Market-Based Management®

General Principles v. Detailed Rules

Aleksander Solzhenitsyn was a young decorated captain in the Red Army stationed on the Prussian front in WWII.  One day he was abruptly asked to report to his commanding officer. 

"Please hand me your weapon."  "Sure, why?"  "Did you write in a letter to so-and-so that 'the whiskered one' wasn't conducting a proper war strategy?"  "Well, yes, I suppose so, why?  What is this about?"

Other men stepped forward - the secret police - "You are a spy spreading anti-communist propaganda!!"  "But I would never be a spy - I believe in communism!!"  "You criticize Stalin - you are spy!!" 

They ripped off his medals and his captain's bars and marched him away, to eventually be thrown into what he called "Stalin's sewage system," now known as the Gulags or forced labor camps. 

His book The Gulag Archipelago is a moving testimonial memorializing the millions who suffered and died in those camps which he miraculously survived due to his training as a mathematician. (He was taken off of manual outdoor labor in 50-below-zero conditions to work on calculations.)

Upon his liberation, he became an outspoken critic of Stalin and that "sewage system."  He was allowed to speak out because it was convenient at the time for the current politburro. At some point he outlasted his usefulness and became more of a nuisance. 

Since he'd attained international recognition by that point (including winning a Nobel peace prize which the USSR did not allow him to receive), I suppose they couldn't just make him disappear, so instead he was shipped to Germany, stripped of his Soviet citizenship and eventually exiled to Vermont.

There he lived a relatively quiet life until invited by Harvard University in 1978 to give their commencement speech.

I am guessing that everyone in the crowd that June day expected him to pour vitriol on the USSR and sing the praises of western society and his benevolent host, the U.S.  They were quickly disappointed...

"Harvard's motto is 'Veritas.'  Many of you have already found out and others will find out in the course of their lives that truth eludes us if we do not concentrate with total attention on its pursuit. And even while it eludes us, the illusion still lingers of knowing it and leads to many misunderstandings. Also, truth is seldom pleasant; it is almost invariably bitter. There is some bitterness in my speech today, too. But I want to stress that it comes not from an adversary but from a friend."

He had decided to use the opportunity to give the West some "performance feedback," as an outsider who is living in - but is not of - that society.  A sort of counter-weight to Alexis De Tocqueville's optimism.   If you're a product of Western civilization, it is instructive to read in its entirety - not to simply agree with, but to provoke thought and reflection about the society in which you live.  However, it is his section on Legality that I would like to dwell on a moment because it struck me so powerfully:

"I have spent my life under a communist regime and I will tell you that a society without any objective legal scale is a terrible one indeed.  But a society with no other scale but the legal one is not quite worthy of man either. [...] Whenever the tissue of life is woven of legalistic relations, there is an atmosphere of moral mediocrity, paralyzing man's noblest impulses."

What makes Market-Based Management different from other management approaches is that it is based on Hayek's concept of Spontaneous Order (and Polanyi's Republic of Science).  One condition for a spontaneous order - where all the members of an organization are voluntarily cooperating to maximize long term value - is a strong set of beneficial Rules of Just Conduct - a set of general principles that applies to everyone as well as beneficial norms of behavior that are based on shared values.

The opposite of a principle-based approach is a rules-based approach.  This rule-based approach is, I think, what Solzhenitsyn is addressing in his comments.  I see this approach a lot - and often unconsciously paired with negative assumptions about the nature of employees:  that people cannot be trusted, are stupid or must be controlled. 

It's the 100 item check-list that an administrative assistant is told to complete everyday; the RR&E-as-contract that is "negotiated" to define "meeting" expectations (usually just a more sophisticated form of a check list); the memo to the mill leader from "corporate" that says "do this or you're out of compliance"; the 10 signatures needed to approve a $500 incentive... 

Rules beget more detailed rules and plea's for exceptions, resulting in favoritism, arguing over which rules apply, and increasing bureaucracy -- people focus on the rules and forget about the results - and worse, use the plethora of detailed (and sometimes conflicting) rules to pick and choose which to follow and which to ignore in order justify whatever it is they want to do, regardless of the benefit to the whole.

The rules-based approach promotes Solzhenitsyn's legalism, dampens the human spirit and prevents experimentation, discovery, innovation, and limits the use of individual knowledge and expertise - all things necessary to have a thriving organization where members have the opportunity to reach their full potential.

The MBM approach broadly asks us to concentrate on enforcing the general rules while allowing individuals to figure out the particulars.  Focusing on the particulars causes the general to break down - as Charles Koch has oft repeated: "you can't tell someone to be entrepreneurial but then tell them what to do, when and how."

This is not to say that there is no place for detailed rules or step-by-step instructions.  That would be absurd.  But in this as in all areas of life, wisdom and good judgment must be applied.  The MBM Guiding Principles spell out the most fundamental general principles that define the boundaries of our actions.  When there's a conflict with the first three especially, they win, full stop.  Start there.

An overview of Koch Industries, its culture and influence

Many people approach me with interest about Koch Industries - what it's all about, the culture, etc.  This video done by WSU for an alumni award given to Charles & Liz Koch in 2008 is a nice start at a high level overview... 

Fred Koch's Influence

Here is Charles Koch, CEO of Koch Industries and author of The Science of Success, How Market-Based Management Built the World's Largest Private Company (Wiley & Sons), talking about some of the lessons he learned from his father:

The Challenge Process

We've had the good fortune to interview several business leaders across Koch on a variety of topics for their personal insights... Below is just a small sample of what is currently - or will soon be - provided internally to employees. The "Conversations with Charles Koch" site is up and running on most of the company intranets. Enjoy.

How Would the Market Deal with the Mortgage Mess?

I have been on the road much lately and unable to blog. However, some weeks ago we received this excellent question in our comments section.

"We have just discarded two government subsidy solutions to the housing market/bad loan mess we now have. Is there a politically viable alternative that conforms to free market principles? So far, free market ideas on how to deal with these toxic assets has been seriously lacking."

First of all, I will point out that markets are not perfect; they are—after all—made up of people, which can cause them to swerve too far up or too far down in much the same way a mob may stampeded this way or that (for an excellent analysis of this phenomenon I would recommend Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds). Despite these sometimes dramatic swings, market price trends are still the best way to collect widely dispersed information about supply and demand to effectively allocate society’s scarce resources. The problem with the current mess was that government institutions were effectively cheering and prodding the mob on, which made it swerve entirely too far in the wrong direction, when it might have otherwise turned back to sanity earlier.

Sadly, I muss confess that there is unlikely to be a politically viable alternative to this happening again. Both parties cheered the expansion of home ownership and were even joined by strong free-marketeers (the latter felt the creation of an “ownership” society would advance the cause of markets and that too much housing was a relatively minor evil when compared to most other subsidies)). In a broad sense, the crisis has not shifted the government’s paradigm—the government is still pressing banks to loan money to the un-creditworthy (indeed, the threat of legal action or community pressure caused many a bank to lend to those with both poor incomes, poor prospects, and little collateral). Having been badly burned by doing just this, the banks are decidedly reluctant. Like with our wandering mob, the pressing momentum of the human beings making up the market are now carrying the mob far in the opposite direction. The free market approach to this mess would have been to first not create the conditions that caused it, and, second hold accountable those foolish enough to lend and borrow. Markets are fantastic at punishing those who make bad decisions, but this involves letting those who made bad loans fail. When economic resources have been misallocated by market manipulation, the only way to ultimately fix the problem is to pull these resources apart (companies, capital, and people) and allow them to find where they can create the most value for society. Unfortunately, this is often a very painful process and must be endured for the restoration of long-term prosperity. If the government had allowed the banks and other large firms to fail, then the short-term pain would have been significant, but it would have been just that—short-term—and emerging from the mess would have been a stronger economy built on a solid foundation for a renewed march forward. This is why free market proposals to toxic assets has been lacking, because the free market approach to such assets would be to do nothing and treat these assets as the worthless scraps of paper that they actually are.

On the road again...

Vocabulary building for my colleagues: 

Peripatetic: Per-i-pa-tet-ic:  |peripəˈtetik|
    1. adj. - traveling from place to place, esp. working or or based in places for relatively short periods.
    2. noun - a person who travels from place to place

ORIGIN with reference to Aristotle's practice of walking to and fro while teaching.  Old French peripatetique, via Latin from Greek peripatētikos for "walking up and down." 

Example: "She says she's decided to accept my peripatetic life." "She said you're pathetic?" "No peripatetic - there's a big difference."

Synonyms: Wandering, roving, roaming, migrant, migratory, nomadic, itinerant, traveling, unsettled.

We're on a Maslow Kick...

After some encouragement from the good Dr. Daley, I am back on a Maslow kick...  If you're wanting to get on the bandwagon too, then the book immediately recommended is Eupsychian Management (fully reprinted later along with commentary in Maslow on Management, excerpts reprinted along with other useful material in The Maslow Business Reader). 

I've read "EM" three times, am at my fourth reading in as many years, and get something new and useful every time.  Eupsychian Management is one of the "Principal Sources" of MBM - see the link on the side of the blog.

Usefulness to MBM applications abound... Just one immediate example: his letter to John D. Rockefeller III on p. 8 of the Reader comes in handy for initiating a very practical discussion about vision development, organizational health, and / or guiding principles. 

I only just started the Maslow biography The Right to be Human, but have read Motivation and Personality and Toward a Psychology of Being - both excellent but not as immediately applicapble to work experience as the above mentioned books. 

If you're on the kick too, please feel welcome to add to the comment section.  If you are considering starting, I will leave you a Maslow quote to make you think through if this is worth your time:

"What is not worth doing, is not worth doing well." - A. Maslow, Maslow on Management

 

If the same were only true in certain other fields of human activity...

A quote to ponder from Albert Einstein:

"... Since the purpose is to understand the world as it really is, and not to persuade anybody of anything in particular, there is no place in science for deception, especially unconscious self-deception.  The scientist cannot get away with fooling himself.  Because all that will happen at the end of the process if you fail to detect your errors is that your aeroplane will not fly.  The laws of nature, you see, cannot be deceived.  So there is a strong underlying ethical principle woven into the very fabric of the scientific process - something which is all too often overlooked.  Would it not be wonderful if the same were true in certain other fields of human activity?

As quoted in M. Strong's The Habit of Thought, chapter 2: Intellectual Integrity.

PNC

Two of my daughters were talking about someone - "boyfriend" was the key word that got my attention...  In the midst of the discussion my oldest said, "what do you expect? PNC."

I googled PNC with my real-time-daughter-translation-system (aka my wife) and found out it is an acronym for "People Never Change." 

Interesting.  Change what?  Their character?  Their basic human nature?  To what extent are we able to change ourselves, to change others... to change societies? 

Thomas Sowell argued that there are two broad competing visions that tend to shape our views in this area.  Based on my reading, I think what he calls "vision" might be what we refer to in MBM as a "mental model."  On one side is the "constrained vision":  Human nature is what it is - it's not changing.  PNC.  On the other side is the "unconstrained vision": Human nature is malleable, perfectable. 

Which end of the spectrum do you tend towards?  Whatever the extremes or blend, it will have a big impact how you interact with the world.  Sowell wrote, "we all have visions [mental models]- they are silent shapers of our thoughts."  He also wrote, "we will do almost anything for our visions [mental models], except think about them."   

His book, A Conflict of Visions, is an effort to get us to think about them.  It is on the Principle Sources reading list for MBM.  

Here is an interview with Thomas Sowell where he talks about his book. 

Infrastructure, Markets, and Commerce

There is a lot of talk afoot of the need to rebuild the nation’s infrastructure, and a favourite charge of anti-marketeers is that markets cannot provide complete, integrated networks of roads, bridges canals etc. However, while the market may not provide transportation networks as extensive as those built, subsidized, or sponsored by government, the market would be more likely to provide transportation infrastructure where it would bring the most benefit to the most number of people, while maximizing the efficient use of society’s scarce resources. Of course, those wishing their teeny village a multimillion dollar bridge would be fresh out of luck. Furthermore, the public would be denied admittedly impressive but value-destroying white elephants, such as the Channel Tunnel or the Big Dig. However, this is not to say that the government cannot build worthwhile projects (anyone who has flown into Reagan National Airport can tell you it really needs a much longer runway), but the question remains that even if the market fails to produce a worthwhile public project, then will the politicians and the planners get it right?

I was recently reminded of this quandary while working my way through Tim Blanning’s The Pursuit of Glory: The Five Revolutions that Made Modern Europe: 1648-1815, which includes a chapter discussing the nature of roads and road-building in seventeenth and eighteenth century Europe. Relying on contemporary accounts, Blanning begins a typical historian’s gush about the grand nature of French road-building and the colossal task undertaken by tens of thousands of workers and vast expenditures by the central government. However, unlike most historians, he digs a little deeper and discovers that, for all the highways’ grandeur, few people bothered to use them. Consider the following quote from Arthur Young—an Englishman touring France in the early eighteenth century. Although much (and grudgingly) impressed with the French roads, he observed that they had emptied a mere ten miles out of Paris and while moving south he observed:

“In 36 miles, I have met one cabriolet, half-a-dozen carts, and some old woman with asses. For what all this waste of treasure?”

So why had such massive roadworks failed utterly to encourage commerce? The answer lies with who decided where the roads went. Eager to impress important persons at court, ministers built roads to serve the latter. Accordingly, the Duc de So and So might have a beautifully paved road running to his remote country chateau, while a major commercial hub went un-serviced. In addition to serving the powerful, the royal roads had also been built to convey the king’s post, edicts, and orders to the far corners of the realm. Thus, the French roads tended to shoot out like spokes in a wheel from Paris towards the regional centers of administration. Unfortunately, while this ensured a straight shot from Paris to many locations, getting from anywhere to anywhere else in France by royal road meant going through Paris. The Sun King’s roads may have radiated out from Paris, but they allowed little in the way of lateral movement, which greatly reduced their commercial utility (a fine road is of little value if one cannot get to it). Despite the dearth of traffic, Frenchmen could rightly take pride in their roads, but often reproducing Young’s fair-mindedness, French travelers to England declared her roads just as fine—If not better—than their French counterparts. According to visitors (French and otherwise), the problem with English roads was that they were too crowded with a steady movement of carriages and carts that one Frenchman described as “magical.”

So why were the English roads crowded and the French roads bare? A logical suggestion might be that the English government employed smarter planners or had a better road-building bureaucracy than the French. However, the truth of the matter is that while the French government dedicated huge amounts to road construction, the British government hardly lifted a finger. True, English locals did owe a customary duty to keep the roads in their district in repair, but this custom had long since degenerated into farce with the gatherings of workmen quickly degenerating into a combination of shirking, drinking, and brawls (not necessarily in that order). This all began to change in 1695 when an entrepreneur petitioned the British Parliament to allow him to build a road upon which he might charge a toll, which would be collected at either end and admission granted through the turning of a pike. No doubt encouraged by a share of the promised revenue, Parliament rapidly agreed. Seeking to maximize the volume of his turnpike, the entrepreneur picked a location that would serve the most traffic. Furthermore, in order keep the revenue flowing fast and furious, he made sure that the road remained in top condition and that the maximum amount of traffic moved smoothly. Following the profits of this first trail-blazer, numerous entrepreneurs began petitioning Parliament for the right to serve the public for a nominal fee. While the turnpike acts came slowly at first (only 25 passed in the 1730s), the improved roads apparently made it easier for members of Parliament to get to London to pass more turnpike acts. The number of turnpike acts increased to 37 in the 1740s, before exploding to 170 during the 1750s and an additional 170 the following decade. By 1770 an estimated 15,000 miles of roads had been built in Great Britain, while the traveling time between most places in the British Isles declined by a factor of four.

What was true in the eighteenth century is true today. Markets can and will provide infrastructure provided they are allowed to. Meanwhile, government sponsored infrastructure is more likely to serve the interests of politicians than the people. History is littered with “bridges to nowhere,” and that trend is unlikely to change anytime soon.