Bottom Up

Chapter 8 is my favorite from Ridley’s The Rational Optimist.  In it, he builds the case that even though many people imagine progress comes from a top-down world, it really emerges from the bottoms up.

This is not a new epiphany.   I discovered it myself early in my career as I witnesses a variety of top-down and bottom-up organizations, and experienced some bottom-up organizations become top-down and vice versa.

Before I go further, I think some definition is in order.

In a top-down organization, decision-making is centralized and driven from the leaders (top) down to the lower level associates.  In a bottoms-up organization, decision-making is decentralized.  Front line associates are given latitude to make decisions that make sense for them and leaders hold them accountable for achieving results.

The easiest way I’ve come to recognize the top-down from a bottom-up organization is by determining what the lower level associates are held accountable to.

In centralized organizations, they’re held accountable to inputs, or doing what the leaders tell them to do Did you follow my instructions? Did you follow this process? Did you make X number of sales calls?

In decentralized organizations,  lower level associates are held accountable for results, or outputsDid you achieve sales growth? Did you make a new product that customers wanted to buy?  Did you do better than your competitors? Was it good?

Several times in my career I’ve asked some managers who were prone to top-down leadership about their thoughts on centralization.  Some couldn’t trust people to make the right decisions or they thought decentralization had its place, but they believed they were a good judge for what couldn’t be decentralized.

In truth, these were micro managers and bureaucrats.  They envision their role as making procedural decisions and issuing orders. Perhaps that’s the conventional image of a leader society has imprinted on us.

More subtly, these  folks are more comfortable issuing orders and determining whether their charges did as they were told than they are at evaluating results and confronting folks about those.   Most bureaucrats obtained their roles by pleasing other bureaucrats.  They don’t have much experience with output success, so they aren’t good judges in that respect.  They cannot articulate what success looks like, beyond executing whatever personal to-do list they have imagined.

Back to Ridley.  Many economists (mainly of the Austrian flavor) have written about the knowledge problems that restrain the top-down formation from being as effective as bottom-up.  Ridley does a good job of shedding light on this in practice (p. 255):

They [politicians] believe that the recipe for making new ideas is easy: pour public money into science, which is a public good, because nobody will pay for the generation of ideas if the taxpayer does not, and watch new technologies emerge from the downstream end of the pipe.  Trouble is, there are two false premises here: first, science is much more like the daughter than the mother of technology; and second, it does not follow that only the taxpayer will pay for ideas in science.

…England had a scientific revolution in the late 1600s…but their influence on what happened in the manufacturing industry in the following century was negligible.  The industry that was transformed first and most, cotton spinning and weaving, was of little interest to scientists and vice versa.  The jennies, gins, frames, mules and looms that revolutionized the working of cotton were invented by tinkering businessmen, not thinking boffins…

Likewise, of the four men who made the biggest advances in the steam engine…three were utterly ignorant of scientific theories and historians disagree about whether the fourth…derived any influence from theory at all.

Throughout the industrial revolution, scientists were the beneficiaries of new technology, much more than they were the benefactors.   Even at the famous Lunar Society, where the industrial entrepreneur Josiah Wedgwood like to rub shoulders with natural philosophers like Erasmus Darwin and Joseph Priestly, he got his best idea — the ‘rose-turning’ lathe — from a fellow factory owner, Matthew Boulton.

Ditto for advances in the the twentieth century.

The inescapable fact is that most technological change comes from attempts to improve existing technology.  It happens on the shop floor among apprentices and mechanicals, or in the workplace among users of computer programs, and only rarely as a result of the application and transfer of knowledge from the ivory towers of the intelligentsia.

After making the case for bottom-ups, Ridley describes how the world has gone top-down with the conventional wisdom that government can do all or, as quoted in this post, how bureaucrats come to control organizations and R&D, stifling innovation.  But, on page 274, Ridley observes with the advent of open source software, social networking, Wikipedia, etc that…

The world is turning bottom-up again; the top-down years are coming to an end.

I hope he’s right.

Bureaucrats vs. Innovation

I’m enjoying Chapter 8 of Matt Ridley’s The Rational Optimist.  The following two passages remind me of this post of mine on business experimentation and also this previous post about Ridley’s book, on how countries generate and accumulate wealth and then successive generations spend it.  It’s essentially the same concept, applied to businesses.  This is from page 260:

Far from being able to spend their way into novelty and growth, companies are perpetually discovering that their R&D budgets get captured by increasingly defensive and complacent corporate bureaucrats, who spend them on low-risk, dull projects and fail to notice gigantic new opportunities, which thereby turn into threats.

The bureaucrats or politicians that take over a successful company, use the wealth created by that previous success to pad their power fiefdoms.  In this sense, they act much like trust fund kids.

The only quibble with this passage is that companies rarely discover this.  More typically, they die a slow death as outside innovators make them obsolete.  But, I think Ridley was perhaps writing colorfully.

Ridley continues:

Though they may start with entrepreneurial zeal, once firms or bureaucracies grow large, they become risk-averse to the point of Luddism.  The pioneer venture capitalist Georges Doriot said that the most dangerous moment in the life of a company was when it had succeeded, for then it stopped innovating.

This has all happened before, and it will all happen again

Fellow sci-fi geeks might recognize this as a phrase that was repeated throughout the re-imagined Battlestar Galactica TV series.   It’s popped up elsewhere also.

Those words have crossed my mind repeatedly as I read Matt Ridley’s book The Rational Optimist.  In it, Ridley tells a history of the world made possible by trade.

A common theme is the stages of society.  A society emerges from decentralized trade.  I make fish hooks and give you some in return for a few fish.  We both come out ahead.  That allows enough gain in free time that some folks have time to do things other than hunt and gather food.  Some of those folks form government.  They offer up something of value at first, like protection.  But then tend toward more centralized control, more expansive power and more meddling.  That chokes off the gains from trade and the society dies.

Here’s a passage from page 182:

Empires, indeed governments generally, tend to be good things at first and bad things the longer they last. First they improve society’s ability to flourish by providing central services and removing impediments to trade and specialisation; thus, even Genghis Khan’s Pax Monglica lubricated Asia’s overland trade by exterminating brigands along the Silk Road, thus lowering the cost of oriental goods in European parlours.  But then, as Peter Turchin argues following the lead of the medieval geographer Ibn Khaldun, governments gradually employ more and more ambitious elites who capture a greater and greater share of society’s income by interfering more and more in people’s lives as they give themselves more and more rules to enforce, until they kill the goose that lays the golden eggs.  There is a lesson for today.  Economists are quick to speak of ‘market failure’, and rightly so, but a greater threat comes from ‘government failure’.  Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue inflation of their budgets rather than the service of their customers; pressure groups form unholy alliance with agencies to extract more money from taxpayers for their members.  Yet despite all this, most clever people still call for government to run more things and assume that if it did so, it would somehow be more perfect, more selfless, next time.

These changes happen over generations.  It’s interesting to look at the societies on Earth now and consider which stage each might be in.

Since the changes happen over generations, it’s hard to tell sometimes.  Sometimes we look at a society and think it’s doing okay and we mistake it for a successful experiment.  In reality, though, it might be just on that cusp between the benefits realized from trades of the past and the decay that will come from a centralized control.

We mistake the cause and effect.  Trade enabled the wealth of the nation and the government, not the other way around.

Some societies that we think of as primitive, may have been more advanced in the past.  China is catching up now, as its government favors decentralization, but it was once well ahead of the rest of the world.  Page 180:

China went from a state of economic and technological exuberance in around A.D. 1000 to one of dense population, agrarian backwardness and desperate poverty in 1950.  According to Angus Maddison’s estimates, it was the only region in the world with a lower GDP per capita in 1950 than in 1000.  The blame for this lies squarely with China’s governments.

What follows in the next few paragraphs in the book is a picture of what China had mastered in the 1000s “silk, tea, porcelain, paper and printing”, “multi-spindle cotton wheels, hydraulic trip hammers, umbrellas, matches, toothbrushes, playing cards and pig iron.”

Then Ridley describes impact the Black Death and natural disasters and centralized government control of the Ming Dynasty that caused China’s GDP per capita to be less than in was nearly 1000 years earlier.

These are the same stories told in Hayek’s The Road to Serfdom (though maybe he stopped short), Rand’s Atlas Shrugged and Orwell’s Nineteen Eighty-Four, except it’s for real.  It’s happened here on Earth many times before.  It’s happening right now many times and will happen many more times.

Matt Ridley

My previous post, We All Work For Each Other, reminded me of this recent post on the blog Cafe Hayek about a new book from Matt Ridley, The Rational Optimist.  Below is the marketing the book, which happens to be named, Everybody is Working for Everybody Else.  I’m looking forward to reading it.  The video is less than two minutes.  It’s worth it.