The dashing drip of Ketonal, or my fundamental questions for the New Year

My editorial

Recently, I have been working on a few parallel projects, which all orient me towards business and management rather than economics. Of course, the three are related: you cannot expect to draft a decent business plan without understanding markets around you, just as you have meagre chances to understand markets if you ignore the way organisations work. Anyway, the business projects that I am currently working on orient me towards those most fundamental questions of social theory. It starts with a very practical issue, like ‘How can I know this precise project is going to be successful?’, and then, as I am articulating the answer, I feel as if I were ploughing through the entire field of social sciences. I have just finished preparing a business plan for an investment in real estate. At the first sight, it seemed simple as the blueprint of flail: you buy a residential building, you renovate it, in the course of renovation you consider rearranging the division of the building into apartments, then you sell the apartments one by one, and you rent the shops at the ground floor. A textbook of doing business, someone could say. Yet, as I started to estimate the profitability of the thing, questions popped up, initially very simple: will the Internal Rate of Return (IRR) be more suitable to estimate the return on investment, or should I rather consider the Net Present Value (NPV) of the project? Whatever I choose, what window of time should I take to gauge the profits: 5 years, 7 years, or maybe 12? Simple, almost stupid questions, and still they matter. For the mildly initiated: the IRR tends to be used mostly for low-risk, long-run projects, whilst the NPV looks better for short-termist, hit-and-run ventures.

By textbook rules, real estate is definitely the first kind: no technological life-cycle, not really much to handle in terms of manufacturing or logistics, sniper-like customer relations. The IRR should be better. Yet, as I did my homework about the local market of residential real estate, the sheer distribution of prices showed me a dilemma in the design of apartments in the course of renovation: you go into structure and design A, and you gain a modest return, not much above the average yield of sovereign bonds, but if you go into structure and design B, you can achieve way higher. The fork of disparity between the two scenarios was such that I decided to settle for NPV as my main metric of profitability. Absolutely against the textbook, but I intuitively guess this is a better measure. As I applied it, an interesting result appeared: whatever the design chosen, the project has any chance to bring a positive cash flow to the investor if and only if he leverages the thing with a mortgage, like 60% of the assets planned. You could ask: how can borrowing, with the obvious necessity to share your profits with the bank, at a fixed rate, enhance the net cash-flow? Well, yes, it can.

There is that other project I am working on, namely the practical implementation of CSR (Corporate Social Responsibility) in a real company. The company’s boss, who happens to be my friend, asked me to assess objectively whether it would pay him off to implement a code of CSR in his organisation. As a social scientist, I almost intuitively assume that what people think is one thing, what they do is another, what they think they do is still different story, and what they say they think they do is the ultimate smokescreen of human behaviour. For me, the current fashion for Corporate Social Responsibility is very much the Bullshido of management. Still, that friend of mine does not really care about theory. He is about to participate in a few serious tenders in his market, and in each of them he can score additional points if his company has a code of CSR effectively in place. Of course, as you can easily guess, the ‘effectively in place’ part is the trickiest one. There are pennies to collect, actually implementing CSR is the way to collect them, and the practical questions are: is it feasible at all, how to do it, and is it any good outside the formal conditions of those tenders? Just if you haven’t spotted it yet: it is about predicting complex human behaviour, in an organisation, and about assessing the economic outcomes of that behaviour. Tough s**t, actually.

There is still another venture I am progressively becoming involved into, in the Fintech. A group of business people is considering the issuance of cryptocurrencies in the stock-market fashion, i.e. they would like to issue cryptocurrencies in the way financial institutions issue various financial instruments: with an Initial Public Offering, and some respectable balance sheet to back up that IPO, with decent underwriting, with book building etc. The only difference in comparison to regular securities is that what will be issued are not securities as such but numerical codes corresponding to the units of cryptocurrency, and there has to be a technological platform to sustain the whole thing. The question those business people ask is very simple, once again: at the end of the day, after we account for the discount at issuance, and for the cost of maintaining the technology, what will be the return on investment? Intuitively, I am thinking about taking the history of Bitcoin (the best documented so far) as a case study, and try to build any kind of bridging to the world of classical financial instruments. Still, this is just an intuition. I am trying to find out the right scientific questions to ask, in order to answer the general business question.

I am nurturing my own business project on a small scale: an educational website in the field of social sciences. That scientific blog I keep, progressively more and more nested in the WordPress environment at https://discoversocialsciences.com , and still mirrored at http://researchsocialsci.blogspot.com makes some sort of core, which I want to build that project around. The blog serves me to make my hand as for the style, and the general drill of producing content. I am applying that principle, anecdotally attributed to Pablo Picasso, namely that when inspiration comes, it is likely to find me at work. For the moment, I have very loose ideas as for this project. I haven’t even formalized my paid content yet. I suppose I will start with some sort of crowdfunding, Patreon or other beast, and then move towards something more organized.

The questions I have in my mind, regarding this project, sum up to a loop between ‘who?’, ‘what?’, and ‘how?’. How do I want to interact with my customers? What exactly will be my product? Who will be my customer? Initially, I am thinking about providing additional, educational resources for students. By ‘additional’ I mean that what I will be offering will be a step further beyond textbooks, rather than the typical textbook content. Probably it is because I have always been bored to death with textbooks. I have always preferred to discover things by myself. Yes, it involves getting some dirt on my hands, but it is a lot more fun, and this is the kind of fun I want to provide my customers with: the fun with doing research in social sciences, where doing research is training, in the same time. Thus, the kind of interaction I want to have with my customers consists in involving them in doing research, where I will mentor them. Here, I come to the ‘what?’, and, honestly, I still don’t know what the ‘what?’ is going to look like, in details. I know, for sure, that I want to go for real stuff, i.e. the actual, important, social issues, not the distilled type of problems you can find in textbooks. If I want to learn how to hunt grizzly bears, I have to learn with someone who actually hunts them, not with a rat catcher.

Finally, there is that last one, and in the same time the biggest. I have been working, all the 2017-long, on technological change, and, more particularly, on renewable energies. I have been progressively becoming aware that there is an actual, huge business building up around the topic: smart cities. In Europe, the idea is really gathering speed. Recently, I did some research about the ‘Confluence’ project in Lyon, France. This is another smart city – or rather smart district in a city – being built in parallel with similar ones popping up in Vienna and Munich. As I had a provisional glimpse of the thing, the speed and magnitude of business and investment projects going on there is just appalling. I think I am going to devote much of my time until this summer to preparing and promoting a business plan for entering the business of smart cities. Here, once again, I am at the stage of figuring out what are the right questions to ask.

Those last months, I tend to think that fundamental questions are the best ones to ask. Additionally, I had that funny kind of New Year’s Night, at an emergency ward, in my district hospital, under an intravenous drip, with symptoms of acute food poisoning. The main suspect is a piece of herring with unclear curriculum. This is the thing with us, Polish people, and the herring: this is really tough love. Anyway, that night spent with a cannula stuck in my left hand’s veins, it made me really consider life under a different angle. The angle was really different. I asked my friends around: no one was seeing their drinks from underneath, only I did. Ketanol was the dashiest one. Such situations tend to push you back to fundamental questions, like: what is the point of being here and now? Now, you could legitimately wonder about the connection between the doings of a vicious herring, and social sciences. Well, I am wondering what are the most fundamental questions of social sciences, when said sciences are being applied to real-life, practical situations. This is the kind of questions I would like my students to know how to ask.

I ask ‘What kinds of things are happening around me and how are they happening?’. In each of the situations I have just described, I am kind of tuning my brain on some specific distinctions: prices of real estate and their distribution over time and across space, cash flows, patterns in human behaviour regarding ethical norms, creation and evolution of monetary systems, ways of entering the general field of smart cities, and, finally, the number of drops that an intravenous drip produces per minute. When I am wrapping my mind around something new, the wrapping means finding the right categories to distinguish in the given situation. How can I know my distinctions are the right ones? There is only one way to know it, baby: by trial and error. Make some distinctions, apply them in the situation at hand, figure out whether they make you advance any further, draw a bottom line, repeat the whole sequence until you reach a subjective state of intellectual satisfaction. There is a useful scientific method of checking if my distinctions are accurate for the piece of real life I am currently dealing with. Just check if you can deconstruct, out of that piece of real life, meaningful sequences of things you have distinguished. If you can build a sequence of events, and that sequence is kind of relevant for the situation, the way you describe those events is probably accurate. Not necessarily accurate at 100% – it never is – but accurate just enough to set a path for further action. The scientific bottom line of this question is to transform experience into data, which, in turn, can be subject to mathematical modelling. Yes, I like maths. They are logic expressed without bullshit.

Then, in a second step, I ask ‘How is the way of happening in the thing A connected to the way of happening in the thing B?’. In terms of formal scientific tools, there is a cartload of statistics to apply here, and this is the right track. Still, my own path of thinking, and the path of thinking I would like my students to follow, is even more fundamental. When I study the connection between happenings, I want to know, for example, whether the thing A kind of pulls the thing B out of inexistence, or does it rather push the thing B out of the world? If reality had a DNA, and if that DNA reproduced itself by recombination (which requires female realities and male realities, and this is really interesting), my two things, A and B, would be like two genes, which can be switched on or off. In one possible scenario, when the gene A gets activated, the gene B follows, and it is like 1 -> 1. In another scenario, the activation of A automatically switches B off, or 1 -> 0. On the long run, the kind of gene B that gets deactivated frequently, gets kicked out of reality, into a dormant state, as there is no respectable, female reality who would like to give birth to baby realities with B in their genome. This is how some phenomena, like burning the alleged witches at the stake, get kicked into a blissfully dormant state, at least until some idiot has the idea of waking them up. Easier than you think, to wake those monsters up, by the way.

If, on the other hand, phenomenon B gets activated in noticeably many cases, it kind of gets knighted into the reality, and it acquires the privilege of activating or deactivating other genes in reality. This is how small, functional interactions between measurable occurrences can lead to structural changes in the social system (see, for example: Krugman 1991[1];  Krugman 1998[2]). That approach to functional connection between phenomena is slightly different from what you can learn in you class of statistics, yet there is a lot on common between the two ways of apprehending coincidental change. Statistically, we can talk about correlation between phenomena, when they swing away from their statistically expected states by a similar distance in the same time, or about their mutual cointegration, if they swing at the same rhythm, i.e. with the same length, amplitude, and frequency in their respective cycles. What I am the most interested in, in my research, are those specific cases of correlation and/or cointegration, when the functional connection at hand leads to one of the connected phenomena suddenly shifting into a qualitatively different state (into a different equilibrium, as we could say in economics).

Now, I ask my third BIG question: ‘So what? Does it matter at all? How does it matter?’. Things matter to me, when they change I do things. Things matter to the society, when they change the way people do things. Thus, in all the multitude of coincidentally changing things, in their correlations and cointegrations, in the way they affect the genetic code of reality, there are changes that involve our behaviour. These ones matter. If the given piece of reality switches its genes into the ON position, what will I do? How can some patterns of behaviour become dormant? How can they be revived (and, bloody hell, is it a good idea to revive them)? What should I do? What will other people do? What do I expect them to do? This is when social science becomes the real fun. I look for that tiny little correlation, which makes my behaviour wise or aberrant in the given situation. I look for those little signals, predictors of wonderful progress, or, in more complex a situation, of deplorable recess.

[1] Krugman, P., 1991, Increasing Returns and Economic Geography, The Journal of Political Economy, Volume 99, Issue 3 (Jun. 1991), pp. 483 – 499

[2] Krugman, P., 1998, What’s New About The New Economic Geography?, Oxford Review of Economic Policy, vol. 14, no. 2, pp. 7 – 17