Why do we have such weak and poorly performing institutions and leaders in the West, even by the standards of recent history? Big developments are almost never mono-causal, so forgive me for not having a theory of everything on this critically important topic. Today we’ll focus on the hollowing out of operational capabilities, aka crapification on an institutional level, as one major contributor. This is a very large topic, so forgive this first stab as incomplete.
The norm for humanity is to lurch from crisis to crisis and too often merely surviving disasters as opposed to responding well. We’ve had the modern era luxury of believing otherwise. The nearly 100 years of absence of large-scale wars in Europe from 1815 to 1914 was a historical anomaly, as has been the period from 1945 until Covid, where despite many regional conflicts (with the US too often precipitating the war), rich economies have enjoyed the boon of stability. And speaking of Covid, industrial-revolution generated increases in income led to better diet and sanitation, and then seminal medical advances, namely antibiotics and vaccines. Plague and pestilence seemed things of the past for large swathes of the world.
Now the Four Horsemen have saddled up, with overarching “end of life as we know it” threats in the form of the US looking way too likely to consider using tactical nukes to bolster its weak position in Great Power conflicts it is bizarrely fomenting, along with of climate change. Yet despite the apparent sophistication of our systems, such as greater speed and ease of execution of all manner of knowledge work, from record keeping to document preparation to communication to our magic Internet making some types of information acquisition trivially easy, many of us experience symptoms of breakdown in our daily lives and as we and others have chronicled, on a macro level now, painfully visible in such fiascoes as haphazard and halfhearted responses to climate change to the US rapidly accelerating the loss of its hegemonic position through hare-brained strategies towards Russia and China.
Aurelien described significant pathology in recent post: institutional inertia. Organizations find it very difficult to change even when circumstances demand just that. Worse, doubling down on comfortable, established behaviors is often counterproductive. Aurelien used NATO as an example: it simply could not stop existing when the USSR fell because it was too useful for other purposes, like face time with US officials. But it remained adapted both to defense against an invasion (witness German tanks that presupposed operating on nice German roads and having access to dense German maintenance facilities) and regional conflicts against insurgents, as in weak opponents.
But the current rot goes well beyond institutions stuck in very big ruts. That problem is compounded by astonishingly weak leadership almost everywhere you look…another big topic I hope to address separately.
A different pathology seems to be a lack of comprehension of the scale of problems. It’s hard to know if this comes about due to a lack of imagination or pervasive acculturation to superficial takes. Climate change is a dramatic example. Readers may have noticed I take great umbrage at Green New Deal hopium, which makes it seem as if all we need to do is transition to new energy sources and not much will have to change.
I have to wonder if this blinkered vision results from what Peter Drucker described in the early 1980s as the the symbol economy. Drucker is unlikely to have originated the idea but he was early to be worried about its implications. He noticed that managers preferred to focus on symbol economy artifacts, particularly financial markets, which were not tightly tied to the real economy and he intuited would become less so in the future.1
Bear in mind that experts and commentators outside major institutions regularly exhibit these failures of imagination, so it’s not as if this behavior comes from institutional rigidity.
Inability to appreciate the magnitude of challenges leads to wishful thinking. Consider the 2015 Greece bailout negotiations. Here the already-basket-case nation was facing the maturing of some IMF and EU financings, meaning they’d need to replace them with new loans.
But it was clear by then that the IMF/neoliberal austerity regime had produced a depression-level contraction, with the result that Greece’s debt-to-GDP ratio had risen.2 So many were calling for the new Syriza government to throw off its Trokia3 shackles and leave the Eurozone.
But that was not going to solve any of Greece’s problems and would in fact make them worse.
The supposed big benefit of a Grexit was that Greece would be able to have its own currency. The idea then was that the new currency, say the drachma, would fall in value, giving Greece a competitive advantage. Greece could also theoretically redenominate its Euro debts as drachma debts, again lowering their cost.
This line of thinking was all wet. Even though Greece does have a large tourism sector, analyses of the rest of its economy showed that it would actually be on balance harmed by having its own, cheaper currency. One reason was that Greece was an importer of energy, food and pharmaceuticals.
Even more important, most of Greece’s external debt was English law debt, meaning the government could not redenominate it. So a weaker currency would make repayment even more expensive. And Greece’s banks were on European Central Bank life support. Cutting that cord would lead to a banking system collapse. That’s before getting to the fact that word of a Grexit getting out would lead to massive runs on Greek banks. Everyone who could would pull their deposits out to put them in a non-Greek bank so as not to be exposed to having their Euro deposits force-converted to worth-less drachma.
That’s before what it would take to issue a new currency. Merely designing, printing, fitting out ATMs to take the new currency along with Euros and distributing the currency is easily a year. The IT work for banks in Greece and payments players and banks outside Greece to make the changes is at the very very very best three years, and more realistically, five or six. Recall it took three years of planning and eight years of execution to launch the Euro with no hitches, and bank codebases were much smaller back then.
As Nathan Tankus, then writing on Naked Capitalism, pointed out:
Being shut out from the payments system (on any level ranging from having ELA4 being cut off from the banking system to Iran or de facto Iran-style financial sanctions) and essentially forced to exit will need mobilization of the society on total war levels.
These days, telling people they can’t have their policy pony produces the worst sort of “shoot the messenger” behavior. We were early to describe how, despite Greece having the right economic analysis in terms of the counterproductiveness of austerity, as well as the moral high ground, the Troika held all the cards. Greece would be forced to swallow another painful bailout. But we received the worst sort of vitriol in the comments section, to the degree we had to implement a comments holiday. That was an early example of the sort of partisan close-mindedness we see now.
Because Greece managed the difficult feat of uniting the entire EU against it, the bailout it eventually received, in July 2015, was on worse terms than the one initially on offer, in February.
Similarly, with Brexit, there was a shocking dearth of analysis of what a Brexit would mean in practice. For starters, what about a hard border for trade and services don’t you understand? As the separation date approached, the UK government failed to provide shippers and truckers with guidance about new forms and procedures, giving the strong impression they hadn’t thought about it much.
There were plenty of warning signs during the protracted negotiations. European officials telling the UK it could not have certain things once it was outside the EU, yet the UK repeatedly asking for them (which came to be called “cakeism”). Poorly written official documents (you may not be a fan of the EU, but it can still manage bureaucratic spit and polish. Too bad for every Michel Barnier there seems to be a host of Ursuala von der Leyens).
We had argued, with Brexit, that the UK still could get through it with only an interim period of cost and dislocation if it engaged in what we called war level mobilization. But aside from the fact that the Tories thought that belief in a glorious Brexit would carry the day, the badly hollowed out civil service was not remotely up to the task. Insiders report that the high performing old guard has been replaced by far less capable and motived staffers, as the finance industry hoovered up more and more of what passed for talent.
A recent Der Spiegel article described the mess the UK is in, and Brexit is a major contributor. The IMF projects the UK will have the lowest growth in 2023 of any large country, falling below that of sanctions-pummeled Russia:
Now we have the stunning example of the so-called Collective West refusing to accept, after months of growing evidence, that it’s being outgunned by one country that it dismissed as being an economic and military pipsqueak except for its nukes. And despite more and more reporting of the fact that it would take the US and NATO a decade to catch up on artillery production, there’s no sense of urgency about doing anything despite that. Consider this April 29 Wall Street Journal story, U.S. Struggles to Replenish Munitions Stockpiles as Ukraine War Drags On. The headline makes it sound as if the US is merely having trouble keeping up with the pace of Ukraine shelling. It does not acknowledge that typically Russian artillery fire has been 20,000 rounds a day versus 6,000 to 7,000 rounds on average for Ukraine earlier in the war. The article ‘fesses up that Ukraine is now down to a maximum of 3,000 rounds a day without comparing that to Russian levels:
The Ukrainians have been firing as many as 3,000 shells a day at Russian positions, and stocks are low in both the U.S. and its North Atlantic Treaty Organization allies, especially in 155mm howitzer shells, an ammunition that has been crucial to repelling Russian forces.
The Journal similarly depicts the US as straining to increase output, yet falling well short:
More than a year after Russia’s full-scale invasion of Ukraine, U.S. plans to increase production of key munitions have fallen short due to shortages of chips, machinery and skilled workers.
Note also the porcine maquillage on bad facts. The Royal United Services paper by Alex Vershinin on The Return of Industrial Warfare estimated it would take the West 10 years to catch up to Russia. Below we have more optimistic Pentagon forecasts, followed by a defense contractor discussing even shorter timetables:
Years of stop-start Pentagon funding for munitions led companies to close production lines or quit the industry, while output of many components and raw materials moved overseas. Defense Department chiefs estimate the decline will take five or six years to reverse.
“We want to get the fragility out of the system, so if this ever happens again, it’s six months instead of three years to get a meaningful improvement in capacity,” said Jim Taiclet, chief executive officer of Lockheed Martin Corp.
Consider this, again from the Journal:
Making even basic artillery shells is a complex, multistage process carried out in far-flung locations with aging machinery. Casings aren’t just lumps of steel, but highly engineered objects to ensure shells are the same size and can be fired reliably. Some also have sensors and electronic systems to improve range and accuracy.
It takes around a month from ordering the steel to make shell casings for the metal to arrive. The Army facility in Scranton takes about three days to machine the parts. The finished casings are shipped to Iowa, where it takes another three days to load and pack them with propellant and explosives.
Alexander Mercouris, in a recent video, described that making artillery shells was a technically daunting task and took highly skilled workers. I must confess to not recalling exactly why but I believe everything had to be made to very high tolerances, including temperature and humidity control.
The US is not big on investing in and retaining factory labor. And the manufacturing process described above, with machining separate from packing, sees less than idea.
By contrast, in terms of urgency, I was born right around the Sputnik launch. Even as a wee child, I knew that the US had been galvanized into meeting the Soviet challenge.
Even worse, the US officialdom and press seem unwilling to even contemplate that Russia is ahead of us in many weapons categories: anti-aircraft, signal jamming, counter-battery (note its Penicillin system), hypersonic missiles.
Despite the evidence of Russian prowess, and high odds of Ukraine defeat, the officialdom has not retreated from the increasingly-dubious Ukraine counteroffensive plan and is not even doing much to prepare expectations for bad outcomes.
We will avert our eyes from the massively self-destructive act of pushing Russia and China into a tight alliance and making them look far better than the Western powers by virtue o being less obviously power-mad and belligerent.
Why are we seeing this epochal collapse in execution capability? These examples, while important due to their impact, only scratch the surface. Other critically important systems in astonishing decline are education, including higher education, health care (gains in some advanced technologies are more than offset by looting and rationing), and infrastructure. In a time of resource scarcity, policymakers are doing nothing to combat waste by design in the forms of planned obsolescence and blocking the right to repair.
Due to the space required to introduce this topic, we’ll introduce some ideas now, hopefully to expand on them and add other ideas later.
One major contributor is the rise of neoliberalism and with it, the war on labor. I am not convinced that neoliberalism leads to financialization, but that a financialized economy (witness the UK as first movers) can move its economy and elite thinking must faster into a neoliberal model due to the pre-existing lower importance of labor. Recall that Michael Hudson depicts the competition between the industrial and financial models of capitalism dating to the early Industrial Revolution. Hudson does not think the domination of financial capitalism was at all a given; like Marx, he thinks it would, absent other circumstances, been more likely for the industrial model to become more widespread. He attributes the apparent success of financial capital to the defeat of Germany in World War I.
Ironically, the rise of Russia and China may represent the overdue resurgence of the primacy of industrial capitalism.
When I went to business school (graduating 1981), about 40% of the class was engineers (and not computer engineers but engineers in disciplines that were much less bug tolerant) and a significant proportion had worked for manufacturers in other functions, like sales or procurement. Having gone from seeing the tail end of America’s manufacturing era (my father had been a manufacturing manager, later executive) to finance gave me a sense of the difference between operating in a world of physical constraints versus ones that were more arbitrary (at Goldman, a typo was a career-limiting event; at McKinsey, it was seen as tolerable in a client document if the ideas and analysis were sound). You see that deal models are malleable and contacts aren’t set in stone (you can often cure a breach or pay for a waiver).
In other words, more and more organizations are less and less required to worry about pesky hard realities like maintaining equipment and being not too mean to highly skilled labor. US management has increasingly come to treat labor as disposable, even when the time to replace workers comes at a cost.
I can’t yet connect the dots as to how this has come about, but this change in the nature of the job of being a boss in many parts of the economy, combined with the rise in perceived importance of talking to Wall Street (as in preferring celebrity CEOs to less showy “keep the trains running on time” types) has contributed to an elite tendency toward magical thinking. Before you depict that as an exaggeration, I challenge you to depict US policy towards Russia and China (and increasingly the Global South) as anything but that.
Indeed, faith-based foreign policy dates at least to the Bush era, when a senior adviser allegedly declared, “We make our own reality.” That’s arguably the lodestar of the Project for the New American Century.
But it’s not just neocons who think they can push reality around. This sort of thinking has also been popular in the New Age (the oft-preached idea that you can manifest anything you want) and Christian prosperity touts. Even casual mentions of “positivity” and “negativity” come out of New Age manifestation right-thinking.
Related is the increased complexity of many organizations, if nothing else due to scale and scope. Decades of consolidation and globalization has made the biggest companies more sprawling. Yet I don’t detect that management has improved sufficiently to meet these challenges. Indeed, the supposed model of a leader for a big multi-industry operation, Jack Welch of General Electric, celebrated for decades in the business press, has finally been revealed as a fraud.
As companies and competitive settings have become harder to contend with, many business chiefs have fallen back on simple guidelines like “Maximize shareholder value.” But the principle of obliquity finds that in highly complex systems, we can’t get enough of a grasp of their behavior to chart a simple course. A brief introduction of this idea, from former Financial Times columnist John Kay, who stressed that when companies try to “maximize shareholder value,” they don’t succeed:
Oblique approaches are most effective in difficult terrain, or where outcomes depend on interactions with other people. Obliquity is the idea that goals are often best achieved when pursued indirectly.
Obliquity is characteristic of systems that are complex, imperfectly understood, and change their nature as we engage with them…
Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations…in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.
Sorry to pause now, but hopefully that gives some grist for thought and discussion.
1 Mind you, use of models isn’t a bad thing. Technology expert Michael Schrage, in his book Serious Play, looked at how model making and modeling media affected product design and development. He found that the most seasoned model users would regularly rely on multiple modeling approaches, recognizing that any one had shortcomings. Schrage however did notice and discuss the potential downsides of financial modeling, particularly since it, unlike product modeling, was removed from the reality of the investment or deal. As we’ve pointed out, there’s a strong tendency for the model to be treated as reality. In fact, for any financial forecast, 5 or 6 variable dictate results (after tax cash flow). Making assumptions at the bottom versus the top end of a reasonable range will produce results ranging easily from X to 10X. Most professionals recognize how arbitrary this process is; I’ve had M&A department heads say, because it’s obvious, that they can make a deal worth pretty much what anyone wants it to be worth.
2 New IMF research published around this time confirmed that so-called fiscal consolidation, aka neoliberal sack cloth and ashes, made debt burdens worse in weak economies. But the “program” side of the house is independent from the research wing and ignored these findings.
3 The European Central Bank, EU member states (as lenders) and the IMF. Simplifying a long story, the ECB had violated its own rules to make substantial short-term advances to Greece’s banks, which were buying Greek government debt, as in playing a big role in funding its operations.
4 Emergency Lending Authority. A program to provide short term support to supposedly solvent banks. Greece’s banks were not solvent and the program authorizations had to be reapproved