Media soundbites are ever more harsh, drawing a sharper line mostly through caricature. It is a dangerous game to play, since conventional crowd wisdom, once gained, is extraordinarily difficult to dislodge.

Weaknesses of capitalism

One of the prisms of contention concerns capitalism and its weaknesses. And while the popular press concedes that communism was a failure, there remains a significant cross-disciplinary academic crowd that insists a kinder, gentler society is possible, but is left untried. This assertion is becoming more difficult to make given that many forms of government of the leftward side of the spectrum, all versions of socialism, have generally been tried in one European country or the other, and they are all structurally inviable.

Karl Marx from the Library of Congress

And European countries are excellent incubators for experiment; smaller populations, controllable geographies, comparatively non-corrupted, and a healthy, educated populace. These attributes define an open, adaptable and not unwieldy landscape in which to brave a new world. Why then, are they all failing absent serious and drastic reduction in government?

What of Marx does survive? The philosopher Brian Leiter makes the point that the labor theory of value and the theory of the falling rate of profit have both been disproved, albeit there is a small vocal left-libertarian chorus that stands by them. But Mr. Leiter points out that Marx did characterize capitalism correctly:

capitalism continues to conquer the globe; its effect is the gradual erasure of cultural and regional identities; growing economic inequality is the norm in the advanced capitalist societies; where capitalism triumphs, market norms gradually dominate all spheres of life, public and private; class position continues to be the defining determinant of political outlook; the dominant class dominates the political process which, in turn, does its bidding; and so on. (The article, above, includes citations to supporting evidence.)

Particularly important, in my view, remains the Marxian theory of ideology, which predicts that the ruling ideas in any well-functioning society will be ideas that promote the interests of the ruling class in that society, i.e., the class that is economically dominant.

Leiter Reports: A Philosophy Blog: What is Living and What is Dead in Marx?

Bureaucracy vs. capitalism

But should we be surprised by the assertions of Marx? Are these actually attributes of capitalism, or of dominant bureaucracies? We could prescribe the same attributes to the Mayan culture, or to Rome, or on a shorter time line, even of Stalinist Russia. That is, any successful bureaucracy inevitably takes on these traits.

As to the assertion that the dominant class eventually structures its ideology to protect itself and its interests, even the YMCA began as an organization with the purpose to help the poor, and now caters to its main contributors. Here Olson in The Rise and Decline of Nations suggests all bureaucracies inevitably fall prey to their most boisterous and influential constituents.

Since so few companies survive either, most of them victims of their own entrenched interests and exigent annuity streams, bureaucracy becomes a prevailing and ultimately damning theme in all of these tales. 

Are we now talking about crony capitalism, or the inherent danger of bureaucracy? Is it possible for a nation, even when it is founded on the rule of law and limited government, to resist the temptation of encroachment and ultimately bankrupt itself in a surreal combination of sentimentality and special interest? For the most damning result is not just the warren of twisted incentives and pay-offs, but the statist mess it makes of the society or organization it governs. We are now in the ironic position that banks can legally hypothecate their client’s assets while Marlene Schmuck cannot sell baked muffins out of her own house.

Taylor and the bourgeoisie

Arguably the most enduring trait of Marxian philosophy still remains. And that is the prevalent dichotomy of the bourgeoisie and the proletariat. In fact it is difficult to walk the hallways of any company and not hear the unspoken assumption of management vs. worker, even as the media and the current President increase the volume regarding greed, income inequality and capital vs. worker.

The Taylor theory of management actually buttresses this view. Our left brain predilection for process in preference to discernment produces a natural tendency for hierarchy. But there is an argument to be made that here again, Marx was fabulously and gloriously incorrect. For there is no obvious disconnection between capital and the worker. There is only the struggle to add value and emotively, to gain validation.

If value and validation are the key to a vibrant and advancing society, then the natural dichotomy is between the entrepreneur/worker (for what is the difference?) and suffering and statist power or bureaucracy. For it is bureaucracy that limits right brain activity. It is bureaucracy that does not value adaptability or engagement or creativity. And it is bureaucracy that inevitably protects itself, succumbs to special interest, and is especially prone to corruption and favoritism. That Marx did not see that political and bureaucratic totalitarianism was the natural derivative of his socialist theories is the most damning articulation of his tautologies.

Implications for markets and organizations

It is through market induced variation and trial and failure that emergence and innovation; value, is produced. Capital follows. There is a great argument to be made that organizations are decentralizing not as a function of technology, but the other way around. They are discovering that the Taylor model, like the Marxian dichotomy, are incorrect. That cross-functional teams, and now cross-hierarchical teams (in a much flatter topology) are the natural form of congregations and organizations of people.

We may need some hierarchy and bureaucracy. But communication, vision, and some of our other traditional reasons for employing them were never wholly correct. And placing people in such positions of power is, like fame, an extremely unnatural and often self-destructive thing to do. In fact we intuitively sense that the best leaders understand this issue.

Bureaucracy (Lib Works Ludwig Von Mises PB) by Ludwig von Mises

The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation by Ikujiro Nonaka

Euros and bad debt

A common currency is really very simple both to create and dissolve. After all, the United States of America has had one for quite a while now. And contrary to conventional wisdom, it does not depend on capital flows, central banks or fiscal unions.

Eurozone under pressure. Photo from Wikipedia

The American dollar survives because all its constituents obtain their own debt ratings and therefore credit risks and payment obligations. Just because they share the same currency does not mean that New Orleans gets the capital obligations of North Dakota or New York.

But that is what Europe did. It ignored CAPM. The great international financial (or is that economics?) consortium decided that sovereign debt could ignore any capital requirement. You know, because it was safe.

It also turns out that despite their double dog promises and almost super human ethics, governments run sloppy books. Sometimes they even cook them. In an era where virtually all financial statements are unreadable, it may not be a good idea to rely on them for deal making.

Question: will putting governments on double secret probation help? Brussels seems to think so. The rest of us might be forgiven for viewing that suggestion as a comedy movie script, since ‘stern warnings’ have never worked on other nations no matter how often it is tried.

The Greek option

Both Los Angeles and New York have larger economies than Greece. And both are very likely to go bankrupt in the next decade. We will of course immediately kick them out of the US dollar, allowing them to devalue their new currencies and become ‘more competitive’ with the rest of the USA and the world.

Their populations will cheer their politicians’ prescience as their standards of living plummet even while their debts remain in US dollars. Any further concerns will evaporate as they whistle to work at all the new jobs that flock to the now deflated oasis of prosperity. And all previously unstable economic structures will now be viable at the new lower currency rate.

It is hardly worth mentioning that there is a simpler (and sillier) alternative to this inflationary option. New York and Los Angeles could renegotiate their debts and restructure their obligations and regulations in order to remain solvent in the future.

Countrymen, unite

Another alternative for New York and Los Angeles is to give up their sovereignty. After all, they do deserve to lose something; they led their people on. They have driven huge economies of millions of people to the brink of misery. Better that Texas and Ohio now take over the reins and guide them through their misfortune.

Similarly, Germany can take control of a more centralized European Central Bank (ECB) action which forces a new and decidedly non-sovereign European fiscal union. That way, Mediterranean provinces can adopt whichever austerity pogrom or program seems sensible to their new masters.

There will be two ironies to this new European union. The first is obvious; the world went to war less than a hundred years ago to prevent just such a union. And none of its people want it. But then, the majority of Europeans did not want a European Union either. Call it the wisdom of the crowd.

The second irony is really no less obvious. For it was bureaucratic bungling from the top of the hierarchy that created a financial mess that contravenes grade 9 finance. Now we are led to believe that more bureaucracy and control will fix it.

The other option is to allow failing states to fail. After all, they have been doing so since time immemorial, including quite recently. And contrary to current wisdom, the world did not end.

The benefits of this approach, despite the immediately painful adjustments to the populace, are many. First, it avoids further delay caused by more money printing, which will make the effects of default worse when it inevitably arrives. It allows each state to create solutions and restructuring plans unique to their situations and cultures. It preserves autonomy. It gives all of us the benefit of multiple examples. It avoids further centralization which in humanity’s history has always ended badly. And certainly not least, it tends to marry error with payment.

End of the Euro zone

The discussion of Greek default, which makes up 3% of the Euro zone economy, now includes ending the Euro zone. Think about the incestuous leverage implied in that statement. Now it must be remembered that it is mostly a zone in name only. And if anyone should leave the Euro zone, it should be Germany and some of the other northern states, leaving the Euro to wallow along with Mediterranean debt.

But all that discussion aside, why would a bankrupt state need to leave a common trading zone? The two are totally unrelated.

Perhaps the best irony of the Chicken Little cry of the European crisis is the one move that everyone wants to avoid; Greece should immediately scatter the barnyard by moving to default. Why wait? At least then all the chickens would return to their own roost.

The last thing Greece should do is leave the barnyard. Threatening to do so is exactly the wrong move.

The Open Source model continues to confuse and frustrate theorists and managers alike on exactly where its strength lies.  What is its ability to innovate and provide lasting value in the marketplace?  The success of Linux, Apache, Perl and other software projects poses a conundrum to management science, economics and social scientists in general, threatening to overthrow their carefully constructed apple carts.

Free obscures the paddling under the water

Aurora 224 2ch Open Source DJ Mixer

It is surprising to see so many experts befuddled by impassioned entrepreneurs that rally around a cause and forge a future. Settlers in any number of cultures have been building churches, post offices, jails and garbage dumps long before any government took over the task and began directing them about its timing, zoning and purpose.

Do not get the wrong idea that the above examples mean open source equals community service, or is antithetical to profit. But the lack of payment has confused the discussion.

What those examples teach us is that free association is a pervasive one. We could also use examples of multiple suppliers enjoining to form a firm, but the problem there is the opposite one; people are confused by the seeming profit motive rather than the rallying motivation based on common interest.

What are the strengths of hierarchy?

To get to the heart of the matter, Open Source advocates could argue very forcibly that governments have done a worse job of managing cities than their unorganized fore bearers did. In fact, the management of complex and open systems is well documented and miserable. It is very difficult if not impossible to do, and it becomes the issue in conservation areas, large parks, global warming theories, and city planning.

Large organizations with command and control hierarchies would do well to consider these and Open Source examples and learn from them. If upper management’s first fiduciary duty in large organizations is to do no harm, their long term track record is abysmal, primarily because bureaucracies assume permanence and entrench it with structure and inertia.

Part of the strength of Open Source is that since it has no bureaucracy, it is inherently adaptable. One could say it listens well, but that is an inherently hierarchical statement. It does not listen as much as it communicates what it finds since the members are both employees and customers, to use the vocabulary of the firm.

Self-organization and peer selection

Perhaps we are all too jaded to realize the power of self organized, engaged peer production. Perhaps we are all so accustomed to being herded and shepherded and organized from our first hours in kindergarten through decades of passive rote memorization and then structured Taylorean work places that we have forgotten that self initiated collaboration is the natural human state of affairs. Perhaps we have intentionally impugned competition for so many decades that we can no longer identify it when we see it.

The simple fact is that auto and peer selection is more accurate than supervisor allocation, and that engagement and creativity are bound with mastery and purpose, not obedience. Did we need social science experiments to prove that job performance is a function of both ability and motivational or dispositional factors, and that self-selection inherently favors the confluence of those functions?

The concept of self-selection is under-emphasized in the discussion of Open Source. As Eric Raymond says,

“…contributions are received not from a random sample, but from people who are interested enough to use the software, learn about how it works, attempt to find solutions to problems they encounter, and actually produce an apparently reasonable fix. Anyone who passes all these filters is highly likely to have something useful to contribute[1].”

That is a great deal of filtering, and arguably more effective than any hiring process. The cognitive effect on motivation of all that work hardly warrants mention. And coupled with peer selection, we have a hugely powerful foundation that is difficult to duplicate in a hierarchy without getting seriously out of the box.

Redundancy as a feature

Raymond also coins the ‘Linus Law’ which makes another fundamental point that most analysis of open source misses; “Given enough eyeballs, all bugs are shallow.” What he means is that the comparatively large number of programmer / debuggers makes what traditional programming finds difficult quite easy; each programmer tends to have their own perspective, thus increasing the probability that a bug will be matched to existing expertise to solve it.

There are fundamental lessons here for management science. First, it reinforces the concept of multi-disciplinary teams and specialization structured around a common purpose. Second, it portrays the strengths of complex systems; adaptability and emergence as a construct of self-organizing redundancy.

In traditional processes and hierarchies we tend to think in terms of efficiency which requires simplicity which demands single process points. Simplicity is efficient. But it struggles in the face of adversity. And it utterly fails when it faces novelty because it can not respond. Open source structures thrive on redundancy. They count on it.

Another key to the Linus Law is that someone characterizes a problem, and someone else understands it and answers it. Interestingly, most people agree that identifying the problem is the more difficult of the two sides of the coin. Here again, the answer is redundancy.

Communication as a role, not a management trait

As to structure, Open Source is not just a group of people jammed together willy-nilly. There is a great deal of method to the madness, with a core group of ‘halo’ developers that take on an organizing role which keeps overhead low. Hierarchical organizations tend to promote information aggregators; some organizations see it as a key management trait despite technology’s growing ability to automate most of the function. In Open Source, there is never confusion about roles because there is no hierarchy to climb.

Emulating complexity and scale free networks

But the central message regarding open source must return to redundancy. Innovation even in group projects revolves around the concept that design, enhancement and perfection are iterative, and occur in parallel spaces. That is a feature, not a bug.

Exploration loves connected duplication and diffusion. Communication is central, allowing chunky adaptations and almost immediate exploitation. What hierarchy views as waste, open source views as essential.

What is engagement?

To conclude, we return to the example of free association, where the Amish build a church or barn. There is no commander or middle management shouting orders or allocating resources, or motivating the troops. Like an ant colony, each person finds a place to contribute and does so. There is no queen or strategic CEO imparting vision or developing execution capability for the well being of the project or the organism. And even without the benefit of technology, the Amish will put up a barn as fast or faster at less cost than any group of construction workers similarly equipped with charts and plans and cranes and managers.

To be fair, the gist of the above paragraph may be too broad; a barn is a simple construct. But certainly no hierarchical organization can inject the same ‘empowerment’ or ‘engagement’ from the top down as a self-selected team working to pursue their passion. How then, does an organization imitate that? Actually, quite easily if one turns the question on its head.

On the other side of the coin, there is a great deal of useless information generated on the Internet by thousands of people working together. That may not be open source per se, but it is freely associated creative destruction, and the point is that bad ideas naturally degrade into nothingness in the unregulated, unmanaged atmosphere of the Internet, measured only by use, than under a government or managerial hospice nurtured by heroic egos and coalitions of inertia.

Inherent cognitive dissonance of hierarchy

The concept of Open Source embraces the idea that people, free of censure from superiors and the very explicit threat of a pay check, almost immediately become more engaged. And once engaged, peer pressure acts more effectively than any command and control structure.

The lessons learned from Open Source are not just of collaborative software. The primary lesson of Open source is that the benefit of hierarchies remains elusive, and their systemic tendencies of failure avoidance and permanence are rarely compensated by direction, execution, and vision, if they were ever strengths at all.

[1] Eric S. Raymond, The Cathedral & the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary, 1st ed. (O’Reilly Media, 2001).

Cathedral and the Bazaar  Eric S. Raymond

Here Comes Everybody: The Power of Organizing Without Organizations  Clay Shirky

Change management’s failure rate is 70%[i].  Since these are reported figures, actual failure rates are likely higher.  It is a despairing percentage  given the vast effort and research by thousands of public and private management and social scientists.  After this article, you will understand why the continued failure, and what you can do about it.

Research chronicles change

Change management remains a popular field; hundreds of millions of dollars change hands each year along with a continuing line-up of publications, books and speakers.  Balogun does a good job outlining the various cultural issues an organization inevitably faces in effecting change, and for that reason alone her book is worth adding to your bookshelf.  After all, change is fundamentally about changing people, not organizations.

But there is the first issue with most of the change management literature.  It chronicles steps and variables, all eerily akin to Kubler-Ross’ 5 stages of grief outlined in her book On Death Dying, that change encapsulates.  That is not a coincidence.  Any significant life change is likely to produce a combination of those reactions; humans are emotionally attached, especially to their habits.  Change management literature would benefit from the rich literature surrounding grief and longing.

Even so, much of change management literature fundamentally misses the point.  It describes the symptoms.  It does not treat the cure.  The fundamental issue with change management is that it performs surgery on the sniffles while the virus runs rampant.

Size matters

To illustrate the core issues with change management, remember that not all change is created equal.  Small organizations have a drastically better chance at effecting change than large ones, just as small groups in large organizations find it easier to change than large groups.  And although this intuitive truism is addressed in change literature, it does not form the basis of fundamental constructs in change management even though it points to the solution.

The reason it is easier to change small groups is simple.  They are us.  It is stratification and separation that defines the challenges of change management.  It is the study of prescription by the doctor.  But it is the patient that is sick.

Regardless of the approach taken to effect change, every one of them has two focus points; how to lead or communicate change, and how to coax associates into internalizing and accepting it.  This issue is obviously mitigated in a small group where the change instigator is already part of the group.  Their continued presence and influence is felt every day in every aspect.  In this fundamental sense, the leader is no longer the counselor.  The group is changing itself even if the change is instigated by only one member.  After all, is that not how all change begins?

Internalization and self-organization

In the end, no one can force change on anyone.  No counselor can enjoin or coax acceptance on a grieving widow.   No parent can force a teenager to internalize a love of reading.  There is no secret process wherein a CEO can lead a sub-group to fundamentally change their attitudes and processes.  In the end, change comes from within.  “You can lead a horse to water, but you can not make him drink.”

This then, is the fundamental issue with change management, and none of the literature proposes a practical solution to that problem other than refining the methods and processes of guidance, counseling, leading, and generally coaxing the horses.  But there exists an entirely different solution.

How to succeed at change management

Of course counselors, leaders and change agents are fully aware that it is impossible to force internalization.  The individual and the group must choose to change.  And the challenges of internalization rise exponentially in group settings; resistance is more easily buttressed.

The literature exhausts itself in methods to empower the group to internalize and change on their own.  This concept is not new.  But the derivative of that concept remains for the most part unexplored; it is the hierarchy itself that prevents the change.

Hierarchical structure is the issue

For relatively large groups that span departments and hierarchies, the chances of successful change drop precipitously.  The answer does not entail refining the process of counseling or leading change.  The answer is to collapse the hierarchy so that the group sees itself as a group with a common issue.  If forming a multi-disciplinary team is impossible, then successful change is highly unlikely.

Notice there are prerequisites.  If the group does not readily acknowledge an issue, then continued communication and leadership is unlikely to convince them, and there is little point in continuing.  If the survival of the organization is at stake, then we suggest an entirely different approach.

Second, the team must feel empowered and self-autonomous.   That is, its leaders must be part of the team on a continual basis.  And the major elements of the solution to said issue must be found within the team.  In other words, the team must exert control over themselves along with the tools to solve their challenges.  These prerequisites are simple requirements for any team to internalize its own issues and resolve them.

If the team does not have self-organizing authority, or requires significant aid through the bureaucracy, internalization decreases and success rates drop.  Empowerment in these cases is an inadequate word.  Actualization is a much better one.

Model 21 G.M.C. Change from chain to bevel drive. Dolly Var... by New York Public Library, on Flickr

Change and complexity

An organization is not a staid hierarchy or bureaucracy that sits in equilibrium which from time to time is prodded into action or change.  This model appears accurate only because significant change seldom occurs and so organizations appear to be statist.  It also appears accurate because the hierarchy itself represents equilibrium and permanence.  In that respect, the hierarchy is misleading and an impediment to the organization.

For organizations are not a staid set of processes and departments.  To the extent that they believe so, they become brittle and arthritic.  Rather, organizations are organisms, continually adapting to their environments, even if in jumps and starts because they are artificially frozen in place by their hierarchies.

The key to change management is to restructure (consistent with culture and purpose) so that the organization sees itself as a continually adapting self-autonomous organism that can and does instigate incremental change whenever circumstances warrant.  Teams then voluntarily undergo incremental adaptation for the most part internalizing their needs as they go.  The organization then adopts a self-instigated evolutionary approach to change, a constant adaptation to internal and external environments.  In scientific terms, we are introducing complexity.  In psychological terms, we are nurturing actualization through structure.

Critics may decry the impracticality of this approach.  To anticipate the foremost of these objections, the implications to the hierarchy are not nearly as revolutionary or anarchist as imagined.  The small 50 person firm with a traditional hierarchy (based on function) in most cases already forms a good model; embedded leadership, little or no departmental barriers, and group and team autonomy.  Second, the hierarchy does not need to disappear as much as change their roles; away from iron bound direction and towards facilitation, coaching, and expertise.  Think resource librarian or functional expert as opposed to counselor or supervisor. Imagine a celebration of discernment and self-autonomy as opposed to hierarchically mandated process.

As always, the implications are organization dependent, which is why we recommend Balogun’s book below, and once instituted, become eminently sensible.  Some of the best run companies in the world are already managed in this way, and their success has often forced a restructure of their industries.  Such has been the effect of their influence and profitability.

In summary, we do not need a more effective rider; we need to free the horse to approach the spring whenever they are thirsty.  The answer is not a better doctor; it is a more actualized patient.  Structure the organization so that change is and does occur as a normal course of doing business, instigated and managed by the teams that perform the work in the first place.  That is what is really happening anyway.  Why not structure the organization to help it to happen? Now the patient becomes the self-directing master of their own health. The responsibility, the direction, and the ultimate success is inherently internalized by structure.

Something else will happen in such a hierarchical structure.  The organization will immediately become more creative and efficient.

Reading on improving change success rates

[i] Julia Balogun et al., Exploring Strategic Change, 3rd ed. (Prentice Hall, 2008).

Exploring Strategic Change (3rd Edition)  Julia Balogun

The Health Care Fiasco

If the goal is a creative, low cost, reliable and adaptive health care system with 100% coverage, the answer is surprisingly simple; inject a complex system into the industry.  Currently the industry is so highly bureaucratic and influenced by government regulated spending that innovation has no chance to drive down costs or spawn varying service and price points.  A simple estimate would be that a health care system exhibiting complexity would cost about 7-8% of GDP, which is a far cry from the 15+% of GDP that the government controlled system now costs.

Ladies Benevolent Institution, Montreal, QC, 1909 by Musée McCord Museum, on Flickr

Only a large monopoly could go about the gargantuan task of restructuring the health care industry and markets in the manner we have witnessed in 2009.  Media coverage is surreal.  Democracies were not made for accomplishing such a task.  They are intentionally committee bound, inefficient and filled with compromise. There is no avenue for a monopoly to replicate innovation as inspired by thousands of experiments and failures.

A complex system in health care would be a free market.  To use the food industry as example, costs have declined for decades due to technology and productivity.  The government subsidizes means-tested individuals, not institutions, which preserves autonomy and self-organization.  Think of it; governments hand out food stamps rather than controlling super markets.  Why do they control 90% of hospitals?

No multi-million dollar research projects yield more accurate information than we already know about the topology of the complex system to drive adaptability and innovation and a lower cost curve.  We must introduce a free market as described in summary in the article on pricing commodities.

Self-organization

Direct supply and demand

No good can come from employer based health care.  The autonomous user agent, the consumer, must be self-organizing and in charge.  The tax sheltered employer system is easily changed to be revenue neutral for the consumer.  It also solves the ‘out-of-work equals uninsured’ dilemma if consumers directly purchase their insurance.

Insurance obstructing health care

Health care insurers also unnecessarily intervene in the complex system of health care. Catastrophic plans with higher deductibles would drastically lower both transaction and delivery costs.  Health insurance is not health care.  It is insurance.  Allow it to work.

Insurance which pays all costs destroys the self-organizing, autonomous behavior that creates a market.  And it is not insurance.  A high risk pool as in other markets could easily handle the relatively few that remain uninsured.

Gradualism

Process regulation

A drastic reduction in the legislation restricting and describing diagnosis and delivery systems.  We always get into trouble when we pretend to know the solution or end game of evolution (i.e., innovation).  Imagine if the government wrote regulations on PC use.  We do not constrain Apple on the development of their IPod.  Ants are not told how to forage for food.  The food industry is not told how to collect, store and deliver their product.

A significant portion of health care’s incredible cost is that market innovation on productivity, specialization of labor, and technology have not been allowed to infiltrate the industry (if you want to see spontaneous combustion, take an efficiency expert to a doctor’s office or hospital).  This government intrusion is bureaucracy at its worst.  Adaptability and evolution is unpredictable and emergent.  Regulation which presupposes the solution is its nemesis.

Innovation barriers

A revamped or privatized FDA.  It is the single highest cost of innovation.  A complex system or market in approval would work much more effectively.  BTW, Moody’s is no longer an independent agency, and one of the reasons it failed in its fiduciary duty during the financial crisis.  That issue has yet to be addressed by any regulation.

Robustness and duplication

Competition

Currently there is little competition by providers; they are protected by state.  No market can work without innovation.  Innovation requires evolution.  Evolution depends on competition.  Bureaucracy or committee are not substitutes.  Just as importantly, competition will encourage scale free networks without which the industry will remain inefficient.

Accessible information

Complex systems depend on communication and information to work.   Autonomous agents (most importantly consumers) in the health care industry need information to weight their decisions.  We suspect that if consumers were in charge of spending, provider information would quickly and naturally evolve.  To illustrate, imagine a super market without prices.  It could not survive a free market.

But this is the state of affairs in health care where doctor offices, hospitals and other providers do not compete on readily available prices.  The resulting price variance even in small geographies must be in the hundreds and thousands of percent and unrelated to quality or effectiveness; it is impossible to be otherwise.

Imagine Kroger’s selling milk for $2 while Harris Teeter sold it for $350.  That is the current state of health care, policed only partly by insurance companies attempting to minimize cost.  Notice that without direct payments by consumers to providers, any exercise of their choice tends to drive costs up rather than down.

If the public is illogically dead set against sharing their personal information (credit is already shared), then provider information alone would reduce the cost of health care by hundreds of billions of dollars a year.  One of the key debates by the Obama administration has been how to replicate this cost-curve phenomenon with bureaucrats.  The dirty secret is that there is no mathematical method of doing so.  Ask Russia. It is one example of how complex systems are more than the sum of their parts. Controlled systems most definitely are not.

If governments insist on subsidies, they may do so only to help individuals procure plans offered by private organizations.  This intrusion on the market would be better accomplished at the state level (to encourage plurality and therefore experiment and failure), and keeps government out of the management of health care as much as possible, allowing the complex system to work.

Amenable landscapes

Rule of law and tort reform

The cost to the system of current case law is much higher than realized.   Every country with socialized plans relies heavily on tort legislation.  Our current version of highly regulated health care is partly the worst of both socialized medicine and free markets since tort law is omitted in a highly regulated environment.

Innovation and adaptability rely on transaction and contract efficiencies, along with the penalties that implies. It does not rely on barriers. Current tort law in many cases does not even address the issues it purports to cure.  We either believe that individuals generally choose ethical approaches as the most effective method of furthering their self-interest, or we do not. The law in general must choose whether to protect, punish but ultimately nurture the agents in the system, or spawn parasites. Is the fox in charge of the hen house? All other nations believe so.

Tax law

The tax laws regarding charitable contributions must be prejudiced in their favor over government intrusion.  As alternative channels, charitable organizations increase the complexity of the system, which increases innovation and emergence.

Biotechnology

The biotechnology industry will inevitably change the foundation of medicine and more than likely, life as we know it.  Like the industrial revolution, the change will be an avalanche.  That we consider anything but a complex system capable of constructively adapting to such a landscape is terrifying to contemplate.  It will tear down industries, upend bureaucracies, and threaten the very foundations of inertia bound societies.  No committee of politicians with self-election incentives, nor a department of career bureaucrats, is equipped to handle the trillions of decisions that will be made, regulation or no.

Conclusion

Our economies are complex systems.  The story of self-organizing, autonomous agents is the story of evolution and humanity’s climb out of the cave, halted only by repression of that choice by bouts of corruption, fascism, and any number of government structures that rob the system of its self-determination.  Supported, they can take us to the stars.

Hampering and destroying them will impoverish us all.

Download Health Care Fiasco

Photo courtesy of Musée McCord Museum on Flickr

The dichotomy of bureaucracy

Mancur Olson’s authorship is a perfect example of the natural dichotomy of bureaucracy. For in his first book, he turned the world on its head by logically convincing us that special interest could tarnish a society. By his third and last book, he argued that the underpinning of quality institutions founded on individual liberties and the absence of predation by private or public sectors was foundational to economic growth.

Rise and decline of nations by Mancur Olson

Is it possible to make both an argument for and against institution and bureaucracy? Olson did. In his middle and now hugely famous book, The Rise and Decline of Nations(Olson 1984), he highlighted the potential for democratic institutions to lead to economic stagnation. In his final work(Olson 2000) he would affirm their fundamental importance in guaranteeing long-term economic growth.

His arguments remain compelling, insightful and easily read.

Collective action

Mancur Olson remains the first reference in collective group action even though his masterpiece, The Logic of Collective Action(Olson 1971) was published a generation ago. In it, he lays out the issues for larger groups to attain alignment and achieve optimum results for their members.

Since at least the New Deal, conventional wisdom had viewed special interests and pressure groups as a positive force in governments and societies (Commons 1950). Olson argued the opposite.

Olson argued that special interest groups representing small numbers of firms in oligopolistic industries could support monopolistic or protectionist legislation. This regulation often harms the broader economy, especially groups with difficulty self-organizing, who would then suffer without clear access to restitution. Similarly, any vocal or influential minority group can influence regulation to their own benefit, causing other groups to shoulder inordinate shares of the economic burden.

Later, a whole new branch of economics would be developed called public choice theory, with its concepts of rent seeking and incentive distortion. Olson’s ideas are in alignment with them.

Distributional and encompassing coalitions

In the Rise and Decline of Nations, Olson expanded these themes. He made a critical distinction between distributional coalitions, which are seen as leading to outcomes inimical to economic growth, and encompassing coalitions, which are seen as potentially aiding economic growth in a society.

Stable democracies would over time tend to accumulate rent-seeking distributional coalitions that engage in cartelization and protectionism that distorts incentives and impedes technological and organizational progress, hindering economic growth.

But in any society there are also encompassing organizations whose interests may correspond broadly with those of society at large. These groups find their interests difficult to pursue for the simple reason that they are large and unwieldy, and have a difficult time focusing their members’ coalition around the topic at hand.

9 implications of special interest

Armed with these concepts, Olson proposes 9 implications (1984, 74):

1. There will be no countries that attain symmetrical organization of all groups with a common interest and thereby attain optimal outcomes through comprehensive bargaining.

2. Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time.

3. Members of “small” groups have disproportionate organizational power for collective action, and this disproportion diminishes but does not disappear over time in stable societies.

4. On balance, special-interest organizations and collusions reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive.

5. Encompassing organizations have some incentive to make the society in which they operate more prosperous, and an incentive to redistribute income to their members with as little excess burden as possible, and to cease such redistribution unless the amount redistributed is substantial in relation to the social cost of the redistribution.

6. Distributional coalitions make decisions more slowly than the individuals and firms of which they are comprised, tend to have crowded agendas and bargaining tables, and more often fix prices than quantities.

7. Distributional coalitions slow down a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions, and thereby reduce the rate of economic growth.

8. Distributional coalitions, once big enough to succeed, are exclusive, and seek to limit the diversity of incomes and values of their membership.

9. The accumulation of distributional coalitions increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution.

Stable democracies without exogenous shocks or substantial internal upheaval tend to accumulate more and more of these distributional coalitions over time.

Olson’s crowning example is that West Germany and Japan enjoyed much faster growth than Britain after WWII mainly because their cartelized groups were destroyed forever. Britain’s situation was not a sudden development; after leading the world in economic growth during the Industrial Revolution (1688-1834), they fell behind in the mid-19^th century compared to such rising powers as Germany and the United States, and this deceleration only worsened in the aftermath of World War II.

Organizational implications

In Olson’s country research, the dangers of unions and cartelized industries alike are identical. 

And every bureaucracy must be eternally vigilant against diversion of the organizational mission by powerful self-interested coalitions.  Like parasites, they threaten the life of the organism as a whole.  Coalitions in bureaucracies make it more difficult to adapt and change during calamities, construct barriers to entry, build edifices where sanity would fear to tread, and preclude solutions that would more quickly bring restoration after adversity.  The reason is simple; coalitions do not have the mission in mind.

Most clearly, midst globalization and increasing rates of change, special interests and rules and regulations in organizations tend to restrict empowerment of individuals to increase productivity, innovate, and adapt.  Increasing control during historic rates of change is adversarial to both the individual and the long term health of organizations.

References

Commons, J.R. 1950. The economics of collective action. Macmillan.

Olson, Mancur. 1971. The Logic of Collective Action: Public Goods and the Theory of Groups, Second printing with new preface and appendix. Revised. Harvard University Press.

———. 1984. The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities. Yale University Press.

———. 2000. Power And Prosperity: Outgrowing Communist And Capitalist Dictatorships. 0 ed. Basic Books.

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities by Mancur Olson