Detailed Abstractions

Well… it’s that time of the year.  Time to look back to see what happened, as well as look forward to see what might be.  Indeed, it seems to be part of the human condition to tends towards introspection, though doing so once a year seems a little odd… but here we are

Looking back, we see movie trends from the Christian Science Monitor, auto trends from AutoBlog, more about cars from Wired, mobile trends from eWeek, technology trends from Rueters… well, the list is long.  (the most interesting one below – Stratfor’s geopolitical trends of the past decade).

As for 2010, it might have been the most dangerous year, it might have been the best year in sports, or you can decide yourself with 2010 year reviews, among other places, here, here, and here.

Looking forward with predictions in 2011 there are trends for travel, financial trends, technology trends, social media trends (which really is a trend in itself), and so on.

From an overall perspective, trends are interesting and can highlight movements towards this technology, away from that one, towards new ways of thinking, and away from old ones.  It reminds us all that the constant in life is change and helps us focus on where we were and where we can go.

So – for now – Happy New Year’s to all.  Take a look back and take a look forward.  It’s one the best parts about this time of the year – so enjoy!

Talk to you next year!

Thank you.

For Stratfor, they are publishing a list of the most important geopolitical trends of the past decade.  They are currently on number 6 (starting from 10 and working their way to number 1).

Stratfor - 10 most important geopolitical events of the past decade

Over at HBR Amar Bhidé has written an article discussing the housing market and subsequent crash (very interesting – entire thing here) and proposes that among the causes of the crash, a sort of self restriction had taken the market from a vibrant one to one controlled by centralized authority:

The modern economy creates and spreads unprecedented prosperity by drawing on the resourcefulness and enterprise of the many, not by blindly following the dictates of a few. Individuals today make and act on their own judgments to a degree that would have been unimaginable to our forebears….

In recent times, though, a new form of centralized control has taken root—one that is the work not of old-fashioned autocrats, committees, or rule books but of statistical models and algorithms. These mechanistic decision-making technologies have value under certain circumstances, but when misused or overused they can be every bit as dysfunctional as a Muscovite politburo….

His argument is one we’ve heard from the military and other agencies as well – what they needed was more human intelligence on the ground, not more technical complexity from high.

He continues:

…Consider what has just happened in the financial sector: A host of lending officers used to make boots-on-the-ground, case-by-case examinations of borrowers’ creditworthiness. Unfortunately, those individuals were replaced by a small number of very similar statistical models created by financial wizards and disseminated by Wall Street firms, rating agencies, and government-sponsored mortgage lenders. This centralization and robotization of credit flourished as banks were freed from many regulatory limits on their activities and regulators embraced top-down, mechanistic capital requirements. The result was an epic financial crisis and the near-collapse of the global economy. Finance suffered from a judgment deficit, and all of us are paying the price….

Even going so far as to invoke Hayek to make the case:

The great twentieth-century thinker Friedrich Hayek made the classic argument for decentralized choice in his essay “The Use of Knowledge in Society.” The stability of the economy depends on constant adjustments to small changes, he believed—“B stepping in at once when A fails to deliver.” No single individual has the knowledge to make those adjustments; rather, it is widely dispersed across many individuals. But information about “the circumstances of the fleeting moment” cannot be quickly and accurately communicated to a central planner. Therefore, individuals who have on-the-spot knowledge must be allowed to figure out what to do….

Adaptation to changes—the focus of Hayek’s article—is only part of the story. The success of the modern economy also depends on innovation. As it happens, decentralization beats central planning here, too. Innovations are unprecedented, one-of-a-kind developments. Even incremental ones require imagination. An innovator cannot simply rely on historical patterns in placing bets on future opportunities. Knowing what has worked before and what hasn’t is but a starting point. Innovation also requires considerable trial and error. Unforeseen technical problems—or customers not doing what they had told market researchers they would—demand recalibrations that combine on-the-spot observations and historical knowledge with leaps of imagination….

Of course like most writers who seem to espouse the virtues of decentralization, he still thinks some things need centralized control which don’t:

Technologically advanced societies couldn’t function without some centralized control, of course. Governments need to regulate how businesses drill for oil, develop genetically modified crops, and pick the paints they use in toys, for instance….

Either way, he goes on to argue that the financial industry, using mathematical formulas and statistical models, embraced a sort of top-down control giving rise to “Mechanistic Decision Making” & “Robotic Finance”.

This basic line of reasoning isn’t exactly new.  Wired had an article in February of 2009 (here) about the risk formula which killed Wall Street.  The formula worked well for 5 years as investors used it as a way to measure pooled risk in MBSs (mortgage backed securities), but the formula:

…still hadn’t solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there’s a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there’s a higher probability they will default, too….

Now while both articles point to specific issues which helped the collapse, like most they conveniently left out all discussion in reference to the government’s role in perverting the incentives, but together I think they present an interesting challenge to those of us who believe in decentralization as a good (DA post on decentralization here).

& that is – can there be mechanisms put into place which actually help foster decentralized control since our history, both long term and recent, seems to indicate humans have a tendency towards centralized control at certain levels of complexity.

We see this through various disciplines such as anthropology, archeology, and history, that over the past 10,000 years or so, humans made a mass migration from the nomadic lifestyle which was practiced for nearly 200,0000 years, to villages, towns, and cities.

Using agricultural knowledge to help spur this transition, humans also started growing in population.  As more land became developed and could support more people, villages and towns grew into large cities & states.

With the advent of these new societal structures, came new power structures.  In nomadic communities, authority is handled from a tribal point of view.

This means that people don’t really have positions of authority which is spelled out by any specific power structure.  Their authority comes from their ability to influence.  So elders with specific knowledge are sought after for wisdom and help, without a formal power structure of say a judicial system.

With the growth of society, came the growth of power structures as they became necessary to handle the population explosion.  Things such as basic sanitation and clean water were large public work projects which required the control of enough resources (labor mostly) which heretofore had been impossible.

These beginning power structures, would eventually evolve into the world in which most of us find ourselves today: a world in which more of our daily lives are coming under scrutiny from centralized power structures.

& we’ve seen what these power structures are capable of doing, both good and bad.  While it allowed for greater sharing of knowledge through vibrant cities which pooled resources in denser areas, it also allowed for the pooling of resources for war.

Either way, in this case the centralized authority we can normally blame was there in multiple areas, but for this specific factor it was self imposed.

Indeed in looking at human history, it seems given some level of complexity we seek out centralized forms of control.  It might seem today as if humans would never pick governments and politicians as idiotic and with as much power as they have today, but these were gradual changes over generations.

Taken with the most recent example of self selected centralization, it may be we need to consider the possibility that humans tend towards this direction with or without institutions directly promoting centralized control.

More thoughts on complexity here

Over the last couple of decades business leaders, researchers, and writers everywhere have been discussing what they see as a positive move in business from a standard top down organizational chart to a more decentralized decision making systems.

The goal stated from the beginning of moving down this path was to replace slow, ineffective bureaucracies with more nimble, versatile companies who can move with the new rate of change.  Thanks to the internet and other advances in sharing human knowledge throughout the world, the pace of change & innovation today is far greater than the pace of innovation a century ago.

As a society though, it seems we have yet to fully adjust.  Using standard logic, allowing decisions to be made at the lowest possible level in a corporation, does allow it to be more efficient and more responsive to their clients.  It allows them to see problems faster to find solutions faster and empower employees with a sense of belonging to a real team.

Continuing that logic however, allows us to look at the potential negative possibilities as well.  Allowing just anyone in a company to make any decision of course would result in complete chaos.  We’ve also seen that  by allowing those with good corporate political abilities to make tough decisions, without questioning their ethics or actual critical decision skills has led us down the wrong road.

The question we must ask ourselves then becomes, should power still be concentrated in the hands of a few, moral citizens, or should we continue on the path of decentralization that helped lead us to our current fiscal crisis?

What we do know, is that businesses and individuals both support more entrepreneurial thinking and training starting at younger ages (Junior Achievement Study here):

Gallup then asked the question, “If entrepreneurship means, ‘Taking the initiative and assuming risk to create value for the company or business, either as an owner of your own business or in your place of work,’ would you consider yourself to be entrepreneurial?”

Using this definition, nearly six in 10 (58%) of the employees surveyed and two-thirds (65%) of those responsible for hiring describe themselves as entrepreneurial….

The vast majority (96%) of employees feel it is important for the American workforce to become more entrepreneurial in order to keep America competitive in the global market…

Going further about education itself:

Finally, nearly half of employees (46%) and four in 10 (41%) of those responsible for hiring believe the best place to learn entrepreneurship is in grades K-12, surpassing all other options.

Along that same trend, Purdue recently decided to change their entrance requirements to allow only students who have taken a full 4 years of math at the high school level (here).  Their decision demonstrates the importance of logic and critical thinking skills that math helps to reinforce:

“We just wanted to make sure Purdue students are ready for the rigors of a Purdue education,” Horne said, noting studies show more math education correlates with college completion rates. “It’s not about getting in. It’s about succeeding once you’re there.”

We also know through the practice of government, the dynamic system of the United States might have felt more pain that other countries during this crisis, but due to the mostly decentralized economic model, we will recover more quickly than most.  As the Economist recently noted (here):

Second, one can look at America’s admirable record of dealing with turmoil. A study by the Ewing Marion Kauffman Foundation, a think-tank that studies entrepreneurialism, found that America’s high rate of economic “churning” boosts productivity and hence material well-being. Between 1977 and 2005 some 15% of all American jobs were destroyed each year as firms closed or cut back. Thanks to the expansion of successful firms and the entry of new ones, however, many more jobs were created than destroyed. Start-ups (ie, firms less than five years old) provided a third of the new jobs during this period.

This “creative destruction” process, both in the macro form of the economy and in the micro form of managing a team involves allowing people to fail.  Only from our failures, do we truly become successful.

So for business leaders, or educators, to honestly pursue this strategy, it means at least two things need to change:

1. People need to be able to let go of control
2. People need to be more tolerant of failure

At this point, it appears businesses are getting this message, however the government seems to be falling back on top down control.

• Enron – bad company, fraudulent business model – went bankrupt, business leaders jailed.
  • Government solution?  Overreaching regulation in SOX.
• GM – bad company, bad decisions – should go bankrupt (it’s a feature not a bug),
  • Government solution – prop up companies who should have failed.
• Economy gets hurt because of loose monetary policy, combined with quasi-government backing of securities and lax business ethics -
  • Government solution:  cheaper money, quasi-government backed institutions deemed “too big to fail”…

So while it might be true that in recent times business leaders have proven themselves to be unworthy of trust and decentralized decision capabilities, I believe fully we must understand that the solution to that problem is not in removing the current structure and go backwards in time.

The solution ultimately comes down to both us an individuals and the incentives of the game.  Are we willing to live with the consequences of our decisions and as a society? Are we willing to live with some level of risk that large companies might “fail”?

Or will our fears keep us locked into a governmental cycle of pushing more top down control, doomed to repeat a past that has failed all societies who have tried it?