Jupiter Ascending
A telltale sign of bureaucracy is a cunning indifference to the existence of the tradeoff
“In a bureaucratic system, useless work drives out useful work.” — Milton Friedman
In a corporation, what is useful work? It should be a straightforward question. If the company is involved in making and selling widgets, then useful work would be anything that contributes directly to making and selling widgets. Engineering is useful work. Manufacturing is useful work. Sales is useful work. Everything else is not.
But is this true? Just because something isn’t obviously useful doesn’t mean it’s useful. Collecting bills from customers is useful because really the company is in the business of generating revenue from making and selling widgets. Accounting is important because it helps management understand what’s working and what’s not working in terms of resource allocation. Are they investing in the right kinds of projects? Are they spending conservatively on inputs and labor? Human resources makes a difference because it helps to create an environment in which the firm’s human capital can be optimized for the purposes of … generating profitable revenue from the sale of widgets.
In any enterprise, there are tradeoffs. There is an optimum balance in the ecosystem for all things. Too much of one thing (or too little of it) and we don’t get the best outcome. We want to maximize the profitability of the firm. Or we want to maximize the positive impact of the government agency in, say, reducing poverty or improving educational outcomes.
Tradeoffs exist because we have limited resources.
The only people who seem unaware of tradeoffs are the people who seem to think that we live in a world of infinite resources. We can always print money according to Modern Monetary Theory, for example. Money as representative of actual goods and services becomes severed from reality, in this view. It is an abstraction. As the kids say when they want to get their own way, “it’s a construct.” This is a phrase that was devoid of meaning before it became a cliché.
When tradeoffs exist, we need to make choices. To govern is to choose, whether it’s a private company or a public organization.
How do we choose? That’s in the design of the organization, in its DNA. In a private company, there is a board of directors representing the interests of the shareholders who own the firm. They issue strategic directives to management and they oversee the performance of the executives in carrying out its mandate. The management organize the firm into smaller sub-groups focused on specific functional or geographic domains. There is a fractal relationship in which senior management issues directives to and oversees the performance of their subordinate organizations. The people on the line execute, delivering outcomes. In a government agency, there is something similar, say in a government department. There is the Department of War underneath which there is the Department of the Army, the Department of the Navy, and the Department of the Air Force.
Every one of these fractal blooms must make decisions about how to allocate resources in order to optimize some deliverable. Optimization is in our nature. Animals optimize based upon things that have been coded into their DNA over generations as they adapt to the circumstances of their environment.
Optimization is organic.
In executing these fractal mandates, our organizations have adopted over time rules-based structures that defer to assumed expertise. These are fundamentally mechanical structures, ostensibly put into place to make us more efficient.
In some cases, this is process engineering. We take a process like collecting bills from a customer. We break it down into its constituent steps. Look at the contract. Identify the deliverables. Set up systems that flag performance against those deliverables. When completed, notify the customer of the deliverable and the attendant triggered payment. Make it easy for the customer to pay by providing details like an ACH instruction. Remind customer gently and then not so gently. Rinse and repeat.
It’s mechanical in the sense that there are only so many ways to do it. It’s something we can automate. It requires no judgment; it brooks no personal intervention.
On the other hand, there are plenty of processes that require judgment. HR needs to assess whether their policies are helping to advance the fundamental goals of the organization: generating profitable revenue from the manufacture and sale of widgets. This is difficult. How do they avoid conflating their actions with those of other players? How will they know that they are being effective or not?
When HR tells us that we need to put in place policies that consider diversity, equity, and inclusion, they render an expert judgment.
The rational argument for diversity in hiring is straightforward. The firm can attract a better-quality workforce as a whole if it tries to address some historical biases that have distorted the hiring process pejoratively. Bringing in people with different perspectives can lead to better decisions or better performance. Cynically, it may be cheaper to hire people who the market discounts because of race or disability or whatever.
If we do that rationally, then we will consider the tradeoffs. The firm may increase its hiring of these historically disadvantaged groups to the point where the tradeoffs balance. They’ll shift the employment mix until the marginal benefits of doing so start to decrease even as the marginal cost goes up due to a more competitive, broader market, say if everyone starts getting the idea to hire more broadly.
Of course, if the purpose of this is moral, then there is no limit. We can convince ourselves that people from these groups carry a built-in nobility that makes them superior to mainstream candidates. Then there are no tradeoffs. It’s the proverbial free lunch. Even more so if we convince ourselves that people from the mainstream are flawed just by being from the mainstream.
It devolves into the corner solution in which we only hire people who tick certain boxes.
We end up discriminating on the basis of race or gender or disability if we lose sight of the fundamental objective: generating profitable revenue from the manufacturing and sale of widgets.
We can subvert the fundamental objective and replace it with a new one: hiring as many diverse people as possible into lucrative positions. This can happen if people assume that the profitable revenue will continue no matter what we decide to do. This can happen if people ignore the tradeoffs inherent in life.
Friedman’s point is that useless work drives out useful work because people in positions of fractal power start to make decisions as if tradeoffs do not exist. That is the bureaucratic tipping point.
It’s like piling grains of sand onto a pile. They have no immediate impact. Drip, drip, drip and nothing happens. Until suddenly, the pile of sand starts to collapse chaotically.
This is even truer today in a world in which disruption seems to lurk around every corner from technology, geopolitics, or other forms of instability.
As investors or observers, we want to watch out for these signs of dripping sand. They are the signs of internal rot, of corruption of the database, of sclerotic buildup around the key organs.
My theory is that they are more likely to bubble up in times of perceived wealth and comfort. They are luxuries we cannot afford.
You’ll know people are worried about resources when they pay attention to tradeoffs again. Look for the companies that are throwing out their allegiance to prior climate change initiatives that seem divorced from commercial reality or organizations losing their fealty to DEI. Those are the incipient signs of turnaround in that they indicate a re-cognition of the tradeoff.