The belief that efficiency is fundamental to competitive advantage has turned management into a science, whose objective is the elimination of waste, - whether of time, materials, or capital, - wrote Roger Martin in “The High Price of Efficiency,” a January 2019 article in the Harvard Business Review. Martin is professor and former dean of the Rotman School of Management at the University of Toronto, as well as a prolific writer.
“Why would we not want managers to strive for an ever-more-efficient use of resources?,” asked Martin. Of course we do. But, an excessive focus on efficiency can produce startlingly negative effects. To counterbalance such potential negative effects, companies should pay just as much attention to a less appreciated source of competitive advantage: resilience, - “the ability to recover from difficulties - to spring back into shape after a shock,” he presciently added a year before the advent of Covid-19.
In his recently published book, When More Is Not Better: Overcoming America's Obsession with Economic Efficiency, Martin expanded on his HBR article, arguing that an excessive focus on efficiency is not only detrimental to business but constitutes a serious threat to America’s democratic capitalism. “Throughout the first nearly two and a half centuries of America’s existence as a sovereign state, most citizens experienced an advance in their economic status in the overwhelming majority of those years. Based on that trend, Americans have, unsurprisingly, used their votes throughout the years to support and perpetuate capitalism as America’s economic system. But that consistent economic advance has stalled, and has been for a longer period than ever before in American history.”
The book is based on a six-year project on the future of America’s democratic capitalism by the Martin Prosperity Institute. The project conducted in-depth interviews with a wide variety of Americans to understand what they thought about the directions of the country. It excluded people in the top 10% of the income distributions, focusing instead on the vast majority of the populations, which includes people with household incomes ranging from $25,000 to $110,000 with a median of $75,000.
“Our goal for this research was to go deeper with fewer Americans, rather than seek quantitative significance using a formulaic set of questions,” noted Martin. “We interviewed and listened to each subject for hours, to learn how people were experiencing economic life across America, across many regular American occupations. Our agenda was to listen to our subjects’ thoughts and gauge their emotions.”
The project came away with two clear findings. First, people didn’t feel that the economy worked for them, with emotions ranging from discouraged to ambivalent. Second, people were decisively disengaged from politics, having checked out because all you see are angry debates while nothing meaningful gets done.
“On the whole, our subjects were both perplexed and sheepish. They couldn’t figure out why following what they thought of as the American economic success formula wasn’t resulting in the kinds of favorable outcomes it was supposed to. And they were somewhat ashamed to have opted almost entirely out of the political process. They knew they should stay involved, but they felt minimal confidence that making the effort would indeed make a positive difference. Their responses got me increasingly worried for the future of America’s much lauded combination of democracy and capitalism.”
Advances in technology and global power helped lead America to the forefront of the world stage in the post-WWII years. But for the past few decades, automation and globalization have been hollowing out America’s middle class. The American Dream, - the possibility that anyone can get ahead and achieve success and prosperity through talent and hard work, - may well be disappearing, raising serious concerns for the future of democratic capitalism.
Starting in 1947, the US Census Bureau has been tracking median family income, the best indicator of the economic health of US families. From 1947 to 1976, the median income of US families grew at over 2.4% CGR. As a result, the median family income doubled in one 30-year generation. But, from 1977 to 2019, median income has only grown at 0.6% CGR, meaning that the median family income has only risen by 31% over the past 42 years.
“More worrisome is where the growth has gone,” adds Martin. Economic mobility was a key tenet of the American Dream. Up to the mid-1970s, economic growth was an equalizing force: the poorer you were, the more you benefited from growth in the American economy. But over the past four decades, this relationship has flipped entirely: the richer you were, the more you benefited from economic growth, with the poorest benefiting the least. Economic and productivity growth used to be tightly coupled. Between 1948 and 1973, productivity grew 96% while wages grew 91%. But between 1973 and 2018, while productivity grew by 77%, wages grew just 12% or 0.027% per year.
Why has this happened? One reason is the changing dynamics in the US labor market. As MIT economist David Autor noted in a number of papers, the increased digitalization of the US economy has contributed to the polarization of employment and wage distributions over the past several decades. Job opportunities and wages have significantly expanded for high skill, college educated workers, while contracting for middle-skill blue- and white-collar occupations that have been more susceptible to automation and offshoring.
Martin’s book is focused on a second, related reason: democratic capitalism no longer works for the average American due to fundamental structural problems. “Capitalism is no longer unambiguously about everybody working hard and getting ahead - it is about the benefit of overall economic growth flowing so disproportionately to rich people that there just isn’t enough left for average Americans to consistently advance.”
The root of the problem is that over the past four decades, we’ve treated the economy as a kind of machine that can be broken up into its constituent parts, each of which can be optimized to create an optimally efficient whole. Since the definition of efficiency for something as complex as an economy is rather abstract, such a model of the economy uses proxies to measure and attempt to achieve maximal efficiency.
In principles, the model was intended to produce a big bulge in the middle, - that is, a large middle class, - with a tapering of outcomes on the upper and lower ends, - corresponding to both richer and poorer families. The richer families would make investments and pay substantially higher taxes that would help everybody else, especially families on the poorer end.
But, “the evidence increasingly suggests that the output of our economic machine hasn’t been producing either the assumed distribution or the favorable movement, and that it hasn’t done so for some time. Instead, the bulge in the middle is slowly but surely shrinking and the prosperity of a vast majority of families is no longer moving smartly upward. Perhaps more worrisome, while government policies should be intended to serve the many for the long term, they are being gamed by interested parties to ensure that they serve the few in the short term, with damaging impact over the long term.”
“These outcomes are systemic, and without a fundamental shift in how we manage the economy, they will get only more out of alignment with our hopes and assumptions. I believe that this shift needs to start with abandoning the perfectible-machine model of the economy. We should instead understand the economy in more natural terms, as a complex adaptive system - one that is too complex to be perfectible, one that continuously adapts in ways that will almost certainly frustrate any attempts to engineer it for perfection.”
I couldn’t agree more. Engineering approaches work well when dealing with physical systems like cars, bridges and buildings, which are subject to the well understood principles of classical mechanics. But, they do not work so well when dealing with highly complex systems with fast changing, interacting components, where it is much less clear what’s going on in the present, let alone how things will evolve into the future. This is particularly the case with complex sociotechnical systems like economies that involve people and organizations. We need different principles and processes to address this class of highly complex problems.
When dealing with such systems, we have much to learn from biological systems. There’s no such thing as an optimal design. As in biology, the key attributes of a good design are robustness and flexibility. The system must be robust enough to perform adequately under lots of different conditions, including unanticipated interactions, external events, and a wide range of human decision-making styles and choices. And, such systems must be flexible enough to quickly adapt to a fast changing environment.
“The downside of the status quo is staring Americans in the collective face,” wrote Martin in conclusion. “Our obsession with economic efficiency has featured too much pressure, too much connectedness, and too much pursuit of perfection, all of which has produced a dangerously unbalanced economy lacking resilience. But collectively, we can restore balance if we just get started, stay reflective, and tweak relentlessly. And because the outcomes in a complex adaptive system aren’t linear, incremental, and predictable, we will have no idea just how good a future American democratic capitalism could have. America’s next chapter could be the greatest in its history!”
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