Category Archives: book review

Structure of Scientific Revolutions vs. The Black Swan (Journalism remix)

Structure of Scientific Revolutions CoverI’ve just finished Thomas S. Kuhn’s classic 1962 book “The Structure of Scientific Revolutions.” For those unfamiliar with the title, it is the book that gave us the important and oft over-used term: “paradigm shift.”

I won’t pretend it was an easy to read. Written in a classic academic style, what is a fascinating topic and set of ideas struggles to shine. However, don’t hear me blaming the author for this… it is both that the book comes from another era, and that it springs from a cannon of academic writing that simply doesn’t seek to be as penetrable outside a certain community.

That said, I did enjoy it immensely. One reason is that I once again lucked out and ended up reading it at the same time as another book – Nassim Nicholas Taleb‘s The Black Swan – that despite being on a different topics and written 45 years later, dovetails nicely.

blackswan-199x300Paradigm shifts are black swan events. They can be hard, if not impossible to predict. They can arise because of the appearance of a single unforeseen data point (a black swan in a world where all swans were previously believed to be white) and they overthrow systems that we have become overly, comfortably, complacent and reliant on. Finally, although paradigms shifts are rare, because they force us to see the world in an entirely new way they have a disproportional and possibly even unparalleled, impact.

I often like to refer to Schopenhauer’s three stages of truth: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

Both Taleb and Kuhn’s books play on this theme. For Taleb, our problem is that we can’t see or predict the changes in our world. We expect that we can predict them and that they’ll arrive in a nice orderly – or bell curve distributed – manner.

They don’t.

Despite the mental image we have of history (and our lives), history doesn’t crawl. It moves it fits and starts. Oscillating between long steady states and sudden change. We often believe the steady states will last forever, and when change comes we trivialize it and then fight it, until it becomes the new steady state, at which point, we come to believe it was always that way.

This is also Kuhn point. Look at how he sees paradigm shifts as being important for both the science and politics changes:

Political revolutions are inaugurated by a growing sense, often restricted to a segment of the political community, that existing institutions have ceased adequately to meet the problems posed by an environmental that they have in part created. In much the same way, scientific revolutions are inaugurated by growing sense, again restricted to a narrow subdivision of the scientific community, that an existing paradigm has ceased to function adequately in the exploration of an aspect of nature to which that paradigm itself had previously led the way. In both political and scientific development the sense of malfunction that can lead to crisis is prerequisite to revolution…

…The parallel has, however, a second and more profound aspect upon which the significance of the first depends. Political revolutions aim to change political institutions in ways that those institutions themselves prohibit. Their success therefore necessitates the partial relinquishment of one set of institutions in favour of another, and in the interim, society is not fully governed by institutions at all. Initially it is crisis alone that attenuates the role of political institutions as we have already seen it attenuate the role of paradigms. In increasing numbers individuals become increasingly estranged from political life and behave more and more eccentrically within it. Then, as the crisis deepens, many of these individuals commit themselves to some concrete proposal for the reconstruction of society in a new institutional framework. At that point the society is divided into competing camps or parties, one seeking to defend the old institutional constellation, the others seeking to institute some new one. And, once that polarization has occurred, political recourse fails. Because they differ about the institutional matrix with which political change is to be achieved and evaluated, because they acknowledge no supra-institutional framework for the adjudication of revolutionary difference, the parties to a revolutionary conflict must finally resort to the techniques of mass persuasion, often including force. Though revolutions have had a vital role in the evolution of political institutions, that role depends upon their being partially extrapolitical or extrainstitutional events. (Kuhn, Pages 92-93 of the 3rd edition)

If you don’t think the world operates this way, just look as far as the news industry.

When Shirky says revolutions are times when “The old stuff gets broken faster than the new stuff is put in its place” he is paraphrasing Kuhn. Journalism is already dividing into camps, those defending the old, and those seeking to figure out what the “new” will be.

But despite all the discussion, we are still very early on in the debate. How do I know? Because we haven’t even begun to shed the old paradigm? The entire debate about journalism, what it is, how it should be practiced and what makes it good or bad is still being largely being evaluated and adjudicated by the old matrix. When journalism finally gets saved I suspect it will be because it will be, in part, radically redefined – a redefinition affirmed and made possible by the establishment of some new institutions, organizations and/or processes. (That’s what my post on the death of journalist was seeking to do).

So yes, we’ve left the ridiculed phase (that lasted 20 years), but we are still early on in the violently oppose phase. All thos unhappy journalists are angry because they may be the midst of a paradigm shift, and that means much like Newtonian physicists confronting Einstein’s theory of relatively everything, absolutely everything they believed in, fought for, taught and lived. is probably going to get redefined and altered beyond recognition. It will still be there, but it will forever be understood differently.

That’s a scary thought. But it is fun one as well, filled with possibility. Which is why Kuhn and Taleb are fun to read together.

Reforming Government on the Globe & Mail's Wiki

A few months ago John Ibbitson – the Globe and Mail columnist who used to cover Ottawa and now covers Washington, DC – asked me if I’d help edit the 3rd chapter of his new book, Open & Shut.

The chapter, entitled Yes, Mr. President; No, Prime Minister asks why is it that after 8 years of President Bush, President Obama is able to quickly change the direction of government whereas in Canada, newly elected parties often struggle to implement their agenda.

Last week the book was released. As part of the launch process the Globe and Mail created a wiki dedicated to the book’s themes where readers can critic or expand on its ideas and analysis. More interestingly, as readers post to the wiki John will respond to their  ideas, critics and thoughts on a blog hosted by the Globe.

To kick off the wiki on Open Government, John asked me if I would write a short essay answering the following the question:

Federal politicians, and federal public servants, seem increasingly remote and disconnected from the lives of Canadians. Open and Shut maintains that this is because the public service remains closed to outsiders, and because Ottawa has ceded so much power to the provinces. Do we want our federal government to matter more in our lives, and if so, what should we do to give it meaning?

You can see my response, and what I hope will eventually become a growing number of comments on the future of the public service, here.

As an aside, two other sections have been created. One is on Open Politics, which is teed up by John Duffy (political strategist). The other is on Canada/US integration, which is kicked off by Scotty Greenwood (executive Director of the Canadian-American Business Council).

Why Policy Matters in Politics

There are a shocking number of people involved in the political process who firmly believe that policy doesn’t matter. That, at best, it distracts from, and at worst it impedes, successful political campaigns. Obviously, readers of my blog (not to mention those who know me) know that I am a big believer in the power and importance of public policy specifically and ideas in general. So I’ve been feeling nicely bombarded with confirming evidence that substantive policy – as opposed to simply style or spin – really is at the heart of political success.

The first is short and simply: Frank Rich’s excellent, and brutally entitled, column “A President Forgotten but Not Gone” in the Saturday New Times, where he uses Bush as example of the limits both of propaganda, and of power without purpose.

The second is much more in depth. It comes from reading of Tom Kent’s “A Public Purpose.” In it, while talking about the remaking of the Liberal Party after the defeat of the St. Laurent Government in 1957, he notes:

The main lines of policy of the rebuilt Liberal party – conspicuously, the emphasis on employment, medicare, a national pension plan, but many others too – were adopted at the party convention of January 1958, and by as democratic a procedure within the convention as the processes of political parties ever produce…

The policies did not, in other words, originate from the remaking of the party. In essence, they were already written when the organizational rebuilding took place. To a large extent, indeed, the new people who did the organizing came forward because they were coming to a body of ideas, for the better government of Canada, that they felt to be at once progressive and practical.

This is the central fact about the remaking of the Liberal party from 1957-1963. The process was not to regroup, reorganize, and, some time later, determine policies. The main lines of policy came first. They were the presence behind all the detailed work of opposing, reorganizing, finding candidates, building support. all that came second, not first. (Emphasis mine)

Kent’s comments reaffirmed for me three reasons why policy matters in politics:

a) First, while we can debate the degree to which the public reacts to a policy platform, a sound policy platform is an important step to gaining the public confidence. Thus, I can agree with Kinsella that governments are generally turfed out, not elected, while maintaining that an electorates willingness to turn to an alternative is dramatically improved if said alternative has a coherent set of (well thought out) policies.

b) Second, a sound policy platform is necessary to making a party electable because it has always been ideas, not the remote promise of power, that has attracted the new blood and energy to the party. As Kent points out, in 1957 the new policy platform of the Liberal party preceded its reorganizations and rejuvenation because new innovative and progressive policies attracted a new generation of leaders, activists and organizers into the party. Without this new energy a party will wither and die, no matter how inept or incompetent is competitors.

c) Finally, and possibly most importantly, policy is critical to governing successfully. Kissinger, for all his faults, articulated this challenge succinctly:

High office teaches decision making, not substance. It consumes intellectual capital; it does not create it. Most high officials leave office with the perceptions and insights with which they entered; they learn how to make decisions but not what decisions to make.

In short, once elected you are too busy to build your intellectual capital and to formulate a plan. You must have a vision and platform in place beforehand, otherwise you’ll end up looking like Diefenbaker or Martin, operating without an obvious direction or purpose. Policy matters because without it, time in government will be unproductive, painful and short.

WiiNomics… Nintendo’s scarcity strategy keeps paying dividends

I finally, finished Co-opetition by Brandenburger and Nalebuff (some of you may have noticed it was up on the library list for quite some time). It wasn’t for lack of interest – I’ve just been reading so many great books of late.

nesOne item in the book that stuck me was the example of Nintendo and the launch of it’s Nintendo Entertains System (NES) back in the mid-80s. This wasn’t because, as a kid, I was denied an NES by my parents, but because it lent credence to the accusations that Nintendo has purposefully created scarcity in the supply of its current machine – the Nintendo Wii – as well as some of its games – like the Wii Fit.

Certainly the following paragraphs out of Brandenburger and Nalebuff suggest there is a strong precedent in Nintendo’s actions. My friend Andrew M. has long argued that Nintendo has being artificially creating scarcity, but I’ve also thought it was just that the company hadn’t anticipated its success and so production had lagged demand. Now I’m inclined to think Andrew has been correct. If Brandenburger and Nalebuff are correct, then it looks like scarcity has been a Nintendo strategy for over 30 years. Check out these tidbits:

Even as demand took off, Nintendo remained cautious about flooding the market. It strictly controlled how many copies of games were produced, and pulled its own games off the market as soon as interest declined. Over half of Nintendo’s game library was inactive. Sometimes, severe shortages resulted…

…Somewhat paradoxically, the shortages may have helped create even more consumer demand. There were at least three different effects going on. First, shortages made the game cartridges even more desirable in the eyes of consumers, actually boosting demand. Trendy restaurants play the same game. For example, the long lines outside K-Paul’s in New Orleans made it even more fashionable, further increasing the lines…

…Second, shortages made headlines; filling demand would not have. “Tonight’s top story: Nintendo sold game cartridges to all those who wanted them. Details at Eleven” We don’t think so. The shortages generated tremendous free publicity for Nintendo, a company known to be rather stingy on advertising (spending only 2 percent of sales).

Third, shortages helped retailers move slower-selling Nintendo games, because parents would buy a lower-selling title if the the kid wanted was sold out. Of course, this was only a temporary solution, what we call the “Band-Aid” effect. The substitution might tie the kid over from Christmas to New Year’s, but kids tend to remember these sorts of things. So parents would have to return for the sold out title once fresh supplies come in. Nintendo made two sales instead of one.

(Page 113-114 of the paperback edition)

This time around, rather than making the game cartridges scarce – something hard to do since Wii games or printed on CDs, which are abundant – Nintendo made the games console itself scarce. I’m not sure about the last effect, but there is ample evidence of the first and second effecit. Nintendo has earned endless free media as a result of the Wii’s scarcity. Plus the scarcity has peaked interest – especially among non-traditional gamers.

I’m not sure if Nintendo is control the flow of video games in general – but certainly it is near impossible to buy a Wii Fit in Vancouver. So it would be interesting to know if this strategy is being used on its games as well.

Also interesting is to read how other parts of Nintendo’s strategy have also remained intact. When the Wii was first released I remember Sony and Microsoft deriding it for being little more than a generic graphics card attached to a hard drive. Well – the accusation was actually pretty accurage. But then, this was true of the NES as well:

In truth, the Famicom (renamed Nintendo Entertainment System in the North America) was hardly a computer at all-everything was dedictated to a single purpose, game playing. In order to keep the costs down, Nintendo deliberately used a commodity chip, an 8-bit microprocessor dating back to the 1970s. Personal computers at that time-such as the IBM AT or the original Apple Macintosh-were selling for between $2500-$4000. Nintendo’s machine was priced at $100. The Famicom’s price radically undercut the competition, its price so low that many people believed it to be below cost.

Back then it was Nintendo’s creative games that drove demand – not cutting edge graphics. This time, it was again creativity – the motion sensitive wiimote – that has driven demand.

CEO compensation – a symptom of institutional decay

So reading Emergence sprouted another thought regarding the increasingly bankrupt (literally and figuratively) model of the classic bureaucratic organizations. Again I point to Umair Haque’s post on the recent financial crisis:

The first step in building next-generation businesses is to recognize the real problem boardrooms face – that we’ve moved beyond strategy decay. Building next-gen businesses depends on recognizing that they are not about new business models or even new strategies.

The stunningly total meltdown we just witnessed in the investment banking sector – the end of Wall St as we know it – was something far darker and more remarkable. It wasn’t simple business model obsolescence – an old business model being superseded by a more efficient or productive one. The problem the investment banks had wasn’t at the level of business models – it had little to do with revenue streams, customer segmentation, or value propositions.

And neither was it what Gary Hamel has termed “strategy decay” – imitation and commoditization eroding the returns to a once-defensible strategic position, scarce resource, or painstakingly built core competence.

It was something bigger and more vital: institutional decay. Investment banks failed not just as businesses, but as financial institutions that were supposedly built to last. It was ultimately how they were organized and managed as economic institutions – poor incentives, near-total opacity, zero responsibility, absolute myopia – that was the problem. The rot was in their DNA, in their institutional makeup, not in their strategies or business models.

I think Umair is on to something and that CEO salaries may make for a great case in point.

For many years the left has decried growing CEO salaries as a sign of the market’s excesses – or worse, of a broader culture of greed. But excessive senior management salaries are, from an investors perspective, are a symptom of a staggeringly flawed institutional model. If your business depends that much on the one person at the top – if the current and future value of the entire organization rests in the hands of one person… then yikes! Shareholders beware.

The idea that a CEO is worth 1000, or even 100 times more than the “average” workers in an organization isn’t just a problem from a morale or ethical perspective (it may or may not be). If your average worker isn’t contributing that much value in relation to their ultimate superior than you have a massively top heavy – and hierarchical – organization. One where, I suspect, Umair would find there are poor incentives, near-total opacity, zero responsibility, absolute myopia. To be sure, ideas are probably not being floated about, and they are almost certainly not successfully emerging from the bottom up.

In short, it isn’t a happy place to be. And it turns out the markets may not think it is so good either.

Comfort with ambiguity

Finally polished off “Emergence” by Stephen Johnson (another post on it here) – the last 30 pages have been lingering for about 2 weeks.

Johnson’s ideas continue to touch on themes I’ve been explaining to others for two years now. More recently, on why boomers continue to misunderstand their Gen Y cousins. Take for example, Johnson’s conclusions about what video games are doing to all of us (but Yers in particular):

The conventional wisdom about these kids (gen Yers) is that they’re more nimble at puzzle solving and more manually dexterous than the TV generation, and while there’s certainly some truth to that, I think we lose something important in stressing how talented this generation is with their joysticks. I think they have developed another skill, one that almost looks like patience: they are more tolerant of being out of control, more tolerant of that exploratory phase where rules don’t all make sense, and where few goals have been clearly defined. In other words, they are uniquely equipped the more oblique control system of emergence software (and, I might add, emergent systems more generally).

While the boomer vs. gen Y comparison is generally apt, l think even more than being generational this is class based. Emerging creative classers are not only comfortable with this exploratory phase, they actively need it. This is why the large bureaucracies (but not necessarily large organizations) struggle to attract and retain both the demographic and the class. They often force upon their workers too much structure, to much rigidity on the front end, evaporating the creative opportunities where we might imagine something better, bigger or more effective.

A note of caution too for those who think the financial collapse augers a new era of safety in large bureaucracies. Don’t fool yourself. It was the large bureaucracies of the banks and government regulators, working in tandem, that got us into this mess. While some creative classers may attempt to retreat to the safety of a large government or private sector institutions I suspect that many will do just the opposite. As bureaucracies become still more risk averse and controling their capacity to foster to new ideas and approaches will be that much more constrained. The “outside thinkers” will be in still greater demand.

The Great Crash vs. Emergence (re-mixed)

So it is with impeccable timing that about 3 weeks ago I started listening to John Kenneth Galbraith’s “The Great Crash: 1929.” (Indeed, I wish I had similar impeccable timing when planning my RRSP, 401k and stock purchases). Obviously the events of the last week, and more precisely the events of yesterday make this essential reading for everyone.

By quirk of luck (due to a recommendation by Mark Surman) I have also been reading Emergence: The Connected Lives of Ants, Brains, Cities, and Software by Steven Johnson. Emergence is about “the way complex systems and patterns arise out of a multiplicity of relatively simple interactions.” Possibly the most easily understood exmaple of emergence is seeing how ants or termites can create complex societies based on a few simple rules.

Interestingly, although Galbraith and Johnson almost certainly never met, and their books were written over 50 years apart, they are fundamentally writing about the same thing.

John Kenneth Galbraith’s The Great Crash is about an emergent system – the speculatory stock market bubble that lead to the 1929 crash. Indeed what makes reading these books simultaneously so interesting is observing how Galbraith describe an emergent system without the language and frameworks available to Johnson 50 years later. Consequently, Galbraith’s book is hints at a larger system even as he struggles to describe how the decisions of hundreds of thousands of individuals could be simultaniously coorindated but not directed. He intuits a distributed system, but simple can’t describe it as accurately as Johnson.

A great example of this struggle is visible when Galbraith’s describes his frustration with others efforts to pin the 1929 crash on a given, or set of, individuals. I’m willing to bet that, sadly, we are about to embark on a similar misadventure: I wager the next congress is going to launch a series of hearings to determine “who” caused our current financial crises. This, as Galbraith pointed out about “The Great Crash”, will be nothing short than a colossal waste of time and energy, one that will distract us from the real challenge. This is not to say illegal activities did not occurr somewhere on wallstreet (or K street) both in recent years and in the years leading up to 1929. I’m certain they did. Nor should they go unpunsished. They should. It is just that then, as well as today, they almost certainly did not cause this crisis. As Galbraith puts it:

“This notion that great misadventures are the work of great and devious adventurers, and that the latter can and must be found if we are to be safe, is a popular one of our time. Since the search for the architect of the Wall Street debacle, we have had a hue and cry for the man who let the Russians into Western Europe, the man who lost China, and the man who thwarted MacArthur in Korea. While this may be a harmless avocation, it does not suggest an especially good view of historical processes. No one was reponsible for the great Wall Street crash. No one engineered the speculation that preceded it. Both were the product of the free choice and decisions of thousands of individuals. The latter were not lead to the slaughter. There were impelled to it by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich. There were many Wall Streeters who helped foster this insanity, and some of them will appear among the heroes of these pages. There was none who caused it.”

There was no one who caused it. Remember that. Galbraith wants to pin it on something large and decentralized but can’t put his finger on what it is. Consider this line “No one engineered the speculation that preceded it. Both were the product of the free choice and decisions of thousands of individuals. The latter were not lead to the slaughter. There were impelled to it by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich.” Throughout his book Galbraith keeps talking about a “collective lunacy” but cannot account for it. As he concedes, the desire to become rich is ever present, something in 1929 triggered a larger hysteria. Some emergent property made it vogue.

This is what we need to understand. In 1929 – as well as today – a group of people lived and worked in a system that had powerful incentives that encouraged them to engage in risky practices (in 1929 it was investing in stock on margin, today it was lending people money who simply could not afford it). Finding the people will achieve little compared to understanding the basic set of rules that created these incentives – removing the people will do little. Managing the incentives will do everything. A big part of this may involve new regulations, but probably more importantly it requires recognizing that whole new business models are required as these shape incentives far more than regulations. No business wants to go through this type of crises again. A business model that insulates them against it will be the one to copy. This is why Umair Haque’s post is so important.

Encouragingly and contrary to popular beleif, Galbraith doesn’t believe that the crash of 1929 caused the Great Depression. Depressingly he sites other problems that lead to the larger crisis – problems some of us might see as familiar:

  • A dramatic and uneven distribution of income (we got that)
  • Poor corporate structures (we got that one too)
  • Poor banking structure (check)
  • A uneven state of the foreign balance (check again, although in reverse)
  • Opaque economic intelligence (not so sure about this one).

Yikes, so we are batting 3, maybe 4 out of 5.

My biggest fear and suspicion is that this bailout, if it occurs. Will probaby not “rescue” the system. It will simply give us breathing room to adapt the system. Certainly that would have been the case in 1929, and history very much looks like an emergent system, beyond the control of a top down state, has once again taken over.