Drawing on the work of Daniel Dennett, Eric Beinhocker, in his book The Origin of Wealth, paints a magnificent picture of the evolutionary process which remains vividly emblazoned on my mind. The visual image is of a three dimensional landscape comprising all possible outcomes. The outcomes are represented by vertical rods of varying height. These rods, placed closely together, create a contoured surface like a pin art toy which is illustrative of all possible outcomes. This concept, staggering in its enormity, is surprisingly easy to understand.
In this landscape every possible manifestation of an idea is represented by height. Some ideas are better than others and there are, generally speaking, vast differences between good ideas and bad ones. But in the landscape of all possible ideas every ideas is surrounded by other ideas only slightly varying from itself.
So each good idea is similar to the one next to it, which will be in most cases be either marginally better or marginally worse. Though in some cases, where a critical factor has been changed, a drastic difference in acceptability would result. The landscape is therefore full of hills and valleys representing good ideas and bad ideas.
On this landscape of the possible we are trying to find the highest ground, the outcomes which produce results closest to our goals. Where few people are allowed to explore (as in the case of a tightly controlled economic system) the chances of finding the higher ground will be limited. In the case of the U.S. economy we generally want experimentation and exploration—as much of it as possible.
Where we employ more explorers we can expect to find more peaks but also more valleys. It’s impossible to know the ratio of good ideas to bad ones so let’s assume a normal distribution. The trick then is to maximize the effect of the good decisions and minimize the effect of bad ones.
The economic exploration process therefore is most effective when we employ the following principles:
1. Employ more explorers
When we reduce barriers to entry we allow individuals to explore their ideas in the public forum and to receive immediate feedback about what’s working and what isn’t. It’s easy to imagine a person, with what he thinks is a great idea, who doesn’t have the resources to bring it to the marketplace. The idea may never get realized and more importantly may never get rigorously analyzed. When people are exposed to a new idea they go through a process of analysis to determine if it’s needed, to what extent it’s needed and how much it’s worth.
When an idea is put into the marketplace it’s like harnessing the computing power of millions of underutilized PCs to create a supercomputer. When an idea is exposed to public scrutiny hundreds of thousands of people will contribute a small amount of their brain power to work on the problem. In this way bad ideas can be quickly rejected and good ideas refined into even better ones. Great ideas are rarely developed in isolation and always built on the good ideas that preceded it. By encouraging more exploration we gain a better chance of developing some really outstanding ones.
2. Stop chasing the ball
I’ll admit up front I don’t know much about soccer but I remember playing it in elementary school and the thing I remember most vividly is the coach trying to convince us not to all run after the ball in a group. She tried to explain a zone defense and demonstrate how clustering around the ball left us open for a defeat once the ball came loose. At the same time we could not just stand in one spot either. It was important to be ready to attack the ball and to pay attention to where the ball was but also to maintain the ability to protect our zone.
When we send out economic explorers we need to be ready to follow them but not in such a hurry we all run after a good idea just as it’s turning into a bad one. We need the right mix of eagerness and caution. This is difficult to gauge in the economy and even more difficult to control. To get the right mix we need to create a system which allows people to decide for themselves how fast to chase after the ball but also encourages them to hang back.
3. Share success
I have long been a proponent of rewarding success. If you are the explorer who discovers Cloud Computing Land or Camera-in-a-Phone Land, congratulations. Take a bow, have a rest, make some money from the idea. You deserve it and we all benefit from it. Profits, as I like to remind people, are a manifestation of improved lives. If I don’t think your product or service is beneficial at the price you’re offering it I won’t buy it. The fact that people do buy a product or service is de facto evidence they’re benefiting from it.
So in a very real way we do already share success. But I would suggest successful people often take too much credit for the success of their ideas and therefore have too keen a sense of entitlement to the rewards. Societies are successful not only because of the successful explorers but because there were so many willing to explore. Though many do not succeed, their contributions are nevertheless important for the economy as a whole.
4. Share the risk
By allowing successful explorers to benefit from their discoveries and inventions we encourage more explorers to succeed. By creating a system which allows people to fail without being ruined we encourage more people to explore. We need to encourage people to take risks but not inappropriate ones—we need intrepid explorers not foolhardy ones. But achieving that is a delicate balancing act.
As a society we have to entice people to act by both rewarding success and punishing failure (though punishment can be simply experiencing the natural consequences of your actions, not necessarily pilling on additional hardship). A deficit in either area would result in a sub-optimal utilization of resources. Unfortunately, each individual responds to a unique set of stimuli. One principle which has been effective however is to ensure explorers are able to share the risk of failure with others. All the stakeholders need to have skin in the game in order for the system to work.
Posts
0 comments:
Post a Comment