The source of emergent order

Robert Solow from this EconTalk podcast on Growth and the State of Economics:

We all know that a lot of the innovation occurs as a business process. I keep telling myself we also all know that a lot of innovation comes as a matter of dumb luck. You set out to solve problem A, and you fail totally to solve problem A, but you solve problem B that wasn’t in your head at all.

I’m not sure we ALL know that.

But, I do think that growth, innovation, improvement in the standard of living — whatever you call it — depends on how good we are at recognizing that we solved problem B.

I’ve been a part of many organizations that end up solving problem B, but ignore it because they are fixated on solving problem A.

I think this happens with R&D efforts in government and other bureaucratic organizations. They get so hung up on their preferred solution (e.g. solar power or wind power) that they ignore discoveries that don’t fall into their pre-selected, politically-correct categories.

How well a system allows the solution to problem B to propagate, I believe, is related to that system’s long-term viability.

Avoiding reality sometimes works

Good blog post from Clay Shirky about the Obamacare website (Thanks to Russ Roberts @ Cafe Hayek). Here are a few excerpts.

Shirky demonstrates another lesson from The Croods, on why executive paid him to collect information from their own employees. Here he describes an instance where he is with a company’s programmer in the presence of its executives (emphasis mine):

…the programmer leaned forward and said “You know, we have all that information downstairs, but nobody’s ever asked us for it.”

I remember thinking “Oh, finally!” I figured the executives would be relieved this information was in-house, delighted that their own people were on it, maybe even mad at me for charging an exorbitant markup on local knowledge. Then I saw the look on their faces as they considered the programmer’s offer. The look wasn’t delight, or even relief, but contempt. The situation suddenly came clear: I was getting paid to save management from the distasteful act of listening to their own employees.

Humility is not common in the executive suite.

On bottoms up vs. top down (trial and error, specifically):

The idea that “failure is not an option” is a fantasy version of how non-engineers should motivate engineers. That sentiment was invented by a screenwriter, riffing on an after-the-fact observation about Apollo 13; no one said it at the time. (If you ever say it, wash your mouth out with soap. If anyone ever says it to you, run.) Even NASA’s vaunted moonshot, so often referred to as the best of government innovation, tested with dozens of unmanned missions first, several of which failed outright.

Failure is always an option. Engineers work as hard as they do because they understand the risk of failure. And for anything it might have meant in its screenplay version, here that sentiment means the opposite; the unnamed executives were saying “Addressing the possibility of failure is not an option.”

Unfortunately, every once in a while, avoiding reality sometimes works. Sometimes people get lucky when they exclaim that ‘failure is not an option’ and actually create something successful. Those people can be dangerous.

Bottom-up vs. Top-down

Forget comparisons like ‘government vs. free market’ or ‘public vs. private’. We can all pull out examples from each realm that works and doesn’t work.

I think a better distinction of human interaction systems can be drawn between ‘bottom-up vs. top-down’. Bottom-up systems tend to be driven by decisions and interactions very close to the individual. Top-down systems are driven by decisions made by a few individuals at the top of the hierarchy.

I often hear proponents of a central government — a top-down system — cite bottom-up examples to support their view, demonstrating that they don’t understand the top-down/bottom-up distinction.

Fire departments, police departments and roads are prominent examples of this and sound like, “These things are run by government and they work pretty well, let’s expand Federal government.”

Yes. These are usually run by government entities. But local government is not equivalent to Federal government. Local government is more bottom-up than top-down.

I think it’s helpful for discussion and policy-making to be able to recognize the two different systems. Here are a couple of thoughts.

  • To what degree do individuals have the ‘power of voice’?
  • To what degree do individuals have the ‘power of exit’?

Power of voice is an individual’s vote, purchasing decision or the ability to have the decision-makers hear your voice. Votes carry more weight in local elections than national elections. It’s easier to get in touch with city councilmen or the mayor than it is the Congressman or President. A purchase is a vote indicating that the individual values the product at that price.

Power of exit is the individual’s ability to leave or not choose a certain product. If I choose not to buy a product, I’m signaling that it’s not worth it. If I don’t think the city council is steering my city in the right direction, I can move a couple of miles to the next city over. Same if I’m looking for a better a school district.

Power of exit is a function of how many choices are available to me and the dynamics of competition among those choices.

I have lots of choices of products. Competition among those products is generally high. I can incur little cost for choosing one store over another or one product within a store over another.

In my area, I have lots of choices on cities, townships and counties that I can live in. Not as many choices as I have for different types of beer, but still quite a few. Since I do have a fair amount of choice, competition is relatively high and these cities and townships try to do things to voluntarily attract residents — like providing good fire departments, police departments, schools and roads. The cost to move is higher than the cost of choosing one product over another, but still not terribly high if things get really bad (this is why suburbs suck the life out of mismanaged urban areas).

I have 50 states to choose from, but the costs to move between states is relatively high. I have many countries to choose from, but the costs to change countries is even higher. So, competition goes down as these costs increase and so does my power of exit. I still have it, no doubt, but things have to get really bad before exercising that power.

I think there are a couple other elements of the bottom-up vs. top-down systems that are worth mentioning. I don’t think they are as useful in helping us recognize these systems, but I think they explain why bottom-up system work better than top-down.

1. Lots of independent trials/experiments. It’s hard to tell what will work and what won’t, so it’s best to try a lot of stuff.

2. No single point of failure. Since it’s hard to tell what will work, it’s best not to have a single point of failure, which top-down systems have.

3. How far apart are the benefits and the costs? Or, another way to think about it, how far removed are the decision-makers from the consequences of their decisions? This gets down to, how much skin-in-the-game do decision-makers have?

I will discuss more about these last three in future posts.

Bottoms up experimentation — update

After writing this post about how nice it is to have 50 states doing things differently so we can find out what works better, it occurred to me that I should note that this competition among government exists at even more local levels.

My parents, who are sometimes prone to believe that there should be just one way of doing things (the ‘right way’) and the Federal government should just do it that way, once benefited from competition among public school districts.

As I wrote about here, I also benefited from this competition.

My parents decided to move from the school district where they were educated to a competing school district seven miles away so my brother and I could get a better education. They felt that their school district had shifted priorities away from education toward political agendas and didn’t like it.

They could have organized campaigns to elect better board members. They could have run for the school board themselves. But those actions were long shots. Even if they got on the school board, they’d still need to battle the other school board members who wanted to use schools as a social experiment.

Moving to a district that was working was a surer bet and it involved no conflict. They could go about their lives and their kids could receive a good quality education at the same price. It was good and practical for them to have that choice.

This competition is a key element that folks ignore when they ask questions like, “we’ve socialized roads, police, school and fire departments, why not health care?”

The roads, police, school and fire departments are all little experiments. They all do things a little differently. If they do their job poorly, the residents — like my parents — can choose  to move to place where they think does it better. If one department discovers a way to do things better, the other road, police, school and fire departments can choose to adopt those innovations. If they don’t, they might lose citizens.

In this sense, “socialized” roads, police, school and fire departments are much more like businesses competing in a free market than anything socialized.

They compound their mistake when they use these localized, competing government departments as an analogy for something that would be truly socialized like a single, government-run medical system.

It was easier for my parents to move seven miles than to fight the bureaucrats of their local school district. When folks argue for a single, government-run medical system they’re arguing for removing choices like that.

Bureaucrats v Innovators

Here’s a nice piece from the Wall Street Journal about bottoms-up and top-down recovery efforts in two tornado stricken towns, Tuscaloosa Alabama and Joplin Missouri. Apparently, Tuscaloosa is taking the top-down approach, while Joplin is more bottoms-up.

That means that in Tuscaloosa, city officials see themselves as the center of the redevelopment efforts. They want to redesign and rebuild the city to their liking. They want to be the heroes.

In Joplin, the approach is much more practicable. The city officials are doing their job — issuing permits and such — and then getting out of the way to let private citizens do their job.

Instead of encouraging businesses to rebuild as quickly as possible, Tuscaloosa enforced restrictive zoning rules and building codes that raised costs—prohibitively, in some cases. John Carney, owner of Express Oil Change, which was annihilated by the storm, estimates that the city’s delays and regulation will cost him nearly $100,000. And trying to follow the rules often yielded mountains of red tape, as the city rejected businesses’ proposals one after another.

“It’s just been a hodgepodge,” says Mr. Carney. “We’ve gotten so many mixed signals from the get go. The plans have been ever-changing.” Boulevard Salon owner Tommy Metrock, one of the few business owners to rebuild on Tuscaloosa’s main thoroughfare, McFarland Boulevard, says the restrictions created “chaos” as people put their livelihoods on hold while the city planned.

Joplin took a dramatically different approach. According to interviews with local business owners, right after disaster struck the city council formally and informally rolled back existing regulations, liberally waving licensing and zoning mandates. It even resisted the temptation to make “safe rooms” a condition of rebuilding.