[gshulegaard]

Ok...I sort of saw reason to your first comment in regards to article after reading it, but I had to login and point out that this comment sounded hypocritical to me.

First "business" has no concept of "ethics". This is one of the classic market externalities which leads to non-pareto-optimal outcomes.

Second, the "culture" doesn't just reward "hyperbole and fraudulent misrepresentation of business success." If we take your statement at face value, there would be no venture capital firms because they would all be throwing away their money, without any return, until they ran out.

The unfortunate truth is that there _is_ money to be made with Silicon Valley type investment. There _are_ economic inefficiencies which lead to undesirable market outcomes, but it's not because venture capitalists are just throwing money away for _no_ reason.

And finally, Theranos appears (at least to me) to be an exception rather than a rule. And while I don't agree with everything the article says or the way it says it, I think there are a few important takeaways.

Theranos was able to get funding because of who they knew...it calls into question whether or not they would have been able to get funding (or the amount they did) if they had been just another start up _without_ connections. It documents the times Theranos was _denied_ funding by Silicon Valley venture capital when they tried to obtain funding the traditional way.

It also points out the disproportionate amount of media coverage they had and questions whether it had a contributory role to Theranos' rocket-like trajectory. Heck, I would bet many people who use/rely on our software have never heard of my start-up, we hardly get covered in the media. In general I think the start-ups that get large amounts of media coverage are exceptions to the general rule.

Anyway, sorry for the long comment, and I don't want to take away from the fact that there ARE problems with Silicon Valley and business regulation in America in general.

[chimeracoder]

> First "business" has no concept of "ethics". This is one of the classic market externalities which leads to non-pareto-optimal outcomes.

Ethics can be modeled as an externality, but they don't have to be.

Hypothetically, let's say investors were taken to task publicly every time one of their investments blows up - not a simple company shutdown, mind you, but when the company is later proven to be doing really shady, unethical things. Ultimately, this would result in a tangible cost to the investment firm, because investment firms value their brand. In the long run, they would adapt, and take steps to guard against this risk before making investments.

Is that ethics? Or is it just the market acting efficiently, by pricing in the risk-adjusted expected future costs?

You can look at it either way, but at the end of the day, it doesn't really matter. Whether or not businesses have a concept of 'ethics', they can be forced to act as if they do, which amounts to essentially the same thing.

[gshulegaard]

> Whether or not businesses have a concept of 'ethics', they can be forced to act as if they do, which amounts to essentially the same thing.

Ah excellent point! But your hypothetical offers an external market correcting force. Another external market force would be government regulation (take for example the recent government laws forcing retirement investors to put their clients first).

The lines get pretty gray when you try to figure out what should be considered part of the market and what should be considered external to it. Personally, I would consider public perception outside of a traditional "market" model...but like I said, I am by no means an economist.

I also wanted to mention that most companies think in the short run and therefore often make self-harmful decisions to themselves. This relates to your comment:

> ...pricing in the risk-adjusted expected future costs?

Companies can only sell products to people that can afford them, so by keeping wages low, they are actually pricing themselves out of the market. A classic and oft referenced counter-example to this is when Henry Ford payed his factory workers well-enough that they could afford to buy the cars they were assembling.

Anyways, I obviously like to philosophize about economics far too much and don't want to bore anyone :) I am also NOT an economist so I have a rather limited perspective.

[chimeracoder]

> I am also NOT an economist so I have a rather limited perspective.

No worries, and thanks for responding.

> Personally, I would consider public perception outside of a traditional "market" model...but like I said, I am by no means an economist. Another external market force would be government regulation (take for example the recent government laws forcing retirement investors to put their clients first).

Speaking as an economist, I'd say it's pretty standard for economists to consider public perception (brand value) to be part of the decision-making model. In fact, it's essential - plenty of decisions can't be explained rationally unless you account for intangible assets and revealed preferences.

Likewise, it's common for non-economists to think of government regulation as an exogenous force, but from an economic perspective, government action is very much a component of the market - it exists as part of the market, not outside it.

> Companies can only sell products to people that can afford them, so by keeping wages low, they are actually pricing themselves out of the market.

This is a common talking point among advocates of wage floors (e.g. 'minimum wage'), but you'd be hard-pressed to find an economist who agreed with that statement as written, even if you're looking only at economists who already advocate for wage floors. (There are some economists who advocate for wage floors, but rarely using that line of reasoning). Labor economics is a complex subfield, though, (not to mention politically charged these days), so I'll just say that companies do price in risk-adjusted expected future costs (just not always with complete or accurate information, or with the outcomes one might like), and leave it at that.

[gshulegaard]

> I'd say it's pretty standard for economists to consider public perception (brand value) to be part of the decision-making model. In fact, it's essential - plenty of decisions can't be explained rationally unless you account for intangible assets and revealed preferences.

Interesting, I was under the impression that this was sort of the bold new frontier for behavioral economics. I would agree that plenty of decisions can't be explained rationally without accounting for intangible (non-price/revenue driven) effects, but hadn't realized that the specifics were widely accepted by "traditional" economists.

I also, myself, am skeptical of revealed preferences (specifically whether or not they can be revealed with respect to ordinality). But perhaps it is now widely accepted?

> Likewise, it's common for non-economists to think of government regulation as an exogenous force but from an economic perspective, government action is very much a component of the market - it exists as part of the market, not outside it.

Oh gosh, its been awhile, so my command of the proper terminology and referencing is severely lacking. But I agree with what you are saying...what I was trying to (poorly) articulate was that in a non-regulated, laissez faire market involving only Suppliers and Consumers (Demand) without an external correcting force acting on the market the market outcome would be inefficient. Of course from an economic model standpoint, the "new" market incorporates the regulation...and the government is actually an actor within the market. My lax terminology is probably a result of a) not being an economist first and foremost and b) usually having politically oriented discussions with individuals who like to call Right-wing economic view points "capitalism".

> This is a common talking point among advocates of wage floors (e.g. 'minimum wage')

Well, truth be told, I am not a fan of wage floors...I am more a proponent of basic income. And Labor economics is definitely complicated and the actual economics usually aren't the basis for the political positions (at least as I understand it)...but one rather contrived example which stuck with me was: If you are a company selling a $10 good, which market would you prefer: 100 potential buyers with $10 each or 1 buyer with $901 and 99 with $1? Which is what motivated that last comment...which is rather narrow and analysis thereof far above my own narrow view of economic theory. It just resonated with me.

[CPLX]

Don't get me wrong that's not the only culture that Silicon Valley has. It also has an amazing culture of innovation, and much to be proud of. But there is also an actual problem whereby hype and PR and growth hacking often crosses the line into deception and fraud. It's a problem at Theranos, it was a problem at Zenefits, Uber has had issues, etc. It's an issue, and the original article here is trying to pretend that it's outsiders and fringe players. It's not, it's woven into the culture too.

[gshulegaard]

Well you may be onto something.

Pushing for hyper growth above all else can lead to cutting corners. It's also a common mistake for inexperienced entrepreneurs to make.

Any way cheers!