My first business was a monopoly, and I ran it from a school bus seat in a suit and tie.
I was in seventh grade at Dexter, a private school in Brookline that required a suit and tie and, for reasons no one ever explained to me, a seasonal hat: a beanie in the winter and a baseball cap in the fall and spring. The cap had to stay clean, and its brim had to stay flat. I grew up in Boston, where you prove you are a real Red Sox fan by how thoroughly you have destroyed your cap, and Dexter sent us out every morning in hats that looked like someone had just peeled the sticker off from Lids. Picture a twelve-year-old dressed like a junior loan officer, under a hat no self-respecting Boston kid would be caught dead in (at the time), and you have the founder of my candy racket.
My bus stop was in Huron Village, directly across the street from a corner store called Sage's. Sage's is gone now (Sarah's Market sits where it used to be). Back then it sold Starburst for fifty cents a pack, and if I had two minutes before the bus arrived, I could run in, spend my entire allowance (five dollars most weeks, ten in good ones) on as much Starburst as I could carry, and be back at the curb before the bus door opened.
Candy was banned on the bus. Selling it was, presumably, more banned. Inside the building, Dexter enforced its rules with real conviction. Dexter and Southfield, its sister school for girls, were still separate schools then, run out of the same building, and in the hallways the boys walked single file along one wall while the girls walked single file along the other. We were not supposed to look at them. While that ridiculous rule was enforced on school grounds, on the bus nobody enforced anything at all. The only place at Dexter more Lord of the Flies was the boys' locker room.
I opened every sale at two dollars. If a customer swore he only had a dollar, I took the dollar, provided no one behind him had more. I never went below a dollar, and I never went home with inventory. Once I worked up the nerve to start, every pack I bought sold before we reached school, on every ride, for the better part of two years.
My customers knew exactly what I had paid. Everyone knows what a pack of Starburst costs. They might have complained about it sometimes, but they still paid, because the alternative was no Starburst, and none of them either had the opportunity to or would risk carrying candy onto the bus themselves. What they did carry, for reasons I still cannot explain, was cash. I never had cash at school. I had spent all of mine on Starburst.
No one ever competed with me. I would love to credit strategy, but my moat was geography: as far as I could tell, mine was the only stop on the route with a candy store across the street. I did not have a word for it at the time. Years later I learned the economist's word, rent, for money you collect because of where you are standing rather than what you make.
The Sprite Trade
The profits went straight back to Sage's.
Sprite was running a promotion that year: one in six bottle caps won a free Sprite. The bottles were clear, and if you tilted one and looked up through the bottom, you could see the printing on the underside of the cap. You could not read it through the plastic, but you could see the blur of it, and winning caps had more words on them, so a winner's blur was bigger. The clerks at Sage's let me stand at the cooler and inspect every bottle. They had no reason to stop me: somebody was going to win those Sprites either way, and Coca-Cola was paying for them. I would buy a winner, redeem the cap for another bottle (also pre-screened), and repeat until the cooler ran dry of winners. One dollar bought me six to eight Sprites. I was proud of beating a competitor of Coca-Cola.
Sprite, I found out years later, is Coca-Cola.
At my peak I cleared about ten dollars a week, which in seventh-grade purchasing power is a small fortune. The first week I held a full ten, I bought two two-liter bottles of soda and six dollars of assorted junk food, drank all four liters in one sitting, and threw up in the unfinished bathroom in our basement. Every market has its corrections.
The Price of a Long Block
In high school I went to Buckingham Browne & Nichols in Cambridge, where the thing I arbitraged was my own time.
Some classes at BB&N ran ninety minutes, and somewhere around sophomore year I learned (I do not remember how) what it cost to skip one. The answer was a forty-five-minute detention, held on Thursdays and therefore called a T squad, and nothing else. Skip two classes and you earned an S squad, and by now you can guess the day: two hours on a Saturday, which was a bad deal. But you were allowed to do homework during a T squad, and BB&N assigned two to four hours of homework a night.
So the math went like this. Skip ninety minutes of class, serve forty-five minutes of detention, and spend those forty-five minutes on homework I owed anyway. Net gain: ninety minutes a week, at a cost of zero. I skipped exactly one long block a week, never two, for roughly three years. Along the way I found a second loophole — if you signed in late, the classes you missed were excused — and between the two I set what I am fairly confident were consecutive school records for tardiness and skipped classes.
I spent the time in my grade's common room with friends, or alone at the school rink, practicing, because at five-foot-one and a hundred pounds soaking wet I was certain I was going to play in the NHL.
Detention was held in a science lab and run by a surly old science teacher whose only job was to make sure no one talked. No one wanted to talk. We had homework.
Hi, Sam Brownell
The teachers caught on long before the administration did. One of my favorites, who also coached the JV hockey team (my team, which tells you how the NHL plan was going), broke with custom on my midterm report. Where the form normally carried nothing but a letter grade, he wrote that whenever I skipped his class, he knew he could find me in the common room or on the ice. He was trying to warn my parents, having figured out the school would not. When my classmates heard I had gotten written comments, they complained. They wanted comments too, on the theory that feedback might raise their grades.
The school itself noticed all at once. The summer before my senior year, the principal called my mother in and told her they were considering holding me back a year because of my absences. My mother, who had never received a single notice that I had been late or absent, was furious, and she had a point. BB&N had built a superb machine for students trying to get into Harvard and had nothing in place for a student who was not. My absences went into a spreadsheet that no one read until June.
My parents never told me about the meeting. I worked it out that fall, when the principal, a woman I did not even recognize, started greeting me by my full name every time she passed me in the hallway. "Hi, Sam Brownell." I went home and asked my mother what had happened, and she told me.
In a strange way, the school's mistake made me untouchable. BB&N could hardly hold me back for absences it had never once told my mother about, and I spent senior year in a kind of Dead Man on Campus immunity: greeted by name, and otherwise left alone. I graduated on time with my class. On graduation day, with nothing left for the school to take away, I walked into the dean of students' office, sat down, and walked him through the entire model: the T squads, the S squads, the homework, the late sign-ins. The next year the school rewrote the rules.
Doing the Calculus
I have spent the twenty-odd years since turning those two stories into a working theory: people follow incentives far more reliably than they follow rules.
Nobody got hurt on that bus. My customers might have grumbled, but they paid, and as far as I could tell never gave it another thought. I gave it plenty. I was charging kids I saw every day four times what I paid, and I have not run a monopoly since. Skipping a class I already knew how to pass hurt mostly me, and it cost me more than I understood at the time. But both rules came with a price attached, and when the price is low enough, people pay it without a second thought, which was as true of me at BB&N as it was of the kids on my bus. BB&N had priced a ninety-minute class at forty-five minutes of supervised homework. I just did the calculus (a class I never took).
I am now, somewhat embarrassingly, obsessed with incentive dynamics: how a price, a rule, or a payout bends the decisions people make. Compensation plans are where I watch them most closely, since a comp plan is the one place a company writes its incentives down with a dollar figure attached. I review sales incentive plans constantly, because every good salesperson does exactly what I did at BB&N: finds the cheapest path to the payout. I do not resent anyone for it. Fair is fair. When a plan pays for the wrong behavior, the fault belongs to whoever wrote the plan, which at my companies is me, and the fix is always the same: watch what people actually do, find the incentive responsible for their behavior, and change it.
The harder problem is the one John Rawls built A Theory of Justice around. Ask people to write the rules before they know which seat they will occupy and they write something fair. Tell them their seat first and they write rules that favor it. I do not hold that against anyone, but plenty of businesses are happy to profit from it. People are myopic (I skipped class for three years to train for a hockey career that peaked at JV), and most markets are arranged so that the most convenient choice is the one that costs the customer the most, at a price the customer rarely stops to notice. Nearly everything I care about, from worker cooperatives to credit unions, is an attempt to change the incentive dynamics around a business so that it produces the most good in the world, and the convenient choice and the right one turn out to be the same choice.
If anyone at BB&N had asked me why I skipped one class a week, I would have explained the math. I was not going to volunteer it before graduation. But I would have told them.
In college I wrote a thesis arguing that worker cooperatives are more moral and should be more productive than conventional companies, and that entrepreneurs have almost no incentive to create them. Today I own most of a company I believe should be far more broadly owned by the people who work there, and it is very much not in my self-interest to make that happen. I will write about living inside that contradiction next.