EDITOR’S NOTE: Like the Internet before it, COVID changed everything. Business models have added new technologies, new thinking and lots of hyperbole. Management professor and author Roger L. Martin has made a career of cutting through all of that to diagnose system problems and prescribing clear, realistic, data-informed and practical ways of making change to reset organizations on a sustainable path. In his latest book from Harvard Business Review Press (2020), When More Is Not Better: Overcoming America's Obsession with Economic Efficiency, Martin provides a guide for rethinking how the economy (and government) works, and points to what’s possible in the future.
In this excerpt, Martin, who spent much of his career at the University of Toronto, contends that Canadians have much to teach their southern cousins when it comes to policymaking. He writes about getting more comfortable with “continuous tweaking instead of fixed, permanent rules” and taking “a holistic perspective rather than many reductionist ones.” If the transborder example rankles the reader, Martin also illustrates how this malleability is also at the heart of keeping things fresh in the NFL.
In the following section called “Write Revision into the Laws You Make,” the author sketches out a model of U.S. policy makers to “consider as they contemplate how they can restore balance to democratic capitalism.”
When Americans identify a problem, their typical reaction is that there should be a law or a rule about it. The United States passes lots of laws and issues many rules as a result. Sadly, the economy doesn’t appear to present problems that are permanently fixable.
U.S. policymakers imagined that the Sarbanes–Oxley Act, or SOX, would prevent large-scale corporate abuse. We saw how that worked out, so why should we have assumed that the Dodd–Frank Act of 2010 would succeed in fixing the system where SOX had failed? It, too, was designed to be the comprehensive fix. Yet it has already been dramatically altered, with much controversy around the alterations, in part because it was designed to be permanent.
Once again, the explanation and the solution lie in realizing that the economy and the business world are complex adaptive systems, which quite simply adapt. In other words, when problems recur in natural systems, they are never quite the same as they were before. We can protect people against all the viruses we know, but we can’t guard against the next adaptation of the virus. We can similarly protect people against the exact repeat of past corporate abuses. But because the players in the system adapt their behavior to game the new legislation, the next banking crisis is not going to be an exact replica of the last. What’s more, establishing complicated rules for a game understood in its entirety by no one will inevitably open opportunities for gaming from the start — in part because the consent of would-be gamers is necessary for the law to pass in our democratic system. Even if that can be avoided and the rules do work at first, players will sooner or later find ways around them because they will have many more years to benefit from the gaming, since no one will have the time, patience or energy to reengage with lawmaking on the subject again — absent another crisis. Legislative permanence plays right into the hands of the gamers and creates more investment in gaming than would otherwise be the case. In the natural model of the economy, regulation should be treated less as a cure and more as an exercise in learning and development. And that was the extraordinary insight of the framers of the first Canadian Bank Act.
In building in a requirement for a regular revision, Canadian lawmakers were implicitly treating the new law not as a solution, but as a prototype from which learning would take place based on the interaction between the prototype and the complex adaptive system it enters. Take encouragement in the learning that comes from experiencing and observing the laws in action. Then tweak and tweak to make that prototype better and better until it is genuinely good — maybe even close to perfection. In essence, it means policymakers should act like software companies: promise imperfection followed by speedy fixes. In that industry, if customers prefer to get the software early, they receive it knowing it will come with bugs: That isn’t a surprise. If instead customers don’t want bugs, they are free to wait for later releases. That system works for all customers and for the software producers. Every new piece of legislation dealing with the economy should be made subject to periodic review and sunsetting if it doesn’t pass muster in such a review. This will raise the cost and lower the value of gaming by shortening the period during which the profits from gaming can be accumulated.
On occasion, America does engage in tweaking or sunsetting legislation. The aforementioned TARP is a good example. Under TARP, the Fed was authorized to spend up to $700 billion to purchase troubled assets that were originally defined as residential or commercial loans in default, loans that were threatening the solvency of the financial institutions that held them. The definition was later expanded to include any financial instruments the purchase of which would provide financial-market stability. The program was later cut back to $435 billion and ended up disbursing a little over $400 billion. To the surprise of almost everyone involved, TARP ultimately didn’t cost the taxpayers a penny, because the Treasury turned a $15 billion profit on the program— even though the assumption going into the program was that all $700 billion would be spent without any recoveries. And, once the crisis had passed, TARP came to an end.
Other domains provide even better examples, notably in sports. While the National Football League (NFL) is of course no paragon of virtue with its misbehaving players and physical brutality, it does understand and internalize the detrimental gaming of its very valuable game — even totally legitimate gaming by clever coaches. Its standing competition committee meets after every season to take stock of how the rules in place did or didn’t provide an optimal outcome on the field for the fans. It has the mandate to tweak — and in fact routinely does tweak — the rules that govern play on the field every year. The committee tweaks the rules to keep offense and defense in relative balance, because if the two get out of balance, the game will become more predictable and less exciting for the fans. If offenses start to dominate defenses, the game will become a back-and-forth offensive race down the field, while if defenses dominate offenses, games will end with no or low score. Both are less enjoyable outcomes than a rough balance between offense and defense. Thanks in part to this relentless tweaking of the game, the NFL has become the most popular and lucrative league in America. Nothing lasts forever — but much legislation implicitly assumes that it does. The assumption should be that all games get gamed and need to be designed for continuous tweaking. The Canadian Bank Act, TARP and the NFL Competition Committee show that it can be done successfully, and any government actor can follow suit.
Title: When More Is Not Better
Author: Robert L. Martin
Publisher: Harvard Business Review Press. Pages: 256. Price: $30.00.
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