Book Key Points: Capitalism, Socialism, and Democracy

The purpose of the compilation of quotes below is not for readers to skip reading the book, but rather to remind readers of the key points outlined in the classic text by Joseph Schumpeter. The book highlights reasoning behind the tendency for mature capitalism to slowly drift toward socialism, and whether democracy could work well within a socialist framework.

We always plan too much and always think too little. We resent a call to thinking and hate unfamiliar argument that does not tally with what we already believe or would like to believe.
  The economic interpretation of history does not mean that men are, consciously or unconsciously, wholly or primarily, actuated by economic motives. On the contrary, the explanation of the role and mechanism of non-economic motives and the analysis of the way in which social reality mirrors itself in the individual psyches is an essential element of the theory and one of its most significant contributions.
  What the theory really says may be put into two propositions: (1)The forms or conditions of production are the fundamental determinant of social structures which in turn breed attitudes, actions and civilizations. Marx illustrates his meaning by the famous statement that the “hand-mill” creates feudal, and the “steam-mill,” capitalist societies. This stresses the technological element to a dangerous extent, but may be accepted on the understanding that mere technology is not all of it. Popularizing a little and recognizing that by doing so we lose much of the meaning, we may say that it is our daily work which forms our minds, and that it is our location within the productive process which determines our outlook on things—or the sides of things we see—and the social elbowroom at the command of each of us. (2) The forms of production themselves have a logic of their own; that is to say, they change according to necessities inherent in them so as to produce their successors merely by their own working. To illustrate by the same Marxian example: the system characterized by the “hand-mill” creates an economic and social situation in which the adoption of the mechanical method of milling becomes a practical necessity that individuals or groups are powerless to alter. The rise and working of the “steam-mill” in turn creates new social functions and locations, new groups and views, which develop and interact in such a way as to outgrow their own frame. Here, then, we have the propeller which is responsible first of all for economic and, in consequence of this, for any other social change, a propeller the action of which does not itself require any impetus external to it.
  As we shall see presently, Marx tries to show how in that class war capitalists destroy each other and eventually will destroy the capitalist system too. He also tries to show how the ownership of capital leads to further accumulation. But this way of arguing as well as the very definition that makes the ownership of something the constituent characteristic of a social class only serves to increase the importance of the question of “primitive accumulation,” that is to say, of the question how capitalists came to be capitalists in the first instance or how they acquired that stock of goods which according to the Marxian doctrine was necessary in order to enable them to start exploiting.
  Supernormal intelligence and energy account for industrial success and in particular for the founding of industrial positions in nine cases out of ten. And precisely in the initial stages of capitalism and of every individual industrial career, saving was and is an important element in the process though not quite as explained in classic economics. It is true that one does not ordinarily attain the status of capitalist (industrial employer) by saving from a wage or salary in order to equip one’s factory by means of the fund thus assembled. The bulk of accumulation comes from profits and hence presupposes profits—this is in fact the sound reason for distinguishing saving from accumulating. The means required in order to start enterprise are typically provided by borrowing other people’s savings, the presence of which in many small puddles is easy to explain or the deposits which banks create for the use of the would-be entrepreneur. Nevertheless, the latter does save as a rule: the function of his saving is to raise him above the necessity of submitting to daily drudgery for the sake of his daily bread and to give him breathing space in order to look around, to develop his plans and to secure cooperation.
  Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the “socially necessary quantity of labor”). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard.
  where capital goods such as plant, machinery and raw materials are used in the production of a commodity, this commodity will sell at a price which will yield a net return to the owner of those capital goods. He realized that this fact has something to do with the period of time that elapses between the investment and the emergence of salable products and that it will enforce deviations of the actual values of these from proportionality to the man-hours “contained” in them—including the man-hours that went into the production of the capital goods themselves—whenever these periods are not the same in all industries.
  exploitation did not arise from individual situations occasionally and accidentally; but that it resulted from the very logic of the capitalist system, unavoidably and quite independently of any individual intention.
  The brain, muscles and nerves of a laborer constitute, as it were, a fund or stock of potential labor (Arbeitskraft, usually translated not very satisfactorily by labor power). This fund or stock Marx looks upon as a sort of substance that exists in a definite quantity and in capitalist society is a commodity like any other. We may clarify the thought for ourselves by thinking of the case of slavery: Marx’s idea is that there is no essential difference, though there are many secondary ones, between the wage contract and the purchase of a slave—what the employer of “free” labor buys is not indeed, as in the case of slavery, the laborers themselves but a definite quota of the sum total of their potential labor.
  This constitutes the value of that stock, and if he sells parts of it—expressed in days or weeks or years—he will receive wages that correspond to the labor value of these parts, just as a slave trader selling a slave would in equilibrium receive a price proportional to the total number of those labor hours.
  Moreover, it can be shown that perfectly competitive equilibrium cannot exist in a situation in which all capitalist-employers make exploitation gains. For in this case they would individually try to expand production, and the mass effect of this would unavoidably tend to increase wage rates and to reduce gains of that kind to zero. It would no doubt be possible to mend the case somewhat by appealing to the theory of imperfect competition, by introducing friction and institutional inhibitions of the working of competition, by stressing all the possibilities of hitches in the sphere of money and credit and so on.
  saving by the capitalist class ipso facto implies a corresponding increase in real capital.11 This movement will in the first instance always occur in the variable part of total capital, the wage capital, even if the intention is to increase the constant part and in particular that part which Ricardo called fixed capital—mainly machinery.
  When discussing Marx’s theory of exploitation, I have pointed out that in a perfectly competitive economy exploitation gains would induce capitalists to expand production, or to attempt to expand it, because from the standpoint of every one of them that would mean more profit. In order to do so they would have to accumulate. Moreover the mass effect of this would tend to reduce surplus values through the ensuing rise in wage rates, if not also through an ensuing fall in the prices of products—a very nice instance of the contradictions inherent in capitalism that were so dear to Marx’s heart. And that tendency itself would, also for the individual capitalist, constitute another reason why he should feel compelled to accumulate,12 though again that would in the end make matters worse for the capitalist class as a whole. There would hence be a sort of compulsion to accumulate even in an otherwise stationary process which, as I mentioned before, could not reach stable equilibrium until accumulation had reduced surplus value to zero and thus destroyed capitalism itself.
  Possibilities of gains to be reaped by producing new things or by producing old things more cheaply are constantly materializing and calling for new investments. These new products and new methods compete with the old products and old methods not on equal terms but at a decisive advantage that may mean death to the latter. This is how “progress” comes about in capitalist society. In order to escape being undersold, every firm is in the end compelled to follow suit, to invest in its turn and, in order to be able to do so, to plow back part of its profits, i.e., to accumulate.14 Thus, everyone else accumulates.
  It is sufficient that, as we have seen, the profit of every individual plant is incessantly being threatened by actual or potential competition from new commodities or methods of production which sooner or later will turn it into a loss. So we get the driving force required and even an analogon to Marx’s proposition that constant capital does not produce surplus value—for no individual assemblage of capital goods remains a source of surplus gains forever—without having to rely on those parts of his argument which are of doubtful validity.
  Marx undoubtedly held that in the course of capitalist evolution real wage rates and the standard of life of the masses would fall in the better-paid, and fail to improve in the worst-paid, strata and that this would come about not through any accidental or environmental circumstances but by virtue of the very logic of the capitalist process.
  Ricardo’s example presents another interesting feature. He considers a firm owning a given amount of capital and employing a given number of workmen that decides to take a step in mechanization. Accordingly, it assigns a group of those workmen to the task of constructing a machine which when installed will enable the firm to dispense with part of that group. Profits may eventually remain the same (after the competitive adjustments which will do away with any temporary gain) but gross revenue will be destroyed to the exact amount of the wages previously paid to the workmen that have now been “set free.” Marx’s idea of the replacement of variable (wage) capital by constant capital is almost the exact replica of this way of putting it. Ricardo’s emphasis upon the ensuing redundancy of population is likewise exactly paralleled by Marx’s emphasis upon surplus population which term he uses as an alternative to the term “industrial reserve army.”
  “Hand in hand with this centralization, or this expropriation of many capitalists by few, develops . . . the entanglement of all nations in the net of the world market, and with this, the international character of the capitalist regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with it, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. This integument bursts. The knell of capitalist private property sounds. The expropriators are expropriated.”
  Is it not the most natural thing in the world to conclude that crises or depressions are due to the fact that the exploited masses cannot buy what that ever-expanding apparatus of production turns out or stands ready to turn out, and that for this and also other reasons which we need not repeat the rate of profits drops to bankruptcy level? Thus we seem indeed to land, according to which element we want to stress, at the shores of either an under-consumption or an over-production theory of the most contemptible type.
  Since, on the one hand, capitalist society cannot exist and its economic system cannot function without profits and since, on the other hand, profits are constantly being eliminated by the very working of that system, incessant effort to keep them alive becomes the central aim of the capitalist class. Accumulation accompanied by qualitative change in the composition of capital is, as we have seen, a remedy which though alleviating for the moment the situation of the individual capitalist makes matters worse in the end. So capital, yielding to the pressure of a falling rate of profits—it falls, we recall, both because constant capital increases relative to variable capital and because, if wages tend to rise and hours are being shortened, the rate of surplus value falls—seeks for outlets in countries in which there is still labor that can be exploited at will and in which the process of mechanization has not as yet gone far. Thus we get an export of capital into undeveloped countries which is essentially an export of capital equipment or of consumers’ goods to be used in order to buy labor or to acquire things with which to buy labor.3 But it is also export of capital in the ordinary sense of the term because the exported commodities will not be paid for—at least not immediately—by goods, services or money from the importing country. And it turns into colonization if, in order to safeguard the investment both against hostile reaction of the native environment—or if you please, against its resistance to exploitation—and against competition from other capitalist countries, the undeveloped country is brought into political subjection. This is in general accomplished by military force supplied either by the colonizing capitalists themselves or by their home government which thus lives up to the definition given in the Communist Manifesto: “the executive of the modern State [is] … a committee for managing the common affairs of the whole bourgeoisie.” Of course, that force will not be used for defensive purposes only. There will be conquest, friction between the capitalist countries and internecine war between rival bourgeoisies.
  So far as colonial expansion is prompted by a falling rate of profit in the capitalist countries, it should occur in the later stages of capitalist evolution—Marxists in fact speak of imperialism as a stage, preferably the last stage, of capitalism. Hence it would coincide with a high degree of concentration of capitalist control over industry and with a decline of the type of competition that characterized the times of the small or medium-sized firm.
  The proposition that many protective duties owe their existence to the pressure of large concerns that desire to use them for the purpose of keeping their prices at home above what they otherwise would be, possibly in order to be able to sell more cheaply abroad, is a platitude but correct, although no tariff was ever wholly or even mainly due to this particular cause. It is the Marxian synthesis that makes it inadequate or wrong. If our ambition is simply to understand all the causes and implications of modern protectionism, political, social and economic, then it is inadequate. For instance, the consistent support given by the American people to protectionist policy, whenever they had the opportunity to speak their minds, is accounted for not by any love for or domination by big business, but by a fervent wish to build and keep a world of their own and to be rid of all the vicissitudes of the rest of the world.
  The attitudes of capitalist groups toward the policy of their nations are predominantly adaptive rather than causative, today more than ever. Also, they hinge to an astonishing degree on short-run considerations equally remote from any deeply laid plans and from any definite “objective” class interests.
  As has been stated before, all this means is that by virtue of its very logic capitalist evolution tends to destroy the capitalist and to produce the socialist order of things.
  Marx himself, while very wisely refraining from describing socialist society in detail, emphasized conditions of its emergence: on the one hand, the presence of giant units of industrial control—which, of course, would greatly facilitate socialization—and, on the other hand, the presence of an oppressed, enslaved, exploited, but also very numerous, disciplined, united and organized proletariat. This suggests much about the final battle that is to be the acute stage of the secular warfare between the two classes which will then be arrayed against each other for the last time. It also suggests something about what is to follow; it suggests the idea that the proletariat as such will “take over” and, through its dictatorship, put a stop to the “exploitation of man by man” and bring about classless society.
  Thus there are prolonged periods of rising and of falling prices, interest rates, employment and so on, which phenomena constitute parts of the mechanism of this process of recurrent rejuvenation of the productive apparatus.
  The difficulties do not seem to consist so much in the lack of surplus sufficient to blot out the darkest hues in the picture: they consist, on the one hand, in the fact that the unemployment figure has been increased by anti-capitalist policies beyond what it need have been in the thirties and, on the other hand, in the fact that public opinion as soon as it becomes at all alive to the duty in question, immediately insists on economically irrational methods of financing relief and one lax and wasteful methods of administering it. Much the same argument applies to the future—and to a great extent the present—possibilities held out by capitalist evolution for the care of the aged and sick, for education and hygiene and so on. Also, an increasing number of commodities might reasonably be expected, from the standpoint of the individual household, to pass out of the class of economic goods and to be available practically up to the satiety point. This could be brought about either by arrangement between public agencies and producing concerns or by nationalization of municipalization, gradual progress with which would of course be a feature of the future development even of an otherwise unfettered capitalism.
  From the standpoint of the economic analyst, the chief merit of the classics consists in their dispelling, along with many other gross errors, the naïve idea that economic activity in capitalist society, because it turns on the profit motive, must by virtue of that fact alone necessarily run counter to the interests of consumers; or, to put it differently, that moneymaking necessarily deflects producing from its social goal; or, finally, that private profits, both in themselves and through the distortion of the economic process they induce, are always a net loss to all excepting those who receive them and would therefore constitute a net gain to be reaped by socialization.
  Still it can be shown, within the general assumptions of the Marshall-Wicksell analysis, that firms which cannot by their own individual action exert any influence upon the price of their products or of the factors of production they employ—so that there would be no point in their weeping over the fact that any increase in production tends to decrease the former and to increase the latter—will expand their output until they reach the point at which the additional cost that must be incurred in order to produce another small increment of product (marginal cost) just equals the price they can get for that increment, i.e., that they will produce as much as they can without running into loss. And this can be shown to be as much as it is in general “socially desirable” to produce.
  Neither Marshall and Wicksell nor the classics saw that perfect competition is the exception and that even if it were the rule there would be much less reason for congratulation than one might think.
  And as regards practically all the finished products and services of industry and trade, it is clear that every grocer, every filling station, every manufacturer of gloves or shaving cream or handsaws has a small and precarious market of his own which he tries—must try—to build up and to keep by price strategy, quality strategy—“product differentiation”—and advertising. Thus we get a completely different pattern which there seems to be no reason to expect to yield the results of perfect competition and which fits much better into the monopolistic schema. In these cases we speak of Monopolistic Competition.
  In the general case of oligopoly there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms. It is true that there are many special cases in which a state of equilibrium theoretically exists. In the second place, even in these cases not only is it much harder to attain than the equilibrium in perfect competition, and still harder to preserve, but the “beneficial” competition of the classic type seems likely to be replaced by “predatory” or “cutthroat” competition or simply by struggles for control in the financial sphere. These things are so many sources of social waste, and there are many others such as the costs of advertising campaigns, the suppression of new methods of production (buying up of patents in order not to use them) and so on. And most important of all: under the conditions envisaged, equilibrium, even if eventually attained by an extremely costly method, no longer guarantees either full employment or maximum output in the sense of the theory of perfect competition. It may exist without full employment; it is bound to exist, so it seems, at a level of output below that maximum mark, because profit-conserving strategy, impossible in conditions of perfect competition, now not only becomes possible but imposes itself.
  If we list the items that enter the modern workman’s budget and from 1899 on observe the course of their prices not in terms of money but in terms of the hours of labor that will buy them—i.e., each year’s money prices divided by each year’s hourly wage rates—we cannot fail to be struck by the rate of the advance which, considering the spectacular improvement in qualities, seems to have been greater and not smaller than it ever was before.
  Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers. Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems of which exactly the same thing holds true. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
  This process of Creative Destruction is the essential fact about capitalism.
  In order to put the first into the strongest possible light, let us assume that an industry which refuses to reduce prices in recession goes on selling exactly the same quantity of product which it would sell if it had reduced them. Buyers are therefore out of pocket by the amount to which the industry profits from the rigidity. If these buyers are the kind of people who spend all they can and if the industry or those to whom its net returns go does not spend the increment it gets but either keeps it idle or repays bank loans, then total expenditure in the economy may be reduced thereby. If this happens, other industries or firms may suffer and if thereupon they restrict in turn, we may get a cumulation of depressive effects. In other words, rigidity may so influence the amount and distribution of national income as to decrease balances or to increase idle balances or, if we adopt a popular misnomer, savings. Such a case is conceivable. But the reader should have little difficulty in satisfying himself111 that its practical importance, if any, is very small.
  Progress entails, as we have seen, destruction of capital values in the strata with which the new commodity or method of production competes. In perfect competition the old investments must be adapted at a sacrifice or abandoned; but when there is no perfect competition and when each industrial field is controlled by a few big concerns, these can in various ways fight the threatening attack on their capital structure and try to avoid losses on their capital accounts; that is to say, they can and will fight progress itself.
  So far as the use of the old machines saves future costs as compared with the immediate introduction of the new methods, the remainder of their service value is of course an element of the decision for both the capitalist and the socialist manager; otherwise bygones are bygones for both of them and any attempt to conserve the value of past investment would conflict as much with the rules following from the profit motive as it would conflict with the rules set for the behavior of the socialist manager.
  It is however not true that private firms owning equipment the value of which is endangered by a new method which they also control—if they do not control it, there is no problem and no indictment —will adopt the new method only if total unit cost with it is smaller than prime unit cost with the old one, or if the old investment has been completely written off according to the schedule decided on before the new method presented itself. For if the new machines when installed are expected to outlive the rest of the period previously set for the use of the old machines, their discounted remainder value as of that date is another asset to be taken account of. Nor is it true, for analogous reasons, that a socialist management, if acting rationally, would always and immediately adopt any new method which promises to produce at smaller total unit costs or that this would be to the social advantage.
  Even railroads and power and light concerns had first to create the demand for their services and, when they had done so, to defend their market against competition. Outside the field of public utilities, the position of a single seller can in general be conquered—and retained for decades—only on the condition that he does not behave like a monopolist. Short-run monopoly will be touched upon presently.
  Even if the opportunity to set monopolist prices were the sole object, the pressure of the improved methods or of a huge apparatus would in general tend to shift the point of the monopolist’s optimum toward or beyond the competitive cost price in the above sense, thus doing the work—partly, wholly, or more than wholly—of the competitive mechanism,20 even if restriction is practiced and excess capacity is in evidence all along. Of course if the methods of production, organization and so on are not improved by or in connection with monopolization as is the case with an ordinary cartel, the classical theorem about monopoly price and output comes into its own again.21 So does another popular idea, viz., that monopolization has a soporific effect. For this, too, it is not difficult to find examples. But no general theory should be built upon it. For, especially in manufacturing industry, a monopoly position is in general no cushion to sleep on. As it can be gained, so it can be retained only by alertness and energy. What soporific influence there is in modern business is due to another cause that will be mentioned later.
  As a matter of fact, perfect competition is and always has been temporarily suspended whenever anything new is being introduced—automatically or by measures devised for the purpose—even in otherwise perfectly competitive conditions.
  traditional theory is correct in holding that profits above what is necessary in each individual case to call forth the equilibrium amount of means of production, entrepreneurial ability included, both indicate and in themselves imply net social loss and that business strategy that aims at keeping them alive is inimical to the growth of total output.
  Since the capitalist process always has been geared to a large amount of current investment, even partial elimination of it would suffice to make plausible the forecast that the process is going to flop. This particular line in the Marxist argument no doubt seems to agree well not only with some outstanding facts of the past decade—unemployment, excess reserves, gluts in money markets, unsatisfactory margins of profits, stagnation of private investment—but also with several non-Marxist interpretations. There is surely no such gulf between Marx and Keynes as there was between Marx and Marshall or Wicksell. Both the Marxist doctrine and its non-Marxist counterpart are well expressed by the self-explanatory phrase that we shall use: the theory of vanishing investment opportunity.2
  The main reasons for holding that opportunities for private enterprise and investment are vanishing are these: saturation, population, new lands, technological possibilities, and the circumstance that many existing investment opportunities belong to the sphere of public rather than of private investment.
  Technological possibilities are an uncharted sea. We may survey a geographical region and appraise, though only with reference to a given technique of agricultural production, the relative fertility of individual plots. Given that technique and disregarding its possible future developments, we may then imagine (though this would be wrong historically) that the best plots are first taken into cultivation, after them the next best ones and so on. At any given time during this process it is only relatively inferior plots that remain to be exploited in the future. But we cannot reason in this fashion about the future possibilities of technological advance. From the fact that some of them have been exploited before others, it cannot be inferred that the former were more productive than the latter. And those that are still in the lap of the gods may be more or less productive than any that have thus far come within our range of observation.
  capitalism—and not merely economic activity in general—has after all been the propelling force of the rationalization of human behavior.
  The capitalist process rationalizes behavior and ideas and by so doing chases from our minds, along with metaphysical belief, mystic and romantic ideas of all sorts. Thus it reshapes not only our methods of attaining our ends but also these ultimate ends themselves.
  The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the actual ability to do as one pleases with one’s own; the grip also in the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps. And this evaporation of what we may term the material substance of property—its visible and touchable reality—affects not only the attitude of holders but also that of the workmen and of the public in general. Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it—nobody within and nobody without the precincts of the big concerns.
  Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest.
  politics is a profession which evolves interests of its own— interests that may clash with as well as conform to the interests of the groups that a man or party “represents.”
  As soon as men and women learn the utilitarian lesson and refuse to take for granted the traditional arrangements that their social environment makes for them, as soon as they acquire the habit of weighing the individual advantages and disadvantages of any prospective course of action—or, as we might also put it, as soon as they introduce into their private life a sort of inarticulate system of cost accounting —they cannot fail to become aware of the heavy personal sacrifices that family ties and especially parenthood entail under modern conditions and of the fact that at the same time, excepting the cases of farmers and peasants, children cease to be economic assets. These sacrifices do not consist only of the items that come within the reach of the measuring rod of money but comprise in addition an indefinite amount of loss of comfort, of freedom from care, and opportunity to enjoy alternatives of increasing attractiveness and variety—alternatives to be compared with joys of parenthood that are being subjected to a critical analysis of increasing severity.
  Thus the same economic process that undermines the position of the bourgeoisie by decreasing the importance of the functions of entrepreneurs and capitalists, by breaking up protective strata and institutions, by creating an atmosphere of hostility, also decomposes the motor forces of capitalism from within.
  the bloodless concept of perfect competition that economic theory has framed for its purposes turns on whether or not individual firms can, by their single-handed action, influence the prices of their products and of their cost factors. If they cannot—that is, if each firm is a mere drop in an ocean and therefore has to accept the prices that rule in the market—the theorist speaks of perfect competition. And it can be shown that in this case the mass effect of the passive reaction of all individual firms will result in market prices and volumes of output displaying certain formal properties that are similar to those of the indices of economic significance and volumes of output in our blueprint of a socialist economy. However, in all that really matters—in the principles governing the formation of incomes, the selection of industrial leaders, the allocation of initiative and responsibility, the definition of success and failure—in everything that constitutes the physiognomy of competitive capitalism, the blueprint is the very opposite of perfect competition and much further removed from it than from the big-business type of capitalism.
  we can readily convince ourselves by observing that one of the most important difficulties of running a business—the difficulty which absorbs most of the energy of a successful business leader —consists in the uncertainties surrounding every decision. A very important class of these consists in turn in the uncertainties about the reaction of one’s actual and potential competitors and about how general business situations are going to shape. Although other classes of uncertainties would no doubt persist in a socialist commonwealth, these two can reasonably be expected to vanish almost completely. The managements of socialized industries and plants would be in a position to know exactly what the other fellows propose to do and nothing would prevent them from getting together for concerted action.13 The central board could, and to a certain extent would unavoidably, act as a clearing house of information and as a coordinator of decisions—at least as much as an all-embracing cartel bureau would.
  It is often claimed that the socialist plan, by removing economic care from the shoulders of the individual, will release incalculable cultural energies that now go to waste in the struggle for daily bread. To some extent this is true—any “planned” society may do that as, for other reasons and in other respects, it also may smother cultural possibilities. It might be objected that public authorities as we know them are hardly up to the responsibility of discovering and nursing talent to the stage of fruition, and that there is no sound reason to believe that they would have appreciated Van Gogh any sooner than capitalist society did. But this objection misses the point. For public authority need not go as far as this. All that is necessary is that Van Gogh gets his “income” as everyone else does and that he is not worked too hard; this would suffice in any normal case—though, when I come to think of it, I am no longer sure whether it would have sufficed in the case of Van Gogh—to give the necessary opportunity for the assertion of creative ability.
  Even if any conceivable socialist economy were sure to be in our sense less efficient than any conceivable commercial economy, the majority of people—all in fact for whom the typical socialist cares—might still be “better off” or “happier” or “more content” in the former than in the latter. My first and main reply is that relative efficiency retains independent meaning even in such cases and that in all cases it will be an important consideration. But secondly I do not think that we lose much by adopting a criterion that neglects those aspects. This however is a very debatable matter on which it is just as well to be a little more explicit.
  One element of these costs should be mentioned specifically. It consists in the absorption of ability in merely protective activities. A considerable part of the total work done by lawyers goes into the struggle of business with the state and its organs. It is immaterial whether we call this vicious obstruction of the common good or defense of the common good against vicious obstruction. In any case the fact remains that in socialist society there would be neither need nor room for this part of legal activity. The resulting saving is not satisfactorily measured by the fees of the lawyers who are thus engaged. That is inconsiderable. But not inconsiderable is the social loss from such unproductive employment of many of the best brains. Considering how terribly rare good brains are, their shifting to other employments might be of more than infinitesimal importance.
  The friction or antagonism between the private and the public sphere was intensified from the first by the fact that, ever since the princes’ feudal incomes ceased to be of major importance, the state has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force.
  For instance, in a socialist society nobody could possibly doubt that what a nation gets out of international trade is the imports and that the exports are the sacrifice which must be undergone in order to procure the imports, whereas in commercial society this common-sense view is as a rule completely hidden from the man in the street who therefore cheerfully supports policies that are to his disadvantage.
  Marxian proposition that the economic process tends to socialize itself—and also the human soul. By this we mean that the technological, organizational, commercial, administrative and psychological prerequisites of socialism tend to be fulfilled more and more. Let us again visualize the state of things which looms in the future if that trend be projected. Business, excepting the agrarian sector, is controlled by a small number of bureaucratized corporations. Progress has slackened and become mechanized and planned. The rate of interest converges toward zero, not temporarily only or under the pressure of governmental policy, but permanently owing to the dwindling of investment opportunities. Industrial property and management have become depersonalized—ownership having degenerated to stock and bond holding, the executives having acquired habits of mind similar to those of civil servants. Capitalist motivation and standards have all but wilted away. The inference as to the transition to a socialist régime in such fullness of time is obvious. But two points deserve to be mentioned. First, different people—different socialists even—will differ from one another both in the degree of approximation to that state which will be satisfactory to them and in their diagnosis of the degree of approximation which has been actually reached at any given time.
  Second, even supposing that an unmistakable state of maturity be reached, transition will still require distinct action and still present a number of problems. The capitalist process shapes things and souls for socialism. In the limiting case it might do this so completely that the final step would not be more than a formality. But even then the capitalist order would not of itself turn into the socialist order; such a final step, the official adoption of socialism as the community’s law of life, would still have to be taken, say, in the form of a constitutional amendment. In practice however people will not wait for the limiting case to emerge. Nor would it be rational for them to do so, for maturity may to all intents and purposes be reached at a time when capitalist interests and attitudes have not yet completely vanished from every nook and cranny of the social structure. And then the passing of the constitutional amendment would be more than a formality.
  First the banking apparatus of England is no doubt quite ripe for socialization. The Bank of England is little more than a treasury department, in fact less independent than a well-ordered socialist community may well wish its financial organ to be. In commercial banking, concentration and bureaucratization seem to have done full work. The big concerns could be made to absorb as much of independent banking as there is left to absorb and then be merged with the Bank of England into the National Banking Administration, which could also absorb savings banks, building societies and so on without any customer becoming aware of the change except from his newspaper. The gain from rationalizing coordination of services might be substantial. From the socialist standpoint, there would also be a gain in the shape of an increase in the government’s influence on non-nationalized sectors. Second, the insurance business is an old candidate for nationalization and has to a large extent become mechanized by now. Integration with at least some of the branches of social insurance may prove feasible; selling costs of policies could be considerably reduced and socialists might again rejoice in the access of power that control over the funds of insurance companies would give to the state. Third, few people would be disposed to make great difficulties over railroads or even over trucking. Inland transportation is in fact the most obvious field for successful state management. Fourth, nationalization of mining, in particular coal mining, and of the coal and tar products down to and including benzol, and also of the trade in coal and in those products might even result in an immediate gain in efficiency and prove a great success if labor problems can be dealt with satisfactorily. From the technological and commercial standpoint, the case seems clear. But it seems equally clear that, private enterprise having been active in the chemical industry, no such success can with equal confidence be expected from an attempt to go beyond the limit indicated. Fifth, the nationalization of the production, transmission and distribution of electric current being substantially completed already, all that remains to be said under this head is that the electro-technical industry is a typical instance of what may still be expected from private enterprise—which shows how little sense, economically speaking, there is in standing either for general socialization or against any. But the case of power production also shows the difficulty of working a socialized industry for profit which nevertheless would be an essential condition of success if the state is to absorb so great a part of the nation’s economic life and still fulfill all the tasks of the modern state. Sixth, socialization of the iron and steel industry will be felt to be a much more controversial proposition than any made so far. But this industry has certainly sown its wild oats and can be “administered” henceforth—the administration including, of course, a huge research department. Some gains would result from coordination. And there is hardly much danger of losing the fruits of any entrepreneurial impulses. Seventh, with the possible exception of the architects’ share in the matter, the building and building material industries could, I believe, be successfully run by a public body of the right kind. So much of it already is regulated, subsidized and controlled in one way or another that there even might be a gain in efficiency—more than enough, perhaps, to compensate for the sources of loss that might be opened up.
  No doubt one might conceivably hold that, however criminal or stupid the thing that democratic procedure may strive to accomplish in a given historical pattern, the will of the people must prevail, or at all events that it must not be opposed except in the way sanctioned by democratic principles. But it seems much more natural in such cases to speak of the rabble instead of the people and to fight its criminality or stupidity by all the means at one’s command.
  The reduced sense of responsibility and the absence of effective volition in turn explain the ordinary citizen’s ignorance and lack of judgment in matters of domestic and foreign policy which are if anything more shocking in the case of educated people and of people who are successfully active in non-political walks of life than it is with uneducated people in humble stations.
  What we are confronted with in the analysis of political processes is largely not a genuine but a manufactured will. And often this artefact is all that in reality corresponds to the Volonté generate of the classical doctrine. So far as this is so, the will of the people is the product and not the motive power of the political process.
  Fifth, our theory seems to clarify the relation that subsists between democracy and individual freedom. If by the latter we mean the existence of a sphere of individual self-government the boundaries of which are historically variable—no society tolerates absolute freedom even of conscience and of speech, no society reduces that sphere to zero—the question clearly becomes a matter of degree. We have seen that the democratic method does not necessarily guarantee a greater amount of individual freedom than another political method would permit in similar circumstances. It may well be the other way round. But there is still a relation between the two. If, on principle at least, everyone is free to compete for political leadership6 by presenting himself to the electorate, this will in most cases though not in all mean a considerable amount of freedom of discussion for all. In particular it will normally mean a considerable amount of freedom of the press. This relation between democracy and freedom is not absolutely stringent and can be tampered with. But, from the standpoint of the intellectual, it is nevertheless very important. At the same time, it is all there is to that relation.
  Between socialism as we defined it and democracy as we defined it there is no necessary relation: the one can exist without the other. At the same time there is no incompatibility: in appropriate states of the social environment the socialist engine can be run on democratic principles.
  Democracy means only that the people have the opportunity of accepting or refusing the men who are to rule them.
  Every system can stand deviating practice to a certain extent. But even the necessary minimum of democratic self-control evidently requires a national character and national habits of a certain type which have not everywhere had the opportunity to evolve and which the democratic method itself cannot be relied on to produce.
  it should be clear that the labor movement is not essentially socialist, just as socialism is not necessarily laborite or proletarian.
  socialist parties could not be advised to watch bourgeois politics in silence. Their obvious task was to criticize capitalist society, to expose the masquerade of class interests, to point out how much better everything would be in the socialist paradise and to beat up for recruits: to criticize and to organize. However, a wholly negative attitude, though quite satisfactory as a principle, would have been impossible for any party of more than negligible political importance to keep up. It would inevitably have collided with most of the real desiderata of organized labor and, if persisted in for any length of time, would have reduced the followers to a small group of political ascetics. Considering the influence that Marx’s teaching exerted, right up to 1914, on the great German party and on many smaller groups it is interesting to see how he dealt with this difficulty.
  Thus that great sociologist, the man in the street, has been right once more. He said that socialism and socialists were un-American. If I catch his meaning, it amounts pretty much to what, less succinctly, I have been trying to convey. American development practically skipped the phase of socialism which saw the career of unadulterated Marxism and of the Second International. Their essential problems were hardly understood. The attitudes appropriate to them existed only as sporadic imports. American problems and attitudes occasionally borrowed these imported articles. But that was all.
  Marx had visualized the conquest of political power as the prerequisite of socialization which was to be taken in hand immediately. This implied, however, as in fact Marx’s argument implied throughout, that the opportunity for that conquest would occur when capitalism had run its course or, to use our own phrase again, when things and souls were ripe. The breakdown he thought of was to be a breakdown of the economic engine of capitalism from internal causes.18 Political breakdown of the bourgeois world was to be a mere incident to this.
  Washington economists have veered round to recommend balanced budgets, but budgets balanced at a very high level of taxation, the taxes to be highly progressive so as to eliminate the high incomes from which the menace of saving primarily proceeds. This accords with the slogan that (owing to the saving done by the receivers of high incomes) “in modern societies, the ultimate cause of unemployment is the inequality of incomes.” Thus the high level of national income to which we have looked for the solution of a good many economic and social problems is itself made out to be the most serious problem of all. Since high income means high savings and since these savings will not be entirely offset by investment expenditure, it will not be possible for the economy to keep on that high level of income and employment— unless fiscal policy keeps it there—if indeed this high level can be reached at all.
  Normally people save with a view to some return, in money or in services of some “investment good.” It is not only that the bulk of individual savings—and, of course, practically all business savings which, in turn, constitute the greater part of total saving—is done with a specific investment purpose in view. The decision to invest precedes as a rule, and the act of investing precedes very often, the decision to save. Even in those cases in which a man saves without specific investment purpose, any delay in coming to an investment decision is punished by the loss of return for the interval. It seems to follow, first, that unless people see investment opportunities, they will not normally save and that a situation of vanishing investment opportunity is likely to be also one of vanishing saving; and, second, that whenever we observe that people display “liquidity preference,” that is to say, a desire to save unaccompanied by a desire to invest—a desire to hoard—this must be explained by special reasons and not by appeal to any psychological law postulated ad hoc.
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Key Points from Think Twice by Michael Mauboussin

According to research by Stanovich and others, if you explain to intelligent people how they might go wrong with a problem before they decide, they do much better than if they solve the problem with no guidance.

The second experiment showed the failure of pure rationality. Here, Richard Thaler, one of the world’s foremost behavioral economists, asked us to write down a whole number from zero to one hundred, with the prize going to the person whose guess was closest to two-thirds of the group’s average guess. In a purely rational world, all participants would coolly carry out as many levels of deduction as necessary to get to the experiment’s logical solution—zero. But the game’s real challenge involves considering the behavior of the other participants. You may score intellectual points by going with naught, but if anyone selects a number greater than zero, you win no prize.

Beauty contest in the stock market amplify bubble as participant guesses the most desirable stocks. This is why there is always an overshoot. Bidders will overbid and create bubble.

Most spend their time gathering information, which feels like progress and appears diligent to superiors. But information without context is falsely empowering. If you do not properly understand the challenges involved in your decision, this data will offer nothing to improve the accuracy of the decision and actually may create misplaced confidence.

In a probabilistic environment, you are better served by focusing on the process by which you make a decision than on the outcome.

These contrasting points of view reveal our first mistake, a tendency to favor the inside view over the outside view.6 An inside view considers a problem by focusing on the specific task and by using information that is close at hand, and makes predictions based on that narrow and unique set of inputs.

The outside view asks if there are similar situations that can provide a statistical basis for making a decision. Rather than seeing a problem as unique, the outside view wants to know if others have faced comparable problems and, if so, what happened.

Remarkably, the least capable people often have the largest gaps between what they think they can do and what they actually achieve.

The second is the illusion of optimism. Most people see their future as brighter than that of others.

Finally, there is the illusion of control. People behave as if chance events are subject to their control.

Study the distribution and note the average outcome, the most common outcome, and extreme successes or failures.

If the properties of the system change, drawing inference from past data can be misleading.

Failure to entertain options or possibilities can lead to dire consequences, from a missed medical diagnosis to unwarranted confidence in a financial model.

Last, a mental model is an internal representation of an external reality, an incomplete representation that trades detail for speed.5 Once formed, mental models replace more cumbersome reasoning processes, but are only as good as their ability to match reality. An ill-suited mental model will lead to a decision-making fiasco.6

we start with an anchor and then move toward the right answer. But most of us stop adjusting once we reach a value we deem plausible or acceptable.

The availability heuristic, judging the frequency or probability of an event based on what is readily available in memory, poses a related challenge. We tend to give too much weight to the probability of something if we have seen it recently or if it is vivid in our mind.

Failure to reflect reversion to the mean is the result of extrapolating earlier performance into the future without giving proper weight to the role of chance. Models based on past results forecast in the belief that the future will be characteristically similar to history. In each case, our minds—or the models our minds construct—anticipate without giving suitable consideration to other possibilities.

The confirmation bias occurs when an individual seeks information that confirms a prior belief or view and disregards, or disconfirms, evidence that counters it.19 Robert Cialdini, a social psychologist at Arizona State University, notes that consistency offers two benefits. First, it permits us to stop thinking about an issue, giving us a mental break. Second, consistency frees us from the consequence of reason—namely, changing our behavior. The first allows us to avoid thinking; the second to avoid acting.

Let’s face it: we all have finite attention bandwidths. If you dedicate all that bandwidth to one task, none is left over for anything else. So people should be alert to striking a balance between nitty-gritty problem solving and a broader context.

Stressed people struggle to think about the long term. The manager about to lose her job tomorrow has little interest in making a decision that will make her better off in three years. Psychological stress creates a sense of immediacy that inhibits consideration of options with distant payoffs.

The subprime mess revealed that what may appear to be optimal for the individual agents in a complex system may be suboptimal for the system as a whole.

A decision-making journal is a cheap and easy routine to offset hindsight bias and encourage a fuller view of possibilities.

Stress, anger, fear, anxiety, greed, and euphoria are all mental states antithetical to quality decisions.

“It is impossible to find any domain in which humans clearly outperformed crude extrapolation algorithms, less still sophisticated statistical ones.”

Yet in reality, half of all people must be below average, and so you should sort out when you are likely to be one of them.

With the diversity prediction theorem in hand, we can flesh out when crowds predict well. Three conditions must be in place: diversity, aggregation, and incentives. Each condition clicks into the equation. Diversity reduces the collective error. Aggregation assures that the market considers everyone’s information. Incentives help reduce individual errors by encouraging people to participate only when they think they have an insight.

In other words, what comes in through our senses influences how we make decisions, even when it seems completely irrelevant in a logical sense. Priming is by no means limited to music. Researchers have manipulated behavior through exposure to words, smells, and visual backgrounds.

Immediately after being exposed to words associated with the elderly, primed subjects walked 13 percent slower than subjects seeing neutral words.13 Exposure to the scent of an all-purpose cleaner prompted study participants to keep their environment tidier while eating a crumbly biscuit.14 Subjects reviewing Web pages describing two sofa models preferred the more comfortable model when they saw a background with puffy clouds, and favored the cheaper sofa when they saw a background with coins.15

For priming to work, the association must be sufficiently strong and the individual must be in a situation where the association sparks behavior.

In reality, many people simply go with default options.

Affective responses occur quickly and automatically, are difficult to manage, and remain beyond our awareness. As Robert Zajonc, a social psychologist, said, “In many decisions affect plays a more important role than we are willing to admit. We sometimes delude ourselves that we proceed in a rational manner and weigh all the pros and cons of the various alternatives. But this is probably seldom the case. Quite often ‘I decided in favor of X’ is no more than ‘I liked X.’ ”19 Affect is situational because it often follows vivid outcomes or a specific individual experience.

Zimbardo explains the factors that make the situation so forceful. First, situational power is most likely in novel settings, where there are no previous behavioral guidelines. Second, rules—which may emerge through interaction or be predetermined—can create a means to dominate and suppress others because people justify their behavior as only conforming to the rules. Third, when people are asked to play a certain role for a prolonged period, they risk becoming actors who can’t break from character. Roles shut people off from their normal lives and accommodate behaviors they would generally avoid. Finally, in situations that lead to negative behavior, there is often an enemy—an outside group. This is especially pronounced when both the in-group and out-group stop focusing on individuals.

To overcome inertia, Peter Drucker, the legendary consultant, suggested asking the seemingly naïve question, “If we did not do this already, would we, knowing what we now know, go into it?”

Yet the tendency to interpret the behavior of a complex system from its components is as common as it is wrong.

“The behavior of large and complex aggregates of elementary particles, it turns out, is not to be understood in terms of the simple extrapolation of the properties of a few particles. Instead, at each level of complexity entirely new properties appear.”6 If you want to understand an ant colony, don’t ask an ant. It doesn’t know what’s going on. Study the colony.

A star’s performance relies to some degree on the people, structure, and norms around him—the system. Analyzing results requires sorting the relative contributions of the individual versus the system, something we are not particularly good at. When we err, we tend to overstate the role of the individual.

“Understanding how well intentioned, intelligent people can create an outcome that no one expected and no one wants is one of the profound lessons of the game.”

Children—indeed people of all ages—do not behave the same under all conditions. They adjust their behavior to reflect their social circumstances.

Theories improve when researchers test predictions against real-world data, identify anomalies, and subsequently reshape the theory. Two crucial improvements occur during this refining process. In the classification stage, researchers evolve the categories to reflect circumstances, not just attributes. In other words, the categories go beyond what works to when it works. In the definition stage, the theory advances beyond simple correlations and sharpens to define causes—why it works.

Outsourcing is not universally good. For example, outsourcing does not make sense for products that require the complex integration of disparate subcomponents.

You must be very alert to the correlation-causality mistake. The fact that we like to make explicit cause-and-effect connections only adds to the challenge. When you hear of a causal connection, step carefully through the three conditions to see if the claim holds up. You will most likely be surprised at how rarely you can firmly establish causation.

Changing the decision-making process as circumstances dictate is a fundamental challenge and can be psychologically taxing.

People have an innate desire to link cause and effect and are not beyond making up a cause for the effects they see. This creates the risk of observing a correlation—often the result of chance—and assuming causation. When you hear of a correlation, be sure to consider the three conditions: time precedence, relationship, and that no additional factor is causing the other two to correlate.

The focus of this chapter is phase transitions, where small incremental changes in causes lead to large-scale effects. Philip Ball, a physicist and writer, calls it the grand ah-whoom.4 Put a tray of water into your freezer and the temperature drops to the threshold of freezing. The water remains a liquid until—ah-whoom—it becomes ice. Just a small incremental change in temperature leads to a change from liquid to solid.

This shows why critical points are so important for proper counterfactual thinking: considering what might have been.7 For every phase transition you do see, how many close calls were there?

Repeated, good outcomes provide us with confirming evidence that our strategy is good and everything is fine. This illusion lulls us into an unwarranted sense of confidence and sets us up for a (usually negative) surprise. The fact that phase transitions come with sudden change only adds to the confusion.

When asked to decide about a system that’s complex and nonlinear, a person will often revert to thinking about a system that is simple and linear. Our minds naturally offer an answer to a related but easier question, often with costly consequences.

For the most part, people are scorched not by black swans, the unknown unknowns, but rather by their failure to prepare for gray swans.

In dealing with systems of collectives, the ideal is to get cost-effective exposure to positive events and to insure against negative events. While we are getting more sophisticated, the financial instruments that we see in the market that are tied to extreme events are often mispriced.28 In the end, the admonishment of investment legend Peter Bernstein should carry the day: “Consequences are more important than probabilities.” This does not mean you should focus on outcomes instead of process; it means you should consider all possible outcomes in your process.29

The idea is that for many types of systems, an outcome that is not average will be followed by an outcome that has an expected value closer to the average.

For example, consider how a golfer may score on two rounds on different days. If the golfer scores well below his handicap for the first round, how would you expect him to do for the second one? The answer is not as well. The exceptional score on the first round resulted from his being skillful but also very lucky. Even if he is just as skillful while playing the second round, you would not expect the same good luck.6 Any system that combines skill and luck will revert to the mean over time. Daniel Kahneman neatly captured this idea when he was asked to offer a formula for the twenty-first century. He actually provided two. Here’s what he submitted:7 Success = Some talent + luck Great success = Some talent + a lot of luck

In my research, I found that analysts on Wall Street ignore the effects of reversion to the mean when they build their models of a company’s future financial results. Analysts regularly neglect the evidence for reversion to the mean in considering essential drivers like company sales growth rates and levels of economic profitability.

spread between return on invested capital (ROIC) and cost of capital reverts to the mean for a sample of more than a thousand companies, broken into quintiles, over a decade (the figure tracks the median ROIC for each quintile).

over time, luck reshuffles the same companies and places them in different spots on the distribution. Naturally, companies that had enjoyed extreme good or bad luck will likely revert to the mean, but the overall system looks very similar through time.

What if you ran the analysis of reversion to the mean from the present to the past instead of from the past to the present? Are the parents of tall children more or less likely to be taller than their children? A counterintuitive implication of mean reversion is that you get the same result whether you run the data forward or backward. So the parents of tall children tend to be tall, but not as tall as their children. Companies with high returns today had high returns in the past, but not as high as the present.

In reality, their performance was simply reverting to the mean. If a pilot had an unusually great flight, the instructor would be more likely to pay him a compliment. Then, as the pilot’s next flight reverted to the mean, the instructor would see a more normal performance and conclude praise is bad for pilots.

While Tomlinson and Hjelt got it right, the media often perpetuates the halo effect. Successful individuals and companies adorn magazine covers, along with glowing stories explaining the secrets of their success. The halo effect also works in reverse, as the press points out the shortcomings in poor-performing companies. The press’s tendency to focus on extreme performance is so predictable that it has become a reliable counter-indicator.

In Moneyball, Michael Lewis, an author who frequently provides fresh views on issues, points out, “In a five-game series, the worst team in baseball will beat the best about 15 percent of the time.”25 You do not see this in chess or tennis matches, games in which the best player almost always beats the worst, regardless of time frame.

Streaks, continuous success in a particular activity, require large doses of skill and luck. In fact, a streak is one of the best indicators of skill in a field. Luck alone can’t carry a streak. My analysis of various sports streaks in basketball and baseball clearly suggests streak holders are among the most skilled in their fields.

Imagine trying a new restaurant with two possible outcomes. In the first case, the restaurant is at its best. You have a wonderful meal with attentive service at a reasonable price. Would you go back? In the second case, the restaurant has an off day. You have a so-so dinner with indifferent service at the high end of what you had hoped to pay. Would you go back? Most people would go back in the first case but not in the second. Given reversion to the mean, what’s likely to happen the second time you go to the restaurant? Chances are the meal won’t be quite as good, or the service will slip a bit. But in this case you have gathered a more accurate view of the restaurant, even if it’s less flattering. On the other hand, if you never return to the restaurant because of a bad experience, you are assured you will gather no additional information, even if that information—as reversion to the mean suggests—would be more favorable.

But Gary Klein, a psychologist, suggests what he calls a premortem, a process that occurs before a decision is made. You assume you are in the future and the decision you made has failed. You then provide plausible reasons for that failure. In effect, you try to identify why your decision might lead to a poor outcome before you make the decision. Klein’s research shows that premortems help people identify a greater number of potential problems than other techniques and encourage more open exchange, because no one individual or group has invested in a decision yet.

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Mexico Trip Day 8 and 9: Chichen Itza, Playa Del Carmen and Tulum Ruins

PSX_20200125_142528Chichen Itza, One of The Seven Wonders of The World, in Yucatan

Today we left Merida for Playa Del Carmen, with a stop in Chichen Itza in between. We departed early at 8am, after having breakfast in the hotel, and drive for 1.5 hour to one of the seven wonders of the world. I mostly sleep on the way, as I felt terribly tired after seven days of heavy physical activity and lack of sleep. One thing I instantly noticed arriving at Chichen Itza is the number of tourists, which was surprising for an off-holiday season. Unlike other sites I have visited, including the Teotihuacan Pyramids, there was burgeoning numbers of people waiting to buy their tickets at the entrance of the site.

PSX_20200125_142646Chichen Itza, One of The Seven Wonders of The World, in Yucatan

Our site guide is a guy in his 40 that is very funny and captivating in explaining the functions and history of temples surrounding the main pyramid. The weather was hot, but not excruciatingly hot as in Asia. There were souvenirs vendors alongside the road to the temple and more on the way to the astronomical building ruins. Two things I learned from the guide explanation is that the Mayan priest use the sound effect of the buildings and various rule he made up to control the people, and lots of sacrifices were made at that time.

PSX_20200125_142731Chichen Itza Astronomical Temple in Yucatan

After the visit, we had our lunch at a Hacienda located 5 minutes away from Chichen Itza. It is like a hotel with a buffet restaurant that cost MXN 140 (US$ 7) without drinks. It’s not fancy, but they served salad and a mix of both Mexican and international foods that was well worth it for the price given. We departed at 2pm, leaving Yucatan province, and drove east of Merida to Playa Del Carmen, a town with famous for its beach and resorts on the province of Quintana Roo.

We arrived at 4.30pm, checked in Hotel Playa Del Carmen located three blocks from the beach, and head out for a walk at the fifth avenue. Few of us strolled on the beach, before returning to the fifth avenue to buy ice cream and look around at the stores alongside the road. At 7pm, we were already in the hotel and Maria guided us to ADO bus station (where I have to buy ticket to Cancun airport the next day) and walked around the square on the Southern side of the city.

PSX_20200125_230532Sunset at The Beach in Playa Del Carmen

For the final dinner together with the group, we had it on a Mexican restaurant on the fifth avenue. I ordered a mix of grilled seafood, which tasted great and similar to those I used to have in Indonesia. It was quite expensive, but the fact that I can’t find decent grilled seafood restaurant in Montreal means that I have to stomach the cost. I joined the others going back to the hotel soon after the dinner, as I had plan to watch the sunrise tomorrow morning in Tulum, an archeological site an hour away from Playa Del Carmen.

PSX_20200125_200809Last Dinner with The Group

I slept roughly for six hours the night, before waking up at 5.30 am and walked to the service collectivo minibus station next to my hotel. There is no fixed schedule when the minibus will depart, but they will depart as soon as it is full. There were several major stops on the way from PDC to Tulum, but essentially you could stop anywhere you wanted, and the driver will even do some short de routing to drop you off exactly where you want to. Although it was Sunday, my minibus was cramped with locals who were traveling from PDC to work at hotels or restaurants scattered alongside the road to Tulum.

I tracked how close I am to the destination using google maps, and when it was close enough, I said, “Zona Arquelogica de Tulum, por favor”. The driver dropped me off on the side of the highway, where then I have to cross and walk further east for 15 minutes to reach the ticket office. But it was a pleasant walk in the morning, when the weather was nice, and the sun is not high yet. Moreover, I had no problem with mosquito during my stay in Yucatan peninsula.

PSX_20200126_142307Ruins on the Cliff at Tulum Archeological Zone

PSX_20200126_142350Seascape at Tulum Archeological Zone

PSX_20200126_142420Tulum Archeological Zone

PSX_20200126_142444Tulum Archeological Zone

The entrance to Tulum Archeological Zone cost MXN 80 (US$4), with an option of 5am-7pm (sunrise a sunset) entry for MXN 260. Since it was almost eight when I arrived at the ticket office, I waited for ten minutes to get the cheaper ticket before going in the archeological zone. At the time, there was only one German tourist ahead of me and several others behind me.

PSX_20200126_142208Sunrise at Tulum Archeological Zone

PSX_20200126_142236View from the Cliff at Tulum Archeological Zone

Tulum Archeological Zone is one of the most beautiful sites I have visited in Mexico. Maybe it was due to the clear morning weather, or the ocean (which I have not been to in four years), or even the sound of the waves. The site was filled very organized, with a clear pathway for pedestrian and a rope outlining the walkaway. I looked for the way to the cliff overseeing the beach and the ocean, where I stayed for fifteen minutes taking few photographs and admiring the landscape.

DCIM100GOPROGOPR5727.JPGSeascape at Tulum Archeological Zone

PSX_20200126_142124Seascape at Tulum Archeological Zone

There is a small beach connected to the site, which seasonally hosts the nest for turtle’s eggs and is protected from human activity. If you are visiting the site in the morning, I suggest that first to go east to the cliff and then walk south to tour around and exit at the same entrance gate. This way, you could see the most beautiful section when there is less people around and still see all the site without walking through the same walkaway again and again.

PSX_20200126_142039The “Protected” Beach in Tulum Arcehological Zone

I wished I had more time to just sit on the cliff and watch the ocean, but I had to rush back to PDC and catch my bus to Cancun airport at 11.35am. At nine, I walked back to the highway and luckily caught a service collectivo heading to PDC. It stopped at fewer places and dropped me off at the same station in PDC at ten to ten. I headed straight to the beach, to beachfront restaurant managed by INTI beach that I had spotted the day before for a brunch.

The staff greeted and welcomed me very warmly, letting me to seat on a plush sofa with umbrella on top facing the beach. I ordered an orange juice and looked at the menu afterwards to see their seafood selection. I relaxed a bit, watching beachgoers walking by, before ending up having a jumbo shrimp with a basilic rice and vegetables, which were delicious, and another glass of pina collada. After the meal, I still sat still and listened to the waves before leaving at 10.45am and grabbed my luggage from hotel, heading to the ADO bus station.

PSX_20200126_142533Brunch at INTI Beach Club, Playa Del Carmen

Cancun airport is very decent and clean, much better than those in Mexico City, Oaxaca or Merida, and also have many shops and restaurants inside the terminal. I bought a bottle of tequila for my girlfriend, and then had my caramel frappucino at Starbucks before sitting at my departure gate. As the flight takes off, I was thinking to myself how nice the last 9-days had been, and humming silently a song I have been listening to for the past two days:

“If you like Pina Coladas, and getting caught in the rain
If you’re not into yoga, if you have half a brain
If you like making love at midnight, in the dunes of the cape
I’m the love that you’ve looked for, write to me, and escape”

DCIM100GOPROGOPR5752.JPGBrunch at INTI Beach Club, Playa Del Carmen


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Mexico Trip Day 6 and 7: Relaxing in Oaxaca, Merida and Uxmal Ruins

PSX_20200123_144052Sunrise from a Hill in Oaxaca

We stayed for two nights in Oaxaca, and on the third day, few of us were planning to watch the sunrise together from the hill close to Santo Domingo Cathedral. We met in the hotel lobby at 5.30am and started walking for 40 minutes west from our hotel. It was a unique experience for me to see the town early in the morning. There is a highway on the foot of the hill with a pedestrian walkaway on the side, where we scout for a clear view to the city downhill. I set up my tripod and started composing few photographs for the next half an hour while observing the sky’s color changing from thick orange to white-yellow color.

PSX_20200123_144442Santo Domingo Cathedral During the Sunrise

PSX_20200123_144548Oaxaca in the Morning

PSX_20200123_144632Santo Domingo Square in Oaxaca

The walk back to our hotel is even more interesting, as we passed several murals on the wall that we didn’t notice in the dark. We stopped to take more pictures and even some selfies in between. I love the way the sunray slowly lit the colorful building walls as we walked, as if a curtain was being gradually lifted on the whole city. It felt great to walk early in the morning. The air feels fresh and a bit cold, there were barely any cars and we could wander on the street as a result. We even saw a woodpecker on a tree branch, spotted by Max when he heard a weird sound coming from the sky.

PSX_20200123_144740Main Street in Oaxaca

PSX_20200123_144748Towers of Santo Domingo Cathedral During the Sunrise

PSX_20200123_144827Santo Domingo Cathedral During the Sunrise

PSX_20200123_144856Street Scene in Oaxaca

PSX_20200123_144755Entrance to Santo Domingo Cathedral in the Morning

Today, we had a flight to Merida at 4pm, meaning that we have to go to the airport at 1.15pm. This gave us ample time to explore Oaxaca further or just enjoy the day relaxing somewhere nice. After going back for breakfast in the hotel and taking a shower, I went to the Zocalo and found a coffee shop with seats on the terrace facing the Zocalo. There were many women selling textiles decorated with patterns, each of them standing ten meters apart while showcasing their good. I sat down for a good one and a half hour, reading my kindle and pondering whether I should pursue a PhD degree when I come back to Canada, to one day become a policy maker and contribute something to the world.

DCIM100GOPROGOPR5686.JPGA Street in Oaxaca in the Morning

DCIM100GOPROGOPR5676.JPGMe Reading and People Watching in Zocalo, Oaxaca

PSX_20200123_144948Nice Cup of Espresso in Zocalo, Oaxaca

Around 11.30, Juliette spotted me sitting there and said hello. She helped me locate the chocolate store we went to two days before, where I had planned to revisit to buy some chocolate bar and powder. I walked there fifteen minutes later and walked back to the direction of my hotel. That is when I met Steve and both of us ended up having lunch together at La Olla, the restaurant we went to last night. Funny thing is that when we already sat on the second floor of the restaurant and ordered our food, we saw Max and June entering the same restaurant, all this without any planning before.

Our flight with Interjet to Merida has one layover in Mexico City. In the airport I bought two chocolate bars and a bottled water for the flight, all of which cost less than MXN 100. While waiting, I also wrote a postcard to my girlfriend, who has a hobby of collecting postcard from her relatives traveling overseas. The flight from Oaxaca to Mexico City was delayed by about twenty minutes, which made the layover in Mexico City airport very brief that there is only enough time for me to go to the washroom and bought another bottled water.

At 9pm we arrived in Merida, which is warmer and more humid than Oaxaca. Getting out from the airport, we were tired and hungry. So, we drove straight to the hotel, Hotel Colonial de Merida, and put our luggage in our room before heading to the restaurant across it called Chaya Maya. It turned out to be a popular restaurant among the tourist and was still heavily packed at over 10pm. I had a pork cochinita, one of the local foods, that taste like a pulled pork sandwich with a tortilla as the bread.

Maria and a few of us went to the Plaza Grande two blocks away after the dinner to straighten our stomach and buy some water. Then, all of us went back to our room and slept, knowing that tomorrow we will have a long day.

The next morning, I woke up at 6am and walked to Plaza Grande to watch the sunrise. The sky was cloudy, with a tint of bright purple color. I had three hours to explore the city, before meeting for an arranged tour to Uxmal Ruins and Kabah at nine, so I paced my walk around the square. Surrounding Plaza Grande, there are two buildings that are worth a visit: Palacio Municipal de Merida and Catedral de Merida San Lidefonso. I went inside the cathedral and walked around the square again, before taking an uber to Santa Lucia Park and Paseo de Montejo, where many people were jogging in the morning.

PSX_20200125_061050Plaza Grande in Merida During the Sunrise

PSX_20200125_061133Plaza Grande in Merida During the Sunrise

Back in the hotel, I showered and had a big breakfast with the rest of the group. There are two options for tourist visiting Merida: first, to swim in the cenotes, which is a lake inside a cave with clear water, and second to visit the ruins. Another our member and I chose the later, as we don’t like to get wet during the trip and having to take shower again in the hotel after.

At ten past nine, a white minibus picked us and two other passengers before going to the direction of Uxmal Ruins, which is 1.5 hour away from the city. There, we met our site guide and tour around for an hour before we have our free time to climb the ruin on the back of the main pyramid. Uxmal Ruins are not as big as Teotihuacan or Monte Alban, and the landscape surrounding it was less stellar, but it’s still worth the visit.

PSX_20200125_060838Uxmal Ruins, Merida

PSX_20200125_060925Uxmal Ruins, Merida

Around noon, all four of us had lunch together and chatted. It turned out that the elderly couple is a marine corps veteran and a nurse from California, and this is their fifth time visiting Merida. They told captivating stories about places they have traveled to, such as Russia in the 90’s, safaris in Zambia and Kenya, and their horrible experience staying in a hut in Mongolia. I had a lime soup and chicken cochinita for the lunch, both of which were delicious, and the chicken is much more tender than last night’s pork cochinita.

PSX_20200125_061229Uxmal Ruins, Merida

PSX_20200125_061742Me in Uxmal Ruins, Merida

We continued the trip driving for another half an hour to a site called Kabah. There, we hiked more ruins and took some pictures. If you are visiting this place, don’t forget to go across the road of the parking lot and see the arch that historically served as the entrance of the site. Since it is not very big, we took only 30 minutes or so to walk around the complex.

PSX_20200125_061613Me in Kabah, Merida

The day tour finished at 4.30pm and I asked to be dropped at a square just next to my hotel for a reason. There’s a nice ice cream shop called Santa Lucia on the square, next to a hotel, and they have seats facing the crowds. I ordered two large scoop of mango sorbet for about MXN 100 and finished it while watching people walking by.

DCIM100GOPROGOPR5695.JPGIce Cream at Santa Lucia, Merida

I walked for one and half hour after that going to few markets and parks across the city before finally going back to hotel and took a shower. We had a fancy dinner at the Gastronomies Museum at 7.30pm, with Maria explaining various spices sourced from parts of Mexico that is gathered to make cuisines. The museum also has a miniature of Mexican village, where there are explanations about the food making processes. There was a live music in the center of the open-air restaurant and the ambience is just right. We had couple rounds of wine and Juliette and I stayed until midnight talking and drinking until the music stopped. It was probably one of the best nights I had for a long time, feeling both relaxed and happy traveling in a foreign country.



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Mexico Trip Day 4 and 5: Oaxaca and Monte Alban Archeological Site

PSX_20200122_002536Sasnto Domingo Cathedral During the Sunset, Oaxaca

Last night sleep was good, at least compared to the previous three day when I didn’t have 8 hours of consecutive sleep at night. Today, we are heading to another city located South East of Puebla that is called Oaxaca (wa-ha-ka). We had breakfast on the hotel together at 8am, then I took a quick walk to the Zocalo and bought two bottled waters for the five-hours road trip. I mostly read my kindle book and listened to music throughout the way. When we finally arrived in Oaxaca at 2pm, we were glad that the weather was much warmer, and the sky was cloudless.

PSX_20200122_223037One of the Main Street in Oaxaca

There were a demonstration in the inner city when we arrived, so almost all the road was blocked by a bus or group of people holding a banner, forcing us to stop in the middle of a road and stroll our luggage to the hotel less than 5 minutes away. As usual, we checked-in at our hotel, Parador del Dominico, before heading out for lunch together. Our hotel is located 5 minutes east from Santo Domingo Cathedral, which is located 5 minutes north from the Zocalo (central square). Further south from the Zocalo, there is a market 5 minutes away, which in total took us 15 minutes to walk. Somewhere in between, we stopped at a chocolate store and tried Oaxacan chocolate under the brand name Mayodormo. Inside the market, we toured around to see various goods and meats being sold, and ate tlayuda, which is a sense is a Mexican pizza (tortillas with toppings on top of it).

PSX_20200122_074918Square in front of Santo Domingo Cathedral, Oaxaca

It was around 15.30 when we have free time to explore the city and I went back to the Zocalo and Santo Domingo Cathedral to take few photographs. Directly next to Santo Domingo Cathedral is Museum of Cultures, which cost MXN 80 to get in and take around 2 hours for me to walk around each chamber and see each exhibit. Also, from the second floor of the museum, there is a window offering a view to the Ethnobotanical Garden and the square, which is well worth exploring.

PSX_20200122_075342View from a Rooftop Terrace Near Santo Domingo Cathedral

Less than an hour before the sunset, I walked to the direction of the hill in front of Santo Domingo cathedral to scout for the perfect spot for watching the sunrise tomorrow. Satisfied with my finding, I headed back to the square in front of the cathedral and went inside a café that has a rooftop patio on the second floor, waiting for sunset.

PSX_20200122_075440Me on the Terrace

The sunset was very colorful, with the ray reflected beautifully on the walls, enhancing the colors. I sat on the café for a good 45 minutes before it turned dark and realized that it’s time for me to walk back to the hotel and meet the rest of the group for a dinner together. Maria, our tour guide, suggested that we go to Le Campane for dinner, which served Italian pasta and selection of wines. We spend the rest of the night talking and drinking before stopping for 10 minutes watching local youngsters learning to dance bachata on the square on our way back.

Breakfast was served in our hotel the next day, about an hour before we depart to Monte Alban at 8.15 am, which is located only 40 minutes uphill from the city. The air was fresh in the mountain, and with the sun coming out already I put on my sunglasses. We met our site guide, a man in his sixties that talked slowly but is quite informative. First, we went to the highest point of the archeological zone to see the whole site and learn about the purpose and history of each building. From there, we descent slowly to visit each of the architectural marvel, which took about one and a half hour to complete. During the walkaround, we also had the chance to climb the temple at the other end of the site, giving us the perspective from both end of the zone.

PSX_20200122_223421Monte Alban Archeological Zone

PSX_20200122_223521Monte Alban Archeological Zone

PSX_20200122_223814Me at Monte Alban Archeological Zone

At the entrance of the archeological zone, there is a small museum, gift and coffee shop where few of us sat and drink after the tour, admiring the nature surrounding the site. We talked about other beautiful places in Mexico with Maria, our tour guide, and converse about various subject matter related to Mexico.

We went back to the city at noon. Juliette, Maria and I were already planning to have a fancy lunch at a restaurant called Tierra Del Sol, located nearby the Santo Domingo Cathedral. Due to the nice weather, we were planning to sit on the rooftop, but unfortunately, they weren’t opening that section yet due to lack of staff. We eventually sat nearby the window, which is still very nice, and were warmly welcomed by the staff. It was an interesting culinary experience for us, as one of the waiters brought pots of spices and chillies next to our table, showing us how to make a sauce for our meals. There, for the first time in my life, I tried eating insects.

PSX_20200122_222920Lunch at Tierra Del Sol

There isn’t much left to do in Oaxaca for me after the lunch, as I had visited most of the interesting buildings yesterday. Initially, I planned to go to Hierve el Agua, but there is no local tour going there on the afternoon and private tour was prohibitively expensive, so I scrapped it from my list. For the rest of the day, I wandered around the city, walking about two kilometers to the east of the square and ended up having a 90 minutes massage for MXN 900 (MXN 1000/US$ 55 with tips).

I met my group again for dinner at 7.30pm, and we headed to another rooftop restaurant called La Olla, conveniently located two blocks from our hotel. I tried their mezcal mixed with fruits and also eat octopus tortillas, which were amazing. It was so good that the next day I came back to this restaurant for lunch.

DCIM100GOPROGOPR5688.JPGMy Favorite Octopus Tortilla at La Olla, Oaxaca

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