What links all of today’s fierce debates around policy, productivity, competition, and capitalism?
The unprecedented events of the last couple of years have forced a dramatically wider appreciation of “slack.” It’s a very simple concept, but it could genuinely come to define the next iteration of culture and capitalism. Here are some of the insights that have helped me understand it best.
“Bloodshed and Cuckoo Clocks.”
[8 minute read]
“You know what the fellow said—in Italy, for thirty years under the Borgias, they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland, they had brotherly love, and they had 500 years of democracy and peace. And what did that produce? The cuckoo clock.”
- Harry Lime (Orson Welles), The Third Man.
Ideas that are somehow threatening to an established consensus are often the most interesting. The “evolution of cooperation” is apparently an uncomfortable area for many biologists. Science is increasingly discovering that evolution isn’t a relentless trial-and-error deathmatch that produces the most optimally-adapted species.
This time last year Scott Siskind wrote an extremely long essay called “Studies on Slack.” If you have a spare hour it’s really worth exploring. The essay sat with me for a long time before I started to begin to understand it. The “Too Long; Didn’t Read” summary is that successful evolution actually requires a delicate balance between outright competition and cooperation. As Rory Sutherland said in our recent “Most Interesting People in the World” speaker series - “there’s an optimal level of slack in a system and it isn’t zero.”
Slack in the system is usually easy to identify, and thus eliminate, especially in the name of efficiency and profitability. But the unintended consequences of a “lack of slack” are now visible everywhere. Market structure experts like Corey Hoffstein have done great work illustrating how diminishing liquidity is increasing the fragility of asset markets. Especially during periods of volatility, when it’s most needed. The precariousness of just-in-time supply chains has become painfully obvious. Cyberattacks are bringing down whole swaths of critical infrastructure. A significant portion of the Internet went down again this week due to reliance on a single provider. We’ve networked everything together, thus making it dramatically more volatile, just as we’ve removed a lot of the necessary slack.
To best understand why this is important, it helps to consider one of the most profound concepts I’ve ever encountered: fitness landscapes. It’s one of those incredibly simple-sounding ideas that ends up being universally applicable.
A Fitness Landscape. Source: Max Olson, futureblind.com
In the example above, a weak evolutionary environment is the rolling hills (think: lush Maui), and the steep peaks are a highly competitive environment (think: bustling Manhattan). The goal of any species is to get to the highest possible “fitness” peak. But the interesting thing is that, the harsher the environment, the harder it is for a locally-optimized species to evolve by trying something new. It stays at its own local peak, and just gets picked-off by predators instantly if it deviates. The whole system therefore gets more fragile, especially if there’s a sudden change in the overall environment.
Think of a high-earning Wall Street worker in a competitive city like New York. They hit middle age and peak family responsibilities, just as they start to intellectually stagnate in their job. They can’t leave their current position to experiment with a new career path as a photographer without sacrificing some of the “fitness” of their current financial position. It’s harder to retreat from a steep peak than a shallow one. Thus you can get stuck in a local optimum of burnout. Moreover - a financial crisis can devastate the entire homogenous economy.
The kind of successful experimentation that allows for diversity and ecosystem resilience requires some breathing room. Siskind uses the example of monopolies. Before they got broken up, both Xerox and Bell Labs invented an absolutely insane number of breakthrough technological innovations, from the mouse to the transistor. Transformational R&D is typically a long-term payoff, and falls in recessions.
Thus the idea that the omniscient hand of “THE MARKET,” when left entirely unconstrained, produces maximum innovation, is simply not borne out in reality. Pure competition actually produces surprisingly fragile and homogenous systems. It ends up with 80% of the world’s almonds being grown in a single, vulnerable, drought-prone place like California’s Central Valley. As Peter Thiel puts it:
“Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away.”
The wonderful paradox is that you become best evolved by competing less hard.
Joe’s Stone Crab in Miami is the highest-grossing independent restaurant in America, despite being closed for 3 months of the year. The restaurant industry has an average of 75% annual personnel turnover. Joe’s hourly employees stay an average of 10 years, and overall staff for 15 years. As Roger Martin writes in When More is Not Better:
“Considered strictly, Joe’s pursues inefficiently high compensation for both employees and suppliers, inefficient use of space in the restaurant, and inefficient sale of low-price chicken entrees. All that notwithstanding, Joe’s model has been proven monumentally effective for over a century, with no sign of slowing down.”
Joe’s balanced business model has plenty of slack, yet has proven wildly successful. In contrast, Siskind describes how Eddie Lampert’s Sears was reorganized to be an intense competition between internal departments for resources. It obviously did not end well.
A clever way to deliberately inject slack into a business is through “balanced scorecards.” By forcing the use of internally contradictory targets, you are driven to implement creative compromises. For example, Southwest Airlines seeks to be the lowest cost airline and the number one airline in terms of customer satisfaction, employee satisfaction, and profitability.
Safi Bahcall’s book Loonshots offers a detailed account of how you’d structure an individual organization for the optimum mix of internal competition and innovation. First you separate groups working on new breakthroughs and on existing franchises into two groups of 150 people (Dunbar’s number!). Then you “create dynamic equilibrium (ensure that projects and feedback travel easily between the two groups). Break apart while staying connected.” This creative tension between two different groups is a direct analogy for the working of the human brain. Hmmm.
On an individual level, Rory Sutherland’s view (book insights here) is that slack needs to be deliberately built into the working day; “20 minutes to stare off into space.” John Cleese’s recent short book on creativity (insights here) repeatedly emphasized the role of slack in generating insights. In fact, he believes the longer the period of reflection is, the greater the eventual breakthrough might be. The perpetually wonderful writer Morgan Housel also contributed to the current slack zeitgeist by recently outlining all the great thinkers and innovators who mandated balance within their routines. As Housel sums it all up: “not maximizing your potential is actually the sweet spot in a world where perfecting one skill compromises another.”
You cannot guarantee creativity and innovation, but you can foster the conditions of its emergence, and that requires more slack. Pure competition drives us into local optima where we can stagnate as people, societies, and businesses. The question is - what’s the force that draws us back down from a temporary peak? The potential answer is one of the most exciting ideas I’ve ever encountered, but that’s for another day.
Have a good weekend!
Other interesting reading:
- Read: Beware of Tight Feedback Loops by Brian Lui (19 minute read).
- Why read: a great intro via Cedric Chin, Brian’s article challenged the accepted wisdom (and my prior belief) that faster feedback loops are always a good thing. Brian discusses how good investing and strategy is actually a process of world construction based on creativity, slack, and equanimity. It’s 100% resonant with my thinking and it’s a great read.
- Read: At lunch with Freeman Dyson (33 minute read).
- Why Read. Whenever I see an article with equations in it, my eyes glaze over. So this is for the more numerate readers, but the implications are quite dramatic.
- “Within biology’s subspecialty of evolution theory, there is a small area of study known as evolution of cooperation. That study, some would say, lies closest to the biologist’s terror. That makes it worth poking at.
- A decade before the publication of Darwin’s “On the Origin of Species,” Alfred Lord Tennyson’s poem “In Memoriam A. H. H.” gave a startlingly good description of natural selection. This is the poem where “Nature, red in tooth and claw” ultimately loses out to “…love, Creation’s final law.” But it is poetry, not science.”
- Read. What is your favorite deep, elegant, or beautiful explanation? By Stewart Brand in Edge (4 minute read).
- Why Read. A repeat from an earlier week because of its relevance to today. This is Stewart Brand’s answer to the cool Edge series of asking one question a year to interesting people. This is maybe the shortest article I’ve thought the most about.
- “Fitness landscapes express so much so economically. There's no better way, for example, to show the different modes of evolution of a remote oceanic island and a continental jungle. The jungle is dense and "rugged" with steep peaks and valleys, isolating countless species on their tiny peaks of high specialization. The island, with its few species, is like a rolling landscape of gentle hills with species casually wandering over them, evolving into a whole array of Darwin's finches, say. The island creatures and plants "lazily" become defenseless against invaders from the mainland.”
- “You realize that for each species, its landscape consists almost entirely of other species, all of them busy evolving right back. That's co-evolution. We are all each other's fitness landscapes."
Have a great weekend!