What is the best organizational structure?

(This is a non-investing post so skip if you are looking for investing stuff)

(Image by Vern Evans for Strategy+Business)

How to Get Rich? is the title of a speech given in 1999. It sounds like it might have been from someone promoting a get-rich-quick scheme; perhaps someone selling a seminar, or a product, or a training program. But it is not. In fact it was an illuminating lecture given by Jared Diamond in 1999.

For those not familiar, Jared Diamond is a somewhat controversial social scientist who primarily specializes in anthropology, geography, physiology, and ecology. He is most famous for his book, Guns, Germs, and Steel, on why certain civilizations, especially what he calls the eurasian one, succeeded while many others failed. I haven't read the book yet but, from what I understand, a lot of the controversy is over the fact that Diamond attributes outcomes to geography, which is a bit too radical for many to accept—conventional thinking is that genetics, culture, social systems, and so on, are the key factors, not geography. Many also accuse him of having a euro-centric bias but I don't see much bias from anything I have read or heard from him.

In his How to Get Rich? speech, Jared Diamond asks "what is the best way to organize human groups and human organizations and businesses so as to maximize productivity, creativity, innovation, and wealth?". It is an interesting read and I recommend it to those with an interest in history, human evolution, and development of societies. As usual, no one really knows what actually caused the current state of the world but Jared Diamond provides an enlightening view. (If you are interested in Jared Diamond's thoughts, you may also want to check out this interview with Strategy+Business magazine.)

Let me excerpt some of the key aspects of the speech and inject my opinion (however, I recommend that you read the full speech if you are interested, for there is a lot of detail that I am not capturing below.)



On His Approach

One of the reasons for looking at history is because of what Diamond says below.

I propose to try to learn from human history. Human history over the last 13,000 years comprises tens of thousands of different experiments. Each human society represents a different natural experiment in organizing human groups. Human societies have been organized very differently, and the outcomes have been very different. Some societies have been much more productive and innovative than others. What can we learn from these natural experiments of history that will help us all get rich? I propose to go over two batches of natural experiments that will give you insights into how to get rich.

There's always something new I learn from the greats. Diamond suggests that human history consists of tens of thousands of experiments. Until reading this speech, I never thought of history quite like that. It's an interesting way of looking at things. It's sort of like doing lab experiements to test theories, except, with history, the experiments have already occurred and you are trying to learn something from them.

The First Experiment

The first batch of natural experiments concerns understanding the effects of isolation and of group size and of communication with other groups on the productivity of human societies. Let's learn from the extreme examples of isolation of human societies.

Jared Diamond attempts to figure out the impact of isolation by looking at a rare case of Tasmania, which is an island just off Australia.

Thus, for the last 10,000 years the Tasmanians represented a study of isolation unprecedented in human history except in science fiction novels. Here were 4,000 Aboriginal Australians cut off on an island, and they remained totally cut off from any other people in the world until the year 1642, when Europeans "discovered" Tasmania.

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Incredibly, though, archeological investigations have shown one other thing: during those 10,000 years of isolation, the Tasmanians actually lost some technologies that they had carried from the Australian mainland to Tasmania. Notably, the Tasmanians arrived in Tasmania with bone tools, and bone tools disappear from archeological record about 3,000 years ago. That's incredible, because with bone tools you can have needles, and with needles you can have warm clothing. Tasmania is at the latitude of Vladivostok and Chicago: it's snowy in the winter, and yet the Tasmanians went about either naked or just with a cape thrown over the shoulder.

That example is quite remarkable but even more remarkable, at least to a history newbie like me, is the following Japanese example.

Guns arrived in Japan around 1543 with two Portuguese adventurers who stepped ashore, pulled out a gun, and shot a duck on the wings. A Japanese nobleman happened to be there, was very impressed, bought these two guns for $10,000, and had his sword-maker imitate them. Within a decade, Japan had more guns per capita than any other country in the world, and by the year 1600 Japan had the best guns of any country in the world. And then, over the course of the next century, Japan gradually abandoned guns.

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The Samurai discovered that the peasants with their guns would shoot the Samurai while the Samurai were making their graceful speeches. So the Samurai realized that guns were a danger because they were such an equalizer. The Samurai first restricted the licensing of gun factories to a hundred factories, and then they licensed fewer factories, and then they said that only three factories could repair guns, and then they said that those three factories could make only a hundred guns a year, then ten guns a year, then three guns a year, until by the 1840s when Commodore Perry came to Japan, Japan no longer had any guns. That represents the loss of a very powerful technology.

This loss was possible only in Japan because of its isolation; there were no other neighbors threatening Japan.

So the conclusion Diamond draws is:

So these stories of isolated societies illustrate two general principles about relations between human group size and innovation or creativity. First, in any society except a totally isolated society, most innovations come in from the outside, rather than being conceived within that society. And secondly, any society undergoes local fads. By fads I mean a custom that does not make economic sense. Societies either adopt practices that are not profitable or for whatever reasons abandon practices that are profitable. But usually those fads are reversed, as a result of the societies next door without the fads out-competing the society with the fad, or else as a result of the society with the fad, like those European princes who gave up the guns, realizing they're making a big mistake and reacquiring the fad. In short, competition between human societies that are in contact with each other is what drives the invention of new technology and the continued availability of technology. Only in an isolated society, where there's no competition and no source of reintroduction, can one of these fads result in the permanent loss of a valuable technology.

The Second Experiment

The other lesson that I would like to draw from history concerns what is called the optimal fragmentation principle. Namely, if you've got a human group, whether the human group is the staff of this museum, or your business, or the German beer industry, or Route 128, is that group best organized as a single large unit, or is it best organized as a number of small units, or is it best fragmented into a lot of small units? What's the most effective organization of the groups?

To answer this question, Diamond picks the well-debated example of China and Europe:

Why is it that China in the Renaissance fell behind Europe in technology? Often people assume that it has something to do with the Confucian tradition in China supposedly making the Chinese ultra-conservative, whereas the Judeo-Christian tradition in Europe supposedly stimulated science and innovation. Well, first of all, just ask Galileo about the simulating effects of the Judeo-Christian tradition on science. Then, secondly, just consider the state of technology in medieval Confucian China. China led the world in innovation and technology in the early Renaissance. Chinese inventions include canal lock gates, cast iron, compasses, deep drilling, gun powder, kites, paper, porcelain, printing, stern-post rudders, and wheelbarrows — all of those innovations are Chinese innovations. So the real question is, why did Renaissance China lose its enormous technological lead to late-starter Europe?

We can get insight by seeing why China lost its lead in ocean-going ships. As of the year 1400, China had by far the best, the biggest, and the largest number of, ocean-going ships in the world. Between 1405 and 1432 the Chinese sent 7 ocean-going fleets, the so-called treasure fleets, out from China. Those fleets comprised hundreds of ships; they had total crews of 20,000 men; each of those ships dwarfed the tiny ships of Columbus; and those gigantic fleets sailed from China to Indonesia, to India, to Arabia, to the east coast of Africa, and down the east coast of Africa. It looked as if the Chinese were on the verge of rounding the Cape of Good Hope, coming up the west side of Africa, and colonizing Europe.

The Chinese, as we now know, lost their huge scientific knowledge along the way. But why?

In 1432, with the new emperor, the anti-Navy faction gained ascendancy. The new emperor decided that spending all this money on ships is a waste of money. Okay, there's nothing unusual about that in China; there was also isolationism in the United States in the 1930's, and Britain did not want anything to do with electric lighting until the 1920s. The difference, though, is that this abandoning of fleets in China was final, because China was unified under one emperor. When that one emperor gave the order to dismantle the shipyards and stop sending out the ships, that order applied to all of China, and China's tradition of building ocean-going ships was lost because of the decision by one person.

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Essentially the same thing happened in China with clocks: one emperor's decision abolished clocks over China. China was also on the verge of building powerful water-powered machinery before the Industrial Revolution in Britain, but the emperor said "Stop," and so that was the end of the water-powered machinery in China. In contrast, in Europe there were princes who said no to electric lighting, or to printing, or to guns. And, yes, in certain principalities for a while printing was suppressed. But because Europe in the Renaissance was divided among 2,000 principalities, it was never the case that there was one idiot in command of all Europe who could abolish a whole technology.

Does anyone else see an ominous parallel between the earlier Chinese period and the present? Similar to the past, China is ruled by an autocratic, totalitarian, government. So far, they have significantly boosted growth and pursued many advances in science and technology. But, as I have said of all totalitarian systems, all it takes is for one person at the top to bring everything down.

The controversial aspect of Jared Diamond is with his suggestion that geography is main reason for these structural differences in society. He suggests, for instance, that China evolved as largely a unified state because of geography. Skeptics claim that geography alone cannot explain the differences.

If a unified state was prone to failure, is it better to be extremely fragmented?

Does this mean that a high degree of fragmentation is even better? Probably not. India was geographically even more fragmented than Europe, but India was not technologically as innovative as Europe. And this suggests that there is an optimal intermediate degree of fragmentation, that a too-unified society is a disadvantage, and a too-fragmented society is also a disadvantage. Instead, innovation proceeds most rapidly in a society with some intermediate degree of fragmentation.

So, it seems, if Jared Diamond views are to be believed, high fragmentation is also very bad. In addition to India, I wonder if the slow progress of Africa (excluding Northern Africa and Horn of Africa) was due to extreme fragmentation. Africa has always had a ton of different ethnic groups, tribes, and so forth, nearly all of them spending more time fighting for territory.

Conclusion

Jared Diamond finishes off his speech with a few examples from the business world. I'm not going to go into them since they are similar to the historical examples. So to summarize, the key conclusions of Jared Diamond are:

First, the principle that really isolated groups are at a disadvantage, because most groups get most of their ideas and innovations from the outside. Second, I also derive the principle of intermediate fragmentation: you don't want excessive unity and you don't want excessive fragmentation; instead, you want your human society or business to be broken up into a number of groups which compete with each other but which also maintain relatively free communication with each other. And those I see as the overall principles of how to organize a business and get rich.

(Thanks to Rational Angle for brininging this speech to my attention several years ago. I finally got around to writing about it.)