Irving Wladawsky-Berger

The Industrialization of Services

In the late 18th century, the Industrial Revolution started the transition from a manual-labor based economy towards an economy based on using technologies, tools and machines to significantly improve the manufacturing of physical goods.  Over the next two hundred years we have seen the industrial sector of the economy achieve major improvements in the productivity and quality of manufacturing, ranging from very simple to highly complex physical objects.

A major step in that remarkable story of innovation occurred around thirty years ago.  Before that time, most manufacturing plants were fairly inefficient by almost any contemporary measure, and were turning out products of varying quality.  Then, driven by the huge success of Toyota and other companies around the world, the industrial sector and academia discovered the merits of applying engineering discipline as well as a holistic, systems-wide approach to manufacturing processes.  Company after company embraced the Toyota Way, Six Sigma, Lean Production and similar methods in their manufacturing and logistics operations, which have brought the industrial sector of the economy to a whole new level of productivity and quality.

The rise of IT in the last several decades has enabled us to start applying technologies to the large and diverse world of services.  In the beginning, computers were used primarily to perform calculations.  In the 1970s, we started to make a lot of progress automating highly repetitive, back office tasks like processing financial transactions, inventory management and airline reservations.  Then, a decade later, the personal computer enabled us to develop all kinds of productivity applications like word processing and spreadsheets.  The 1990s brought us the Internet and World Wide Web, which introduced revolutionary ways of dealing with content, communications and commerce.

Dealing with Increasingly Improbable Events

 For a long time, scientists and science-fiction writers alike have pursued the question whether you can accurately predict the future from the past given sufficiently large groups, historical information and computational power. 

For example, in the Foundation Series, one of science-fiction's classics of all times, Isaac Asimov introduced the fictional scientific concept of Psychohistory.  The essential idea in psychohistory, says the Wikipedia entry, is that “while one cannot foresee the actions of a particular individual, the laws of statistics as applied to large groups of people could predict the general flow of future events.  Asimov used the analogy of a gas: an observer has great difficulty in predicting the motion of a single molecule in a gas, but can predict the mass action of the gas to a high level of accuracy.”

Psychohistory relied on extremely advanced models which enabled a purely mathematic approach to predict future events.  However, it was not able to cope with totally unpredictable events.  Thus, when a mutant was born, the fictional character known as the Mule, his totally unanticipated psychic skills invalidated the assumptions underlying the models, and history then proceeded on a very different course that what had been predicted by the psychohistory computers.

Asimov and his wonderful Foundation story have been on my mind in the last few years as I have been thinking about complex organizational systems, where people and the services they perform for each other are the primary components.  In particular, I have wondered about the limits in our ability to accurately model and predict the behavior of such people-based systems, especially as I continue to reflect on the causes of the global financial crisis - our financial systems being an example of such complex, people-based organizational systems.  Will the mutations, highly irrational behaviors and other unpredictable events inherent in such systems always befuddle mathematical models and computers, no matter how sophisticated and powerful we make them.

A Gathering Storm We Totally Missed

I think that it is by now pretty clear that there is no simple answer to the causes of the biggest financial crisis since the Great Depression. 

Plain, old-fashioned greed - that is, the pursuit of individual wealth, possessions and power - clearly played a major role.  So did the Wall Street's bonus system which practically encouraged its people to make risky investments so they can earn huge sums of money in a good year, without having to worry about the impact of their risky, short-term bets in subsequent years.

There is plenty of blame to go around: the management of the financial companies; the rating agencies; the regulators; the extreme anti-government ideology that prevailed in the US in the last several decades.  Our financial crisis is best seen as a systemic failure of massive proportions.

But, there is one group whose role in this systemic failure I personally find particularly troublesome: my own technical and research community.

Checks and Balances

The Founding Fathers is the name we give to the leaders who signed the US Declaration of Independence and participated in drafting the Constitution.  They set up a system of governance based on the principle of separation of powers under which the state is divided into different branches, each with separate and independent powers and areas of responsibility.
 
Critical to the success of this style of governance is a system of checks and balances, whose purpose is to prevent any one branch of government from becoming too powerful at the expense of the others, and to induce them to cooperate in getting things done.  The notion of checks and balances has become embedded in the culture of the country, not just as it applies to the federal government, but also to the balance of powers between federal, state and local governments.
 
It has proven to be a brilliant system of government.  Not only has it endured for over two centuries, but it has done so while adapting to the vast changes that the country has undergone during that time, including its massive growth in size, population and power; the vast diversity in the composition of its people; and the highly different political beliefs, social mores and market conditions it has experienced through all that time.  Its success is largely due to its built-in flexibility to adapt to vastly varying conditions.  If any part of the system becomes too prominent, the other parts react to limit its powers and bring the overall system back in balance.