Static vs. Dynamic Efficiency
Static and dynamic efficiency are two economic concepts that can be summed up as long-term vs. short-term. For example, a patent law is ripped up allowing for more supply of X, would be static efficiency. However, dynamic efficiency is allowing for long-term protection of intellectual property. The two each have trade-offs.
Static= increase in short term supply but reduction in long term innovation.
Dynamic= Increase in long term innovation, but decrease in short term supply.
This post is not about patent laws, but about whether we choose static or dynamic efficiency in our own lives. We are constantly choosing static vs. dynamic efficiency. Should we watch tv or work out? Should we look at social media or spend time with family? Should we read the 10-k or skim it? Choosing the dynamic option, will result in less short-term gratification. However, you will reap compounded gains over the long-term.
“The devil is in cheap dopamine.” -Naval
Cheap Dopamine= anything that gives you dopamine that you did not earn.
On many occasions, static efficiency and cheap dopamine come from similar choices. If I watch tv, I get short-term entertainment and relaxation. If I go to the gym I wake up sore tomorrow and cannot see the fruits of my labor immediately. If we live strictly for the short-term, the trade-offs are pretty lopsided. However, be thinking long-term. Working out consistently could be the difference between seeing your great grandkids being born or dying an early death. Aside from the other cognitive and physical benefits, that trade-off trumps the short-term upside.
We live in a world craving short-term dopamine. When our ancestors wanted food they did not have the luxury of doordash. They had to track it down and prepare it. It is really nice to get food delivered, but I feel confident that my brave hunter ancestor enjoyed his meal much more than I. My favorite speech is the Man in the Arena by Teddy Roosevelt. So much so that I will place it below.
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” – Teddy Roosevelt
I feel our ancestors had so many tasked that placed them IN THE ARENA! Just having a full stomach took a battle. We may not feel there are many arena’s left. However, I would argue that every day is an arena. Loving your kids, staying away from infidelities’, perfecting your craft are all arena’s. In order to be in the arena, you must choose dynamic efficiency. Those cold souls are the ones that choose to live on Twitter and criticize other’s politics or whatever is the subject of outrage. One man or woman choosing to spend time with his or her children does infinitely more good for the world than any person arguing on Twitter. If you want to make difference in the world, put your phone away and be kind to someone.
Isn’t this a business blog?
Yes, it is about business. I am getting to that.
“We believe that a fundamental measure of our success will be the shareholder value we create over the long term.7 This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.
Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies.8 Accordingly, we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy:
• We will continue to focus relentlessly on our customers.9
• We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
• We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.” – You Probably Know Who…
Jeff Bezos, in the first Amazon shareholder letter. He consistently differs from the short-term mindset of so many investment professionals. Amazon is a case study in choosing dynamic efficiency over static. The investment and business world craves short-term gains. Every start-up founder I speak with in my day job craves being acquired. They wish to work a few years and cash out. There is nothing wrong with that. However, the great companies are not talking about exits before revenues. They want to participate in the battle. They want to build something great. Zuck famously turned down billions of dollars in a matter of seconds in front of what I am sure was a wide-eyed board of advisors. This was a guy in his 20’s. He turned down the static and has built the dynamic.
I often spend time admiring people that love what they do. I do not really care how much you make. When I see a teacher fighting the good for children when he or she has been offered multiple more lucrative opportunities; that is truly special to me. Those people are in the arena. They will not be with the critics. They know what it is like to fight battles. They are choosing long-term over short-term. Then I see a founder who has a website talking about a 2-year exit for > $100M… I know they have not found what that teacher has found.
In today’s world, it is easy to choose the static route. However, to be great you must do what others are not willing to do. I hope that you and I will both choose long-term over short-term. I hope we find our arena.