The Rebel Allocator

by Jacob Taylor

  “I bet you felt vindicated,” I said. “Let me ask a foolish question.”

  “Are you capable of any other kind?” he said jocularly. “And by the way, feel free to order yourself something to eat,” he said, motioning toward the counter. “I’m buying.” At least this job came with some fringe-fry benefits. OK, that was bad. I’ll show myself out.

  I was enjoying my education, but school was about to really be in session.

  CHAPTER 19

  I went to the counter and ordered myself a Cootie burger with the fried egg on top, fries and a large shake. No sense holding back if he’s buying, right? As I rejoined Mr. X, I fired him a question: “You could probably sell all of the hamburgers you wanted if each one came with say, a free trip to Hawaii. That’s an exaggeration, but how do you know when you’re spending too much, even if it seems strategic? A trip to Hawaii would certainly delight them.”

  “That’s not a foolish question,” he replied. “Sit down here and I’ll show you something important.” With that, he shuffled off behind the restaurant counter.

  I sat at one of the open booths, excited to enjoy a famous Cootie burger. I expected Mr. X to take the vacant side of the booth, as was customary in Western culture. But when he returned, he stood waiting expectantly on my side until I got the hint and slid in. He sat down next to me with a handful of straws, a pencil, and a piece of paper. He proceeded to arrange the straws into rudimentary triangles and made some scribbles on the paper.

  “This is the Iron Law of Economic Survival,” he began.

  “Commit this to memory,” he said with a serious tone. “In order for a business to thrive, the value delivered to the customer, V, has to be greater than the price the customer is charged, P, which has to be greater than the cost of that good or service, C. V is greater than P is greater than C,” he said, pointing to each. “They can be in a different order for brief periods of time, but anything other than C then P then V is not sustainable. Either the customer will stop buying, your business will go bankrupt, or both.”

  “I’m with you, keep going,” I said.

  “OK, let’s address each letter individually. First C. What does cost actually mean here?” he asked.

  I thought for a moment and then answered, “In general, businesses have costs to make stuff. They have to pay for employees, buy equipment, buildings, inventory, advertising, lobby politicians to look the other way. Is that what you mean?” I couldn’t help myself from sneaking in a little jab.

  “That’s an OK start,” he said, his frown likely a response to my social commentary. “The correct answer is really ‘all of the above.’ Every cost should be included in that C number. The more comprehensive your list, the better your calculation of true economic cost. It’s very easy to use accounting tricks to make C be whatever you want by shifting costs into different time periods. Always be wary and ask yourself does this represent every true cost? Don’t fool yourself. And don’t let others fool you with their projections. Let’s see if you can do better with P?” he said, pointing to the middle straw.

  “This seems straightforward,” I hazaraded. “It’s the price you receive for selling something?”

  “Alright, that one was kind of easy,” he said. “Let me add some nuance. It’s helpful to look at the price through different time periods. For instance, what if you sold something like a newspaper subscription where the customer kept paying every month. That first month’s price, one transaction, wouldn’t tell the whole story. Often it is better to look at the customer’s lifetime relationship to determine accurate costs and prices.”

  “Here’s something I’ve always wondered,” I said. “How do you know what price you can charge?” I wanted to test his thoughts on price-gouging.

  “That sounds like a very simple question, but the answer is anything but. We can talk about it later. That simple question takes us down all kinds of rabbit holes. Competition, game theory, psychology. Let’s put a pin in that for now, but I will give you a general rule of thumb: if you have more than five competitors in your fishbowl, don’t expect to be able to control the price of anything. Also, I’ve noticed that in the long run, a mature market becomes a two-horse race. Usually an old, reliable brand versus an upstart battling it out. Think Coke and Pepsi locking horns in the Cola Wars.”

  “Fair enough,” I said. I could snare him on that subject later.

  “How about the toughest one, V?” Mr. X said. “I’ll have to warn you, centuries of philosophers have worked on what makes something valuable.”

  That’s not very encouraging. As I started to feel the tickle of panic, my food arrived. I looked at Mr. X and he nodded to say go ahead and dig in. So I did. I could feel him observing me as I took the first few bites, like he was measuring my enjoyment. Maybe he was sliding straws around in his head?

  Mr. X’s warning made me doubt that I could come up with a good answer. My mind wandered back to my comically-sparse apartment for clues while I ate. I did have a relatively nice hand-me-down coffee table. A dim flash of possible insight sputtered in my mind. “It seems like the more effort someone had to put into something, the more valuable it must be. For instance, I’d expect to get more value out of a coffee table that was handcrafted than some piece of junk slapped together. Wouldn’t it be better and deliver more value? So maybe one measurement of value is stored up human time or effort?”

  “You don’t know it, but you’re in very good company with that guess. Ever heard of Adam Smith?” he asked.

  “Wasn’t he the lead singer of some British band in the ‘80s? The Smiths, right?” He didn’t seem to get my joke.

  “No, the Adam Smith I’m referring to was an economist in the 1700s. He shared your thought: that value comes from the amount of labor needed to create something. A more complete theory eventually came along though. It’s called the ‘theory of subjective value.’ Sounds confusing, but it’s pretty simple when you hear it. We all have wants and needs at different times. They vary with the condition you’re experiencing. If you’re drowning in a river, a glass of water isn’t of much use. If you’re stranded in the desert, it’s almost infinitely valuable to you. The value of something always depends on your individual context.”

  “Oh, like you only really want an umbrella when it’s raining, otherwise it’s a pain to carry around?” I said.

  “Right, every human has a list buried in their head that’s the order of their wants and needs at that given moment. Entrepreneurs work hard to identify and satisfy items on that list. The list usually changes slowly. You regularly need food, water, shelter, clothing. But there are occasional massive upheavals to our lists. For five thousand years, everyone wanted a better horse saddle. Then one day, the automobile turned over the subjective apple cart. Now people weren’t so interested in saddles. They needed gas, oil, and tires.”

  “Or a smart-phone?” I said, imagining it might be a big change in technology. “Now people need apps and data like they need oxygen.”

  “I’ll have to take your word for it,” he said. Old people. “Remember, each person’s list is their own, and it’s completely subjective to their experience. The best steak in the world may be repulsive to your vegan classmate. Some people would feel guilty driving an expensive, ostentatious car. Your list is uniquely your own and changes based on your environment and the options available.”

  “I see,” I said. “I guess my coffee table is valuable because it can hold my drink upright, not because it took someone a lot of effort to create it.”

  “That’s right. There are startling implications in understanding the subjective theory of value,” he said. “Let me give you another concrete example.”

  “Shoot,” I said.

  “There was a plan to spend six billion dollars to redo the railway track from London to Paris,” he said. “Engineers believed this would improve the passenger experience by cutting thirty minutes off a four-hour journey. Less time on the train is a good thing, right? But what if instead they spen
t only six million dollars to add TV sets into every seat and also provided passengers with free movies? Couldn’t they spend 1/1000th of the original price and make the ride feel even shorter than the thirty minute proposed reduction?” I nodded in thought. “They didn’t think very hard about what would make the customer more happy. The obvious engineering answer isn’t always right due to the subjective nature of experience.”

  “Time flies when you’re having fun,” I joked. “Maybe they’d even want to sit at the station and finish their movie, making the trip a little longer?”

  “Probably not,” he said, derailing me. “All of this is just a long way of saying perceived value is based on what the individual consumer feels and experiences. Look at that counter over there.” The employees were still hustling with smiles on their faces. “Every employee at Cootie Burger is empowered to spend up to twenty dollars, with no questions asked, to make a customer happy. Why do we do that?”

  “I think I might know,” I said. “The people closest to the customer probably have the best gauge on how to fix a problem or what might delight the customer. If you’re at headquarters a thousand miles away and are making decisions in a vacuum away from your customers, how do you know if you are hitting the mark? How can you tell what is a strategic versus a non-strategic expense? You can’t--there’s no feedback when you’re so far away.”

  He smiled when I used his terminology. I felt the ache of internal conflict, at the edge of my subconscious. Some part of me was eager for Mr. X’s approval. Why should I care? “That’s exactly right, Nick,” he said. “That’s why I come down to the Lab on a regular basis. I don’t want to get too far from our customers. It’s also why we push a healthy portion of our decision-making out to the frontlines and give employees the latitude of twenty dollars no-questions-asked. We feel it gives us a chance to increase our V as much as possible for every unit of C. Do you know anything about World War II?”

  “A little,” I said.

  “Well, I lived through it,” he said. “The Nazis were on a horrifying mission, but the German army did some really smart things in an organizational sense. They had this concept called auftragstaktik.”

  “Off-rag-stak-what?” I said. That was more of a mouthful than my Cootie burger.

  “Don’t worry about the name,” he said. “Focus on the concept. The Nazi upper command would tell their soldiers what they wanted accomplished and why it was important. It was then up to the lower ranks in the field to come up with how it gone done. They get bigger picture strategy from above, but operational flexibility in the field where the environment is dynamic and messy. The pieces on the commander’s mapboard don’t always fit with what’s happening in the field. They wanted the German soldiers to feel empowered to make decisions and be creative in achieving their directives. The Germans were often outnumbered, but they were one of the most effective armies ever assembled. A lot of that was due to their thoughtful decision-making structure. Just because their aims were so awful doesn’t mean we can’t learn something useful from them.”

  I imagined myself on the front lines driving a tank, the engine shuddering while a German commander shouted orders at me. “So you want your soldiers to feel empowered to make decisions as well?”

  “Yes, you’re starting to pick it up,” he said. He glanced at his watch. “That’s all I have time for today. When you finish your meal, Cathy will take you to the airport. Spend some time thinking about your CPV triangles. See you in a few weeks.”

  Before I could I say anything, he had shuffled out the door. I flew all this way for a burger and a World War II story? This might be a little harder than I thought.

  CHAPTER 20

  My relationship with Stephanie was in full bloom. Every minute I wasn’t at work, school, or on an airplane, I spent with her. I met all of her grad school friends. We’d go out in a big group for dinner together on Friday nights. Sometimes we’d go bowling after. Other times it’d be darts and shuffleboard at our favorite bar. If we drank too much, we’d usually end up dancing somewhere. Then the search was on for a 2:00 AM slice of pizza. It was a rowdy bunch, considering they were all hardworking Ph.D. students. We had a lot of fun together.

  We went on regular double dates with Larry and his fiance, Maggie. While Larry was a human mountain, Maggie was petite. The juxtaposition of the two of them was always good for a laugh. The sheer physics of… nevermind. They would argue with an intensity I’d only seen in romantic comedies. Yet they’d seem to come back stronger after a big blowup. Like how a bone is supposedly stronger in a place where it’s broken and mended.

  Stephanie and I would go on hikes when we could break away to nature. We had our best conversations walking side-by-side on a trail. There was something magical about being in nature. We drove to the closest national park for a weekend getaway. I was under a lot of stress at work and school. I needed the recharge time with someone who understood me. It gave me the strength to put on my mask and head back into the lion’s den every Monday morning.

  CHAPTER 21

  I received a note with another Warren Buffett quote from Mr. X before my next trip:

  “The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.”

  I have a special treat for you this week. It’ll be a real shocker!

  - Mr. X

  I didn’t know what to make of the quote, but I was looking forward to finding out what my treat might be. When you have a billion dollars at your disposal, anything is possible, right?

  When I landed at the Wichita airport, Cathy picked me up and drove me downtown. Just before she kicked me out of the car, she told me that Mr. X was a perennial season ticket holder for the Wichita State Shockers basketball program. She said he had great seats as she handed me a ticket. I was to meet Mr. X at the game for this week’s session. Oh, so that was my “shocking” treat. All that money and only a ticket to a lousy college basketball game? I guess it could be fun.

  I entered the arena and navigated my way down near the floor where our seats were. I found Mr. X in head-to-toe black and yellow Shockers gear, ready to cheer on his team. He looked like he had been plucked from the student section and left in the sun to wither into a human raisin in all his swag. All that was missing was the face paint.

  “Hi, Mr. X,” I greeted him.

  “Hey, Nick,” he said with a genuine smile. “Have a seat.”

  I settled in next to him. “Great seats--we’re almost close enough to get sweat on us,” I said.

  “I don’t splurge on a lot of things relative to my wealth, but this is one of them. I love college basketball, especially Wichita State,” he said. This is splurging? “These kids are playing for the love the game, not million dollar paydays. I respect how they leave it all out on the court.”

  With my upbringing, I didn’t get much exposure to sports. I wasn’t exactly in my element, but I did enjoy the energy of the crowd in a rocking stadium.

  “I want to pick up where we left off last time,” he started. “Do you remember the Iron Law of Economic Survival?”

  “Yes, I made different cost-price-value triangles all week, experimenting with what you said.” I wanted Mr. X to find me an apt pupil to get him to let down his guard.

  “Good, maybe we won’t have to go so slowly this time,” he said. That didn’t feel slow to me, but whatever.

  “Let’s start with a few fringe cases,” Mr. X said. He broke out a clipboard and placed it on the armrests between us to fashion a small table. He pulled out a fresh sheet of paper and several Cootie Burger straws. Who carries this kind of stuff around with them? He started marking up the paper. The players were warming up and doing their pre-game rituals not far from our makeshift classroom. The crowd was still filing in a
nd it was quiet enough for us to talk.

  “What happens if the price straw is on the other side of the value straw?” Mr. X inquired.

  Class was in session.

  This seemed pretty straightforward to me, like I might be missing something. “The customer won’t think they’re getting their money’s worth if the price they pay is more than the value they receive. They won’t end up buying. At least not for long--it’s unsustainable.”

  “Correct,” he said. “It’s an opportunity for other businesses to come steal that unhappy customer. Eventually that person will find a way to stop paying for that product or service. Being cheated doesn’t sit well with us for long.”

  “Even if it means overthrowing a totalitarian regime,” I said. Yikes, I sounded like my father. Better dial that back a bit if I want to win Mr. X’s approval.

  “Or changing their laundry detergent,” Mr. X said. “Here’s a slightly tougher one. What if the cost straw is farther out than both the price and value straws?”

  After a minute of reflection, I said, “Well, the customer feels like they’re getting their money’s worth, so they’re happy. But as the producer, you have a problem. You’re subsidizing the happiness of your customers at your own expense. Which you can only afford to do for so long before you run out of money.”