A murmuration of starlings

Catataxis means “more of the same is different”. Warhol’s silkscreen prints of 32 Campbell’s soup cans seems to say “more difference is the same”. In his wall of near identical soup cans, each is different “variety” but they are all essentially the same. In other words you may have ‘choice’ but no real variety.  Choosing one of them is no real choice at all. That static image, made in 1962, was a portentous warning of the future.  You probably feel it most today when you are surfing through the 999 channels on your satellite TV. You have far more ‘choice’ than twenty years ago but there is nothing you want to watch.

Warhol’s soup cans miss one  key feature: things are not static but dynamic. Computer generated imagery ( CGI) on those TV programs fills in the background crowds in a battle scene, or adds the herds of dinosaurs in a science documentary.  They can make realistic crowd behaviour by using a ‘flocking’ algorithm. This has three simple rules: go in the same direction as everyone else, try to be in the middle and don’t bump into other people. By instructing each computer generated agent in the crowd to follow those rules they create  realistic  flocking behaviour; the herd of dinosaurs looks real.

Those three rules of flocking behaviour are also the rules for the supermarket buyer or TV executive. We can take them one by one. First, you have to follow the current trend. You have to respond to what is popular or you will have no customers. Second, you have to be in the middle. Your job is to get as many customers as possible and, by definition, they are clustered around the middle. Third, don’t bump into other people. Your product needs to be slightly different or you will get sued for copyright infringement.

The reason why everything on TV looks a bit the same is that the people who commission the shows are  flocking. So a better metaphor for consumerism than Warhol’s soup cans is a flock of starlings on a winter evening. As the birds group together in the darkening sky, the patterns they make coalesce and fragment unexpectedly. Three simple rules make something complex and startlingly beautiful. It is jittery, unstable, individually free but bounded by the group and impossible to predict. It is a group effect , a catataxic effect. This is the modern consumer economy: an evening murmuration of the starlings

The instability comes from the balance of two opposing forces. There is the push of trying to be different and the pull of trying to belong. This is classic teenage angst. It’s no coincidence that advertising gurus peg the aspirational age at 17. This is the age that everyone in the modern consumer economy would like to be. It is the nexus of cool. Those younger than 17 want to be just like those older kids. They aspire to the maturity and freedom of a 17 year old. Those older look to recapture their youth. So if you pitch your product at 17 year olds you will hit a much broader market. That’s where trends are born. It’s the centre of gravity of the starling flock.

Nestle and the Sugarbabes

Jelly baby playtime #2 front focus

In 1988 Nestle bought Rowntree, the UK confectionary company famous for its fruit gums and jelly babies. It paid £2.5 bn which was three times more than the market thought it was worth. Nestle then had a big problem with its accounts.

Traditionally,  accountants would only look at the value of tangible assets; physical things like equipment and buildings. The difference between what you paid for a company and its tangible assets was called goodwill and had to be written off. Rowntree at the time had tangible assets of £0.5 bn. So according to the accounting principles of the day, Nestle had just blown £2 bn on intangible assets that had no true recognised value.  It faced having to declare a huge loss.

Nestle argued this was nonsense. The intangible assets were not worthless, in fact they were very valuable. They were consumer brand names that had cost many millions in advertising  investment to build up. Moreover, they were more valuable than physical equipment. Machinery wears out  and breaks down in the end; it depreciates in value. Brand names don’t. They last for ever.

This debate about accounting policies ran on for over a decade. The proper accounting treatment of brands was not settled until 1999 in the UK and 2002 in the US. Nestle’s view won out. Brands do have financial value and don’t depreciate.

Brand valuation is an example of catataxis. It’s the value of a concept rather than a physical object. Beauty is in the eye if the beholder. Brand is in the mind of the consumer. So accountants are now valuing things one level higher than the physical.  They are pricing emotions in your head. How you as a consumer feel now has a recognised monetary value. That is catataxis.

The ultimate expression of a brand is a pop group. Rowntree’s jelly babies is a physical product with some warm consumer associations. But a pop group is not a physical product at all. Its pure concept. So a band is the ultimate brand. It can exist without its physical parts. Forget jelly babies, look at the Sugarbabes.

The Sugarbabes formed in 1998 with three members: Siobhan Donaghy, Mutya Buena and Keisha Buchanan. One by one, all three of the original members have left the group. The line up in 2010 is Heidi Range, Amelle Berrabah and Jane Ewen. The constituent parts are completely different from ten years ago, but the band is still the same. It is still selling out big arenas so clearly the fans don’t mind. The band is not its members. It exists at a higher level. A catatactic success story.

Cynics can point out that this is a manufactured girl band. It is run by Crown Management, so of course the members are mere interchangeable components. This view is unfair. Organically formed bands who write their own material have similar problems.  The Rolling Stones as a band (and brand) is still as strong as ever. But the solo albums by the members are embarrassing flops. Mick Jagger released a solo album in 2001 which sold only 954 copies on its first day. A few years later the Stones “Bigger Bang” tour played to 3.8 million people and grossed $500m. So when Mick writes songs and releases them under the Stones banner its completely different from releasing them on his own. That is catataxis.

Consider Pink Floyd. This band lost its creative mainspring  not one but twice. Syd Barrett left in 1968 and Roger Waters left in a very acrimonious breakup in 1985. Roger Waters wrote almost all of the The Wall which has sold 20m copies worldwide. His first solo album was “The Pros and Cons of Hitchhiking”. This is very similar to The Wall, even down to the artwork by Gerald Scarfe. It was written at the same time as The Wall and at one time could have been recorded by the band. It was an embarrassing flop.

A big dispute followed about the ownership of the Pink Floyd name.  Roger Waters lost out and the remaining three band members kept ownership of it. They have since released two successful albums and had three sellout tours. Roger Waters is touring “The  Wall” right now – though not under the Pink Floyd name. Is it any good? I’ll tell you next year. I am lucky enough to have tickets to his May shows in the UK….

 

( the show was great by the way – and I had seats right at the front – see pics below) 

Water – the catatactic commodity

Coal was the key commodity of the 19th century. It powered the Industrial Revolution. In the 20th century it was oil. The wars in the Middle East in the latter part of that period were clearly oil based conflicts. But oil played a significant part in both of the World Wars in the first half of the 20th century. In the First World War, oil first demonstrated its importance. It powered the British Navy. The internal combustion engine in the form of the tank and the airplane created the decisive breakthroughs to end trench warfare. My grandfather was wounded in the ill fated Mesopotamian Expedition. They were fighting to protect British oil supplies in modern day Iraq.

In the Second World War, Japan’s attack on Pearl Harbour was in retaliation to the USA’s oil embargo. Japan’s invasion of South East Asia was an attempt to capture the oil fields there. Likewise, Rommel’s war in North Africa and Hitler’s invasion of Russia has the ultimate goal of securing oil supplies. Hitler diverted his tank divisions from the doorstep of Moscow south to the Caucasus. He viewed the oil fields there as the more important prize. That led to Stalingrad and his eventual defeat. It is easy to see why some historians view all conflicts in the 20th Century as “Oil Wars”.

So what of the 21st Century? Some pundits believe water will replace oil as the key commodity. Water resources are finite. Demand is increasing dramatically. This is not just because of the drinking and washing requirements of a population growing exponentially. Both agriculture and industrial manufacturing consume a lot of water. It takes xx litters of water to produce a cheap cotton T shirt. Limited supply, voracious demand. Will the price of water skyrocket?  It is already an investment theme. There is a good selection of Water funds you can buy, and a matching Dow Jones Index.

And now the chance of the first Water War. Five nations near the Nile’s source have recently signed an agreement to share the river’s water between them. Uganda, Tanzania, Ethiopia, Kenya and Rwanda want to use Nile water for their own irrigation and hydroelectric schemes. Egypt is sabre rattling in response. Anwar Sadat, when making peace with Israel in 1979, said ” The only matter that could take Egypt to war again is water” . Maybe he will be proved right.

Egypt and Sudan use 90% of the water in the River Nile but only make up a quarter of the population along its banks. Around  80% of the water that ends up in the Nile falls first as rain on the Ethiopian highlands. Half of the population of Ethiopia is close to starvation and there is a chronic lack of water for irrigation. So why shouldn’t they use some of the water for themselves? Eqypt’s reply is that it has hardly any rainfall so the Nile is literally its lifeline. Any attempt to divert that water is a serious threat to national security.

The problem is this. Water is not like any other commodity. Oil fields stay put, so there is not much dispute about who owns it. It belongs to whoever owns the land above it. You could sneakily try to drill in from the side.  (Please see the movie “There will be Blood”. Only Daniel Day Lewis could make the line “I’ll drink your milkshake…”  sound so terrifying). In practice, you have to own the land to own the oil. That’s not true with water. Water does not stay put, it flows. And half the time its not on the land anyway. Its in the sea, or in the sky. So its not really a commodity, its an ecosystem. A meta commodity. How can you use 19th century territorial laws to define the ownership of a cloud in the sky? That is catataxis.

The centrifugal governor

What went wrong in the UK banking crisis of 2008?  According to George Osbourne it was a catataxis – although he does not use that word. The confusion of roles between the Bank of England and the FSA meant that a key role was not being done properly: macro prudential regulation. The Bank of England’s remit was to keep inflation under control. They were responsible for setting interest rates so that inflation would not breach 3%. The Bank of England was looking at the big picture. The only trouble is it was the wrong picture . The FSA was busy regulating the City on a micro level, making sure that no one broke the rules. They were examining each financial firm in turn, going through a checklist to make sure that procedures were being properly followed. The FSA was the micro regulator but where was the macro regulator? This function fell between the two stools. Both organisations were interpreting their remit too narrowly.  Rules were being applied but at the wrong level: this is catataxis. There needs to be someone who will lock up the drinks cabinet just as the party is getting good. According to George Osbourne’s proposed reforms, there needs a to be a regulator but at the macro level. Thats why he is abolishing the FSA and replacing it with a new body.

We have been here before. Back at the dawn of the industrial revolution James Watt invented a device to make steam engines run more smoothly. It was called  a centrifugal governor.  Two balls rotating around a spindle. The faster the spindle rotates, the further out the balls get flung. But the further out the balls are, the more work it takes to rotate the spindle which will therefore slow the system down. A big flywheel with a lot of inertia will smooth out an erratically firing engine.  But this is a dynamic flywheel: the distribution of the weight changes with speed. Its damping down the acceleration. In other words, it is regulating the second derivative. It is macro prudential regulation. Having led the world in the steam age, maybe the new reforms will help Britain’s global competitiveness in the financial age.

A centrifugal governor