The real Enterprise 2.0
April 30, 2010
Lenin famously said that the economic system in Russia would be run as one big factory. Many economists at the time said that this was impossible. Yet there were already big factories in the West then, and there still are, so why not? Is there a limit to the size of a factory that cannot be surpassed, or is it because the factory logic cannot be used outside of a real factory?
The typical hierarchical form of an organization is meant to simplify communication, accountability and the coordination of tasks. In theory an employee needs only one connection, to the boss. This is far easier than communicating with all and trying to coordinate actions with everyone. And what about accountability? The worker is accountable only to her manager. That manager reports to her manager on the next higher rank, and the chain goes further, leading in the end to – Lenin.
During the centuries since the publication of “The Wealth of Nations” by Adam Smith, in 1776, the principal theme of most economists has been that government regulation or centralized planning were not necessary in order to make an economic system function well. The coordination would be the result of markets. Lenin and the communists were advised to move to a market economy. The parties in that system follow their own self-interest and are governed, when it comes to the actual choices they make, by a system of prices. This is the polar opposite of centralized planning. Adam Smith was a proponent of extreme decentralization.
A 21-year-old comes out with a revolutionary new theory
Ronald Coase was one of the first economists who started to question mainstream thinking in economics. If a system of prices and competition would do all the coordination necessary, why did we have centralized planning, not only in the now bygone communist countries, but also in well functioning and successful firms? Why did we need management, whose function was to coordinate?
Ronald Coase set out to bring the different views together. It is almost impossible now to fathom that he found the answer as early as during the summer of 1932, at the age of 21. He realized that there were costs involved in using the pricing mechanism. The needs and offerings have to find one another. The prices have to be discovered. Negotiations need to be undertaken. Contracts have to be made. There may be disputes that later have to be settled. These costs were not part of “the invisible hand” equation of Adam Smith. Ronald Coase called these costs transaction costs.
The first revolutionary argument was that a firm would emerge, exist and continue to exist successfully only if it performed its planning, coordination and management functions at a lower cost than would be incurred by means of market transactions, and also at a lower cost than would apply if the same things could be performed by another firm.
The second revolutionary argument was that a well-functioning economic system needs both markets and planning. This depends on the size of the organization and the level of the market side transaction costs. Increasing the size increases (internal) transaction costs. Running an organization is difficult and running a bigger organization is more difficult.
Management is an overhead
Managerial overhead increases as the organization grows. Management, communication and coordination are all transaction costs. Every sales call, every offer, every agreement and every meeting also consumes limited resources and increases transaction costs.
As the corporation grows, all its energy finally goes into maintaining the corporation and does not benefit external stakeholders.
Whenever transaction costs inside the organization reach the level of the transaction costs in the markets, markets outperform firms and outperform central planning/coordination in general. This was the main theoretical argument against Lenin. The same thing is clearly still evident today in companies like GM, or organizations like large health care units.
Communist countries learned their lesson, but we still haven’t.
An organization can only be successful when the costs of hierarchical coordination are lower than the gains achieved from that coordination.
The existence of high transaction costs outside of firms leads to the emergence of the firm as we know it, and management as we know it. A large part of corporate economic activity is designed to accomplish what high market transaction costs prevented earlier.
The Internet is an extinction-level event for the traditional firm
If the (transaction)costs of exchanging value in the society at large go down drastically, the form and logic of economic and organizational entities also change! Accordingly, a very different kind of management is needed.
Today, with social media, we stand on the threshold of an economy where the fundamental processes of communication and coordination are being transformed. Familiar economic entities are becoming increasingly irrelevant as the Internet, not the traditional organization, becomes the most efficient means to communicate, coordinate and exchange value.
For most of the developed world, hierarchies, as much as markets, make up the dominant economic pattern. The Internet is nothing less than an extinction-level event for the traditional firm. The Internet makes it possible to create new forms of value creation and new forms of value exchange.
It changes our views of markets and hierarchies in ways that Adam Smith or Lenin could never have imagined.
Thank you @cshirky
In our competitive view of the world, we often think that the most capable are those who are the most competitive, and accordingly that competition creates and secures efficiency.
It may be that high performance is incorrectly attributed to competition and is more a result of diversity, self-organizing communication and non-competitive processes of collaboration.
Competitive processes lead to the handicapping of the higher-level system that these processes are part of. This is because competitive selection leads to exclusion: something is left outside. Leaving something out always means a reduction of diversity. The resulting less diverse system is efficient in the short term, but always at the expense of flexibility. Agility and complex problem solving require diversity. Everything goes fine if nothing changes and if there are only easy problems to take care of!
Self-organizing, non-competitive processes are about interdependent individuals and groups solving problems in a shared context. Interaction creates capability beyond what could ever be predicted just by looking at the performance of the individuals involved. The higher performance and robustness are emergent properties of interaction. They are not attributable to the parts of the system.
Social networks provide problem-solving capability that results directly from the amount of communication and level of diversity of communication.
Most organizations would soon fail if all their employees thought alike or had little or no contact. There are two new challenges. The first is to understand the need for networking with views and values that are different. The second challenge is even bigger because of the mainstream reductionist thinking: our assumption has been that by understanding the parts in detail, we understand the whole. This is simply not possible! What happens in interaction between the parts is more important than the parts. The whole is the emergent pattern of that interaction, not the sum of the parts.
Diversity here means the degree of unique information in the network. If all contribute the same information, then diversity is low. If each agent contributes relevant, unique information that is not shared by others, then the diversity measure is high.
Networks with a wide spectrum of information/experiences are resilient to noise. This facilitating effect of diversity is critical when dealing with difficult problems where false information can lead to expensive consequences. Higher system performance and robustness occur through the simple combination of the different experiences of individuals, even though each individual takes part in communicative interaction from their own limited perspective.
The importance of self-organization and diversity is unfortunately still greatly underestimated today, particularly in hierarchical, centralized, monoculture systems – like firms.
One of the great societal promises of social media is that interaction in wide-area networks, with enough diversity, can solve problems beyond the awareness of the individuals involved.
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Background: On serendipity
Thank you Stuart Kauffman, Sari Baldauf and Norman Johnson
Complexity. The new world between chance and choice
April 10, 2010
Nonlinear dynamics are concerned with messy systems. Examples for these systems are the human brain, the evolution of life itself and the weather. There is not a single science of non-linearity, but there are different streams of research such as chaos theory or the theory of complex adaptive systems. The latter strand takes up an agent- and rules of interaction-based approach to modeling complexity. The first explains the behavior of systems that can be modeled by complex equations where the output of one calculation is taken as the input for the next. These equations are repetitive and iterative.
Chaos theory explains how the parameters in the equations cause patterns in time. These patterns are called attractors. A parameter might be the flow of information or the amount of energy in the system. At low rates the system moves forward displaying a repetitive, stuck behavior. This pattern is called a point attractor. At higher rates the pattern changes. At very high rates of, for example information flow, the system displays a totally random behavior. The pattern is highly unstable. However, there is a level between repetition/stability and randomness/instability. This level is called the edge of chaos. The pattern in time is called a strange attractor.
Never the same but always recognizable
The strange thing with a strange attractor is that the ongoing movement is never the same but always recognizable. The pattern is paradoxically stable and unstable, predictable and unpredictable at the same time. These patterns are spatially called fractals. Chaos describes a dynamic that is not a synthesis of order and disorder. It is about orderly disorder or disorderly order. The very meaning of these words is new.
The weather is normally used as an example of a system that displays this pattern. The overall weather patterns can be (almost) predicted over short periods of time. Over long periods, the behavior cannot be predicted. The long-term behavior of a system like this is determined as much by the smallest changes in the smallest of parts of the system, as it is determined by the laws governing it. The conclusion is very clear. Predictability is always short-term. Long-term predictions would only be possible if absolutely all the variables in the system could be measured with absolutely infinite accuracy. But it is impossible to know all the variables and it is totally impossible to measure all the variables with the accuracy needed.
The smallest overlooked variable or the most minute change can escalate up by non-linear iterations into a major transformative change in the later life of the system. Another conclusion is that from a chaos theory perspective, movement towards equilibrium is always movement towards death. If a system is healthy, successful and alive, it is “at the edge of chaos” where the long-term cannot be seen.
Classical physics took individual entities and their movement (trajectories) as the unit of analysis. Chaos theorists such as Ilya Prigogine, claimed that these trajectories cannot be calculated because of the impossibility of measuring with the precision needed. But there was something even far more exciting going on. Henri Poincaré was the first scientist to identify two distinct kinds of energy. The first was the (kinetic) energy in the movement of the particle itself. The second was the energy arising from the interaction between particles. When this second energy is not there, the system is in a state of non-dynamism. When there is interactive energy, the system is dynamic and capable of novelty and renewal. Interaction creates resonance between the particles. Resonance is the result of coupling the frequencies of particles leading to an increase in the amplitude of motion. Resonance makes it impossible to identify individual movement in interactive environments because the individual’s trajectory depends more on the resonance with others than on the kinetic energy contained by the individual itself.
Every interaction of any particles is thus potentially meaningful and can lead to amplification of the slightest variation. Interactive systems with even the smallest variations take on a life of their own that is under continuous construction. The future form and direction of the system is not visible in the system at any given time. The future is not in the system and it cannot be chosen or planned by anyone.
The scientists at the Santa Fe Institute developed the other strand of research: the complex adaptive systems approach. A CAS consists of a large number of agents. Each agent behaves according to its own intentions and rules for local interaction. Local here means that no agent can interact with the whole population of agents at the same time. No individual agent can determine the pattern of behavior that the system as a whole displays. These adaptive systems display the same dynamics as the chaos theorists found: stable equilibrium at one end of the spectrum, random chaos at the other, and in-between the newly found complex dynamic of stability and instability, predictability and unpredictability, paradoxically at the same time: the edge of chaos.
From complex adaptive systems to complex responsive processes
The conclusions are important for us. Firstly, novelty always emerges in a radically unpredictable way. Secondly, the patterns of healthy behavior are not caused by competitive selection or independent choices made by independent agents. Instead, what is happening, happens in interaction, not by chance or by choice, but as a result of the interaction itself.
The Internet changes the patterns of connectivity, transforms our understanding what “local” is, and makes possible new enriching variety in interaction. The changed dynamics we experience every day through social media have the very characteristics of the edge of chaos.
The sciences of complexity change our perspective and thinking. Perhaps, as a result we should, especially in management, focus more attention on what we are doing than what we should be doing. Following the thinking presented by Ralph Stacey, the important question to answer is not what should happen in the future, but what is happening now?
Our focus should be on the communicative interaction creating the continuously developing pattern that is our life.
Thank you Stu Kauffman and W Brian Arthur. Based on Ralph Stacey and Doug Griffin.
Learning from Caravaggio
April 2, 2010
We have a curious habit of thinking that what we are accustomed to is the way things should be. We are inclined to accept conventional forms as facts, and as meaningful reference points, when facing novelty.
Artists are often the people who want to see the world afresh. It is not easy to get rid of preconceived ideas, but the artist who best discards accepted notions and prejudices often produces the most remarkable works of art. However, a painting that represents a traditional subject in an unexpected way is often condemned. Normally there is no good reason, apart from the work of art just not following tradition.
There have been a few times in history that a great artist looked carefully at what was visible to everybody, but in fact saw things very different from the way others saw them.
Very few artists have caused as much shock and outrage as Caravaggio. A famous story is told about the commissioning of a painting of Saint Matthew for the altar of a church in Rome. This happened around 1600. The saint was going to be represented writing the gospel that was later going to be named after him. As gospels were the word of God, there was also going to be an angel in the picture, giving guidance to Matthew. Caravaggio read the old texts very carefully and tried to figure out what it must have been like when an old man suddenly had to sit down and do something that he had never done, or never dreamed of doing: writing a book, and being guided by an angel!
Caravaggio painted an elderly workingman, seemingly from a poor background. A man with a bald head and muscular legs, writing awkwardly! Beside him was a child with white wings. A young angel was guiding Matthew’s hand just like a teacher would do to a pupil doing something for the very first time. Caravaggio’s painting was a fantastic portrait of a human being in a very, very special situation. But it was also a completely new way of expressing an old topic. The painting was to be placed on the altar of a church in Rome. This never happened because Caravaggio’s work created a huge scandal. The painting was not accepted because it was claimed that it showed a lack of respect for the topic and the saint! What Caravaggio had done, for the first time in history, was to create a simple expression and give a human face to something that was highly formalized. Caravaggio may have been the first human-centric painter.
People thought that Caravaggio was out to shock them. They also thought that he had no respect for beauty and tradition. In fact, Caravaggio may have been the first artist in known history who was labeled both a rebel and a naturalist at the same time. He was the first painter of the “ugly” true reality. The curious thing is that seeing Caravaggio’s paintings today; one still encounters the same boldness and power that must have shocked people over four hundred years ago.
Caravaggio’s art is very much alive today, although the altar painting described here was never accepted for the altar and was eventually destroyed in Germany during the Second World War.
The question remains whether the human-centric approaches today meet the same kind of opposition as Caravaggio encountered. It is not about challenging the conventions carried forward by the church, or representations of what is holy. Human-centric thinking questions the conventions carried forward by corporate thinking and the idealized representations of leadership/management. The pattern is the same.
Nothing has changed, when it comes to the importance of Caravaggio! Being human-centric is as difficult today as it was in 1602.
Thank you @cshirky
