(Bloomberg Opinion) -- This is one of a series of interviews by Bloomberg Opinion columnists on how to solve today’s most pressing policy challenges. This conversation has been edited and condensed.
Sarah Green Carmichael: Over the past 40 years, incomes for the top 0.01% have soared and everyone else has really only gotten a modest raise, or none at all. Over that same time, industries have also gotten more concentrated, with a handful of firms now capturing the majority of profits. Your new book is called “When More Is Not Better: Overcoming America’s Obsession with Economic Efficiency.” As someone who majored in economics at Harvard, got an MBA from Harvard Business School, served as a professor of strategy and also was the dean at the Rotman School of Management, what do you see happening here?
Roger Martin: In economics, you learn that one of the fundamentals of a developed economy is a big, prosperous middle class. It has the most people and it’s the heart of the economy. And in business, you learn that there’s a whole bunch of competitors, and they all are duking it out in something called an industry. There are some going out of business, because they’re doing badly, and there are some that are doing better than others.
And so we’re surprised when we see that the rich are getting richer, richer, richer, richer and richer, like they’ve never gotten before. And those middle-class people are stagnating. And then in industries, we might see the winner take all while other companies are either just hanging on, or are in the process of going out of business. The economy has accidentally produced these very Pareto outcomes rather than having outcomes that are more distributed.
SGC: In your book, you say that companies and policy makers have become consumed with the idea that the economy can be “made ever more perfect by pursuing increasing levels of efficiency” — things like shorter customer call times, fewer retail employees per square foot, the cheapest possible procurement costs, or mergers and corporate consolidation. If an efficient machine is the wrong metaphor for the system that we want, what is a better metaphor for understanding how the system really does work?
RM: I think the best metaphor is a complex adaptive system. We’ve set up the economy for Amazon, and we should set it up for the Amazon. Amazon is a big machine, the Amazon is a complex adaptive system.
First, it’s a system, so the pieces of the puzzle connect and influence one another. It’s complex in that it’s really hard to tell in advance what exactly affects what. And lastly, and maybe most importantly, it’s adaptive. So whatever state it’s in, it optimizes to that state. Think about the jungle — if there’s a little tree growing behind a big tree, it’s going to grow sideways to get out from the out from the shadow of the big tree. Or if there are predators in this part of the rain forest, you will go scurrying over to that part.
So what does that mean? It means that if you’re if you’re a Nobel economist, you can say, “Well, if we increased money supply by 2.8%, we’ll get this much GDP growth.” Chances are, you’re just going to be wrong. Because you don’t actually know what’s going to happen. The other implication is that adaptivity has got every chance of overwhelming whatever you tried. People will say, “Ah, I know how to exploit that. And I’m going to start behaving differently.”
So we have all these machinists pulling levers and hoping that things will happen the way they want, but it doesn’t happen the way they want. People just adapt to it and game the system for their own purposes, and that has all contributed to having outcomes that that almost nobody wants.
SGC: You express concern for the future of democratic capitalism in the book. At the same time, the middle-class people that you spoke with as part of the research said they were completely politically disengaged. How does someone go from total disengagement to then wielding a pitchfork?
RM: Yeah, well, you don’t need many people wielding pitchforks to make a revolution. You just need acquiescence. Or even people just saying, “Well, maybe this is worth a try.” I started this project in 2013, before Bernie Sanders was a national figure. He was a senator, but not really a national figure. And that was before you had 40% of under-25-year-olds thinking socialism would be pretty good.
SGC: You argue that we do need to strive to make our system more resilient, “so that over time it can adjust to its changing context in ways that allow it to continue functioning and delivering its desired benefits.” But to get there, I’ve noticed that you don’t prefer a grand solution. You prefer many small solutions instead. Why take that approach?
RM: Well, it’s not so much a preference. It’s that I don’t believe that any grand solution would work. And that’s again because it’s a complex system. I think anybody thinking that they have the answer is delusional. And if you take small steps, you can avoid taking a step that’s accidentally horrible.
Isn’t that how you live your daily life? You don’t say, “I’m feeling tired, why don’t I sleep for five days?” You say, “I’m gonna go to bed an hour earlier and see if I wake up feeling better.” Because we are a complex adaptive system.
SGC: For a business, this is a very difficult time to resist cost-cutting or become less efficient. The pressures on managers to be more efficient are very real. And it seems like it would be very difficult to resist those pressures.
RM: First, I don't say that efficiency is bad. I say the obsessive pursuit of it, with no attention to resilience, is going to kill you. Just keep that in mind that there's a certain amount of resilience that that you need. And if your top line has dropped by half, right, it’s not actually pursuit of efficiency to lay off half your staff. You're no more efficient than you were when your business was 2x, right? That's not increased efficiency. That's just being non-stupid.
SGC: What about the public sector? Given all that Congress seems to not be able to get done, how realistic is reform?
RM: Politics is an industry, just like any other. It happens to be a duopoly in the U.S. And right now, I would say it is managing for efficiency and not resilience. It’s managing its own business — the business of politics, not the country. “How can we gerrymander to make sure that we have no elections that matter?” And they’re getting lower and lower ratings from the electorate. They’re asking, “What makes my life efficient?” Not, “What makes this institution resilient for the long run?”
If they were worried about [resilience], they’d say there’s certain amount of friction we should put in it. We should not gerrymander, we should actually have real elections so we actually have to compete for votes. It is conceivable to me that it has to kind of crash and burn as an institution before we get to the other side.
SGC: When you think about a more resilient, less efficient economy, what does it look like? What does success look like?
RM: So it’s not less efficient — I’m just asking for balance. There’s a difference between efficiency and the pursuit of efficiency. Aristotle said that if a person sets out in life to be happy, they’re unlikely to end up happy. But if a person sets out to live a good life — by which he meant a life of servitude to their society and their fellow citizens — they’re likely to end up happy.
I would say the same about shareholder value. Pursuing shareholder value does not increase the probability that you will increase shareholder value. In fact, it makes the job harder. It makes customers say, “Oh, so we don’t matter?” It makes employees say, “So that’s what I roll out of bed every morning to do?” So I would say, the pursuit of efficiency without resilience ends up being kind of self-defeating, and ends up being very short term. You get a burst of what feels like efficiency that becomes inefficient.
SGC: Can you give an example?
RM: If you’re McDonald’s, you spend a decade or more making your Big Macs a little smaller and a little smaller until “Big Mac” is misleading advertising. But you’re getting more efficient all the way. And then you notice this broader thing happening, which is people not showing up in your restaurants.
On the other hand, Costco is grotesquely inefficient. If you think about it in a really narrow sense, they pay everybody more than they would have to pay. The quality of their meats is more than would be necessary to compete with the Kroger’s across the street. But their sales per square foot are five times the competitor across the street. And when’s the last time you’ve seen a Costco ad on TV? Never. Because people are desperate to go to Costco and buy more stuff than they ever thought they were going to.
SGC: What’s the bottom line? What are the hallmarks of an economy that would be more resilient, rather than this sort of fragile, ostensibly efficient economy we have now?
RM: A resilient one would be able to handle shocks, and would be able to adjust in a more continuous way. A resilient economy would have people saying, “This isn’t really working the way we thought, and it hasn’t blown up yet. But since it’s not working the way we thought, we should tweak it.” That’s what a resilient one would look like — just constantly, continuously tweaking and managing it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Green Carmichael is an editor with Bloomberg Opinion. She was previously managing editor of ideas and commentary at Barron’s, and an executive editor at Harvard Business Review, where she hosted the HBR Ideacast.
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