China bought out all of the backbone carriers and is running it as a state operation. Even if this isn't true, this makes sense.

Anyway, I think that trying to continue to charge for voice doesn't make sense and I think it is the freebie giveaway like email to get people to really go for broadband.

Here are some good articles about Worldcom etc.

This Week's Clue: The Telecom Crash of 2002
Gordon Cook on how regulators are trying to bail out legacy telcos at the expense of ISP's
Worldcom Reveals Accounting Scandal - Reuters
AS THE WORLDCOM TURNS: A blog about WorldCom

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