Who Decides? Who Pays? Who Benefits?

(Note: This is a direct quote from Chapter 15 of my book, "Freedom or Serfdom?)

The Parable of the Pie

Polly's Pie Parlor has an unusual business model. You pick the pie you want, but Polly delivers it to the customer who comes in half an hour later. You get the pie someone ordered half an hour ago; I hope you like his taste. And you won't pay for either of those, instead you pay for the pie somebody ordered two hours ago. No trading of pies is allowed.

That is obviously a silly example – or is it? It is an instance of what is called third-party decision making. One person decides, someone else pays and yet a third person lives with the decision. Yes that happens, maybe not in pie parlors, but it does happen in business, and especially in government.

Government and Third-Party Decisions

Government decisions are inevitably third-party decisions, made by someone far from the scene and who neither pays the cost nor lives with the results. It is worth looking at the problems this causes.

For any decision we must consider: (1) who decides, (2) who pays, (3) who lives with the results, and (4) who has the most knowledge of the situation. The best decisions are made by someone who pays the price, lives with the results, and is knowledgeable about the issues to be decided.

A person who pays but does not live with the consequences will have an incentive to keep costs down. However, he may not even care about quality or any results that do not affect him.

Someone who lives with the results but does not pay has an incentive to get a good solution, but not to control costs. He may go for an expensive solution that is only marginally better than something much cheaper.

A decision-maker who neither pays nor lives with the solution has no incentive to either control costs or find a good solution to the problem. Note that most government decision makers are in this category. They neither pay the price nor live with the result.

With government decisions, the decision-makers are usually insulated from both expense and results. However they do have an incentive to appear successful, so they tend to be reluctant to change their decisions. A change would be an admission that they were wrong, not usually career-enhancing. A bad decision is likely to remain in effect, much as the fees on climbers of Mt St Helens and Mt Adams remain in effect.

A person who pays and who lives with the decision, and who gets to make that decision, will have an incentive to balance cost and results. That incentive is likely to lead to the best overall decision, especially if that person is knowledgeable. Third parties are unlikely to have the first-hand knowledge possessed by the people directly involved. Those third parties may be 2,000 miles away from the situation. Furthermore, they may impose a “one size fits all” solution, ignoring differences between places as diverse as a big city like Los Angeles and a rural village where a traffic jam might mean three cars at a stop sign.

Third-party decision makers often think of themselves as smarter and more knowledgeable than the average person. They may even be correct, but the third party tends to have a different type of knowledge than the people at the scene. That third party is likely to have a theoretical background rather than the knowledge that comes from hands-on experience. Meanwhile, the people directly involved draw on personal experience and on information from others who have such experience. And those who pay and live with the results have an incentive to get more information if they need it.

For example, a rancher in eastern Oregon may have employees who drive 50 miles from town each day, then 50 miles back after work. Employees soon tire of the drive and of the expense of gas and automobile maintenance. The rancher has a hard time keeping good people, so he decides to provide housing right on his ranch. Not so fast! Representatives from urban/suburban areas dominate the state legislature. They do not make that daily commute, they do not lose employees who hate the drive, and many probably don't even know the difference between a bull and a steer. Guess who gets to decide how to run that ranch? That's right, the legislators from urban districts, people who want to prohibit such housing. Land use restrictions require that “Minimum lot sizes in farm and forest zones range from 80 to 240 acres.”[1] That restricts the number of houses a rancher may have for himself and his employees.

Ironically, many of the people who support those limits also want to reduce driving, yet their rules force ranch employees to commute from town. That is an example of not only third-party decision making but of stage one thinking. The decision makers do not think beyond the initial objective.

As government acquires more power, we find third-parties making more and more of our decisions. The results are predictable. Our only advantage is that we can blame someone else for the mistakes.

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[1]      http://www.landwatch.org/pages/perspectives/accomplishments.htm

Big Company Innovation?

The electric light, the telegraph, the telephone, the personal computer, the automobile. All these and more have one thing in common: they were developed by small companies, some by a single individual. In fact the record of true innovation shows that large companies seldom make real breakthrough inventions. While those big organizations often improve on the invention of others they seldom invent anything drastically different from existing products. Why is that?

I believe the short answer is “bureaucracy.” The larger an organization the more bureaucratic it becomes, be it a government or a business. That is probably inevitable, it is not humanly possible to directly manage every employee in a large company. However the executives do want every employee to work in accordance with their ideas. One way to accomplish that (or try to accomplish it) is to write policy statements and hire people to administer those policies. Those people become bureaucrats who see their jobs as administering policy. The policies then begin to take priority over the real goals of the organization.

Consider what happens when such a bureaucrat is faced with a request to try something drastically new. For example suppose an employee of the Smith Corona typewriter company had proposed that the company design and sell personal computers. That proposal would have required approval from layers of bureaucracy. Imagine yourself a manager, an accountant, or a controller asked to pass judgment on such an idea. If you approve it and it fails, you will share the blame. However if the innovation succeeds the credit will all go to the person who proposed it. You stand to gain little or nothing by approving the innovation, but you could lose much. However it costs you nothing to reject it. What will you do?

That in a nutshell is why big organizations are seldom truly innovative. They are infected with bureaucrats whose incentive is to maintain the status quo. They discourage the risk taking required for innovation.

Meanwhile individuals and small groups continue to bless the world with their innovations. Many of today's large technology companies started when some entrepreneur had an idea, then took the risk to pursue his dreams. Google, Amazon, Microsoft and others were started by individuals or small groups who put their own money on the line for their brainchildren. There was no corporate finance department to judge the undertaking as too risky, nor were there any managers to tell them they should concentrate on their jobs instead of those wild ideas. Instead, those innovators were free to pursue their passions, and they succeeded.

“But wait,” you say. “Didn't AT&T (American Telephone and Telegraph Company) come up with a lot of innovations? That was a huge company before the government broke it up, but it was responsible for everything from direct distance dialing to the transistor.”

That is true, AT&T was a very innovative company but how the company accomplished that is instructive. Nearly all those innovations were produced by a small division called Bell Labs (jointly owned with Western Electric). Bell Labs employees were encouraged to take risks, work on long-term projects and even engage in basic research. Employees won six Nobel Prizes for physics, most for work that had no immediate practical application. Long-term results were more useful, including much of the technology behind the computer on which I am writing this.

The Bell Labs secret was that it was almost a separate entity, beyond the reach of bean counters who demand quick results with low risk. The employees could pursue their passions without the pressure for quick commercial success. Other companies have created similar research labs. What they have in common is that creative employees are allowed to pursue their ideas. Those employees can work independently on innovations that may or may not ever succeed. Commercial success, if it comes at all, may be years or even decades in the future.

This is contrary to the normal management mindset which is to plan and control. One management book described business as ballet, not hockey. That meant that managers must plan the details as does a choreographer for a ballet. They must not expect employees to react on the spur of the moment in the manner of a hockey game. That is good advice for managing established enterprises. However such detailed planning and organization is the kiss of death for innovation. Innovation is hockey. The players are turned loose to act as they see fit. And players they are. Such creative people enjoy what they do. The employer's job is to provide them toys for their play, not to direct their actions.

Innovation is a messy process. That is one reason the independent entrepreneur is often more innovative than the highly trained scientist or engineer at a large company. The entrepreneur is playing, doing what he enjoys and such play leads to innovation. At a large company the same person would have his creative juices sucked dry. His play would be seen as a waste of time at best and probably a waste of company resources. Management would label him as a renegade, uncooperative, unwilling to work toward the good of the company.

Likewise in government (the largest bureaucracy in the country), employee creativity is stifled. Most government employees start out with high ideals and a desire to help the country. However they are shoehorned into the system, becoming drones whose job is to carry out policy, not to act in a creative manner.

Any organization that wants creativity must be prepared to put up with the risk, lack of control and general chaos that come with innovation. The organization must allow employees freedom to play and must not punish them for failure of wild ideas. You cannot manage innovation but you can facilitate and allow it.

Creativity is a precocious but unruly child. That child cannot be tamed, but will delight the world with new and useful ideas if allowed to be himself.

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