Tag Archives: Rethinking economics

Have big organisations had their day? Alas not in the public sector

In a recent bog post David Boyle, whom I regard as a fellow campaigner for a new economic paradigm, describes the phenomenon of the “empty corporation”. He mentioned this after trying to deal with two large British companies: Barclays Bank and TalkTalk, the telecoms company. These companies offer their customers no human contact, and are unable to solve more than very simple problems without causing their customers a lot of work. And yet these businesses conform to our idea of high productivity, which is the holy grail of economic development. Examining how these companies work gives us clues about how economic development needs to change direction.

The key to this is the insight, offered in recent book by information scientist César Hidalgo, that the human brain can only handle so much complexity. And the human brain is at the apex of any system for managing complexity. Whatever power Artificial Intelligence (AI) and computing may have to transform life, they remain a long way from handling complex situations reliably. Groups of people can manage more complexity that individuals, but this is a process of diminishing returns; it ceases to be true of large groups. That is fundamentally why large organisations do not handle complexity well. So how do they succeed?

They do so by simplifying things. Manufacturers build standard products in large numbers. Service providers try to pull off a similar feat, by offering a standard service, handled by a relatively simple set of rules, with the minimum variation due to context. Further, they produce these products and services by fragmenting the more complex parts into simpler steps. By doing so they are able to develop “economies of scale”, first admiringly highlighted by the founder of modern economics, Adam Smith, in a pin factory. That makes them highly productive and competitive, within a tightly defined remit.

Anybody who has worked in a large organisation (as I have within in financial services) will recognise this drive to simplicity. Failures are usually attributed to excessive complexity. Every so often there is a reorganisation to re-simplify things. Hierarchies and bureaucracy is put in place with the aim of preventing complexity from growing – though this sometimes backfires by doing the opposite. Even so large organisations often become unstuck because vital processes are neglected (a recent example being TalkTalk’s inadequate defence against hacking) or parts of the organisation interpret their an over-narrow remit without comprehending the full context (VW’s problems with emissions standards being a case in point here).  It seems impossible to get the balance between inadequate and excessive control.

And yet officialdom often favours large corporations. That is mainly because they have a similar problem with complexity. They find it much easier to handle a smaller number of large organisations. They are many examples, but one that sticks in my mind is the almost vindictive campaign by officialdom against smaller abattoirs after a scandal of lax standards. This still afflicts British agriculture; we may question whether it really has produced much in the way of safety benefits. But it has made the blame game easier to manage. There is a further, and sinister twist. Large corporations, especially in the USA, have discovered how easy it is to manipulate new regulations by lobbying officials and politicians. The payback on investment is apparently enormous.

The problems of excessive scale are even more apparent in the public sector than in the private one. A recent case described by Guardian journalist Deborah Orr is particularly poignant. She told of a woman falsely accused by a neighbour of antisocial behaviour. It was quite clear that this neighbour had mental health problems. Officialdom, in the shape of the housing association that managed the property and the police, where utterly unable to cope. They could not see beyond an isolated series of incidents, which each had to be dealt with according to a set process, regardless of human impacts. In the end her neighbour was evicted – but only because his rent was behind; at no point did anybody think of getting down to the root of the problem – the neighbour’s mental health problems, which are presumably being inflicted on somebody new. The theme of Ms Orr’s article is the lack of compassion in the modern world. To me it is simply the inability of large organisations, like the housing association and the police, to manage context and complexity. There is no place for compassion is such places. Compassion means allowing the impact of context, and that means losing control.

These problems are made worse by organisations attempting to be more “productive” by reducing levels of staff, and “de-skilling” – using less qualified, and cheaper, staff, working within tightly defined rules. Unfortunately this is one area where the wrong lessons from the private sector are being imposed on the public sector.

There is a sort of defining paradox about the problem. On the one hand we have workers working very hard, and very productively, and on the other we have the organisations they work for failing. This almost always arises because the sum of all the things that the workers are doing fails to add up to what they are collectively trying to do. There is even a name for the discipline of trying to resolve this type of problem: “process management” – which I personally have found an essential set of ideas as a manager. Unfortunately people charged with process management are usually given too narrow a remit to get to grips with the real problems their organisation faces. And all too often these problems are insoluble for large organisations – because solving them means depending too much on the exercise of judgement at a junior level (including the “compassion” of which Ms Orr speaks), the full consequences of which the wider organisation will be unable to handle.

Economists should ponder this paradox when they tut-tut about poor growth in productivity, as they are prone to do. Most still believe that productivity comes about with simplification and scale. But each of our lives is complex, from the billionaire to the welfare claimant. Offering us a bewildering menu of simple, standardised products and services is often not what we need, even if each of these services is very cheap, because it is produced to high standards of productivity. At least the billionaire can employ a small staff of professionals to try and make sense of it all. Alas the welfare claimant often needs interaction with just the sort of trained and empowered professional whose jobs are being de-skilled. Productivity, as it is usually understood, may be self-defeating. We need a new way of looking at it.

In the private sector the processes of technological advance and competition will eventually drive positive change. Big corporations will try to slow it down by creating monopolies, by making life difficult for their competitors, or by misusing such concepts as intellectual property rights. But the life expectancy of larger organisations is already shortening. A long last technology may be taking forward individual empowerment at the expense of centralisation. It is always dangerous to predict where technology will take us, but the smartphone, blockchain technology (pioneered by BitCoin), and additive manufacturing (3D-printing) are surely pointing towards a more distributed model of capitalism. Meanwhile the struggles of large companies to secure customer databases and fight disruption from cyber attack are pointing the same way too. With inevitable exceptions, the big commercial corporation may have had its day.

Alas there is no sign that policymakers understand that scale is a problem for public services, even though almost very day provides evidence that it is. Each failure is greeted with promises that some tweak in the system will sort the problem out. You would think that after so many years of such failed promises that people would start to twig. And yet, alas, no.

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Information science can help us understand economics

HidalgoI have just finished reading César Hidalgo’s Why Information Grows – the Evolution of Order, from Atoms to Economics. This is a flawed work. But the author is on to something – and something rather important.

Mr Hidalgo’s key insight is that it helps to understand economics as part of the advance of order, or information, against the tide of ever increasing entropy – the advance of disorder that is the central insight of the Second Law of Thermodynamics.

I don’t disagree with the disappointed reviews I have read of this book in The Economist or on Amazon. Some interesting ideas that lead to… nowhere much. His final section, a postscript nominally about acknowledgements, does much to explain how this came about. He describes how the book was written. Apart from Mr Hidalgo’s use of the words “bleed” and “vomit” to describe the process of writing, and his need to describe all the coffee shops where he wrote the book, he tells us how the book evolved. He started to write about economic growth, realised he was onto something much bigger, adapted and …

I have abandoned the book. Any bleeder knows that books are never finished, only abandoned. Yet I hope to have reached a point at which the orphan I produced is mature enough to find a home in most people’s heads.

Alas for most people he has not achieved that maturity – the ideas were to big to catch and consolidate in the time he had. But I am glad that he did “abandon” when he did, rather than keep his insights private for another few years while that extra maturity came about. It has found a home in my head.

The advance of order and information on Planet Earth is the great wonder of our existence. For some it is proof of God, for it can only be the work of an imagination. But for others, who do not believe in such a God, or for whom God works in altogether a different way, this wonder is a puzzle. Mr Hidalgo describes in general terms how such a thing can come about. A system out of equilibrium can generate order from its unravelling; this order can be stored in solid matter as information. We advance because our Sun is in the long process of self-destruction and because our planet has solid matter in which the information can be stored.

This advance of information took place though the formation of life on earth, and on to the civilisation created by humans. Mr Hildalgo’s starting point for the book was his realisation that this is that economic advance (a word I prefer in this context to “growth”, the word he uses) is another facet of this process, and that this insight helps us to understand economics. But his postscript describes how he was overcome by the banality of this observation, and how then strove to describe something altogether bigger.

If he is going to talk about economics, he needs to move beyond his understandable feelings of its banality towards an understanding of what economics is for, and then trying to work with that. He hints at it but leaves no time to develop his thinking properly. He is right that the idea of economic growth is not much in itself. But what economics should be about is advancing the wellbeing of humanity without destroying the planet that it inhabits. And that must be seen in terms of the growth of information, and not, as far too many people see it, as the consumption of energy and the creation of physical artefacts.

Now let’s move on. Mr Hidalgo’s thoughts on economics flow from an appreciation of the critical constraints on the growth of information in human society. This is set by the physical capacity of the human mind to retain and process information. People can organise as teams in order to acheive beyond their personal capacity, but this too has constraints imposed by what organisations and social networks can do. He draws on the insights of the great lawyer-turned-economist Ronald Coase, amongst others, to explain the implications of these constraints. These show why it is so difficult for “developing” economies to catch up with the developed world, for example. It is through understanding how organisations and networks manage and create information that we can understand the direction needed for human advancement.

Interestingly he does not feel the need to discuss whether massive computing power and databases help in this process (or I missed it if he did).  We tend to associate the word “information” with them. But these things are really very limited in their power to think and imagine, and we often confuse information with data. Still, there is an interesting discussion to be had about the role advancing artificial intelligence might play.

Economists often show what is referred to “physics envy”. This is the wish to reduce their discipline to some elegant natural laws which are susceptible to mathematical treatment. And yet, as somebody who has studied physics for real, I wonder at how little comprehension of physics economists generally have. By and large they haven’t got beyond the First Law of Thermodynamics, and systems in equilibrium. And yet physics (and chemistry come to that) only gets at all interesting and useful when you get beyond these basics. I remember that light bulb moment when studying Chemistry A-level when we moved from the stable predictable world of thermodynamic equilibria to the crazy world of kinetics, where most of the real value lies. And yet the economic models the world uses, and around which the world of economics revolves, are fundamentally based on equilibrium thinking.

So if economists have physics envy, Mr Hidalgo’s ideas are exactly the sort of direction they should be looking to move forward. But, alas, macro-economists in particular would prefer to pontificate about comfortable aggregates like GDP, inflation, productivity and money supply as if these were genuine physical phenomena.

An information-based outlook would change the way we viewed economics. We would see that Saudi Arabia is not a rich country, but a poor one, as its economy is based on oil rather than the enrichment of information. And we might understand better why making organisations, and systems like national economies, big often makes things worse rather than better. It does so because these big places tend to concentrate their information development into tight networks at the power centres, leaving much of their human potential under-utilised.

It isn’t that theoretical economics itself offers any basis for so-called economies of scale. In fact the idea goes against the oft-used maxim of diminishing returns, which economists like more for its convenient mathematical consequences that any real grounding in reality. But economies of scale are the language and self-justifying belief system of political and commercial power. Advancing productivity, it is said, is the key to economic success. Bigger systems are more productive. So we must make everything bigger. For an example of this, look at the case being made for expanding Heathrow Airport. Economists are unable to present a serious counter-narrative, it seems, though a few are uneasy about this logic leading to monopolies.

The most important thing about Mr Hidalgo’s work is that it starts to give us a strong theoretical language with which to tackle one of the biggest social and economic issues of our time – the under-utilisation of human resources through the consolidation of large governmental and commercial networks – which lies behind growing inequality. It also helps us with another issue – the commonplace assumption that we must choose between improving the lot of the poor and protecting the future of our planet.

By thinking about information and networks, we break the stranglehold of thinking about the world in terms of money and physical things. That holds a lot of promise.

 

 

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