The Knowledge Economy Cash Anomaly, Part 3: The exciting conclusion

This is part 3 in a series.  Here are Part 1 and Part 2.

Tax Shields 

The organization of the knowledge economy is inclined towards creating great tax advantages.  Both start-ups and mature companies enjoy huge advantages that the resource economy does not enjoy.  Most investments can be expensed.  The companies grow fast enough that they create huge tax losses, even as they create extraordinary value for the owners.  Once they become mature global companies, their assets can be transferred almost costlessly to whatever jurisdiction offers the most favorable treatment.  Transfer pricing makes it almost impossible for authorities to tell where value was added.  Money generated off-shore can stay off-shore tax free indefinitely.  In contrast, resource economy companies have easily traceable assets, some of which require particular locations and may be quite literally fixed to that location.  Their assets are comparatively easy to tax, whatever form their assets take.

If this is the case, it follows that knowledge economy companies have huge tax shields from their operations.  To have these tax shields add value to the business, the CFO of a company needs a business that is low risk, earns the cost of capital after tax, and does not consume much management attention.  Investing in marketable securities seems like just the ticket.  The gain on securities allows the owners of the company to take advantage of the tax shields that would otherwise go unused.

Here is what we’ve been looking for all along.  A reason why cash is better off in the pocket of the company than in the pocket of the owner.  In addition, all the other reasons why a firm might hold so much cash are still active and valid.  Full use of tax shields would be a driving factor for keeping cash on the balance sheet.  The discount rate for tax shields is low and even if only gets used every few years, it adds to the wealth of the shareholders.  For a founder, cash on the balance sheet capitalizes an otherwise unused tax shield, provides diversification, defends the core business, and enhances the value of R&D investments by its mere presence.

The question for further study would be when we would expect to see these benefits diminish?  Can we empirically test which of these hypotheses are most important in guiding payout policy?

Even the Navy Has Market Risk (they just call it something else)

My long awaited article in Proceedings just came out!  You might not have been waiting for it, but I have!  I started the article over a year ago.   It was a slog.  I can’t quite believe that I’m now signing up to publish an academic paper on the capital structure of robotics companies.

Image Credit: DTIC

In summary, the U.S. Navy is making a terrible mistake in it unmanned maritime vehicle policy.  The Navy is basically designing all their programs for robots that swim in the water to fail.  The technology exists today to make really cool, useful maritime robots.  However, the technology does not exist today to build the Navy’s dream robots.  (Especially since the Navy’s secret dream is to need more manned ships of the type we have today.)  Essentially, the Navy is pulling the equivalent of refusing to look at Roomba because it is not Rosie.

I’ll try and expand upon some of the key ideas from the paper over the next couple of weeks.  Readers of this blog will be familiar with the core ideas which have been translated from business to military jargon.  The Navy has to figure out what it needs its robots to do and the ecosystem around them at the same time that it is working on building the systems.  That’s what we in business call market risk!  The Navy needs to take some steps to reduce that risk.  Although the defense acquisition process stacks the deck against the Navy and it has some truly heroic individuals working on the problem, as an institution, the Navy really isn’t putting forth an adequate showing considering we’re talking about the institution’s future.

As a patriotic citizen of the United States–and as someone who understands that the U.S. Navy as much any institution on the planet has guaranteed an era of global trade, peace, and freedom–I really want our Navy to have a bright future.  Everyone who studies the naval budget–horses and bayonets snark aside–knows that the Navy isn’t on a sustainable path.  Robotics offer the Navy a future even brighter than the past.  To have this future, the Navy will have to learn how to manage and implement this technology.  It won’t be easy, but there are solid principles for doing this.


Also, readers, I want to thank you.  Thank you for being patient with a terrible layout, a casual tone, mixed quantitative/qualitative arguments, poor citation, and irregular tables. I do want you to know that you are reading a blog whose underlying ideas are good enough to go through peer review.  I, for one, commend you for that.  I hope that the ideas have a practical impact in advancing robotics that improve the world.  Now, stop indulging my self-congratulation and get back to putting more robots into the world!

A response to Singer

I must be an Aristotelian active soul, because I have no patience for those who hold themselves up as philosophers but suggest no way to actually live in the world.  I have a new post up on Hizook taking the leading intellectual on drones to task for sloppy reasoning–then I suggest a realistic path forward.

How many will die before we fix this?

Four airmen died this weekend fighting wildfires.  They died needlessly, compounding the tragedy of their sacrifice.  There is nothing technological stopping drones from taking over the retardant dropping mission.  The hold-up comes down to bureaucratic inertia and a lack of political leadership and attention to this issue.

There have been at least six aircrewmen killed just this fire season!  How many does it take before we collectively figure out how to do this mission with autonomous or remotely piloted aircraft?


(My criticism of a lack of political leadership is not a partisan criticism.  The technology to remotely pilot fire-retardant tankers has been around for at least two administrations and neither party in congress–which is the body that will really have to act–has shown much leadership on this issue.  But seriously, our guys are getting killed.  The robotics industry knows how to fix this problem, let’s get everyone at the same table and get the barriers cleared so we quit making widows and orphans every fire season.)

Compared to what?

The Pakistani affiliate of the International Herald Tribune has a great summary run down of recent drone strikes under the Obama administration. It details strike after strike against militants that are operating freely in Waziristan and the tribal areas.  It also produces a summary statistic of civilian casualties which, even if taken at face value, seems to indicate that these strikes exhibit a very high degree of proportionality and discrimination.

I’m out here in San Francisco and I sometimes get some troubled reactions when I tell people that I led a drone unit when I was in the Army.  Eventually telling  these people that my drones were not armed quiets them down, but there is a fundamental misunderstanding about how drones are different and similar from other types of war.  Drones unfortunately have some misperceptions about how they compare to other types of military engagements.

I would like us each to sit in the chair of senior commander or official who has just received intelligence from multiple sources (as it seems these strikes are probably based on) that is really good, but not 100% certain.  There is a militant–who the Pakistanis allow to travel, train, and organize unmolested–who is intent on killing not only U.S. soldiers, but also our civilian allies and females who dare to leave the home to get an education.  He believes that it is his god-given moral imperative to kill all these people.  What would you do?

A)  Nothing

B)  Ask the Pakistanis who have been arming this guy to arrest him

C)  A drone strike

D)  A manned aircraft strike

E)  A commando or sniper raid

Okay, even Marines get this one: when in doubt, Charlie out.  Seriously though, C is the only ethical choice.

Doing nothing means that you have let an evil, violent man go about his plans to kill someone’s son or daughter because he or she believed in a world where everyone has the freedom to make something of themselves.  By the same token, B is even worse, because now you’ve not only let him go free, you’re endangering your sources and methods of finding him in the first place by telling the Pakistanis what you know.

On the other side of the spectrum, there is every probability that any method besides a drone attack would be worse when measured by the standard of proportionality and discrimination.  Drones usually strike using the smallest guided air to ground missile in the U.S. arsenal, meaning they tend not to cause more damage than is absolutely necessary to destroy valid military target.  Would a commando team be as precise?  What if the team itself was attacked by our Pakistani ‘allies?’  Could it or a manned plane follow the target and wait until this small missile was the appropriate munition to use to ensure the destruction of the target?  The answer is no, they could not.

Of most concern to all of us who treasure innocent life is the principle of discrimination which means that you are only attacking legitimate targets.  Although this is where drone are most criticized, this is where they beat all other methods of apply force.  Can you imagine any other weapon so precisely attacking only legitimate targets?  There is no other weapon system where every action of the user is recorded, second guessed, and subject to real time absolute supervision by higher authorities.  Once a pilot is over a target his judgment of the scene and need to protect himself while completing the mission takes precedence over a second guessing boss back at base–and rightly so.  Even more so with a commando team, the commander of that mission has complete autonomy and discretion once his forces are committed.

But let’s be clear, commandos and pilots make more mistakes, not less, by being on scene.  They are affected by all kinds of pressures, are in mortal danger, and are being asked to make snap judgments on their own.  They screw-up.  They drop bombs on the wrong house–or even the wrong army.  Snipers in over-watch shoot civilians all the time–they don’t mean to, they just do.  None of these things are war crimes, they are just mistakes–unacceptable tragedies–but still just mistakes not crimes.  I think that most of us, civilian or military accept this.

Drone operators on the other hand work in secure locations, can loiter over their target, and stalk him for days or weeks until they get a clean shot.  They even have lawyers looking over their video feed as they work!  These are carefully supervised, deliberate operations.  That said, this is still war, where even professionals make mortal mistakes with the best information available.  But even or especially in war, we must do our best to protect those principles we hold dear and every analysis says that drones are the most moral option.  To those who would say that drones are immoral, I would ask in comparison to what?


It is well that war is so terrible–otherwise we would grow too fond of it.  -Robert E. Lee

Needless Deaths

Fire season has just begun this year and already there have been two needless deaths that can be attributed to the FAA and Forest Service’s failure to embrace unmanned and robotic technology.  There is absolutely nothing about the fire reconnaissance mission or the tanker mission that cannot be done better, cheaper, and more safely by an unmanned aircraft.  These men did not need to be in that plane.

The crazy thing about it is that the Forest Service/BLM incident commanders are some of the few people in North America that can actually tell the FAA to go pound sand.  They get to put up a TFR (Temporary Flight Restriction) over their fire and they control all air traffic in the TFR.  Wildfire response crews do not do any night operations because it is considered too dangerous for them to fly at night.  Still, the powers that be have not allowed unmanned aircraft to play a substantial role in firefighting despite successful demonstrations in 2008.

My most sincere condolences to the families of these men.   They are exactly the kind of people that we need more of in society–people that will take risks to protect us all.  We–as a country and a society–are literally killing these people with our failure to embrace unmanned and robotic technologies.  I don’t want to be unsympathetic to the difficulties of change in government organizations and the good work that I’m sure the employees at Forest Service and BLM are doing, but when we’re making widows and orphans with our crappy policy, we all need to step up to the plate to take action to change it.

If I were the U.S. Congress I would:

1)   Call in the FAA, Forest Service, and BLM and tear them all a new one for their foot dragging on unmanned aircraft.

2)  Mandate the conversion of the whole tanker and most of the fire reconnaissance fleet to unmanned aircraft within 5 years.

3)  Direct the Forest Service and BLM to provide unmanned aircraft support at night in the TFRs to incident commanders this fire season.

4)  Give the BLM and the Forest Service some money to do this.  One of the main problems with wildfire firefighting is that there is a negligible advance procurement budget, but a nearly unlimited budget for reimbursement of labor to fight fires.  This is not a good deal for the country, spend a little bit in advance and lets save lives and money next fire season and every season thereafter.

USA #1 & #2

For all the wrangling about the future of U.S. spaceflight, the New York Times had an article to remind us today that the U.S. not only has the largest spaceflight program in the world (NASA), but also the second largest space flight program in the world (DoD).

I think the real consternation comes from the fact that all spaceflight that has a compelling rationale is unmanned.  This rise of the robots in the budget somehow has people confused about what our space programs are capable of.