Inverted placism: a possible future in which Silicon Valley’s a ghetto

I was having brunch with a couple of friends who are lawyers, and we were talking about desirable and undesirable places to live. Seattle (where I may be moving in early 2015) scored high on every list, and one of the attorneys said something to the effect of, “I’d love to live there, but it’s next to impossible to get a job there.” Getting a law job in Seattle is, apparently, ridiculously difficult. This surprised me, because law is even more pedigree-obsessed than VC-funded technology, and where there’s pedigree obsession, there’s placism. Placism, for law, seemed to favor New York and D.C. to the exclusion of all else. There were some attorneys making lots of money in entertainment law (or as divorce lawyers) in Los Angeles, but it wasn’t prestigious to be in a “secondary” market. That seems to be changing, with locations like Seattle and Austin– desirable places to live, no doubt, but not law hubs– becoming very selective, and some moreso than New York.

Ten years ago, in large-firm corporate law (“biglaw”) New York was the place where attorneys wanted to stay as long as they could. Even though the pay wasn’t substantially higher– when adjusted for cost of living, it was invariably lower– the prestige was strong and followed a person for life. The best outcome was to make partner in one’s New York firm. Perhaps 1 in 10 was offered the brass ring of partnership. The next set, those who were clearly good but wouldn’t get partnerships, would move to firms in “secondary markets” and become partners out there. It was acceptable to move out to Austin or L.A. or Seattle, in your mid-30s, if Manhattan partnership wasn’t in the cards, but few planned for it. Law is even more pedigree-obsessed than VC-funded technology, and so placism is pretty major, and the going assumption has, for a long time, been that the best students of the top law schools will invariably end up in New York.

It seems to be changing. More attorneys are considering New York their backup choice, not wanting to put up with the long-hours culture and high rents. It’s no longer considered unusual for top talent to favor other locations, and some of those smaller markets are developing a reputation for being much more selective than New York, the old first choice.

Does anyone care to guess how this might apply to technology?

Silicon Valley isn’t stable

Balaji Srinivasan gave a talk at Y Combinator’s Startup School entitled “Silicon Valley’s Ultimate Exit”. In it, he decried the four traditional urban centers of the United States: New York, Boston, Los Angeles, and Washington, DC. He named that stretch “the Paper Belt”, a 21st-century analogue of the “Rust Belt”. See, all of those cities are apparently run by dinosaurs. Boston is the academic capital, but MOOCs are rendering in-person education obsolete. D.C. is apparently no longer relevant, under the theory that the decline of nation states (which will occur over the next 200 or so years) might as well be concluded to have already happened. New York? All that media stuff’s being replaced by the Internets. Los Angeles? Well, Youtube and iTunes and Netflix have already disrupticated Hollywood, which might as well be relegated to history’s dustbin as well (except for the fact that someone still has to make the content).

Silicon Valley’s arrogance is irritating and insulting. I’m not exactly lacking when it comes to intellectual ability, and on several occasions, I’ve interviewed for a position in the Valley (for the right job, I’ll work anywhere). On multiple occasions it has happened this way: I knock the code sample out of the park, on one occasion submitting one’s considered one of the 3 best submissions. I nail the technical interview. I get the offer… and it’s a junior position because, whatever I accomplished up to this point, I didn’t do it in California. The effect of placism is very real in technology, and it’s strongest in the Valley.

I don’t see this elsewhere. Banks and hedge funds don’t care if you’re from a rural village in China. If you’re smart, they respect it. They have the intellectual firepower to recognize intelligence. What about the Valley? Surely, I’m not saying that the people in the Valley are dumber? Well, it’s not quite that. As individuals, I don’t think there’s a difference. There are A-level intellects everywhere, whether you’re in the middle of Nebraska or in the Valley or on Wall Street. The problem, instead, is that the Valley has a passive-aggressive consensus culture, which means you need to impress several people to get the green light. In New York, it’s typical for an influential person to say, “I like this guy, and those who don’t won’t have to deal with him, but I think he’s fucking brilliant”. In California, that doesn’t happen. This gives intellectual mediocrities (who can, likewise, be found in Valley startups and on Wall Street) a certain show-stopping power (“I don’t think he’s a team player”, “she’s not a culture fit”) that they don’t have, to the same extent, on the East Coast.

For traders and quants, pedigree isn’t all that important. It can get you in the door, but it ceases to matter after that. In the Valley, pedigree matters much more, because recognizing individual excellence challenges the “collaborative culture” and the “laid back” mentality that California is “supposed” to have and, if you can’t bring up a person’s individual firepower, you start defaulting to credentialism and prestige. Not all Stanford grads are geniuses (see: Lucas Duplan). On the East Coast, it’s socially acceptable to say, “He’s fucking stupid and I’m sure his parents bought him in.” That’s a pretty clear “no hire”. In California, you can’t say that! Instead, in the California culture, you end up having to say something like, “Well, his problem-solving skills aren’t what I expected, and I think he’d be unhappy in a technical role, but I guess we can give him a product position and tap the Stanford network.” To me, that’s a “no hire” but, to many managers, that sounds like a ‘yes’.

I had the reverse of this experience when (as part of my consulting practice) I was hiring an engineer for a startup. He was a 20-year-old college graduate, sharp as fuck and probably a better programmer than I was, but socially inept. I said, “he’s brilliant, but would need some mentoring on the social aspect of the work”. To make it clear, I was being as honest as I could be, and my recommendation was to hire him. Unfortunately, my “he’ll need social mentoring” was taken as a passive-aggressive way of saying “no-hire”, rather than a completely honest acknowledgement that a good candidate had (minor) imperfections. He wouldn’t have been hired anyway, nor would he have liked the place, so it didn’t matter in the end. Still, it shocked me that such a minor note against someone (I said, “he’ll need social mentoring”, not “he’s an incorrigible fuckup”) could be taken so far out of proportion.

The point of this digression is that, because people in the Valley refuse to communicate meaningfully, and because of the consensus-driven culture, the rank-ordering of potential candidates that is actually used is the one already furnished. For younger candidates, that’s derived from educational pedigree. For older ones, it comes down to job titles and companies to some small degree, but much more important is location. Placism rules in the Valley.

There’s nothing stable about that, in my view. Academic institutions have lifelong contracts (tenure) with professors and gigantic capital investments, so universities tend to stay put. (Universities that are too prolific with branch campuses, such as NYU having an Abu Dhabi campus, destroy whatever prestige they might otherwise have.) The seat of the U.S. government is, likewise, unlikely to leave D.C. except in event of an unforeseen catastrophe. Hollywood’s geographical advantage (its proximity to a diverse array of terrain types) is still major, because the cost of travel with a film production team is extremely high. New York? New York won’t lose finance (the exchanges are there) and, even if it did, it would still be New York.

That’s something that the Valley, with its arrogant placism, doesn’t get. Let’s say that New York’s financial industry takes a catastrophic dive. We see apartments once valued at $50 million selling for $4 million, and rents dropping to Midwestern levels. And then? Creative people will move in, rapidly, and restore life to the city. New York isn’t beholden to one industry. It will always be New Fucking York. Unless we see a recurrence the 1970s general abandonment of cities by the American population (and, in my lifetime, we probably won’t) the worst-case scenario for it is that it becomes like Chicago: an also-ran city that is, in spite of its lack of “paper belt” specialty, thriving and an excellent place to live.

New York can lose its status as the prestige center of biglaw. It could even lose Wall Street. (That would be a disaster for New York property owners, but the city itself would be resilient.) Silicon Valley, on the other hand, is fucked if the placism of venture-funded technology inverts. That just might happen, too.

Inversion of placism tends to happen when the young and creative decide that the advantages of living in the “prestigious” place are not worth the disadvantages. The rents are too high, the culture is too elitist, and upward mobility is too low. The progeny of well-connected families still end up in the prestigious place (New York biglaw, Valley technology) but the successes of the next generation head elsewhere. Sometimes, they choose another location; others, there’s a sense of diaspora for a while. The Valley could easily lose its singularity. It’s not a great place to live (it’s a strip mall) and it’s far too expensive for what it offers. In truth, everything about it is mediocre except, to some extent, the work; but 95 percent of the work is mediocre (who wants to work in operations at IUsedThisToilet.com?) and getting the other 5 percent requires an advanced degree from a top-5 CS department, or elite connections. A few good people have those and will be able to stomach the Valley, but most good people come from no-name schools (not because the no-name schools are better, but because most people come from no-name schools) and don’t know anyone important out there. In 2010, talented and naive 22-year-olds were willing to move out to the Valley and provide cheap, clueless, highly dedicated labor under the naive (and wrong) assumption that a year at a startup would have them personally introduced to Peter Thiel by the founders. Is that trickery going to work in 2016? I doubt it.

Starting about now, it’s going to become increasingly evident that the talent wants to be outside of Silicon Valley if the same quality of job is available elsewhere. In fact, being in Silicon Valley after 35 will mean one of two things: astronomical success, or dismal mediocrity, with no middle ground. Being in California, at that age, and not being part of the investor community (either as a VC, or as a founder able to raise money on a phone call) will be a mark of shame. If you’re good, you should be able to move to Seattle or Austin, no later than 30, and get the same quality of job. If you’re really good, you can get that kind of job in St. Louis or Nashville. Aside from the outlier successes ($20 million net worth, national reputation) who can make a Silicon Valley residence part of their personal brand, it’ll be the mediocrities who stick around the Valley, still trying to catch a break while ignoring the hints that have been dropped all around them.

By 2020, this will have more of a “diaspora” shape. There won’t be a new tech hub yet. You’ll see talent gravitating toward places like Seattle, Boulder, Portland, Chicago, Austin, Pittsburgh, and Minneapolis, with no clear winner. Millennials are, if not blindly optimistic, attracted to the idea of turning a second-rate city into a first-rate one. By the late 2020s, it will be clear whether (a) new hubs have emerged or (b) technology has become “post-placist”. I’m not going to try to opine on how that will play out. I don’t think anyone can predict it.

Cheap votes

What gives Silicon Valley its current grip on technology? The answer is a concept that seems to recur when aggregations such as democratic elections and markets break down. Cheap votes.

Electoral voting, statistically, can actually magnify the power of a small number of votes. If there are 101 voters and we model 100 votes as coin-flips, the power of the 101st vote isn’t a 1-in-101 chance of swaying the election. It’s about 1-in-13. (Due to the central tendency of the mean, there’s a 7.9% chance that the 100 votes split evenly.) Likewise, the statistical power of a voting bloc increases as the square of its size (in the same as the variance of perfectly correlated identical  variables, when summed, grows as the square of the individual’s variance). What this means is that a small number of voters, acting as a bloc, can have immense power.

Another issue is that many voters don’t really give a damn. Low voter turnout is cited as a negative, but I think it’s a good thing. Disinterested people shouldn’t vote, because all they’ll do is add noise. The ugly side effect of this is that societies generate a pool of cheap votes. Ethical reservations aside, there are plenty of people who care so little about electoral politics that (absent a secret ballot) they’d sell their vote for $100. How much is a vote worth? To the individual, the vote is worth less than $100. But, to many entrenched interests, 500,000 votes (which can sway a national election) is worth a lot more than $50 million.

When you allow vote-buying, power shifts to those who can bundle cheap votes together. That’s obviously a very bad thing for society. Such people tend, historically, to be deeply associated with society’s criminal elements, and corruption ensues. This is one of the major reasons why the secret ballot is so important. Anonymity and privacy in voting are sacred rights, for sure, but we also want to kill the secondary market for cheap votes. There’s no real harm in someone selling his vote to his grandma for $100, but if we allow vote-buying to take place, we give power to some unelected, vicious people who use the statistics of electoral practices to subvert democracy.

Markets are the voting systems of capital allocation and business formation, designed as principled plutocracy rather than a democracy. Of course, just as in democracies, there are a lot of cheap votes to go around. Plenty of middle-class people want to park their savings “somewhere” and watch their numbers go up at a reasonable annual rate, but have no interest in dictating how the sausage is made. They don’t know what the best thing to do with their $500,000 life savings is and, to their credit, they admit as much. So they put that money in bonds or index funds and forget about it. Some of that money ends up in high-risk, high-yield (in theory) venture capital funds.

VCs are the cheap vote packagers of a certain 21st-century question: how do we build out the next stage of capitalism, which requires engagement and autonomy within the labor pool itself to a degree that disadvantages giant organizations? The era of large corporations is ending. It’s not like these companies will disappear overnight, or even in 50 years, but we’re seeing a return to small-scale, niche-player capitalism in which a few small companies manage to have outlier success and (if they want it) can become large ones. VC is the process of taking cheap votes (passive capital) and attempting to influence the formation processes of the nation’s most innovative (again, at least in theory) small businesses.

Abstractly, your typical doctor in St. Louis would rather have more small businesses in the Midwest (his children need jobs, and they may not want to move to Mountain View) than in California, and might prefer his capital being deployed locally. But he has a full-time job and is smart enough to know that he’s not ready to manage that investment actively. So, he parks his money in an “investment vehicle” that has the funds redirected to a bunch of careerists in California who care far more about the prestige of association with news-making businesses (hence, the focus on gigantic exits) than the success of their portfolios. His returns on the investment are mediocre, but his locale is also starved of passive capital, which has all been swept away into the bipolar vortex of Sand Hill Road.

Passive investors don’t care, enough, to pull their funding. In fact, it’s rarely individual investors whose capital ends up directly in venture capital. Because of protections (which may not be well-structured, but that’s another debate) that prevent middle-class individuals from investing directly in high-risk vehicles, it’s actually large pension funds and university endowments (increasing the indirection) that tend to end up in VC coffers. With all this indirection, it’s not surprising that passive investors would tacitly accept the current arrangement, which congests Northern California while starving the rest of the country. But is this arrangement stable? I think not. I think that, while it takes time, people eventually wake up. When it happens, San Francisco may still possess its urban charm, but the Valley itself is properly screwed.

Gervais / MacLeod 26: r- and K-selection in organizations and capitalism.

I wrote about the three existing varieties of capitalism last month. Now I’m going to focus on a concept from evolutionary ecology, which is the r/K selection theory, pertaining to the tradeoff between quality and quantity in reproduction, after which I will detail its connection to business.

First, I should focus on the pure ecology. An r-selected organism (r-strategist) is one that has lots of offspring, but most do not survive. For example, a spider that leaves a brood of hundreds of infants, most of which will not live even a day, is an r-strategist. On the other hand, whales and humans, with their long gestation periods and high parental investment, are much closer to being pure K-strategists: few offspring, high quality. In reality, almost none of the higher animals clearly fall into one category or the other: mammals, perhaps notoriously, show adeptness at both r- and K-selective sexual strategies, with males and younger animals more r-driven and females and older animals more K-favoring. For an animal to have both impulses is most adaptive to nature because the two drives serve different purposes. After a population crash or calamity, the r-selectors will repopulate the quickest; when the population is near or at capacity, however, K-selectors have the advantage. Since both classes of circumstance have occurred over the millions of years in which complex life evolved, both strategies are part of our heritage.

One thought, that I’ve always thought credible, is that the emergence of high intelligence in mammals is, at least in part, an artifact of an arms race between two opposing sexual drives. Humans clearly have both r- and K-strategic sex drives, and much of the narrative of morality as civilizations have evolved is about the tension between these two. The r-selective sex drive (Freud’s id) just wants to spread seed as far as it can go; a hundred offspring would be desirable, a thousand is even better. The harem-holding kings and pharaohs of antiquity were notorious r-strategists. On the other hand, the K-strategist invests highly in a small number of offspring (in ancient times, “a small number” might have been 5-10). K-strategists tend toward monogamy: if one is optimizing for quality of offspring, the best strategy is to find one high-quality partner and treat that person and the children well. K-selectors were the first monogamists, but also civilization’s first architects. An r-strategist doesn’t care about social stability, because the general assumption is that with a few hundred offspring, some will thrive no matter how damaged the environment becomes. K-strategists, on the other hand, want social progress because a fair, reasonable, predictable, and progressively improving society is the one in which quality offspring have the best chances. (Damaged environments are much more random in what they reward and punish.) Finally, the first feminists (male and female) were K-strategists, which is one of the reasons why Sex and the City pseudofeminism is so clearly inconsistent and laughable. Monogamy, democracy, feminism, and social justice all come from our K-selective halves; the r-strategist within us doesn’t give a damn about any of that.

Most religions portray the more ancient r-drive as “evil” (or, at least, sinful) and the K-drive as “good”. I don’t think it’s useful to categorize nature that way. We are animals, and what makes good or evil has more to do with our ability to reflect on, and filter, our impulses than what they are or where they come from. When the species is threatened and the environment is damaged, it’s r-selectors who help it bounce back. If nine-tenths of the male population were killed in a pandemic, moral reservations about polygamy would vanish as humanity struggled to recover. On the other hand, a stable society views the impulsive, present-focused r-selectors as a parasitic nuisance, and people who are extreme on the r/K spectrum are given the name, “psychopath”, because they fit so poorly into a cooperative, peacetime society. 

Memes!

In the world of biology, the delineation between r- and K-selection is not always clear. Trees, for example, distribute lots of seeds (r-strategic) but the adult organism is an extreme K-strategist– designed to live for centuries. Every organism would prefer, of course, to optimize quality and quantity both– it’s only when they trade off against each other that we can discern an specific character– and it’s not clear that specific species favored one or the other, with most advanced species relying on both. In the world of memes, however, we find that there’s much more separability. A biological organism is a complex beast (literally) formed by r- and K-pressures over millions of years; but memes are simpler, and it’s usually easy to tell an r-meme from a K-meme. They are utterly different in character. Many memes are formed consciously, and some are built to grow rapidly (“go viral”) and become fads, then pass away. Others are designed for longevity and cultural impact. The Wire and Mad Men are TV shows that were clearly not built to achieve the highest ratings; they were built for quality and longevity, and people will still want to watch them five decades from now.

Much of what we do in civilization is reproduction of ideas. Laws form as people replicate what they consider to be the fairest means of dispute resolution, rehabilitation, protection of society, and (when needed) punishment. Religion and culture emerge to reproduce successful ideas, and r- vs. K-selective tensions are evident there. Some religions want to grow in membership and are willing to tolerate dilution of the message (r-selection). Others grow conservatively and work aggressively to prevent dilution or evolution in the core ideas (K-selection). Then there’s business. Guild systems are K-selective, insofar as they attempt to mandate quality in the trade (admissions, market manipulation to prevent “race to the bottom” dynamics) at the expense of growth. For example, the advisory “bottleneck” in graduate schooling (a gestation period) is a K-strategic invention. However, these systems tend to be brittle in the face of a competitive global market.

Without explicit manipulations and traditions, business tends toward radical r-selective behavior. A manager might give 15 reports, making it impossible for them to be adequately mentored. New hires are not treated as valuable initiates to a guild or tradition (and possibly put through a painful but controlled “hazing” process) but, rather, treated as utterly marginal members of zero credibility and value. Being hired into the company means nothing; they have to prove themselves once there. Most companies, despite saying otherwise, would rather grow rapidly and dominate a market, at the expense of personnel quality and mismanagement, than grow at a controlled rate and risk second-rate status in the market.

What’s right?

While the impulse to associate K-strategies with “good” and r-selection as “bad” is strong in civilized people, we have to avoid that, especially when analyzing business and technology. There’s no clear right or wrong. Consolidation, obsolescence, declining reputation, and adverse market changes can kill off small players (K-capitalists) of even the highest quality, meaning that the “get big and moralize later” mentality of the r-capitalist is sometimes the only thing that works. Additionally, it’s not clear to me that business K-strategists, as a class, have any real moral high ground. I have plenty of friends working in non-profit organizations (professed K-strategic companies) and the politics in them are just as vicious and mean-spirited as in for-profit corporations– sometimes worse, because of resource scarcity (cf. academia). If I’m going to be a subordinate, I’d rather work for someone “greedy” (r-selective) who will promote smart people who make him money (creating some semblance of meritocracy) than a “visionary” (K-strategist) driven by ego alone.

All that said, there is something dissatisfying about the dominant r-capitalism of the modern corporate world. Organizations that exist only to grow their own shares of society’s resources are not inspiring places to work. No one who is 22 wants to be “working for money” at age 50, or even 30. One knows, every day, in such an organization that it will do whatever it sees as being in its best interest, including terminating one’s employment on whatever terms favor it most. The r-selective corporation feels cold and soulless and, in fact, it is that by design. Its only purpose is to replicate a set of known business processes– admitting declines in quality due to environmental heterogeneity, resource issues, and regression to the mean in the quality of involved people– as far as at least one iota more is gained than spent. It’s a machine making copies of copies of copies that doesn’t stop copying copies until the last replica is utter junk– worth less than the material used to make it. By that point, most of what it has produced is of near-zero value, and since undifferentiated stuff (e.g. garbage, unwanted possessions, pollution) is of negative value, this often means harm will be inflicted on the world if externalities are present.

Nonprofit organizations, in theory, are K-strategic organisms. They serve a social purpose other than the profit motive. The problem with them is that they tend to operate in ways that are out of tune with what the market will reward (or, more bluntly, most are losing money). In business, K-strategic work is often thankless: the rewards come back in the long term, and are mostly enjoyed by other people. We see this in the macroscopic sense (R&D work often pays off a hundredfold or more to society, but the sponsor is likely to break even in terms of value captured) but it’s also true in the microscopic world of personal ethics. The r-operating manager gets credit for the work of 15 people; the K-strategic mentor improves the employability of her charges, relying on their loyalty to enjoy any gains. The problem with the non-profits is that they’re often so economically marginal and dependent that these constant stresses push them toward r-selective behavior (e.g. “publish or perish” in the university industry) on the inside. The meltdown of academia (both in terms of its job market, and in terms of the quality of what’s been produced over the past thirty years) is a case study in this. Existential threats force any organism toward r-strategic behavior, and nonprofit organizations are no different.

So far, we’ve looked at large corporations that are inherently r-selective, and the nonprofit world, in which daily financial pressures can create an r-selective flavor in spite of K-oriented macroscopics. What about small businesses? Unfortunately, most of those are cash-strapped as well, fighting constantly for survival.

Then there are Silicon Valley startups, the worst culprits in terms of inconsistency between a K-selective message (“change the world”) and r-strategic behavior. These young, brash companies have done a great job of marketing themselves as an alternative to Corporate America when their actual purpose is either (a) to become one of those corporate beasts in record time, or (b) assimilate into the existing phalanx on favorable terms for the founders. In fact, they’re far from an antidote to the negatives of r-strategic corporate capitalism; with venture capitalists as their real executives, they’ve managed to copy many of its worst attributes and behaviors.

Is there K-selective capitalism?

Now, let’s study the 3 dominant capitalisms from an r/K-selection approach. Supercapitalism and corporate capitalism are both r-selective, winner-take-all, sharp-elbows ecosystems, and unapologetic about being that way. This is also why the “faceless” corporations and equally faceless manipulators behind supercapitalism get such a negative name. Terms like “global elite” and “multinational corporation” underscore the parasitic and anti-patriotic nature of these powerful but disfavored capitalisms (reviled by both left and right, tacitly embraced by the meek center) that have no community or homeland, and generally harm (exploit) their neighborhood, then pull up stakes and move to another one.

An r-selective corporation doesn’t stand for anything, but it often provides– and often more importantly, distributes– a commodity with incredible efficiency. U.S. Steel and Standard Oil didn’t have missions– neither does Exxon-Mobil or Bank of America– but they served up their respective commodities so well as to become indispensable to society. In an r-selective firm’s maturity, it is best thought-of as a utility. The innovations are done, rewards for risk-taking and creative thinking have been distributed, and the only rewards left are those for office social climbing (which can be done in a capitalistic or governmental bureaucracy). If one firm dominates the space, as often occurs in a natural monopoly, there will be pressure to nationalize it, which is an assertion that, although the process, now well-studied, may be extremely valuable, the capitalistic enterprise surrounding it has ceased to be of value. Government is preferred by many societies to handle such utilities because, while some governments fail at doing so, governments can be K-strategic in behavior (purposes like social justice, widespread education, infrastructural quality and stability are K-selective aims at which governments have seen some victories– as well as hideous defeats). In fact, it might be only governments that can operate in a K-selective way at a certain scale (but I tend to doubt that).

Broadly speaking, war favors r-selectors while peace favors K-selection. When there is stress and turmoil, that which can replicate quickly tends to fill gaps first. Qualitative refinements tend to win out amid stability and prosperity, when the produce of the r-strategist is viewed as unwanted congestion; but scarcity creates an environment in which r-players thrive. The issue in the broader world, however, is that r-strategists can easily make war if they wish. War and distrust seem to be more entropic states that are, quite often, easier to bring into existence. It is not clear whether it’s best for business to be in war or peace, but the r-selective firm has a clear advantage over its K-selective rival, which is that it’s (at least from theoretical first principles) easier to create the warlike environment in which the r-strategist has the advantage. K-selective capitalism seems rare, and perhaps unfit, and that might explain why it is practically never found at scale.

Yeoman capitalism, for its part, certainly tries to be K-selective. The yeoman capitalist enters business for the challenge, to improve her lifestyle, to give something back to the community, or because she genuinely enjoys the work. While the r-strategic capitalist wants to gets as much work out of people for as little as possible, the K-strategist genuinely wants to improve the lives of her customers and employees, and to provide a service or product of superior (even artistic) quality. The issue that these yeoman capitalists face, however, is that they’re often under perennial existential threat. Larger, r-strategic enterprises might descend and make war.

A possible 4th capitalism?

Each of the three capitalisms that I described has shortcomings. I’ll attempt to explain why a fourth alternative might be forming in the technology industry. Let’s look at each from whether it is local or global, and also whether it’s r- or K-selective.

Corporate capitalism is global and r-selective. It is global insofar as the corporation will attempt to engage with any market, employ people at every talent level, and exploit every resource to which it can gain profitable access. It is the only capitalism of the three that can provide anything resembling universal employment, because it will find a place for everyone, excluding (for a moment) the matter of a minimum wage. If illegal enterprises (such as drug empires) are included, it finds positions (as street-level drug dealers, perhaps the worst job ever due to its pathetic pay and extreme danger) even for the otherwise unemployable.

Supercapitalism is local and r-selective. Its aims are power, fast money, rapid growth and proliferation, but it only wants to employ the elite. Investment banks and VC-funded startups take nothing lower than the upper-middle class. Prestige and reputation are too valued by the supercapitalist, who relies on those assets for maximal access to manipulation, for such a person to mingle with the larger and dirtier (and far less prestigious) world. A supercapitalist will exploit an opportunity as far as it can go, so long as personal reputation remains intact. That emasculating insistence on reputation management renders the supercapitalist’s reach limited and furtive; thus, supercapitalism will never be able to dominate daily life as corporate capitalism, in the U.S., has from about 1920 to 2025(?).

Finally, yeoman capitalism is K-selective but local. The yeoman capitalist has a vision and purpose other than making money (because most yeoman capitalists would make more money, and certainly enjoy more security, if they closed shop and got regular jobs). These lifestyle businesses don’t scale– they’re not built for that– and the unfortunate side effect is that they’re always exposed enough to corporate intrusion that freedom from immediate existential threat (as enjoyed by established companies) never occurs. Yeoman capitalism will never go beyond the local scope because it relies both on high talent and starting capital, and the percentage of people who have either is already small, but the proportion who have both is tiny.

Can there be a more globally oriented K-selective capitalism? Right now, the global and K-selective mentality has been the province of governments and nonprofits. I think that there’s quite a large need set (especially pertaining to peoples’ aesthetic and creative needs) to which both have failed. It might be where each sits with regard to short-term risk; nonprofits are too constantly under the gun– constantly raising money– while governments tend to be cushy, established, and legacy-bound. There might be a happy middling ground between those two cases into which a highly innovative but K-strategic capitalism (focused on quality of innovation) could move.

Technology, however, is starting to see changes that result from talent’s leverage (relative to property; as there are really only two important commodities in the world, property and talent, also known as past and future) reaching a historic high. Companies like Valve and Github are experimenting with low-overhead management styles and open allocation. Companies are gradually figuring out that it’s impossible to truly employ top talent; you sponsor it for a while. If you invest in a talented person’s career– and the open-allocation strategy is to hire mature self-starters already capable of investing in their own career (and kicking back things of value to the firm) given full autonomy– you might get that person to stick around for 5 to 10 years. If you don’t, the Dead Sea Effect will set in rapidly.

Except in R&D labs with high levels of autonomy (e.g. Xerox PARC, Bell Labs) there was just too much difference in bearing between top talent and corporate life for them ever to get along. Corporations can’t hold the best people unless they give them (a) 20-percent annual increases, which is expensive, (b) extremely high levels of autonomy, which can be politically expensive, or (c) rapid promotions, which are both economically and politically expensive. Corporate capitalism’s objective is to draw a profit from whatever opportunities are in reach, and often this means taking the middle territory at the expense of the excellent minority. Yeoman capitalism might be a better home for top talent, but its scaling problems and the scarcity of the substrate (resources, funding, connections) combined with top talent’s existing rarity make that match a bit of a split-maze problem; things that require two uncorrelated scarce resources in conjunction rarely happen. Supercapitalism typically courted the top talent that was unsatisfied with the slow career progress (seniority systems) and general mediocrity of the typical corporate world, but something is changing in that. The internet, and the increasing willingness of people to be honest about what they’ve seen in their careers (see: Hacker News) has created a memory. That’s a problem for supercapitalism; the sterling reputation it must maintain in order to operate, in contrast against the short-sighted and often anti-social behavior coming out of its r-selective charter (get big fast, acquire power, dominate) means that its interests are best served by a world of short-lived and unreliable memory, allowing advertisement to rule the day. VC-funded so-called “technology” companies are, for related reasons, often thrived on account of their marketing rather than technology– if they were well-marketed, they could get talent later– but the existence of an independent memory (on the Internet) threatens that.

Supercapitalism, for its part, is not having trouble getting top talent. Smart people sign up to work at hedge funds and VC-funded startups every day. It’s only going to get somewhat less of it– and paying a lot more– as the years pass, as the most talented people increasingly favor K-strategic ways of doing business. Supercapitalism isn’t going to roll up and die– not even close– and it will continue to make places for talented people. It will just, increasingly, not be the only place for top talent to go.

What remains is more of an open question than an answer. In a world where top talent is sponsored rather than employed, and in which “the vision thing” actually matters, what will the K-capitalism that grows up look like? Who will be in charge in the new world? I have no idea, but I know that we won’t get our answers from the established players– the venture capitalists and existing corporate dominators.

Statistics, cooperation, politics, and programming.

Open: a simple dice “game”

Let’s say that you’re playing a one-player “game”, where your payout (score) is determined according to the rolls of 101 dice. One of them is black and 100 are white, and your payoff is $100 times the value on the black die, plus the sum of the values on the 100 white dice. (In RPG terms, that’s d6x100 + 100d6.) The question is: how much more “important” (I’ll define this, more rigorously, below) is the black die, relative to a single one of the white dice?

Most people would say that the black die is 100 times as important; its influence on the payoff is a $500 swing (from $100 to $600) while each of the white dice has a $5 swing ($1 to $6). That would lead us to conclude that the black die is equally important as the hundred white dice, all taken together– or that the black die has 50% of the total importance. That’s not true at all. Why not? Let’s do some simulations. Here’s the code (in Clojure).

(defn white-die []
.  (inc (rand-int 6)))

(defn black-die []
.   (* 100 (inc (rand-int 6))))


(defn play []
.   (let [bd-value (black-die)
.         wd-value (reduce + 0 (repeatedly 100 white-die))]
.      (printf "Black die: %d, White dice: %d, Payoff: %d\n"
.               bd-value wd-value (+ bd-value wd-value))))

Here are some results:

user=> (play)
Black die: 100, White dice: 345, Payoff: 445
nil ;; other returns omitted.
user=> (play)
Black die: 600, White dice: 343, Payoff: 943
user=> (play)
Black die: 400, White dice: 352, Payoff: 752
user=> (play)
Black die: 100, White dice: 338, Payoff: 438
user=> (play)
Black die: 300, White dice: 322, Payoff: 622
user=> (play)
Black die: 200, White dice: 345, Payoff: 545
user=> (play)
Black die: 500, White dice: 326, Payoff: 826
user=> (play)
Black die: 300, White dice: 362, Payoff: 662
user=> (play)
Black die: 100, White dice: 353, Payoff: 453
user=> (play)
Black die: 500, White dice: 359, Payoff: 859

The quality of the payoff has a lot more to do with the black die than the white ones. A good payoff (above $700, the mean) seems to occdur if and if only if the black die roll is good (a 4, 5, or 6) because the sum of the white dice is never far from the mean value of 350. We can formalize this intuition by noting that when independent random variables are added, the variance of their sum is the sum of their variances. The variance of a 6-sided die is 35/12 (2.9166…) and so the variance of the 100 white dice, taken together, is 3500/12 = 291.666…, resulting in a standard deviation just slightly over 17. With a hundred dice being summed together, we can assume the sum of white dice to be approximately Gaussian: 99 percent of the time, the white dice will come in between $306 and $394. Even if the white dice perform terribly (say, $300) a ’6′ on the black die is going to ensure a great payoff.

While standard deviation is a more commonly used measure of dispersion, random variables cumulate according to their variance (the square of the standard deviation). The variance of the black die is not 100, but 10,000 times, that of the white die. This means that it’s 100 times more influential over the payoff than all of the white dice taken together. It contributes just over 99 percent of the variance in the payoff.

Politics

What does this have to do with human behavior and cooperation? Well, consider voting. Some people complain about the supposed “disenfranchisement” of voters in large, non-swing states such as California (reliably blue) and Texas (reliably red) under the electoral college system. When the blocs are predictable, that can be true. However, being part of a voting bloc will, in general, magnify ones’ voting power, just as the black die in the example above dominates the payoff to the point where the white dice hardly matter.

If fifteen people agree to vote the same way, they’ve increased their voting power (variance) by 225 times that of an individual, meaning that each one becomes 15 times more powerful. Let’s go a step further. Say there are 29 people in a voting body, and that simple majority is all that’s required to pass a measure. If fifteen of those agree to hold a private vote, and then vote as a bloc based on the result of that vote, the other fourteen peoples’ votes don’t matter at all, so each bloc member becomes approximately twice as individually powerful. This can further be corrupted by creating nested blocs. Eight of those people could break off and hold their own private vote and become a bloc-within-the-bloc. Of course, secrecy is required; otherwise the out-crowd of that bloc might defect. At least in theory, nothing stops a group of five people within that eight from forming a third-level bloc, and so on. This could devolve into an almost dictatorial situation where two people determine the entire vote. It isn’t always long-term stable, of course; disenfranchised people within blocs will (over time) leave, possibly joining other blocs.

One should be able to see, by now, why something like a two-party political system is so common in government. Coalitions build, because it magnifies the individual’s statistical power (percentage of the variance) to form blocs. It seems to continue until there are two coalitions in the 45 to 50 percent range, and what limits this process is that, as a coalitions grow, they become more predictable and less nimble; once they are predictable, unaffiliated (“swing”) voters have substantially more power than they should according to the principles above; while variance potential of a bloc grows as the square of its size, highly predictable blocs have very little actual variance. In other words, the equilibrium happens when the (quadratically growing) bulk power of blocs is offset by the declining true variance inherent to their predictability, leaving the few swing players as individually powerful (being unpredictable) as they would be as members of a bloc.

Economics and work

Bloc power is a major reason why collective bargaining (unionization) is such a big deal. The Brownian motion of individually unimportant workers joining and leaving a company has a minimal effect on the business. There will be good days and bad for the company due to these small fluctuations but, on the whole, an individual’s vote (whether to work or quit) is meaningless amid the noise. The low-level worker has no real vote. Collective bargaining, on the other hand, can be powerful: a large group voting against its management (a strike) at the same time can have a real impact.

The past two hundred years have proven that, without some variety of collective action, workers (even highly skilled ones) are unlikely to get a fair deal. It doesn’t matter how smart, how capable, or even how necessary they are if their votes don’t matter. There are three approaches that have been used to solve this problem (aside from a fourth, beloved by some wealthy, which is not to solve it). The first is to form a union. As much as there is a problem of corruption within unions, I don’t think any reasonable person can review history and conclude them to have been unnecessary. The second is to form a profession, which is essentially a reputation management organization that (a) keeps the individual member’s credibility high enough to keep that person employable, so he or she can challenge management, since professions require ethical obligations that supersede managerial authority (i.e. there’s no Nuremberg Defense); while (b) occasionally leveraging its role as a reputation bank to push, as a bloc, for specific causes. The third approach is a welfare state, which does not confer bloc-like power for low-level producers (i.e. workers) but (a) gives them power as consumers and, more importantly, it (b) gives individual producers the ability to refuse adverse terms of work.

These form a spectrum of solutions, with unions being the most political (an explicit bloc forms, subverting to some extent the Brownian tug-of-war that occurs in free markets and elections) while the welfare state is apolitical (it does not tell capitalists how to run their companies) while pushing a universal sea change in the market– improved leverage for workers in all industries, liberated from a month-by-month need for work income. Professions, as it were, exist between these two extremes; they are not as explicitly political or bloc-like as unions, but their ability to prevent the professional’s credibility from falling to zero– even if fired by one comp[any’s management, he’s still a member of that profession unless disbarred for ethical reasons, and will usually find new work easily– has them functioning like a private, conditional welfare state.

I’m not going to argue, among the solutions above, that any is superior to the others, or that one of those three should be favored uniformly. In fact, they don’t even conflict; societies tend to have all three of the above in some form. They seem to serve different purposes, also spanning a spectrum from local to global, like so:

  • The union exists to guarantee, as much as it can, employment at a specific company (local) on favorable terms for good-faith workers. It often wrests from management the authority to terminate people. Its downside is that, because it is an explicitly political organization, it often invents by-laws (seniority systems being the most abhorred) that reduce performance. The extreme guarantees against adverse change that unions often provide may result in a low quality of work, eroding the union’s clout in the long run. Unions are, however, the best solution when there is a small number of potential employers (oligopsony).
  • The profession exists to provide credibility (reputation) sufficient to guarantee appropriate employment, but not at a specific employer. The profession doesn’t interfere with individual terminations or promotions, nor does it often tell employers how to behave; its goal is to provide appropriate results for all good-faith members without managing a specific employer. This is more global than the union, because professionals may have to move to different companies or geographic locations to take advantage of the profession’s auspices, but more local than a welfare state because it focuses on a specific class of workers. Professions work well when there is a large and changing set of potential employers, but over a fairly fixed scope of work.
  • The welfare state (a global solution, as it involves a definition of social justice that a central government attempts to enforce uniformly) doesn’t guarantee market employment at all. It does, however, attempt to create an economic floor below which people cannot fall. Even if they lose power as producers (because the market may not want anything they can make) they retain some power as consumers. The moral purpose of this is two-fold. First, unneeded workers can retrain and become viable producers. Second, the welfare state’s existence gives workers enough leverage that they stand a chance at getting a fair deal– without necessarily having to form collectives in order to do it. Welfare states do the best job at the large-scale, society-wide problems; for example, they can provide education and training for those who have not yet entered a union or profession.

What’s most relevant to all this, however, is that collective action is as relevant today as it was 100 years ago. There are a lot of people who claim, for example, that labor unions “were good in their time, but have served their purpose”. I don’t think that’s true. There are, of course, many problems with existing labor unions and with the professions, but the statistical politics underlying their formation is still quite relevant.

Technology

Software engineers in particular are a group of people who’ve never fully decided whether they want to be blue-collar (making unionization a relevant strategy) or white-collar (necessitating a profession). It’s not clear to me that either of these approaches, as commonly imagined, will do what we need in order to get programmers fairly paid and their work reasonably evaluated. I would argue, however, that the existing culture of free agency seems to be leading nowhere. Software and hardware engineers, in addition to designers and operational people, need to develop a common tribal identity as makers. Otherwise, management will continue to run divide-and-conquer strategies against them that leave them with the worst of both the blue-collar and white-collar worlds: the low autonomy and job security of an hourly wage worker, but the unreasonable expectations and long hours associated with salarymen.

The needs of the most creative and effective technology workers should be given consideration; maker culture is becoming a real thing, and the societies and organizations that prosper in the next fifty years will be those that find a way to contend with it. Thanks to personal computing, the internet, and quite likely 3D printing, we’re coming into an era in which the zero-sum approach to resources that has existed for thousands of years no longer makes sense. Copying a book used to be a painstaking, miserable process. (The reason for the beautiful calligraphy and illustrations in hand-copied medieval books is that the work would be intolerable without some room for creative flourish.) Now it’s a Unix command that takes less than second. Information scarcity is rapidly ending and of more interest is the culture (maker culture) that has sprung up around that, starting in the open source world that is making its way into software, which is structurally cooperative.

Maker culture is centered on the positive-sum worldview that makes sense in such a world. Makers tend to no longer see each other as competitors amid existing scarcity; rather, the greater war is against scarcity itself.

Good programmers no longer buy in to traditional industrial competition. They’d rather work on open source projects that improve the world (and their own individual reputations) than line the corporate war chest, because the benefits of tapping into the larger society (open source economy) are much greater, not only for them but often also for their employers, than those of restricting themselves to one corporate silo.  They’ll work on closed-source “secret sauce” projects in a somewhat privileged (“ninja”) position, but not in the commoditized role associated with the “code monkey” appellation. Those jobs, as portrayed less than affectionately in the movie Office Space, are going to die out.

In twenty years, top maker talent will no longer be employed so much as it is sponsored. This will be good for the world, as it will generate a much more cooperative economy than what existed before it, but a large number of organizations will find themselves unable to adapt and will fail.

Gervais / MacLeod 24: Fundamental Theorem of Employment

In analyzing the economics and sociology of office-style Work, an inefficient set of institutional patterns that affects hundreds of millions of people, I’ve often had to ask the question, “Why are so many jobs so bad?” Plenty of positions are inaccurately or dishonestly advertised, many shouldn’t exist at all, and job openings that should exist often don’t. What’s going on with all this? And how should an individual person choose jobs, in light of the inefficient market? I’ve come to a conclusion that, despite the complexity of these issues, is refreshingly simple and, while failing to capture all cases, surprisingly powerful and appropriate to the vast majority of jobs. I might call it the Fundamental Theorem of Employment (FTOE).

A person is hired to do work that the hiring person (a) cannot do for himself, or (b) does not want to do.

Corollary: It is extremely important to know which of the two is the case.

These are, in general, two different cases. A person hires a maid to do undesirable work of which most people are capable, while he hires a doctor to do work that he can’t do for himself. It’s essential for each person to know which of the two cases applies to his or her job. Most jobs can be clearly delineated as one or the other. We’ll call the first category of jobs– a person is hired to bring expertise, skill, or capacity that the hiring manager does not have– “Type 1″; and the “boss doesn’t want to do” jobs, “Type 2″.

In a Type 1 job, you have leverage and you get respect because you’re delivering labor that the manager (a) does not have the ability to render himself, and (b) much more importantly, cannot accurately evaluate. Your boss is forced to trust you. Often, he will trust you just to reduce his own cognitive dissonance. In a Type 2 job, you rarely get any respect; you’re just there to do the worst of the work. You’re not trusted very far, and your manager thinks he can do your job just as well and twice as fast. In the career game, getting stuck in the Type 2 world is a losing proposition.

That seems simple enough, and the advice derived from it is fairly traditional. Build skills. Develop expertise. Become a “unicorn” (a person whose combination of skills makes her unusually rare and confers leverage). Get Type 1 jobs. The real world, of course, isn’t quite so simple; and it might be hard for an individual to tell which of the two possibilities applies to her job. I’m here to tackle some of the more complex cases that pop up in reality, and analyze which dynamic of behavior is more accurate to each.

Below are some cases that don’t necessarily fall into a clear Type 1 vs. Type 2 delineation, and require further analysis.

Excess capacity. Most large companies don’t hire for a specific role, so much as they increase (or decrease) their total headcount based on business needs, cash flow, and economic projections. Companies”don’t hire specifically for Type 1 or Type 2 work; they’re concerned with the economics, not sociology. Most people, in truth, are hired into firms to serve as “excess capacity”; that is, hired into a general-purpose labor pool so there is some slack in the schedule and there are internal candidates for vacancies. Whether a person ends up in Type 1 or Type 2 work isn’t driven by some abstract “general will” of the firm but by the needs of specific managers where that person lands. Unfortunately, this often puts a person into Type 2 work by default.

Depending on the company, the manager of the new employee’s team might not have had any input into the hiring of that person. Sometimes, the company just says, “here are some guys”, and that tends to result in a lot of undesirable work being offloaded onto them. Or, that person may have been hired for a position that was shortly after filled internally, or made redundant, leading to a need to make work for the new hire. The point of all this is that if you can’t identify (and preferably quickly) some X for which (a) a manager needs X, (b) the managers knows he needs X, and (c) you’re very good at X; you just become a fresh hire looking for something to do.

Simply being “excess capacity” isn’t necessarily bad. If there’s honestly about the fact, then management can set an appropriate arrangement. “You can work on whatever you want most of the time, but when you’re needed, you’re expected to be available.” Then, a person has the time and allowance to seek Type 1 work where he or she will add more value. Some companies explicitly set aside time for self-directed work (e.g. 20% time) in acknowledgment of the need for slack in the schedule. Others do not, and fall into a Type-2-driven default pattern of rippling delegation.

In large companies, people are hired for macroeconomic reasons that don’t conform to the Type 1 vs. 2 delineation explicitly, leaving the question unanswered: does the employee become a respected advisor whose expertise confers a certain automatic credibility, or a grunt to which the worst work is delegated?

Automation

Especially relevant to technical work is the role of automation. If work is undesirable, someone will try to “kill” it by programming a computer to do it faster and more reliably than a human. For many business processes, this is easy. For some, it’s quite hard. For example, it took years of research into machine learning before computers could accurately read hand-written addresses. At any rate, computers turn out to be perfect repositories for the worst of the Type 2 work that no one wants to do. They do it without complaint, and much faster. They’re cheap, as well. This is winning for everyone.

Computer programming has its own weird interaction with the FTOE. Business problems were traditionally solved with lots of low-paid and ill-respected manpower, so corporate growth mostly came down to the delegation of Type-2 labor as the beast grew. However, the magic of software engineering is that a small bit of more challenging, more fun work (automating painful processes so that the task is complete forever before the novelty of the new job wears off) can replace a larger amount of bland, tedious work. Most of business growth is about Type-2 hiring: bringing in more people to do the work that the bosses don’t want to do. A competent software engineer can take on the Type-1 task of automating all that junk work– if management trusts her to do so.

Management doesn’t, in general, care how the mountain of traditionally undesirable work is done. If it’s done well by ten bored humans who occasionally quit or fail but are easy enough to replace, that’s the familiar “devil you know”. If someone else can come along and perform the much more enjoyable task of automating that work for good, that’s better because it saves a lot of money and pain. Sort-of. There’s a problem here, and it’s one that every software engineer and software manager must understand.

The relationship between software engineers and management is fraught with conflict. There are few industries where there is more tribal dislike between workers and management than in software, and the problem isn’t the people so much as the interaction of incentives and risks. Software itself (like any industry) generates a lot of undesirable (Type 2) work; but in software, there’s almost always a way of automating the bland work away– a hard, Type 1, sort of job. The danger of that is that the automation of undesirable work might take more time than simply completing it, while the engineer’s impulse (which is almost irresistible) is automate immediately and without regard to cost.

This provides two very different paths to completion: one that is low in variability but boring, the other being more fruitful but riskier. What goes wrong? Without diverging into another subtopic, management participates more fully in an employee’s downside than upside risks– if the engineer does great work, it reflects on that engineer; but if the engineer fails expensively, it reflects on the management– so managers tend to favor low-risk strategies for that reason alone. It’s not that software engineers or managers or bad people; the risks are just improperly aligned.

Solving this problem– aligning incentives and structuring companies to take advantage of opportunities for automation, which almost always improve the firm’s success in the long term– would require another essay.

Defensive rejection

Above, I’ve proposed that people hire others to do work in one of two cases: undesirable work, and work that the person doing the hiring can’t perform. There isn’t always such a clean-cut distinction. Most people don’t have the humility to recognize their limitations, and so they tend to overestimate their ability to perform work that they know little about. The extreme case of this is defensive rejection, in which a person denigrates a class of work as being menial, unimportant, or trivial to compensate for a lack of knowledge about it.

Many software engineers are going to recognize that the attitude of “the business” toward their work is often a case of defensive rejection, and that’s right. But we, as a group, are far from innocent on that front. We tend to take the same attitude toward marketing and business people. The truth is that the good ones are highly capable in ways that most of us are not; most of us just lack the basic competence to separate the good ones from the bad. When one lacks visibility into a field of work, one tends to associate all people who do it with the average competence of the group, which usually leads to an unflattering stereotype for any high position (because most people in it are, in fact, unqualified to hold it). That leads to the incorrect conclusion (also seen with politicians, of whom the average performance is poor) that “none of them are any good”. 

When defensive rejection is in play, the underlying truth is that the manager is hiring in type 1; the employee is brought on to do work that the manager can’t do for himself. Unfortunately, the manager’s insecurity and hubris generate a type-2 context of “I could do that stuff if I wanted to”. The subtext becomes that the work is bland, detail-oriented dreck that the manager is too important to learn. This is the most frustrating type of job to be in; one where the boss thinks he can do your job but actually can’t. It means you have to deal with unreasonable expectations despite low overall status and perceived value to him and to the company as a whole. That’s horrible, but it’s also freakishly common as far as scenarios go, and it leads to the engineer feeling set up to fail– asked to do impossible things, then treated poorly when inevitable failure occurs.

Apprentice systems

There’s one other scenario that doesn’t fit nicely into the Type 1 vs. 2 delineation: the apprentice (or protege) context. At first thought, apprenticeship might seem to be strictly Type 2, since most of the work that apprentices spend their time on is make-work that has ceased being interesting to superior craftsmen. However, apprentices bring a Type-1 function by being able to do one thing the master cannot: perpetuate the work (and, more importantly, the upkeep of a valued tradition or institution) through time. If you’re sixty years old, a twenty-year-old apprentice can continue the work forty years (on average) longer than you can.

Modern private-sector corporations don’t have much use for apprentice structures and guild cultures, because they no longer see that far into the future. No CEO gets job security by setting up a culture of mentorship that might yield excellence ten years down the road. In this next-quarter culture, apprentice systems have mostly been thrown overboard. Long-term vision is far out of style for most modern corporations.

That said, there’s a value in understanding this old-style system. Why? Because even managers are uncomfortable with the naked parasitism of Type-2 employment (e.g. “I’m just hiring you to do the crap I don’t want to do, while I fill my time with the career-building and fun work”) and often attempt to recast the role as an apprenticeship opportunity. That is, at least, how every subordinate job is presented; an opportunity to learn the skills necessary to get to the next step. There are varying degrees of earnestness in this– some managers truly see their reports as proteges, while others see them as mere subordinates.

In negotiation theory, this is sometimes called a standard: a promise that is understood not to be fully delivered (most people realize that most bosses just see their reports as repositories for undesirable work, and that the apprentice metaphor is mostly rhetorical) but that may still be cited in policy to get an arrangement more in accord with that standard than one might otherwise get (“appealing to the standard”). Even people in power are uncomfortable explicitly departing (“breaking the standard”) from something previously promised.

If you want to move from Type-2 to Type-1 employment (and, believe me, you should) then the first thing you have to do is get qualified for that kind of work; the best way to make sure your boss gives you appropriate work (to gain that qualification and validation) is to continually appeal to the standard of the master/apprentice relationship– and hope that your manager doesn’t have the audacity to break the standard.

Why is FTOE important?

It’s important to understand the Fundamental Theorem (and being trained as a mathematician, I know it’s not actually a theorem so much as an observation) of Employment, above, because people tend to discuss conceptions of “the job market” as if they were forces of nature. They’re not. A job exists because someone needs or wants another person to perform work, and the expensiveness of that generally means that one of two cases applies: the person doesn’t want to do that work, or the person cannot do that work. Regardless of the work itself, the social contexts that arise from those two subcategories could not be more different. It’s very important to know which one applies.

The advice that comes out of this is to find a way to qualify oneself for the Type 1 work. That’s harder than it looks. Becoming good at highly-skilled work is the first half of the battle, but there’s a social component that can’t be ignored. Software engineering is a prime example of that. The whole point of the bastardization of “object oriented programming” (which, by the way, has become the exact opposite of Alan Kay’s vision of it) that has grown up in the enterprise is to coerce software engineering into Type 2 commodity work. Having generating scads of low-quality, brittle code, it can be called a failure. Yet that mentality persists in the world of corporate software engineering, and it will be a while before the business starts to recognize software as Type 1 work.

While one is progressing through the validation process that is more drawn-out than building the skill set, I think there are two key strategic necessities. The first, again, is to appeal to the standard (as above) and re-cast any Type 2 social context in employment as a mentor/protege role. The second, and more importantly, is to always drive toward a Type 1 context. The question should be asked: “What am I here to deliver that no one else can?”

The Disentitled Generation

Anyone else up for some real rage? I can’t promise that there won’t be profanity in this post. In fact, I promise that there will be, and that it will be awesome. Let’s go.

People don’t usually talk about these things that I talk about, for fear that The Man will tear their fucking faces off if they tell the truth about previous companies and how corporate office really run themselves, but I am fucking sick of living in fear. One can tell that I have an insubordinate streak. It’s a shame, because I am extremely good at every other fucking thing the workplace cares about except subordination; but that’s one thing I never got down, and while it’s more important (in the office context) than any other social skill, I’m too old to learn it.

Let’s talk about the reputation that my generation, the Millennials (born ca. 1982 to 2000), has for being “entitled”. This is a fun topic.

I’ve written about why so-called “job hopping” doesn’t deserve to be stigmatized. Don’t get me wrong: if someone leaves a generally good job after 9 months only because he seeks a change of scenery, then he’s a fucking idiot. If you have a good thing going, you shouldn’t seek a slightly better thing every year. Eventually, that will blow up in your face and ruin your life. Good jobs are actually kinda rare. I repeat: if you find a job that continues to enhance your career and that doesn’t make you unhappy, and you don’t stick with it for a few years, then you’re an idiot. You should stay when you find something good. A genuine mentor is rare and hard to replace. That’s not what I’m talking about here.

The problem? Most jobs aren’t good, or don’t make sense for the long term. Sometimes, the job shouldn’t exist in the first place, provides no business value, and is terminated by one side or the other, possibly amicably. Sometimes, the boss is a pathological micromanager who prevents his reports from getting anything done, or an extortionist thug who expects 100% dedication to his career goals and gives nothing in return. Sometimes, people are hired under dishonest pretenses. Hell, I’ve seen startups hire three people at the same time for the same leadership position, without each other’s knowledge of course. Sometimes, management changes that occur shortly after a job is taken turn a good job into an awful one. This nonsense sounds very uncommon, right? No. Each of these pathologies is individually uncommon, but there are so many failure modes for an employment relationship that, taken in sum, they are common. All told, I’d say that about 40 percent of jobs manage to make it worthwhile to keep showing up after 12 months. Sometimes, the job ends. It might be a layoff for business reasons. Sometimes it’s a firing that may not even be the person’s fault. Most often, it’s just pigeonholing into low-importance, career-incoherent work, leaving the person to get the hint that she wasn’t picked for better things and leave voluntarily. Mostly, this political injection is random noise with no correlation to personal quality. Still, I think it’s reasonable to say that 60% of new jobs fail in the first 12 months (even if many go into a “walking dead” state where termination is not a serious risk, but in which it’s still pointless and counterproductive to linger). That means 13 percent of people are going to draw four duds for reasons that are no fault of their own. One in eight people, should they do the honest and mutually beneficial thing which is to leave a job when it becomes pointless, becomes an unemployable job hopper. Seriously, what the fuck?

So let me get one thing out there. Not only is the “job hopping” stigma outdated, it’s wrong and it’s stupid. If you still buy into the “never hire job hoppers” mentality, you should fucking stop using your company as a nursing home and instead, for the good of society, use an actual nursing home as your nursing home. I’m serious. If you really think that a person who’s had a few short-term jobs deserves to be blacklisted over it when the real corporate criminals thrive, then letting you make decisions that affect peoples’ lives is like letting five-year-olds fly helicopters, and you should get the fuck out of everything important before you do any more damage to peoples’ lives and the economy. I’m sorry, but if you cling to those old prejudices, then the future has no place for you.

It needed to be said. So I did.

The “job hopping” stigma is one rage point of mine, but let’s move to another: our reputation as an “entitled” Millennial generation. Really? Here are some of the reasons why we’re considered entitled by out-of-touch managers:

  1. We “job hop” often, tending to have 4 to 6 jobs (on average) by age 30.
  2. We expect to be treated as colleagues and proteges rather than subordinates.
  3. After our first jobs, we lose interest in “prestigious” institutions, instead taking a mercenary approach that might favor a new company, or no company. 
  4. We push for non-conventional work arrangements, such as remote work and flex-time. If we put in 8 hours of face time, we expect direct interest in our careers by management because (unlike prior generations who had no choice) we consider an eight-hour block a real sacrifice.
  5. We question authority.
  6. We expect positive feedback and treat the lack of it as a negative signal (“trophy kids”).

Does this sound entitled? I’ll grant that there’s some serious second-strike disloyalty that goes on, with a degree of severe honesty (what is “job hopping” but an honesty about the worthlessness of most work relationships?) that would have been scandalous 30 years ago, but is it entitled? That word has a certain meaning, and the answer is “no”.

To be entitled, as a pejorative rather than a matter-of-fact declaration about an actual contractual agreement, implies one of two things:

  1. to assume a social contract where none exists (i.e. to perceive entitlement falsely.)
  2. to expect another party to uphold one side of an existing (genuine) social contract while failing to perform one’s own (i.e. one-sided entitlement).

Type I entitlement is expressed in unreasonable expectations of other people. One example is the “Nice Guy Syndrome“, wherein a man expects sexual access in return for what most people consider to be common courtesy. The “Nice Guy” is assuming a social contract between him and “women” that neither exists nor makes sense. Type II is the “culture of entitlement” sometimes associated with a failed welfare state, wherein generationally jobless people– who, because they have ceased looking for work, are judged to be failing their end of the social contract– continue to expect social services. These are people whose claims are rooted in a genuine social contract– the welfare state’s willingness to provide insurance for those who continually try to make themselves productive, but fail for reasons not their fault– but don’t hold up their end of the deal.

So, do either of these apply to Millennials? Let me assess each of the six charges above.

1. Millennials are “job hoppers”. There’s some truth in that one. The most talented people under 30 are not going to stick around in a job that hurts their careers. We’re happy to take orders and do the less interesting work for a little while, if management assists us in our careers, with an explicit intent to prepare us for more interesting stuff later. Failing that, we treat the job as a simple economic transaction. We’re not going to suffer a dues-paying evaluative period for four years when another company’s offering a faster track. Or, if we’re lucky, we can start our own companies and skip over the just-a-test work entirely and do things that actually matter right away. Most of us have been fired or laid off “at will” at least once, and we have no problem with this new feature (job volatility) of the economy. None of us consider lifelong employment an entitlement or right. We don’t expect long-term loyalty, nor do we give it away lightly.

2. Millennials “expect” to be treated as proteges. Not quite. Being a cosmopolitan, well-studied generation exposed to a massive array of different concepts and behaviors from all over the world, we expect very little of other people. We’ve seen so much that we realize it’s not rational to approach people with any major assumptions. The world is just too damn big and complicated to believe in global social contracts. Getting screwed doesn’t shock or disgust or hurt us. It doesn’t thwart our expectations, because we don’t really have any. We simply leave, and quickly. For us, long-term loyalty is the exception, and yes, we’re only going to stay at a job for 5 years if it continues to be challenging and beneficial to our careers. That’s not because we “expect” certain things, and we aren’t “making a statement” when we change jobs. It’s not personal or an affront or intentional “desertion”. We can do better, that’s all.

3. Millennials don’t have respect for prestige and tradition. Yes and no. We don’t start out that way. The late-2000s saw one of the most competitive college admissions environments in history. Then there’s the race to get into top graduate departments or VC-darling startups or investment banking– the last of these being the Ivy League of the corporate world. Then something happens. Around 27, people realize that that shit doesn’t matter. You can’t eat prestige, and many of the most prestigious companies are horrible places to work. Oh, and we think we’re hot shit until we get our asses handed to us by superior programmers and traders from no-name universities and learn that their educations were quite good as well. We realize that work ethic and creativity and long-term diligence and deliberate practice are the real stuff and we lose interest in slaving away for 90 hours per week just because a company has a goddamn name.

4. Many of us expect non-conventional work/life arrangements. This is true, and there’s a reason for it. What is the social contract of an exempt salaried position, under which hourage expectations are only defined by social expectations rather than contract? As far as I can tell, there are two common models. Model A: worker produces enough work not to get fired, manager signs a check. Model B: worker puts a serious investment of self and emotional energy into the work as a genuine working relationship would involve, and management returns the favor with career support and coherence. Under either model, the 8-hour workday is obsolete. Model A tells us that, if a worker can put in a 2-hour day and stay employed, he’s holding up his end of the deal, and it’s management’s fault for not giving him interesting work that would motivate him to perform beyond the minimum. Model B expects a mutual contract of loyalty to each other’s interests, but does not specify a duration or mode of work. Model B might be held to generally support in-office work with traditional hours, for the sake of collaboration and mentoring, but that opens up a separate discussion, especially in the context of individual differences regarding when and how people work best.

5. Millennials question authority. True, and that’s a virtue. Opposing authority because it is authority is no better than being blindly (or cravenly) loyal to it, but questioning it is essential. People who are so insecure that they can’t stand to be questioned should never be put in leadership positions; they don’t have the cojones for it. I question my own ideas all the time; if you expect me to follow you, then I will question yours. It’s a sign of respect to question someone’s ideas, not a personal challenge. It’s when smart people don’t question your ideas that you should be worried; it means they’ve already decided you’re an idiot and they will ignore or undermine you. 

6. We expect positive feedback and respond negatively to a lack of acknowledgement. That’s true, but not because we believe “everyone’s a winner”. If anything, it’s the opposite. We know that most people lose at work and would prefer to play a different game when that appears likely to happen. No, it’s not about “trophies”. A trophy is a piece of plastic. We get bored unless there’s a real, hard-to-fake signal that we aren’t wasting our time. Not a plastic trophy, but management that takes our career needs seriously and complete autonomy over our direction. We know that most people, in their work lives, end up with incompetent or parasitic bosses who waste years of their time on career-incoherent wild goose chases, and we refuse to be on the butt of that joke. Does this mean that we’re not content to be “average”, and that we require being on the upside of a zero-sum executive favoritism to stay engaged with our work? Well, in order to have it not be that way, you need to create a currently-atypical work environment where average people don’t end up as total losers. With all the job hopping we do, we don’t care about relative measures of best or better. We want good. Make a job good and people won’t worry about what others around them are getting.

I think, with this exposition, that there’s a clear picture of the Millennial attitude. Yes, we take second-strike disloyalty to a degree that, even ten years ago, would be considered insolent, brazen, and even reckless in the face of the career damage done (even now) to the job-hoppers. We’ve grown bolder, post-2008. Quit us, and we quit. It’s not that we like changing jobs every few months– believe me, we fucking don’t. We’re looking for the symbiotic 5- or 10-year-fit, as any rational person would, but we’re not going to lie to ourselves for years– conveniently paying dues on evaluative nonsense work while our bosses spend half-decades pretending to look for a real use for our underutilized talents (only to throw us out in favor of fresher, more clueless, younger versions of ourselves)– after drawing a dud.

Is the Millennial attitude exasperating for older managers, used to a higher tolerance for slack on matters of career coherency? I’m sure it is. I’m sure that the added responsibility imposed by a generation characterized by fast flight is unpleasant. It is not, however, entitled. It’s not Type I entitlement because we don’t assume the existence of a social contract that was never made. We only hold employers to what they actually promise us. If they entice us with promises of career development and interesting work, then we expect that. If they’re honest about the job’s shortcomings, we respect that, too. But we only expect the social contract that we’re explicitly given. I’d also argue that it’s not Type II entitlement because Millennials are, when given proper motivation, very hard-working and creative. We want to work. We want genuine work, not bullshit meetings to make the holder of some sinecure feel important.

What are we, if not “entitled”? We’re the opposite. We’re a disentitled generation. We never believed in the corporate paternalist social contract, and most of us are comfortable with this brave new world that has followed its demise. Yes, we’re mercenary. We respond in kind (in fact, often disproportionately) to genuine loyalty, but we’re far too damn honest to pretend we’re getting a good deal when we’re thrown into a three-year dues-paying period rendered obsolete in a world where fast advancement is possible and fast firing is probable for those who don’t advance. I’m in software, where, by age 35, becoming a technical expert (you need a national reputation in your specialty if you want to be employable as a programmer on decent terms by that age) or an executive becomes mandatory. As this leaves 13 years to “make a mark”, one simply will not find people willing to endure a years-long dues-paying period that one would want to hire. Asking someone to risk 2 of those 13 years on dues-paying (that might lead nowhere) is like asking a person to throw 15 percent of her net worth into a downside-heavy investment strategy with no potential for diversification– a bad idea. Reasonable dues-paying arrangements may have existed under the old corporate social contract of cradle-to-grave institutional employment, but that’s extinct now. So should be the “job hopper” stigma and the early-stage dementia patients who still believe in it.

Gervais / MacLeod 21: Why Does Work Suck?

This is a penultimate “breather” post, insofar as it doesn’t present much new material, but summarizes much of what’s in the previous 20 essays. It’s now time to tie everything together and Solve It. This series has reached enough bulk that such an endeavor requires two posts: one to tie it all together (Part 21) and one to discuss solutions (Part 22). Let me try to put the highlights from everything I’ve covered into a coherent whole. That may prove hard to do; I might not succeed. But I will try.

This will be long and repeat a lot of previous material. There are two reasons for that. First, I intend this essay to be a summarization of some highlights from where we’ve been. Second, I want it to stand alone as a “survey course” of the previous 20 essays, so that people can understand the highlights (and, thus, understand what I propose in the conclusion) even if they haven’t read all the prior material.

If I were to restart this series of posts (for which I did not intend it, originally, to reach 22 essays and 92+ kilowords) I would rename it Why Does Work Suck? In fact, if I turn this stuff into a book, that’s probably what I’ll name it. I never allowed myself to answer, “because it’s work, duh.” We’re biologically programmed to enjoy working. In fact, most of the things people do in their free time (growing produce, unpaid writing, open-source programming) involve more actual work than their paid jobs. Work is a human need.

How Does Work Suck?

There are a few problems with Work that make it almost unbearable, driving it into such a negative state that people only do it for the lack of other options.

  • Work Sucks because it is inefficient. This is what makes investors and bosses angry. Getting returns on capital either requires managing it, which is time-consuming, or hiring a manager, which means one has to put a lot of trust in this person. Work is also inefficient for average employees (MacLeod Losers) which is why wages age so low.
  • Work Sucks because bad people end up in charge. Whether most of them are legitimately morally bad is open to debate, but they’re certainly a ruthless and improperly balanced set of people (MacLeod Sociopath) who can be trusted to enforce corporate statism. Over time, this produces a leadership caste that is great at maintaining power internally but incapable of driving the company to external success.
  • Work Sucks because of a lack of trust. That’s true on all sides. People are spending 8+ hours per day on high-stakes social gambling while surrounded by people they distrust, and who distrust them back.
  • Work Sucks because so much of what’s to be done in unrewarding and pointless. People are glad to do work that’s interesting to them or advances their knowledge, or work that’s essential to the business because of career benefits, but there’s a lot of Fourth Quadrant work for which neither applies. This nonsensical junk work is generated by strategically blind (MacLeod Clueless) middle managers and executed by rationally disengaged peons (MacLeod Losers) who find it easier to subordinate than to question the obviously bad planning and direction.

All of these, in truth, are the same problem. The lack of trust creates the inefficiencies that require moral flexibility (convex deception) for a person to overcome. In a trust-sparse environment, the people who gain people are the least deserving of trust: the most successful liars. It’s also the lack of trust that generates the unrewarding work. Employees are subjected, in most companies, to a years-long dues-paying period which is mostly evaluative– to see how each handles unpleasant make-work and pick out the “team players”. The “job” exists to give the employer an out-of-the-money call option on legitimately important work, should it need some done. It’s a devastatingly bad system, so why does it hold up? Because, for two hundred years, it actually worked quite well. Explaining that requires delving into mathematics, so here we go.

Love the Logistic

The most important concept here is the S-shaped logistic function, which looks like this (courtesy of Wolfram Alpha):

The general form of such a function L(x; A, B, C) is:

where A represents the upper asymptote (“maximum potential”), B represents the rapidity of the change, and C is a horizontal offset (“difficulty”) representing the x-coordinate of the inflection point. The graph above is for L(x; 1, 1, 0).

Logistic functions are how economists generally model input-output relationships, such as the relationship between wages and productivity. They’re surprisingly useful because they can capture a wide variety of mathematical phenomena, such as:

  • Linear relationships; as B -> 0, the relationship becomes locally linear around the inflection point, (C, A/2).
  • Discrete 0/1 relationships: as B -> infinity, the function approaches a “step function” whose value is A for x > C and 0 for x < C.
  • Exponential (accelerating) growth: If B > 0, L(x; A, B, C) is very close to being exponential at the far left (x << C). (Convexity.)
  • Saturation: If B > 0, L(x; A, B, C) is approaching A with exponential decay at the far right (x >> C). (Concavity.)

Let’s keep inputs abstract but assume that we’re interested in some combination of skill, talent, effort, morale and knowledge called x with mean 0 and “typical values” between -1.0 and 1.0, meaning that we’re not especially interested in x = 10 because we don’t know how to get there. If C is large (e.g. C = 6) then we have an exponential function for all the values we care about: convexity over the entire window. Likewise, leftward C values (e.g. C = -6) give us concavity over the whole window.

Industrial work, over the past 200 years, has tended toward commoditization, meaning that (a) a yes/no quality standard exists, increasing B, and (b) it’s relatively easy for most properly set-up producers to meet it most of the time (with occasional error). The result is a curve that looks like this one, L(x; 10, 4.5, -0.7), which I’ll call a(x):

Variation, here, is mainly in incompetence. Another way to look at it is in terms of error rate. The excellent workers make almost no errors, the average ones achieve 95.8% of what is possible (or a 4.2% error rate) with the mediocre (x = -0.5) making almost 5 times as many mistakes (28.9% error rate), and the abysmal unemployable with an error rate well over 50%. This is what employment has looked like for the past two hundred years. Why? Because an industrial process is better modeled as a complex network of these functions, with outputs from one being inputs to another. The relationship of individual wage into morale, morale into performance, performance into productivity, and individual productivity into firm productivity, and firm productivity into profitability, can all be modeled as S-shaped curves. With this convoluted network of “hidden nodes” that exists in a context of a sophisticated industrial operation, it’s generally held to be better to have a consistently high-performing (B high, C negative) node than higher-performing but variable node.

One way to understand the B in the above equation is that it represents how reliably the same result is achieved, noting the convergence to a step function as B goes to infinity. In this light, we can understand mechanization. Middle grades of work rarely exist with machines. In the ideal, they either execute perfectly, or fail perfectly (and visibly, so one can repair them). Further refinements to this process are seen in the changeover from purely mechanical systems to electronic ones. It’s not always this way, even with software. There are nondeterministic computer behaviors that can produce intermittent bugs, but they’re rare and far from the ideal.

As I’ve discussed, if we can define perfect performance (i.e. we know what A, the error-free yield, looks like) then we can program a machine to achieve it. Concave work is being handed over to machines, with the convex tasks remaining available. With convexity, it’s rare that one knows what A and B are. On explored values, the graph just looks like this one, for L(x; 200, 2.0, 1.5), which I’ll call b(x):

It shows no signs of leveling off and, for all intents and purposes, it’s exponential. This is usually observed for creative work where a few major players (the “stars”) get outsized rewards in comparison to the average people.

Convexity Isn’t Fair

Let’s say that you have two employees, one of whom (Alice) is slightly above average (x = 0.1) and the other of whom (Bob) is just average (x = 0.0). You have the resources to provide 1.0 full point of training, and you can split it anyway you choose (e.g. 0.35 points for Alice, and 0.65 points for Bob). Now, let’s say that you’re managing concave work modeled by the function L(x; 100, 2.0, -0.3), which is concave.

Let the x-axis represent the amount of training (0.0 to 1.0) given to Alice, with the remainder given to Bob. Here’s a graph of their individual productivity levels, with Alice in blue, Bob in purple, and their sum productivity in the green curve

If we zoom in to look at the sum curve, we see a maximum at x = 0.45, an interior solution where both get some training.

At x = 0.0 (full investment in Bob) Alice is producing 69.0 points and Bob’s producing 93.1, for a total of 162.1.

At x = 0.5 (even split of training) Alice in producing 85.8 points and Bob’s producing 83.2, for a total of 169.0.

At x = 1.0 (full investment in Alice) Alice is producing 94.3 points and Bob’s producing 64.6, for a total of 158.9.

The maximal point is x = 0.45, which means that Alice gets slightly less training because Bob is further behind and needs it more. Both end up producing 84.55 points, for a total of 169.1. After the training is disbursed, they’re at the same level of competence (0.55). This is a “share the wealth” interior optimum that justifies sharing the training.

Let’s change to a convex world, with the function L(x; 320, 2.0, 1.1). Then, for the same problem, we get this graph (blue representing Alice’s productivity, purple representing Bob’s, and the green curve representing the sum):

Zooming in on the graph sum productivity, we find that the “fair” solution (x = 0.45) is the worst!

At x = 0.0 (full investment in Bob) Alice is producing 38.1 points and Bob’s producing 144.1, for a total of 182.2.

At x = 0.5 (even split of training) Alice in producing 86.1 points and Bob’s producing 74.1, for a total of 160.2.

At x = 1.0 (full investment in Alice) Alice is producing 160.0 points and Bob’s producing 31.9, for a total of 191.9.

The maxima are at the edges. The best strategy is to give Alice all of the training, but giving all to Bob is better than splitting it evenly, which is about the worst of the options. This is a “starve the poor” optimum. It favors picking a winner and putting all the investment into one party. This is how celebrity economies work. Slight differences in ability lead to massive differences in investment and, ultimately, create a permanent class of winners. Here, choosing a winner is often more important than getting “the right one” with the most potential.

Convexity pertains to decisions that don’t admit interior maxima, or for which such solutions don’t exist or make sense. For example, choosing a business model for a new company is convex, because putting resources into multiple models would result in mediocre performance in all of them, thus failure. The rarity of “co-CEOs” seems to indicate that choosing a leader is also a convex matter.

Convexity is hard to manage

In optimization, convex problems tend to be the easier ones, so the nomenclature here might be strange. In fact, this variety of convexity is the exact opposite of convexity in labor. Optimization problems are usually framed in terms of minimization of some undesirable quantity like cost, financial risk, statistical error, or defect rate. Zero is the (usually unattainable) perfect state. In business, that would correspond to the assumption that an industrial apparatus has an idealized business model and process, with the management’s goal to drive execution error to zero.

What makes convex minimization methods easier is that, even in a high-dimensional landscape, one can converge to the optimal point (global minimum) by starting from anywhere and iteratively stepping in the direction recommended by local features (usually, first and second derivative). It’s like finding the bottom point in a bowl. Non-convex optimizations are a lot harder because (a) there can be multiple local optima, which means that starting points matter, and (b) the local optima might be at the edges, which has its own undesirable properties (including, with people, unfairness). The amount of work required to find the best solutions is exponential in the number of dimensions. That’s why, for example, computers can’t algorithmically find the best business model for a “startup generator”. Even if it were a well-formed problem, the dimensionality would be high and the search problem intractable (probably).

Convex labor is analogous to non-convex optimization problems while management of concave labor is analogous to convex optimization. Sorry if this is confusing. There’s an important semantic difference to highlight here, though. With concave labor, there is some definition of perfect completion so that error (departure from that) can be defined and minimized with a known lower bound: 0. With convex labor, no one knows what the maximum value is, because the territory is unexplored and the “leveling off” of the logistic curve hasn’t been found yet. It’s natural, then, to frame that as a maximization problem without a known bound. With convex labor, you don’t know what the “zero-or-max” point is because no one knows how well one can perform.

Concave labor is the easy, nice case from a managerial perspective. While management doesn’t literally implement gradient descent, it tends to be able to self-correct when individual labor is concave (i.e. the optimization problem is convex). If Alice starts to pull ahead while Bob struggles, management will offer more training to Bob.

However, in the convex world, initial conditions matter. Consider the Alice-Bob problem above with the convex productivity curve, and the fact that splitting the training equitably is the worst possible solution. Management would ideally recognize Alice’s slight superiority and give her all the training, thus finding the optimal “edge case”. But what if Bob managed (convex dishonesty) to convince management that he was slightly superior to Alice and at, say, x = 0.2? Then Bob would get all the training, and Alice would get none, and management would converge on a sub-optimal local maximum. That is the essence of corporate backstabbing, is it not? Management’s increasing awareness of convexity in intellectual work means that it will tend to double down its investment in winners and toss away (fire) the losers. Thus, subordinates put considerable effort into creating the appearance of high potential for the sake of driving management to a local maximum that, if not necessarily ideal for the company, benefits them. That’s what “multiple local optima” means, in practical terms.

The traditional three-tiered corporation has a firm distinction between executives and managers (the third tier being “workers”, who are treated as a landscape feature) and its pertains to this. Because business problems are never entirely concave and orderly, the local “hill climbing” is left to managers, while the convex problems (which, like choosing initial conditions, require non-local insight) such as selecting leaders and business models are left to executives.

Yet with everything concave being performed, or soon to be performed, by machines, we’re seeing convexity pop up everywhere. The question of which programming languages to learn is a convex decision that non-managerial software engineers have to make in their careers. Picking a specialty is likewise; convexity is why it’s of value to specialize. The most talented people today are becoming self-executive, which means that they take responsibility for non-local matters that would otherwise be left to executives, including the direction of their own career. This, however, leads to conflicts with authority.

Older managers often complain about Millennial self-executivity and call it an attitude of entitlement. Actually, it’s the opposite. It’s disentitlement. When you’re entitled, you assume social contracts with other people and become angry when (from your perception) they don’t hold up their end. Millennials leave jobs, and furtively use slow periods to invest in their careers (e.g. in MOOCs) rather than asking for more work. That’s not an act of aggression or disillusion; it’s because they don’t believe the social contract ever existed. It’s not that they’re going to whine about a boss who doesn’t invest in their career– that would be entitlement– because that would do no good. They just leave. They weren’t owed anything, and they don’t owe anything. That’s disentitlement.

Convexity is bad for your job security

Here’s some scary news. When it comes to convex labor, most people shouldn’t be employed. First, let me show a concave input-output graph for worker productivity, assuming even distribution in worker ability from -1.0 to 1.0. Our model also assumes this ability statistic to be inflexible; there’s no training effect.

The blue line, at 82.44, represents the mean worker in the population. Why’s this important? It represents the expected productivity of a new hire off the street. If you’re at the median (x = 0.0) or even a bit below it, you are “above average”. It’s better to retain you than to bring someone in off the street. Let’s say that John is 40th percentile (x = -0.2) hire, which means that his productivity is 90. A random person hired off the street will be better than John, 60% of the time. However, the upside is limited (10 points at most) and the downside (possibly 70 points) is immense so, on average, it’s a terrible trade. It’s better to keep John (a known mediocre worker) on board than to replace him.

With a convex example, we find the opposite to be true:

Here, we have an arrangement in which most people are below the mean, so we’d expect high turnover. Management, one expects, would be inclined to hire people on a “try out” basis with the intention of throwing most of them back on the street. An average or even good (x = 0.5) hire should be thrown out in order to “roll the dice” with a new hire who might be the next star. Is that how managers actually behave? No, because there are frictional and morale reasons not to fire 80% of your people, and because this model’s assumption that people are inflexibly set at a competence level is not entirely true for most jobs, and those where it is true (e.g. fashion modeling) make it easy for management to evaluate someone before a hire is made. In-house experience matters. That is, however, how venture capital, publishing and record labels work. Once you turn out a couple failures, with those being the norm, it might still be that you’re a high performer who’s been unlucky, but you’re judged inferior to a random new entrant (with more upside potential) and flushed out of the system.

In the real world, it’s not so severe. We don’t see 80% of people being fired, and the reason is that, for most jobs, learning matters. The above applies to work at which there’s no learning process, but each worker is inflexibly put at a certain perfectly measurable productivity level. That’s not how the world really works. In-born talent is one relevant input, but there are others like skill, in-house experience, and education that have defensive properties and keep a person’s job security. People can often get themselves above the mean with hard work.

Secondly, the model above assumes workers are paid equally, which is not the case for most convex work. In the convex model above, the star (x = 1.0) might command several times the salary of the average performer (x = 0.0) and he should. That compensation inequality actually creates job security for the rest of them. If the best people didn’t charge more for their work, then employers would be inclined to fire middling performers in the search of a bargain.

This may be one of the reasons why there is such high turnover in the software industry. You can’t a get seasoned options trader for under $250,000 per year, but you can get excellent programmers (who are worth 5-10 times that amount, if given the right kind of work) for less than half of that. This is often individually justified (by the engineer) with an attitude of, “well, I don’t need to be paid millions; I care more about interesting work”. As an individual behavior, that’s fine, but it might be why so many software employers are so quick to toss engineers aside for dubious reasons. Once the manager concludes that the individual doesn’t have “star” potential, it’s worth it to throw out even a good engineer and try again for a shot at a bargain, considering the number of great engineers at mediocre salary levels.

One thing I’ve noticed in software (which is highly convex) is that there’s a cavalier attitude toward firing, and it’s almost certainly related to that “star economy” effect. What’s different is that software convexity has a lot inputs other that personal ability– project/person fit, tool familiarity, team cohesion, and a lot factors that are so hard to detect that they feel like pure luck– in the mix, so the “toss aside all but the best” strategy is severely defective, at least for a larger organization that should be enabling people to find better fitting projects, which makes a lot of sense amid convexity. That’s one of the reasons why I am so dogmatic about open allocation, at least in big companies.

Convexity is risky

Job insecurity amid convexity is an obvious problem, but not damning. If there’s a fixed demand for widgets, a competitor who can produce 10 times more of them is terrifying, because it will crash prices and put everyone else out of business (and, then, become a monopolist and raise them). Call that “red ocean convexity”, where the winners put the losers out of business because a “10X” performer takes 9X from someone else. However, if demand is limitless, then the presence of superior players isn’t always a bad thing. A movie star making $3 million isn’t ruined by one making $40 million. The arts are an example of “blue ocean convexity”, insofar as successful artists don’t make the others poorer, but increase the aggregate demand of art. It’s not “winner-take-all” insofar as one doesn’t have to be the top player to add something people value.

Computational problem solving (not “programming”) is a field where there’s very high demand, so the fact that top performers will produce an order of magnitude more value (the “10X effect”) doesn’t put the rest out of business. That’s a very good thing, because most of those top performers were among “the rest” when they started their career. Not only is there little direct competition, but as software engineers, we tend to admire those “10X” people and take every opportunity we can get to learn from them. If there were more of them, it wouldn’t make us poorer. It would make the world richer.

Is demand for anything limitless, though? For industrial products, no. Demand for televisions, for example, is limited by peoples’ need for them and space to put them. For making peoples’ lives better, yes. For improving processes, sure. Generation of true wealth (as Paul Graham defines it: “stuff people want”) is something for which there’s infinite demand, at least as far as we can see. So what’s the limiting factor? Why can’t everyone work on blue-ocean convex work that makes peoples’ lives better? It comes down to risk. So, let’s look at that. The model I’m going to use is as follows:

  • We only care about the immediate neighborhood of a specific (“typical”) competence level. We’ll call it x = 0.
  • Tasks have a difficulty t between -1.0 and 2.0, which represents the C in the logistic form. B is going to be a constant 4.5; just ignore that. 
  • The harder a task is, the higher the potential payoff. Thus, I’ll set A = 100 * (1 + e^(5*t)). This means that work gets more valuable slightly faster (11% faster) than it gets harder (“risk premium”). The constant term in A is based on the understanding that even very easy (difficulty of -1.0) work has value insofar as it’s time-consuming and therefore people must be paid to do it.
  • We measure risk for a given difficulty t by taking the first derivative of L(x; …), with respect to x, at x = 0. Why? L’(x; …) tells us how sensitive the output (payoff) is to marginal changes in input. We’re modeling unknown input variables and plain luck factors as a random, zero-mean “noise” variable d and assuming that for known competence x the true performance will be L(x + d; …). So this first derivative tells us, at x = 0, how sensitive we are to that unknown noise factor.

What we want to do is assess the yield (expected value) and risk (first derivative of yield) for difficulty levels from -1 to 2 when known x = 0. Here’s a graph of expected yield:

It’s hard to notice on that graph, but there’s actually a slight “dip” or “uncanny valley” as one goes from the extreme of easiness (t = -1.0) to slightly harder (-1.0 < t < 0.0) work:

Does it actually work that way in the real world? I have no idea. What causes this in the model is that, as we go from the ridiculously easy (t = 1.0) to the merely moderately easy (t = 0.5) the rate of potential failure grows faster than the maximum potential A does, as a function of t. That’s an artifact of how I modeled this and I don’t know for sure that a real-world market would have this trait. Actually, I doubt it would. It’s a small dip so I’m not going to worry about it. What we do see is that our yield is approximately constant as a function of difficulty for t from -1.0 to 0.0, where the work is concave for that level of skill; and then it grows exponentially as a function of t from 0.0 to 2.0, where the work is convex. That is what we tend to see on markets. The maximal market value of work (1 + e^(5 * t) in this model) grows slightly faster than difficulty in completing it (1 + e^(4.5*t), here).

However, what we’re interested in is risk, so let me show that as well by graphing the first derivative of L with respect to x (not t!) for each t.

What this shows us, pretty clearly, is monotonic risk increase as the tasks become more difficult. That’s probably not too surprising, but it’s nice to see what it looks like on paper. Notice that the easy work has almost no risk involved. Let’s plot these together. I’ve taken the liberty of normalizing the risk formula (in purple) to plot them together, which is reasonable because our units are abstract:

Let’s look at one other statistic, which will be the ratio between yield and risk. In finance, this is called the Sharpe Ratio. Because the units are abstract (i.e. there’s no real meaning to “1 unit” of competence or difficulty) there is no intrinsic meaning to its scale, and therefore I’ve again taken the liberty of normalizing this as well. That ratio, as a function of task difficulty, looks like this…

…which looks exactly like affine exponential decay. In fact, that’s what it is. The Sharpe Ratio is exponentially favorable for easy work (t < 0.0) and approaches a constant value (1.0 here, because of the normalization) for large t.

What’s the meaning of all this? Well, traditionally, the industrial problem was to maximize yield on capital within a finite “risk budget”. If that’s the case– you’re constrained by some finite amount of risk– then you want to select work according to the Sharpe Ratio. Concave tasks might have less yield, but they’re so low in risk that you can do more of them. For each quantum of risk in your budget, you want to get the most yield (expected value) out of it that you can. This favors the extreme concave labor. This is why industrial labor, for the past 200 years, has been almost all concave. Boring. Reliable. In many ways, the world still is concave and that’s a desirable thing. Good enough is good enough. However, it just so happens that when we, as humans, master a concave task when tend to look for the convex challenge of making it run itself. In pre-technological times, this was done by giving instructions to other people, and making machines as easy as possible for humans to use. In the technological era, it’s done with computers and code. Even the grunt work of coding is given to programs (we call them compilers) so we can focus on the interesting stuff. We’re programming all of that concave work out of human hands. Yes, concave work is still the backbone of the industrial world and always will be. It’s just not going to require humans doing it.

What if, instead, the risk budget weren’t an issue? Let’s say that we have a team of 5 programmers given a year to do whatever they want, and the worst they can do is waste their time, and you’re okay with that maximal-risk outcome (5 annual salaries for a learning experience). They might build something amazing that sells for $100 million, or they might work for a year and have the project still fail on the market. Maybe they do great work, but no one wants it; that’s a risk of creation. In this case, we’re not constrained by risk allocation but by talent. We’ve already accepted the worst possible outcome as acceptable. We want them to be doing convex work, which has the highest yield. Those top-notch people are the limiting resource, not risk allocation.

Convexity requires teamwork

Above, I established that if individual productivity is a convex function of investment in that person, and group performance is a sum of individual productivity, then the optimal solution is to ply one person with resources and starve (and likely fire) the rest. Is that how things actually work? No, not usually. There’s a glaring false assumption, which is the additive model where group performance is a simple sum of individual performances. Real team efforts shouldn’t work that way.

When a team is properly configured, most of their efforts don’t merely add to some pile of assets, but they multiply each others’ productivity. Each works to make the others more successful. I wrote about this advancement of technical maturity (from multiplier to adder) as it pertains to software but I think it’s more general. Warning: incompetent attempts at multiplier efforts are every bit as toxic as incompetent management and will have a divider effect.

Team convexity is a bit unique in the sense that both sides of the logistic “S-curve” are observed. You have synergy (convexity) as the team scales up to a certain size, but congestion (concavity) beyond a certain point. It’s very hard to get team size and configuration right, and typical “Theory Z” management (which attempts to coerce a heterogeneous set of people who didn’t choose each other, and probably didn’t choose the project, into being a team) generally fails at this. It can’t be managed competently from a top-down perspective, despite what many executives say (they are wrong). It has to be grass-roots self-organization. Top-down, closed-allocation management can work well in the Alice/Bob models above where productivity is the sum of individual performances (i.e. team synergies aren’t important) but it fails catastrophically on projects that require interactive, multiplicative effects in order to be successful.

Convexity has different rules

The technological economy is going to be very different, because of the way business problems are formulated. In the industrial economy, capital was held in some fixed amount by a business, whose goal was to gain as much yield (profit or interest) from it while keeping risk within certain bounds deemed acceptable. That made concavity desirable. It still is; stable income with low variation is always a good thing. It’s just that such work no longer requires humans. Concave work has been so commoditized that it’s hard to get a passive profit from it.

Ultimately, I think a basic income is the only way society will be able to handle widespread convexity of individual labor. What does it say about the future? People will either be very highly compensated, or effectively unemployed. There will be an increasing need for unpaid learning while people push themselves from the low, flat region of a convex curve to the high, steep part. Right now, we have a society where people with the means to indulge in that can put themselves on a strong career track, but the majority who have a lifelong need for monthly income end up getting shafted: they become a permanent class of unskilled labor and, by keeping wages low, they actually hold back technological advancement.

Industrial management was risk-reductive. A manager took ownership of some process and his job was to look for ways it could fail, then tried to reduce the sources of error in that process. The rare convex task (choosing a business strategy) was for a higher order of being, an executive. Technological management has to embrace risk, because all the concave work’s being taken by machines. In the future, it will only be economical for a human to do something when perfect completion is unknown or undefinable, and that’s the convex work.

A couple more graphs deserve attention, because both pertain to managerial goals. There are two ways that a manager can create a profit. One is to improve output. The other is to reduce costs. Which is favorable? It depends. Below is a graph that shows productivity ($/hour) as a function of wages for some task where performance is assumed to be convex in wages. The relationship is assumed here to be inflexible and go both ways: better people will expect more in wages, low wages will cause peoples’ out-of-work distractions to degrade their performance. Plotted in purple is the y = x or “break-even” line.

As one can see, it doesn’t even make sense to hire people for this kind of work at less than $68/hour: they’ll produce less than they cost. That “dip” is an inherent problem for convex work. Who’s going to pay people in the $50/hour range so they can become good and eventually move to the $100/hour range (where they’re producing $200/hour work)? This naturally tends toward a “winners and losers” scenario. The people who can quickly get themselves to the $70/hour productivity level (through the unpaid acquisition of skill) are employable, and will continue to grow; the rest will not be able to justify wages that sustain them. The short version: it’s hard to get into convex work.

Here’s a similar graph for concave work:

… and here’s a graph of the difference between productivity and wage, or per-hour profit, on each worker:

So the optimal profit is achieved at $24.45 per hour, where the worker provides $56.33 worth of work in that time. It doesn’t seem fair, but improvements to wages beyond that, while they improve productivity, do not improve it by enough to justify the additional cost. That’s not to say that companies will necessarily set wages to that level. (They might raise them higher to attract more workers, increasing total profit.) Also, here is a case where labor unions can be powerful (they aren’t especially helpful with convex work): in the above, the company would still earn a respectable profit on each worker with wages as high as $55 per hour, and wouldn’t be put out of business (despite managements’ claim that “you’ll break us” at, say, $40) until almost $80.

The tendency of corporate management toward cost-cutting, “always say no”, and Theory-X practices is an artifact of the above result of concavity. So while I can argue that “convexity is unfair” insofar as it encourages inequality of investment and resources, enabling small differences in initial conditions to produce a winner-take-all outcome; concavity produces its own variety of unfairness, since it often encourages wages to go to a very low level, where employers take a massive surplus.

The most important problem…?

Above is a lot about convexity, but I feel like the changeover to convexity in individual labor is the most important economic issue of the 21st century. So if we want to understand why the contemporary, MacLeod-hierarchical, organization won’t survive it, we need a deep understanding of what convexity is and how it works. I think we have that, now.

What does this have to do with Work Sucking? Well, there are a few things we get out of it. First, for the concave work that most of the labor force is still doing…

  • Concave (“commodity”) labor leads to grossly unfair wages. This creates a natural adversity between workers and management on the issue of wage levels. 
  • Management has a natural desire to reduce risk and cut costs, on an assumption of concavity. It’s what they’ve been doing for over 200 years. When you manage concave work, that’s the most profitable thing to do.
  • Management will often take a convex endeavor (e.g. computer programming) and try to treat it as concave. That’s what we, in software, call the “commodity developer” culture that clueless software managers try to shove down hapless engineers’ throats.
  • Stable, concave work is disappearing. Machines are taking it over. This isn’t a bad thing (on the contrary, it’s quite good) but it is eroding the semi-skilled labor base that gave the developed world a large middle class.

Now, for the convex:

  • Convex work favors low employment and volatile compensation. It’s not true that there “isn’t a lot of convex work” to go around. In fact, there’s a limitless amount of demand for it. However, one has to be unusually good for a company to justify paying for it at a level one could live on, because of the risk. Without a basic income in place, convexity will generate an economy where income volatility is at a level beyond what people are able to accept. As a firm believer in the need for market economies, this must be addressed.
  • Convex payoffs produce multiple optima on personnel matters (e.g. training, leadership). This sounds harmless until one realizes that “multiple optima” is a euphemism for “office politics”. It means there isn’t a clear meritocracy, as performance is highly context-sensitive.
  • Convex work often creates a tension between individual competition and teamwork. Managers attempting to grade individuals in isolation will create a competitive focus on individual productivity, because convexity rewards acceleration of small individual differences. This managerial style works for simple additive convexity, but fails in an organization that needs people to have multiplicative or synergistic effects (team convexity) and that’s most of them.

Red and blue ocean convexity

One of the surprising traits of convexity, tied-in with the matter of teamwork, is that it’s hard to predict whether it will be structurally cooperative or competitive. This leads me to believe that there are fundamental differences between “red ocean” and “blue ocean” varieties of convexity. For those unfamiliar with the terms, red ocean refers to well-established territory in which competition is fierce. There’s a known high quantity of resources (“blood in the water”) available but there’s a frenzy of people (some with considerable competitive advantages) working to get at it. It’s fierce and if you aren’t strong, the better predators will crowd you out. Blue ocean refers to unexplored territory where the yields are unknown but the competition’s less fierce (for now).

I don’t know this industry well, but I would think that modeling is an example of red-ocean convexity. Small differences in input (physical attractiveness, and skill at self-marketing) result in massive discrepancies of output, but there’s a small and limited amount of demand for the work. If there’s a new “10X model” on the scene, all the other models are worse off, because the supermodel takes up all of the work. For example, I know that some ridiculous percentage of the world’s hand-modeling is performed by one woman (who cannot live a normal life, due to her need to protect her hands).

What about professional sports, the distilled essence of competition? Blue ocean. Yep. That might seem surprising, given that these people often seem to want to kill each other, but the economic goal of a sports team is not to win games, but to play great games that people will pay money to watch. A “10X” player might revitalize the reputation of the sport, as Tiger Woods did for golf, and expand the audience. Top players actually make a lot of money for the opponents they defeat; the stars get a larger share of the pool, meaning their opponents get a smaller percentage, but they also expand that pool so much that everyone gets richer.

How about the VC-funded startup ecosystem? That’s less clear. Business formation is blue ocean convexity, insofar as there are plenty of untapped opportunities to add immense value, and they exist all over the world. However, fund-raising (at least, in the current investor climate) and press-whoring are red ocean convexity: a few already-established (and complacent) players get the lion’s share of the attention and resources, giving them an enormous head start. Indeed, this is the point of venture capital in the consumer-web space: use the “rocket fuel” (capital infusion) to take a first-entrant advantage before anyone else has a shot.

Red and blue ocean convexity are dramatically different in how they encourage people to think. With red-ocean convexity, it’s truly a ruthless, winner-take-all, space because the superior, 10X, player will force the others out of business. You must either beat him or join him. I recommend “join”. With blue-ocean convexity (which is the force that drives economic growth) outsized success doesn’t come at the expense of other people. In fact, the relationship may be symbiotic and cooperative. For example, great programmers build tools that are used all over the world and make everyone better at their jobs. So while there is a lot of inequality in payoffs– Linus Torvalds makes millions per year, I use his tools– because that’s how convexity works, it’s not necessarily a bad thing because everyone can win.

Convexity and progress

Convexity’s most important property is progressive time. Real-world convexity curves are often steeper than the ones graphed above and, if there isn’t a role for learning, then the vast majority of people will be unable to achieve at a level supporting an income, and thus unemployed. For example, while practice is key in (highly convex) professional sports, there aren’t many people who have the natural talent to earn a living at it. Convexity shuts out those without natural talent. Luckily for us and the world, most convex work isn’t so heavily influenced by natural limitations, but by skills, specialization and education. There’s still an elite at the rightward side of the payoff distribution curve that takes the bulk of the reward, but it’s possible for a diligent and motivated person to enter that elite by gaining the requisite skills. In other words, most of the inputs into that convex payoff function are within the individual actor’s control. This is another case of “good inequality”. In blue-ocean convexity, we want the top players to reap very large rewards, because it motivates more people to do the work that gets them there. 

Consider software engineering, which is perhaps the platonic ideal of blue-ocean convexity. What retards us the most as an industry is the lack of highly-skilled people. As an industry, we contend with managerial environments tailored to mediocrity, and suffer from code-quality problems that can reduce a technical asset’s real value to 80, 20, or even minus-300 cents on the dollar compared to its book value. Good software engineers are rare, and that hurts everyone. In fact, perhaps the easiest way to add $1 trillion in value to the economy would be to increase software engineer autonomy. Because most software engineers never get the environment of autonomy that would enable them to get any good, the whole economy suffers. What’s the antidote? A lot of training and effort– the so-called “10000 hours” of deliberate practice– that’s generally unpaid in this era of short-term, disposable jobs.

Convexity’s fundamental problem is that it requires highly-skilled labor, but no employer is willing to pay for people to develop the relevant skills, out of a fear that employees who drive up their market value will leave. In the short term, it’s an effective business strategy to hire mediocre “commodity developers” and staff them on gigantic teams for uninspiring projects, and give them work that requires minimal intellectual ability aside from following orders. In the long term, those developers never improve and produce garbage software that no one knows how to maintain, producing creeping morale decay and, sometimes, “time bombs” that cause huge business losses at unknown times in the future.

That’s why convexity is such a major threat to the full-employment society to which even liberal Americans still cling. Firms almost never invest in their people– empirically, we see that– in favor of the short-term “solution”, which is to ignore convexity and try to beat the labor context into concavity, that is terrible in the long term. Thus, even in convex work, the bulk of people linger at the low-yield leftward end of the curve. Their employers don’t invest in them, and often they lack the time and resources to invest in themselves. What we have, instead of blue-ocean convexity, is an economy where the privileged (who can afford unpaid time for learning) become superior because they have the capital to invest in themselves, and the rest are ignored and fall into low-yield commodity work. This was socially stable when there was a lot of concave, commodity work for humans to do, but that’s increasingly not the case.

Someone is going to have to invest in the long term, and to pay for progress and training. Right now, privileged individuals do it for themselves and their progeny, but that’s not scalable and will not avert the social instability threatened by systemic, long-term unemployment.

Trust and convexity

As I’ve said, convexity isn’t only a property of the relationship between individual inputs (talent, motivation, effort, skill) and productivity, but also occurs in team endeavors. Teams can be synergistic, with peoples’ efforts interacting multiplicatively instead of additively. That’s a very good thing, when it happens.

So it’s no surprise that large accomplishments often require multiple people. We already knew that! That is less true in 2013 than it was 1985– now, a single person can build a website serving millions– but it’s still the case. Arguably, it’s more the case now; it’s only that many markets have become so efficient that interpersonal dependencies “just work” and give more leverage to single actors. (The web entrepreneur is using technologies and infrastructure built by millions of other people.) At any rate, it’s only a small space of important projects that will be accomplished well by a single party, acting alone. For most, there’s a need to bring multiple people together, but to retain focus and that requires interior political inequalities (leadership) to the group.

We’re hard-wired to understand this. As humans, we fundamentally get the need for team endeavors with strong leadership. That’s why we enjoy team sports so much.

Historically, there have been three “sources of power” that have enabled people to undertake and lead large projects (team convexity):

  • coercion, which exists when negative consequences are used to motivate someone to do work that she wouldn’t otherwise do. This was the cornerstone of pre-industrial economies (slavery) but is also used, in a softer form, by ineffective managers: do this or lose your income/reputation. Anyway, coercion is how the Egyptian pyramids were built: coercive slave labor.
  • divination, in which leaders are elected based on an abstract principle, which may be the whim of a god, legal precedent, or pure random luck. For example, it has been argued that gambling (a case of “pure random luck”) served a socially positive purpose on the American frontier. Although it moved funds “randomly”, it allowed pools of capital to form, financing infrastructural ventures. Something like divination is how the cathedrals were built: voluntary labor, motivated by religious belief, directed by architects who often were connected with the Church. Self-divination, which tends to occur in a pure power vacuum, is called arrogation.
  • aggregation, where an attempt to compute, fairly, the group preference or the true market value of an asset is made. Political elections and financial markets are aggregations. Aggregation is how the Internet was built: self-directed labor driven by market forces.

When possible, fair aggregations are the most desirable, but it’s non-trivial to define what fair is. Should corporate management be driven by the one-dollar, one-vote system that exists today? Personally, I don’t think so. I think it sucks. I think employees deserve a vote simply because they have an obvious stake in the company. As much as the current, right-wing, state of the American electorate infuriates me, I really like the fact that citizens have the power to fire bad politicians. (They don’t use it enough; incumbent victory rates are so high that a bad politician has more job security than a good programmer.) Working people should have the same power over their management. By accepting a wage that is lower than the value of what they produce, they are paying their bosses. They have a right to dictate how they are managed, and to insist on the mentorship and training that convexity is making essential.

Because it’s so hard to determine a fair aggregation in the general case, there’s always some room for divination and arrogation, or even coercion in extreme cases. For example, our Constitution is a case of (secular, well-informed) divination on the matter of how to build a principled, stable and rational government, but it sets up an aggregation that we use elect political leaders. Additionally, if a political leader were voted out of office but did not hand over power, he’d be pushed out of it by force (coercion). Trust is what enables self-organizing (or, at least, stable) divination. People will grant power to leaders based on abstract principles if they trust those ideas, and they’ll allow representatives to act on their behalf if they trust those people.

Needless to say, convex payoffs to group efforts generate an important role for trust. That’s what the “stone soup” parable is about; because there’s no trust in the community, people hoard their own produce instead of sharing, and no one has had a decent meal for months. When outside travelers offer a nonexistent delicacy– the stone is a social catalyst with no nutritional value– and convince the other villagers to donate their spare produce, they enable them all to work together. So they get a nutritious bowl of soup and, one hopes, they can start to trust each other and build at least a barter or gift economy. They all benefit from the “stone soup”, but they were deceived.

Convex dishonesty isn’t always bad. It is the act of “borrowing” trust by lying to people, with the intent to pay them back out of the synergistic profits. Sometimes convex dishonesty is exactly what a person needs to do in order to get something accomplished. Nor is it always good. Failed convex frauds are damaging to morale, and therefore they often exacerbate the lack-of-trust problem. Moreover, there are many endeavors (e.g. pyramid schemes) that have the flavor of convex fraud but are, in reality, just fraud.

This, in fact, is why modern finance exists. It’s to replace the self-divinations that pre-financial societies required to get convex projects done with a fairer aggregation system that properly measures, and allows the transfer of, risks.

Credibility

For macroscopic considerations like the fair prices of oil or business equity, financial aggregations seem to work. What about the micro-level concern of what each worker should do on a daily basis? That usually exists in the context of a corporation (closed system) with specific authority structures and needs. Companies often attempt to create internal markets (tough culture) for resources and support, with each team’s footprint measured in internal “funny money” given the name of dollars. I’ve seen how those work, and they often become corrupt. The matter of how people direct the use of their time is based on an internal social currency (including job titles, visibility, etc.) that I’ve taken to calling credibility. It’s supposed to create a meritocracy, insofar as the only way one is supposed to be able to get credibility is through hard work and genuine achievement, but it often has some severely anti-meritocratic effects. 

So why does your job (probably) Suck? Your job will generally suck if you lack credibility, because it means that you don’t control your own time, have little choice over what you do and how you do it, and that your job security is poor. Your efforts will be allocated, controlled, and evaluated by an external party (a manager) whose superiority in credibility grants him the right of self-divination. He gets to throw your time into his convex project, but not vice versa. You don’t have a say in it. Remember: he’s got credibility, and you lack it. 

Credibility always generates a black market. There is no failing in this principle. Performance reviews are gamed, with various trades being made wherein managers offer review points in exchange for non-performance-related favors (such as vocal support for an unrelated project, positive “360-degree reviews”, and various considerations that are just inappropriate and won’t be discussed here) and loyalty. Temporary strongmen/thugs use transient credibility (usually, from managerial favoritism) to intimidate and extort other people into sharing credit for work accomplished, thus enabling the thug to appear like a high performer and get promoted to a real managerial role (permanent credibility). You win on a credibility market by buying and selling it for a profit, creating various perverted social arbitrages. No organization that has allowed credibility to become a major force has avoided this.

Now I can discuss the hierarchy as immortalized by this cartoon from Hugh MacLeod:

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Losers are not undesirable, unpopular, or useless people. In fact, they’re often the opposite. What makes them “losers” is that, in an economic sense, they’re losing insofar as they contribute more to the organization than they get out of it. Why do they do this? They like the monthly income and social stability. Sociopaths (who are not bad people; they’re just gamblers) take the other side of that risk trade. They bear a disproportionate share of the organization’s risk and work the hardest, but they get the most reward. They have the most to lose. A Loser who gets fired will get another job at the same wage; a Sociopath CEO will have to apply for subordinate positions if the company fails. Clueless are a level that forms later on when this risk transfer becomes degenerate– the Sociopaths are no longer putting in more effort or taking more risk than anyone else, but have become an entitled, complacent rent-seeking class– and they need a middle-management layer of over-eager “useful idiots” to create the image (Effort Thermocline) that the top jobs are still demanding.

What’s missing in this analysis? Well, there’s nothing morally wrong, at all, with a financial risk transfer. If I had a resource that had a 50% chance of yielding $10 million, and 50% chance of being worthless, I’d probably sell it to a rich person (whose tolerance of risk is much greater) for $4.9 million to “lock in” that amount. A +5-million-dollar swing in personal wealth is huge to me and minuscule to him. It’d be a good trade for both of us. I’d be paying a (comparably small) $100,000 risk premium to have that volatility out of my financial life. I’m not a Loser in this deal, and he’s not a Sociopath. It’s by-the-book finance, how it’s supposed to work.

What generates the evil, then? Well, it’s the credibility market. I don’t hold the individual firm responsible for prevailing financial scarcity and, thus, the overwhelmingly large number of people willing to make low-expectancy plays. As long as that firms pays its people reasonably, it has clean hands. So the financial Loser trade is not a sign of malfeasance. The credibility market’s different, because the organization has control over it. It creates the damn thing. Thus, I think the character of the risk transfer has several phases, each deserving its own moral stance:

  1. Financial risk transfer. Entrepreneurs put capital and their reputations at risk to amass the resources necessary to start a project whose returns are (macroscopically, at least) convex. This pool of resources is used to pay bills and wages, therefore allowing workers to get a reliable, recurring monthly wage that is somewhat less than the expected value of their contribution. Again, there’s nothing morally wrong here. Workers are getting a risk-free income (so long as the business continues to exist) while participating in the profits of industrial macro-convexity. 
  2. De-risking, entrenchment, and convex fraud. As the business becomes more established, its people stop viewing it as a risk transfer between entrepreneurs and workers, and start seeing it (after the company’s success is obvious) as a pool of “free” resources to gain control over. Such resources are often economic (“this place has millions of dollars to fund my ideas”) but reputation (“imagine what I could do as a representative of X”) is also a factor. People begin making self-divination (convex fraud) gambits to establish themselves as top performers and vault into the increasingly complacent, rent-seeking, executive tier. This is a red-ocean feeding frenzy for the pile of surplus value that the organization’s success has created.
  3. Credibility emerges, and becomes the internal currency. Successful convex fraudsters are almost always people who weren’t part of the original founding team. They didn’t get their equity when it was cheap, so now they’re in an unstable positions. They’re high-ranking managers, but haven’t yet entwined themselves with the business or won a significant share of the rewards/equity. Knowing that their success is a direct output of self-divination (that is, arrogation) they use their purloined social standing to create official credibility in the forms of titles (public statements of credibility), closed allocation (credibility as a project-maker and priority-setter), and performance reviews (periodic credibility recalibrations). This turns the unofficial credibility they’ve stolen into an official, secure kind.
  4. Panic trading, and credibility risk transfer. Newly formed businesses, given their recent memory of existential risk, generally have a cavalier attitude toward firing and a tough culture, which I’ll explain below. This means that a person can be terminated not because of doing anything wrong or being incompetent, but just because of an unlucky break in credibility fluctuations (e.g. a sponsor who changes jobs, a performance-review “vitality curve”). In role-playing games, this is the “killed by the dice” question: should the GM (game coordinator who functions as a neutral party, creating and directing the game world) allow characters, played well, to die– really die, in the “create a new character” sense, not in the “miraculously resurrected by a level-18 healer” sense– because of bad rolls of the dice? In role-playing games, it’s a matter of taste. Some people hate games where they can lose a character by random chance; others like the tension that it creates. At work, though, “killed by the dice” is always bad. Tough-culture credibility markets allow good employees to be killed by the dice. In fact, when stack-ranking and “low performer” witch hunts set in, they encourage it. This creates a lot of panic trading and there’s a new risk transfer in town. It’s not the morally acceptable and socially-positive transfer of financial risk we saw in Stage 1. Rather, it’s the degenerate black-market credibility trading that enables the worst sorts of people (true psychopaths) to rise.
  5. Collapse into feudalistic rank culture. No one wants a job where she can be fired “for performance” because of bad luck, so tough cultures don’t last very wrong; they turn into rank cultures. People (Losers) panic-trade their credibility, and would rather subordinate to get some credibility (“protection”) from a feudal lord (Sociopath) than risk having none and being flushed out. The people who control the review process become very powerful and, eventually, can manufacture enough of an image of high performance to become official managers. You’re no longer going to be killed by the dice in a rank culture, but you can be killed by a manager because he can unilaterally reduce your credibility to zero.
  6. Macroscopic underperformance and decline. Full-on rank culture is terribly inefficient, because it generates so much fourth-quadrant work that serves the need of local extortionists (usually, middle managers and their favorites) but does not help the business. Eventually, this leads to underperformance of the business as a whole. Rank culture fosters so much incompetence that trust breaks down within the organization, and it’s often permanent. Firing bad apples is no longer possible, because the process of flushing them away would require firing a substantial fraction of the organization, and that would become so politicized and disruptive as to break the company outright. Such companies regularly lapse into brief episodes of “tough culture”, when new executives (usually, people who buy it as its market value tanks) decide that it’s time to flush out the low performers, but they usually do it in a heavy-handed, McKinsey-esque way that creates a new and equally toxic credibility market. But… like clockwork, those who control said black markets become the new holders of rank and, soon enough, the official bosses. These mid-level rank-holders start out as the mean-spirited witch-hunters (proto-Sociopaths) who implement the “low performer initiative” but they eventually rise and leave a residue of strategically-unaware, soft, complacent and generally harmless mid-ranking “useful idiots” (new Clueless). Clueless are the middle managers who get some power when the company lurches into a new rank culture, but don’t know how to use it and don’t know the main rule of the game of thrones: you win or you die.
  7. Obsolescence and death. Self-explanatory. Some combination of rank-culture complacency and tough-culture moral decay turn the company into a shell of what it once was. The bad guys have taken out their millions and are driving up house prices in the area and their wives with too much plastic surgery are on zoning committees keeping those prices high; everyone else who worked at the firm is properly fucked. Sell off the pieces that still have value, close the shop.

That cycle, in the industrial era, used to play out over decades. If you joined a company in Stage 1 in 1945, you might start to see the Stage 4 midlife when you retired in 1975. Now, it happens much more quickly: it goes down over years, and sometimes months for fast-changing startups. It’s much more of an immediate threat to personal job security than it has ever been before. Cultural decay used to be a long-term existential risk to companies not taken seriously because calamity was decades away; now, it’s often ongoing and rapid thanks to the “build to flip” mentality.

To tell the truth about it, the MacLeod rank culture wasn’t such a bad fit for the industrial era. Industrial enterprises had a minimal amount of convex work (choosing the business model, setting strategies) that could be delegated to a small, elite, executive nerve-center. Clueless middle managers and rationally-disengaged (Loser) wage earners could implement ideas delivered from the top without too much introspection or insight, and that was fine because individual work was concave. Additionally, that small set of executives could be kept close to the owners of the company (if they weren’t the same set of people).

In the technological era, individual labor is convex and we can no longer afford Cluelessness, or Loserism. The most important work– and within a century or so, all work where there’s demand for humans to do it– requires self-executivity. The hierarchical corporation is a brachiosaur sunning itself on the Yucatan, but that bright point of light isn’t the sun.

Your job is a call option

If companies seem to tolerate, at least passively, the inefficiency of full-blown rank culture, doesn’t that mean that there isn’t a lot of real work for them to do? Well, yes, that’s true. I’ve already discussed the existence of low-yield, boring, Fourth Quadrant busywork that serves little purpose to the business. It’s not without any value, but it doesn’t do much for a person’s career. Why does it exist? First, let’s answer this: where does it come from?

Companies have a jealously-guarded core of real work: essential to the business, great for the careers of those who do it. The winners of the credibility market get the First Quadrant (1Q) of interesting and essential work. They put themselves on the “fun stuff” that is also the core of the business– it’s enjoyable, and it makes a lot of money for the firm and therefore leads to high bonuses. There isn’t a lot of work like this, and it’s coveted, so few people can be in this set. Those are akin to feudal lords, and correspond with MacLeod Sociopaths. Those who wish to join their set, but haven’t amassed enough credibility yet, take on the less enjoyable, but still important Second Quadrant (2Q) of work: unpleasant but essential. Those are the vassals attempting to become lords in the future. That’s often a Clueless strategy because it rarely works, but sometimes it does. Then there is a third monastic category of people who have enough credibility (got into the business early, usually) to sustain themselves but have no wish to rise in the organizational hierarchy. They work on fun, R&D projects that aren’t in the direct line of business (but might be, in the future). They do what’s interesting to them, because they have enough credibility to get away with that and not be fired. They work on the Third Quadrant (3Q): interesting but discretionary. How they fit into the MacLeod pyramid is unclear. I’d say they’re a fortunate sub-caste of Losers in the sense that they rationally disengage from the power politics of the essential work; but they’re Clueless if they’re wrong about their job security and get fired. Finally, who gets the Fourth Quadrant (4Q) of unpleasant and discretionary work? The peasants. The Losers without the job security of permanent credibility are the ones who do that stuff, because they have no other choice.

Where does the Fourth Quadrant work come from? Clueless middle-managers who take undesirable (2Q) or unimportant (3Q) projects, but manage to take all the career upside (turning 2Q into 4Q for their reports) and fun work (turning 3Q into 4Q) for themselves, leaving their reports utterly hosed. This might seem to violate their Cluelessness; it’s more Sociopathic, right? Well, MacLeod “Clueless” doesn’t mean that they don’t know how to fend for themselves. It means they’re non-strategic, or that they rarely know what’s good for the business or what will succeed in the long-term. They suck at “the big picture” but they’re perfectly capable of local operations. Additionally, some Clueless are decent people; others are very clearly not. It is perfectly possible to be MacLeod Clueless and also a sociopath.

Why do the Sociopaths in charge allow the blind Clueless to generate so much garbage make-work? The answer is that such work is evaluative. The point of the years-long “dues paying” period is to figure out who the “team players” are so that, when leadership opportunities or chances for legitimate, important work open up, the Sociopaths know which of the Clueless and Losers to pick. In other words, hiring a Loser subordinate and putting him on unimportant work is a call option on a key hire, later.

Workplace cultures

I mentioned rank and tough cultures above, so let me get into more detail of what those are. In general, an organization is going to evaluate its individuals based on three core traits:

  • subordinacy: does this person put the goals of the organization (or, at least, his immediate team and supervisor) above her own?
  • dedication: will she do unpleasant work, or large amounts of work, in order to succeed?
  • strategy: does she know what is worth working on, and direct her efforts toward important things?

People who lack two or all three of these core traits are generally so dysfunctional that all but the most nonselective employers just flush them out. Those types– such as the strategic, not-dedicated, and insubordinate Passive-Aggressive and the dedicated, insubordinate, and not-strategic Loose Cannon– occasionally pop up for comic relief, but they’re so incompetent that they don’t last long in a company and are never in contention for important roles. I call them, as a group, the Lumpenlosers.

MacLeod Losers tend to be strategic and subordinate, but not dedicated. They know what’s worth working on, but they tend to follow orders because they’re optimizing for comfort, social approval, and job security. They don’t see any value in 90-hour weeks (which would compromise their social polish) or radical pursuit of improvement (which would upset authority). They just want to be liked and adjust well to the cozy, boring, middle-bottom. If you make a MacLeod Loser work Saturdays, though, she’ll quit. She knows that she can get a similar or better job elsewhere.

MacLeod Clueless are subordinate and dedicated but not strategic. They have no clue what’s worth working on. They blindly follow orders, but will also put in above-board effort because of an unconditional work ethic. They frequently end up cleaning up messes made by Sociopaths above and Losers below them. They tend to be where the corporate buck actually stops, because Sociopaths can count on them to be loyal fall guys.

MacLeod Sociopaths are dedicated and strategic but insubordinate. They figure out how the system works and what is worth putting effort into, and they optimize for personal yield. They’re risk-takers who don’t mind taking the chance of getting fired if there’s also a decent likelihood of a promotion. They tend to have “up-or-out” career trajectories, and job hopping isn’t uncommon.

Since there are good Sociopaths out there, I’ve taken to calling the socially positive ones the Technocrats, who tend to be insubordinate with respect to immediate organizational authority, but have higher moral principles rooted in convexity: process improvements, teamwork and cooperation, technical and infrastructural excellence. They’re the “positive-sum” radicals.  I’ll get back to them.

Is there a “unicorn” employee who combines all three desired traits– subordinacy, dedication, and strategy? Yes, but it’s strictly conditional upon a particular set of circumstances. In general, it’s not strategic to be subordinate and dedicated. If you’re strategic, you’ll usually either optimize for comfort and be subordinate, but not dedicated, because that’s uncomfortable. If you follow orders, it’s pretty easy to coast in most companies. That’s the Loser strategy. Or, you might optimize for personal yield and work a bit harder, becoming dedicated, but you won’t do it for a manager’s benefit: it’s either your own, or some kind of higher purpose. That’s the Sociopath strategy. The exception is a mentor/protege relationship. Strategic and dedicated people will subordinate if they think that the person in authority knows more than they do, and is looking out for their career interests. They’re subordinating to a mentor conditionally, based on the understanding that they will be in authority, or at least able to do more interesting and important work, in the future.

From this understanding, we can derive four common workplace cultures:

  • rank cultures value subordinacy above all. You can coast if you’re in good graces with your manager, and the company ultimately becomes lazy. Rank cultures have the most pronounced MacLeod pyramid: lazy but affable Losers, blind but eager Clueless, and Sociopaths at the top looking for ways to gain from the whole mess. 
  • tough cultures value dedication, and flush out the less dedicated using informal social pressure and formal performance reviews. It’s no longer acceptable to work a standard workweek; 60 hours is the new 40. Tough culture exists to purge the Loser tier, splitting it between the neo-Clueless sector and the still-Loser rejects, which it will fire if they don’t quit first. So the MacLeod pyramid of a tough culture is more fluid, but every bit as pathological.
  • self-executive cultures value strategy. Employees are individually responsible for directing their own efforts into pursuits that are of the most value. This is the open allocation for which Valve and Github are known. Instead of employees having to compete for projects (tough culture) or managerial support (rank culture) it is the opposite. Projects compete for talent on an open market, and managers (if they exist) must operate in the interests of those being managed. There is no MacLeod hierarchy in a self-executive culture.
  • guild culture values a balance of the three. Junior employees aren’t treated as terminal subordinates but as proteges who will eventually rise into leadership/mentoring positions. There isn’t a MacLeod pyramid here; to the extent that there may be undesirable structure, it has more to do with inaccurate seniority metrics (e.g. years of experience) than with bad-faith credibility trading. 

Rank and guild cultures are both command cultures, insofar as they rely on central planning and global (within the institution) rule-setting. Top management must keep continual awareness of how many people are at each level, and plan out the future accordingly. Tough and self-executive cultures are market cultures, because they require direct engagement with an organic, internal market.

The healthy, “Theory Y” cultures are the guild and self-executive cultures. These confer a basic credibility on all employees, which shuts off the panic trading that generates the MacLeod process. In a guild culture, each employee has credibility for being a student who will grow in the future. In self-executive culture, each employee has power inherent in the right to direct her efforts to the project she considers most worthy. Bosses and projects competing for workers is a Good Thing. 

The pathological, “Theory X” cultures are the rank and tough cultures. It goes without saying that most rank cultures try to present themselves as guild cultures– but management has so much power that it need not take any mentorship commitments seriously. Likewise, most tough cultures present themselves as self-executive ones. How do you tell if your company has a genuinely healthy (Theory Y) culture? Basic credibility. If it’s there, it’s the good kind. If it’s not, it’s the bad kind of culture.

Basic credibility

In a healthy company, employees won’t be “killed by the dice”. Sure, random fluctuations in credibility and performance might delay a promotion for a year or two, but the panicked credibility trading of the Theory-X culture isn’t there. People don’t fear their bosses in a Theory-Y culture; they’re self-motivated and fear not doing enough by their own standards– because they actually care. Basic credibility means that every employee is extended enough credibility to direct his own work and career.

That does not mean people are never fired. If someone punches a colleague in the face or steals from the company, you fire him, but it has nothing to do with credibility. You get rid of him because, well, he did something illegal and harmful. What it does mean is that people aren’t terminated for “performance reasons” that really mean either (a) they were just unlucky and couldn’t get enough support to save them in tough-culture “stack ranking”, or (b) their manager disliked them for some reason (no-fault lack-of-fit, or manager-fault lack-of-fit). It does mean that people are permitted to move around in the company, and that the firm might tolerate a real underperformer for a couple of years. Guess what? In a convex world, underperformance almost doesn’t matter.

With convexity, the difference between excellence and mediocrity matters much more than that between mediocrity and underperformance. In a concave world, yes, you must fire underperformers because the margin you get on good employees is so low that one slacker can cancel out 4 or 5 good people. In a convex world, the danger isn’t that you have a few underperformers. You will have, at the least, good-faith low-performers, just because the nature of convexity is to create risk and inequality of return and some peoples’ projects won’t pan out. Thjat’s fine. Instead, the danger is that you don’t have any excellent (“10x”) employees.

There’s a managerial myth that cracking down on “low performers” is useful because they demotivate the “10x-ers”. Yes and no. Incompetent management and having to work around bad code are devastating and will chase out your top performers. If 10xer’s have to work with incompetents and have no opportunity to improve them, they get frustrated and quit. There are toxic incompetents (dividers) who make others unproductive and damage morale, and then there are low-impact employees who just need more time (subtracters). Subtracters cost more in salary than they deliver, but they aren’t hurting anyone and they will usually improve. Fire dividers immediately. Give subtracters a few years (yes, I said years) to find a fit. Sometimes, you’ll hire someone good and still have that person end up as a subtracter at first. That common in the face of convexity– and remember that convexity is the defining problem of the 21st-century business world. The right thing to do is to let her keep looking for a fit until she finds one. Almost never will it take years if your company runs properly.

“Low performer initiatives” rarely smoke out the truly toxic dividers, as it turns out. Why? Because people who have defective personalities and hurt other peoples’ morale and productivity are used to having their jobs in jeopardy, and have learned to play politics. They will usually survive. It’ll be unlucky subtracters you end up firing. You might save chump change on the balance sheet, but you’re not going to fix the real organizational problems.

Theories X, Y, and Z

I grouped the negative workplace cultures (rank and tough) together and called them Theory X; the positive ones (self-executive and guild) I called Theory Y. This isn’t my terminology; it’s about 50 years old, coming from Douglas MacGregor. The 1960s was the height of Theory Y management, so that was the “good” managerial style. Let’s compare them and see what they say.

Recall what I said about the “sources of power”: coercion, divination, and aggregation. Coercion was, by far, the predominant force in aggregate labor before 1800. Slavery, prisons, and militaries (with, in that time, lots of conscription) were the inspirations for the original corporations, and the new class of industrialists was very cruel: criminal by modern standards. Theory X was the norm. Under Theory X, workers are just resources. They have no rights, no important desires, and should be well-treated only if there’s an immediate performance benefit. Today, we recognize that as brutal and psychotic, but for a humanity coming off over 100,000 years of male positional violence and coerced labor, the original-sin model of work shouldn’t seem far off. Theory X held that employees are intrinsically lazy and selfish and will only work hard if threatened.

Around 1920, industrialists began to realize that, even though labor in that time mostly was concave, it was good business to be decent to one’s workers. Henry Ford, a rabid anti-Semite, was hardly a decent human being, much less “a nice guy”, but even he was able to see this. He raised wages, creating a healthy consumer base for his products. He reduced the workday to ten hours, then eight. The long days just weren’t productive. Over the next forty years, employers learned that if workers were treated well, they’d repay the favor by behaving better and working harder. This lead to the Theory Y school of management, which held that people were intrinsically altruistic and earnest, and that management’s role was to nurture them. This gave birth to the paternalistic corporation and the bilateral social contracts that created the American middle class.

Theory Y failed. Why? It grew up in the 1940s to ’60s, when there was a prosperous middle class, but in a time of very low economic inequality. One thing that would amaze most Millennials is that, when our parents grew up, the idea that a person would work for money was socially unacceptable. You just couldn’t say that you wanted to get rich, in 1970, and not be despised for it. And it was very rare for a person to make 10 times more than the average citizen! However, the growth of economic inequality that began in the 1970s, and accelerated since then, raised the stakes. Then the Reagan Era hit.

Most of the buyout/private equity activity that happened in the 1980s had a source immortalized by the movie Wall Street: industrial espionage, mostly driven by younger people eager to sell out their employers’ secrets to get jobs from private equity firms. There was a decade of betrayal that brutalized the older, paternalistic corporations. Given, by a private equity tempter, the option of becoming CEO immediately through chicanery, instead of working toward it for 20 years, many took the former. Knives came out, backs were stabbed, and the most trusting corporations got screwed.

Since the dust settled, around 1995, the predominant managerial attitude has been Theory Z. Theory X isn’t socially acceptable, and Theory Y’s failure is still too recently remembered. What’s Theory Z? Theory X takes a pessimistic view of workers and distrusts everyone. Theory Y takes an optimistic view of human nature and becomes too trusting. Theory Z is the most realistic of the three: it assumes that people are indifferent to large organizations (even their employers) but loyal to those close to them (family, friends, immediate colleagues, distant co-workers; probably in that order). Human nature is neither egoistic or altruistic, but localistic. This was an improvement insofar as it holds a more realistic view of how people are. It’s still wrong, though.

What’s wrong with Theory Z? It’s teamist. Now, when you have genuine teamwork, that’s a great thing. You get synergy, multiplier effects, team convexity– whatever you want to call it, I think we all agree that it’s powerful. The problem with the Theory-Z company is that it tries to enforce team cohesion. Don’t hire older people; they might like different music! Buy a foosball table, because 9:30pm diversions are how creativity happens! This is more of a cargo cult than anything founded in reasonable business principles, and it’s generally ineffective. Teamism reduces diversity and makes it harder to bring in talent (which is critical, in a convex world). It also tends toward general mediocrity.

Each Theory had a root delusion in it. Theory X’s delusion was that morale didn’t matter; workers were just machines. Theory Y’s delusion is rooted in the tendency for “too good” people to think everyone else is as decent as they are; it fell when the 1980s made vapid elitism “sexy” again, and opportunities to make obscene wealth in betraying one’s employer emerged. Theory Z’s delusion is that a set of people who share nothing other than a common manager constitute a genuine (synergistic) team. See, in an open-allocation world, you’re likely to get team synergies because of the self-organization. People would naturally tend to form teams where they make each other more productive (multiplier effects). It happens at the grass-roots level, but can’t be forced in people who are deprived of autonomy. With closed-allocation, you don’t get that. People (with diverging interests) are brought together by force outside of their control and told to be a team. Closed-allocation Theory Z lives in denial of how rare those synergistic effects actually are.

I mentioned, previously an alternative to these 3 theories that I’ve called Theory A, which is a more sober and realistic slant on Theory Y: trust employees with their own time and energy; distrust those who want to control others. I’ll return to that in Part 22, the conclusion.

Morality, civility, and social acceptability

The MacLeod Sociopaths that run large organizations are a corrosive force, but what defines them isn’t true psychopathy, although some of them are that. There are also plenty of genuinely good people who fit the MacLeod Sociopath archetype. I am among them. What makes them dangerous is that the organization has no means to audit them. If it’s run by “good Sociopaths” (whom I’ve taken to calling Technocrats) then it will be a good organization. However, if it’s run by the bad kind, it will degenerate. So, with the so-called Sociopaths (while it is less necessary for the Losers and Clueless) it is important to understand the moral composition of that set.

I’ve put a lot of effort into defining good and evil, and that’s a big topic I don’t have much room for, so let me be brief on them. Good is motivated by concerns like compassion, social justice, honesty, and virtue. Evil is militant localism or selfishness. In an organizational context, or from a perspective of individual fitness, both are maladaptive when taken to the extreme. Extreme good is self-sacrifice and martyrdom that tends to take a person out of the gene pool, and certainly isn’t good for the bottom line; extreme evil is perverse sadism that actually gets in a person’s way, as opposed to the moderate psychopathy of corporate criminals.

Law and chaos are the extremes of a civil spectrum, which I cribbed from AD&D. Lawful people have faith in institutions and chaotic people tend to distrust them. Lawful good sees institutions as tending to be more just and fair than individual people; chaotic good finds them to be corrupt. Lawful neutrality sees institutions as being efficient and respectable; chaotic neutrality finds them inefficient and deserving of destruction. Lawful evil sees institutions as a magnifier of strength and admires their power; chaotic evil sees them as obstructions that get in the way of raw, human dominance. 

Morality and civil bias, in people, seem to be orthogonal. In the AD&D system, each spectrum has three levels, producing 9 alignments. I focused on the careers of each here. In reality, though, there’s a continuous spectrum. For now, I’m just going to assume a Gaussian distribution, mean 0 and standard deviation 1, with the two dimensions being uncorrelated.

MacLeod Losers tend to be civilly neutral, and Clueless tend to be lawful; but MacLeod Sociopaths come from all over the map. Why? To understand that, we need to focus on a concept that I call well-adjustment. To start, humans don’t actually value extremes in goodness or in law. Extreme good leads to martyrdom, and most people who are more than 3 standard deviations of good are taken to be neurotic narcissists, rather than being admired. Extremely lawful people tend to be rigid, conformist, and are therefore not much liked either. I contend that there’s a point of maximum well-adjustment that represents what our society says people are supposed to be. I’d put it somewhere in the ballpark of 1 standard deviation of good, and 1 of law, or the point (1, 1). If we use +x to represent law, -x to represent chaos, +y to represent good, and -y to represent evil, we get the well-adjustment formula:

Here, low f means that one is more well-adjusted. It’s better to be good than evil, and to be lawful than chaotic, but it’s best to be at (1, 1) exactly. But wait! Is there really a difference between (1, 1) and (0, 0)? Or between (5, 5) and (5, 6)? Not really, I don’t think. Well-adjustment tends to be a binary relationship, so I’m going to put f through a logistic transform where 0.0 means total ill-adjustment at 1.0 means well-adjustment. Middling values represent a “fringe” of people who will be well-adjusted in some circumstances but fail, socially speaking, in others. Based on my experience, I’d guess that this:

is a good estimate. If your squared distance from the point of maximal well-adjustment is less than 4, you’re good. If it’s more than 8, you’re probably ill-adjusted– too good, too evil, too lawful, or too chaotic. What gives us, in the 2-D moral/civil space, is a well-adjustment function looking exactly like this:

whose contours look like this:

Now, I don’t know whether the actual well-adjustment function that drives human social behavior has such a perfect circular shape. I doubt it does. It’s probably some kind of contiguous oval, though. The white part is a plateau of high (near 1.0) social adjustment. People in this space tend to get along with everyone. Or, if they have social problems, it has little to do with their moral or civil alignments, which are socially acceptable. The red outside is a deep sea (near 0.0) of social maladjustment. It turns out that if you’re 2 standard deviations of evil and of chaos, you have a hard time making friends.

In other words, we have a social adjustment function that’s almost binary, but there’s a really interesting circular fringe that produces well-adjustment values between 0.1 and 0.9. Why would that be important? Because that’s where the MacLeod Sociopaths comes from.

Well-adjusted people don’t rise in organizations. Why? Because organizations know exactly how to make it so that well-adjusted, normal people don’t mind being at the bottom, and will slightly prefer it if that’s where the organization thinks they belong. It’s like Brave New World, where the lower castes (e.g. Gammas) are convinced that they are happiest where they are. If you’re on that white plateau of well-adjustment, you’ll probably never be fired. You’ll always have friends wherever you go. You can get comfortable as a MacLeod Loser, or maybe Clueless. You don’t worry. You don’t feel a strong need to rise quickly in an orgnaization.

Of course, the extremely ill-adjusted people in the red don’t rise either. That should not surprise anyone. Unless they become very good at hiding their alignments, they are too dysfunctional to have a shot in social organizations like a modern corporation. To put it bluntly, no one likes them.

However, let’s say that a Technocrat has 1.25 standard deviations of law and chaos each, making her well-adjustment level 0.65. She’s clearly in that fringe category. What does this mean? It means that she’ll be socially acceptable in about 65% of all contexts. The MacLeod Loser career isn’t an option for her. She might get along with one set of managers and co-workers, but as they change, things may turn against her. Over time, something will break. This gives her a natural up-or-out impetus. If she doesn’t keep learning new things and advancing her career, she could be hosed. She’s liked by more people than dislike her, but she can’t rely on being well-liked as it were a given.

It’s people on the fringe who tend to rise to the top of, and run, organizations, because they can never get cozy on the bottom. We can graph “fringeness”, measured as the magnitude of the slope (derivative) of the well-adjustment function and you get contours like this:

It’s a ring-shaped fringe. Nothing too surprising. The perfection of the circular ring is, of course, an artifact of the model. I don’t know if it’s this neat in the real world, but the idea there is correct. Now, here’s where things get interesting. What does that picture tell us? Not that much aside from what we already know: the most ambitious (and, eventually, most successful) people in an organization will be those who are not so close to the “point of maximal well-adjustment” to get along in any context, but not so far from it as to be rejected out of hand.

But how does this give us the observed battle royale between chaotic good and lawful evil? Up there, it just looks like a circle. 

Okay, so we see the point (3, 3) in that circular band. How common is it for someone to be 3 standard deviations of lawful and 3 standard deviations of good? Not common at all. 3-sigma events are rare (about 1 in 740) so a person who was 3 deviations from the norm in both would be 1-in-548,000– a true rarity. Let’s multiply this “fringeness” function we’ve graphed by the (Gaussian) population density at each point.

That’s what the fringe, weighted by population density, looks like. There’s a lack of presence of people at positions like (3, 3) because there’s almost no one there. There’s a clear crescent “C” shape and it contains a disproportionate share of two kinds of people. It has a lot of lawful evil in the bottom right, and a lot of chaotic good in the top left, in addition to some neutral “swing players” who will tend to side (with unity in their group) with one or the other. How they swing tends to determine the moral character of an organization. If they side with the chaotic good, then they’ll create a company like Valve. If they side with lawful evil, you get the typical MacLeod process.

That’s the theoretical reason why organizations come down to an apocalyptic battle between chaotic good (Technocrats) and lawful evil (corrosive Sociopaths, in the MacLeod process). How does this usually play out? Well, we know what lawful evil does. It uses the credibility black market to gain power in the organization. How should chaotic good fight against this? It seems that convexity plays to our advantage, insofar as the MacLeod process can no longer be afforded. In the long term, the firm can only survive if people like us (chaotic good) win. How do we turn that into victory in the short term?

So what’s a Technocrat to do? And how can a company be built to prevent it from undergoing MacLeod corrosion? What’s missing in the self-executive and guild cultures that a 5th “new” type of culture might be able to fix? That’s where I intend to go next.

Take a break, breathe a little. I’ll be back in about a week to Solve It.

Gervais / MacLeod 17: building the future, and financing lifestyle businesses

I’ve opined quite a bit on the VC-funded ecosystem (“VC-istan”) and put forward the hypothesis that we’d be much better served by a fleet of 50,000 so-called “lifestyle businesses” than 500 red-ocean, get-big-or-die future corporate megaliths. It’s not that I dislike VCs. I have no issue with them, as people. However, I think that centralized power is generally undesirable. The information-theoretic incompetence of central authority is why command economies don’t work. The current system for financing high-risk technology businesses is out of whack. There are a small number of investors, and they all know each other, and the career matrix of their industry requires them to collude rather than compete. It’s not that they’re explicitly price fixing, but that their careers rise and fall on access to black-albatross deals (black swans are not big enough) that come once in a decade, so they optimize for social access rather than economic efficiency. They compare notes in a way that is almost certainly illegal, but it’s hard to hate them for doing so if one understands their career concerns.

VCs also exist in a framework where making quick returns is more important than building great companies, which favors aggressive-growth businesses bent on upsetting established players in winner-take-all markets (or, more often, threatening to upset those established behemoths and getting acquired in a panic) but overlooks concepts that might be “niche” today but that will build out the future. What we have is a system that overlooks a massive space, favors large companies with horrible management structures, and worst of all, keeps a large amount of capital out of the human creative process.

VC overlooks a massive space

Creativity doesn’t come from large organizations. It comes from people. Large companies can encourage creativity by providing resources and autonomy and, then, getting out of peoples’ way. Or, they can stifle it, via subordination and corrupt, creaky permission systems. Most go toward the latter. If your business truly requires creativity, your only option is to set up an R&D environment that trusts people with their own time. Provide direction, keep incentives aligned, and keep them on-task enough that their work benefits the company. Then get the hell out of their way. Goldman Sachs did this with their “core strategies” division, giving a set of software engineers and quantitative analysts (“quants”) a level of autonomy that was unheard-of by Wall Street standards, especially then. This generated a technical infrastructure far superior to what its competitors had, and they’re still catching up. It’s due to core strats that Goldman didn’t melt down during the Crisis of 2008 as other banks did; because of the software they built, Goldman could assess its financial risk on a firm-wide basis and hedge.

If you want creativity, put your most talented in an R&D center and let them get to work. The researchers are trusted, implicitly, with their own time, and the executive’s role is to be a filter, deciding when creative assets are “ready for prime time” and when they need more refinement. Typical, risk-reductive management will destroy their creativity and you’ll get nothing.

Self-organizing and generally small teams are, in general, where creativity will come from. It doesn’t require a corporate megalith. You’ll get your best performance from small groups of people who picked each other (rather than being glued together by a manager saying, “be a Team, now!”) and who are deeply invested in trying out a new idea. This can happen inside a large corporation, but it’s atypical. We’re going to need a lot of small organizations if we’re serious about building the future.

The future’s not going to be built by well-connected, materially ambitious, and usually already independently wealthy “credible founders” trying to build 750-person companies, get their pictures on the cover of Forbes, and sell to Yahoo for the GDP of a small island nation. Those people have made their beds and are half asleep. Those “founders” are well-connected early retirees playing startup. They aren’t interesting. Don’t waste a minute thinking about them. Rather, the future’s going to be built by the rebellious sorts of people that VCs wouldn’t even touch, because they carry mediocre paper (note to all: “we don’t invest in ideas, but in people” means “we invest in resumes“).

I don’t think that most venture capitalists can detect the people who are capable of building the future. I don’t even think I can do it well on a person-by-person basis, and I’m one of the smartest fuckers out there, so I know that they can’t. It’s just naturally very hard to predict, for highly convex creative endeavors, who and what will succeed and what will not. That’s why you need a fleet. A fleet is more than a portfolio. Portfolios are manageable; that’s even a title and job description: portfolio manager. With a fleet of 50,000 “lifestyle” businesses, there’s no central authority that will be able to manage it. The solution will be to fund creativity on a broad-based scale and passively enjoy the rewards. The moral problem, here, is that we need a structure that guarantees that investors participate in rewards. That’s actually a hard one to solve. I’ll get back to that. 

VC favors fast-growing companies with horrible management and culture

In truth, venture capitalists don’t care about corporate culture. It’s not that they’re bad people; of course, most of them aren’t. It’s just not their job to babysit. Ideally, they want to hand a wad of cash over to those they fund, and get a much larger wad of cash back. They’ll only intervene if the macroscopic performance of the company falters (and if the cause of macro-scale failure is microscopic cultural corruption, it’s far too late; just shoot the fucking thing in the head and liquidiate). Founders are implicitly trusted to deal with the internal, cultural issues, unless the company starts to fail in a macroscopically visible way.

Fast growth is what often ruins the culture. Consider Valve’s self-executive open allocation, for an example of what is good. This is a great way of doing things, but it actually makes it very hard to hire “credible” executives. If you make employee autonomy an inflexible pillar of your company, you can’t hire entitled, semi-retired executives who want the fall-back of authority as opposed to genuine leadership. Employee autonomy isn’t usually eaten by messianic founders. That can happen, but more often it’s sold off to parasitic executive implants. Often, the founders don’t even have a choice. One of the perks of being a venture capitalist is the ability to give executive sinecures and portfolio companies to your underachieving drinking buddies from business school.

A company that wants to have a culture worth caring about is going to have to put the brakes on the malignant sorts of growth, in order to prevent the culture from being sold off entirely in a managerial hiring frenzy. It will even have to give low-level employees some veto power over executive hires, which is not that radical because proper management works for the managed (as well as for investors; interests shouldn’t oppose). It will need to seriously consider an Employee Bill of Rights. It will be able to grow fast (possibly 20 to 30 percent per year, and at twice that rate in early stages) by normal-people standards, but not at the “rocket fueled” rate expected by typical VCs.

VC excludes a large pool of capital

Right now, a middle-class family has two main options regarding direct financial investment in capitalistic activity. One is to buy debt, and the other is to buy stocks, both cases, in large and established companies. Regulations exist to keep their “dumb money” out of the small, much riskier endeavors like new businesses such as VC-istan corporations and lifestyle businesses. Now, I fully agree that a retired widow shouldn’t be putting her $400,000 life savings in one lifestyle startup. It’s too risky. She should have the option of putting that money into lifestyle startups, plural, in some broad-based way that protects her from the swings of any one company, but allows her to participate financially in human creativity, which can be expected to deliver better average returns than established, rent-seeking corporations with no interest in inventing the future.

What is a “lifestyle business”?

I don’t think “lifestyle businesses” deserve their negative reputation. Who says that it can’t become a more ambitious project over time? Nintendo was founded in the 1880s– as a playing-card company. It wasn’t founded with the intention of creating the dominant gaming console 100 years later. To me, “lifestyle” simply means that the founder intends to be with the company for a long time, and would rather grow at a modest (10-30% per year) rate than keep doubling up to appease investors hell-bent on a quick exit. What’s wrong with that? To be blunt, I think it’s a luxury of the already-loaded to consider something growing at 2% per month “mediocre”.

When founders expect to be with a company for 20 years, they’re going to take the long-term cultural issues seriously. They won’t bring in the human garbage that rapid-growing startups often hire when their investors say, “It’s time to hire real executives”, because they don’t want to subject themselves and their employees to atrocious middle management. A founder who can’t say, “that’s our acquirer’s problem”, is going to think differently.

I see lifestyle businesses as an increasingly tenable alternative to the get-big-or-die gambits. Why increasingly tenable? The global economy now grows at 5% and that’s accelerating. (Developed-world economies are stagnating, however; nation-states are becoming obsolete and that, temporarily during this period of adjustment, hurts those of us under the auspices of highly successful nation-states.) Prevailing poverty is turning over to prevailing prosperity. This won’t happen overnight; it’ll be 100 years before the tyranny of geography is over, and there some utterly dire ecological problems we need to solve along the way. However, it doesn’t need to happen overnight. A business thrives if it turns less into more, and with “the pie” growing annually at 5%, that’s a fortunate and “un-level” playing field. The zero-sum, Malthusian mentality of a 10,000-year agrarian era with almost no growth is obsolete. Winner-take-all, “red ocean” markets still exist, but those tend toward natural monopoly, which leads to commoditization and regulatory interference. They’re not that interesting anymore. In the seven minutes that it takes the average adult to read one of my blog posts, the world will become over $1 billion wealthier. In a few minutes, progressive, positive-sum interactions between people just generated enough wealth to make 1,000 people millionaires. 

What this means is that dominate-or-die will no longer be the prevailing business reality. Yes, growth will still be required, but it will be increasingly possible to grow (explore, improve, profit) without domination.

However, economic growth is not “magic”. It happens, minute by minute, as people discover better ways of doing things. It’s the process of “mining chaos” that I’ve discussed earlier. It’s impossible to measure, but I would be surprised if I haven’t added $1 million to the economy over the past year, by helping the most talented people better understand the market and allocate their assets more efficiently. (My estimate of my impact is $2.4 million.) Growth happens because people (for a variety of reasons, some altruistic and some selfish) go out and do things. They take a “why not” approach, not a “why me” approach. The vast, vast majority of them were not drinking buddies with venture capitalists at Harvard Business School and, therefore, they cannot access traditional funding for these red-ocean gambits designed to be “X killers”, where X is some powerful corporate behemoth that the VC hopes will not just be typically inefficient and (as corporations generally are) reduced to 10% of its strength, but so inefficient that it can’t fight back with even 1 percent of its strength.

The financial problem

There’s a deep economic problem with the funding of lifestyle businesses, however, and here it is. Many economists will argue that “profits shouldn’t exist”. What does this mean? No economist would seriously argue that they do not exist, or that there aren’t good logical reasons for them to exist, rooted in imperfect information and the fuzzy question of where the line between labor and profit (for small businesses, managed by their owners) lives. Just as financial arbitrage is possible for people with superior technical infrastructure (competitive advantage) it is possible for a firm to make a profit based on its advantages. What these economists mean is that in an ordered, fair, and stable world, no one would be able to sell something for a price higher than the sum value of the capital, materials, and labor required to make it. Profit comes from the same place as economic growth, from which things that aren’t “supposed to exist” emerge: chaos.

One important distinction that average people often fail to make about “greedy corporations” is that profit is not the corporate economy’s true evil. If a large company is making “too much profit” off of its customers, there’s usually an appropriate response: buy stock. Rather, the robbery takes the form of executive markup. Being extremely technical on terminology, even CEOs are “labor”. Almost every large company has been hijacked by an entrenched, entitled caste of useless parasites whose compensation is justified by social access and failures of self-regulation (i.e. corruption in wage setting) instead of a fair market value for the work. In fact, if corporate executives had full authority to set compensation, there would never be such a thing as profit. They’d take it all for themselves, and owners would get shafted just like employees do. Corporate boards are supposed to step in and prevent this, but the “country club” mentality is so severe among that set that this self-policing is effectively a joke. They all go to the same parties and sit on each others’ boards. No, there isn’t one capital-C Conspiracy “to rule them all”, but there’s enough upper-class collusion to keep anyone else from getting a fair shake. Not wanting to lose executives’ jobs in a shareholder revolt, companies will allow just enough profit to appease equity owners, but deploy it in a different way. They have replaced dividends with “buybacks” that enable next year’s gigantic executive stock grants, nominally tied to “performance”.

These phenomena are important for analysis to show that one can’t reflexively or implicitly trust labor, insofar as even the looting executive sleazebags who periodically ruin the economy are, technically speaking, still “labor”. There’s a natural conflict of interest. Profit is return on capital, and labor would prefer increases in baseline compensation. Labor that controls its own compensation is especially dangerous.

This brings us directly to the moral problem of business finance, and separability of risk. A substantial number of people would be more productive and effective as key operators in small businesses (if they could raise money) than as subordinates in large companies. The problem is one of trust. If there’s a passive financial backer, and a working entrepreneur with no “money in the show”, then the latter holds all the operational power. Once the check clears, very little explicitly prevents the newly-crowned executive from defection. Banks require personal liability on loans, in order to keep people honest. Venture capitalists, having an in-crowd that compares notes to an extent that’s almost certainly illegal, can use its reputation economy as a cudgel. Entrepreneurs are terrified of the barbaric violation that will be inflicted on their reputations if they even hint at defection. (This keeps founders honest, but it also allows extortive terms like multiple liquidation preferences and participating preferred, which would never exist if founders could decline term sheets without reputation risk.)

The problem here is that there’s an underserved valley of business concepts. What’s the actual failure rate of businesses? No one really knows, because the terms are somewhat subjective, but the most credible estimates seem to refute the claim that “90% of new businesses die in 5 years”. It seems that about 40-50 percent of companies given full-time investment will survive 5 years, with much of that failure in the first year, and higher per-year survival rates as time goes on. Think of that as a 15% per year rate of job loss, which is worse job security than typical corporate employment (~4% per year) or incumbent politicians (~2% per year). It’s risky, but not as horrible as it’s made out to be, and would be tolerable if such job loss weren’t packaged with personal financial risk. Moreover, not all businesses that are closed were money-losers in the first place. A large number of them made money, but at low margins that were not enough to justify the managerial labor (from the owner, usually) required. They “failed” when for accounting for the owner’s opportunity cost, but not always objectively. What I mean to say is that the gargantuan failure rate of VC-istan is not the norm across all of small business.

Let’s consider the spectrum of business possibilities by survival rate. VCs want to fund the 0-20% category that, if they succeed, will deliver massive returns. They’re only concerned with expected value. For bank loans that require personal liability, it’s just not wise (and probably impossible to get funding) for anything riskier than 80%. So banks can cover that 80-100% range where, even if the business is closed, the loan will probably be mostly repaid. Technology lifestyle companies live in that 20-80% range that is, right now, completely unfundable. There is too much risk in this “no-man’s land” for bank loans, but almost no chance of them being billion-dollar concerns in less than 15 years, but there’s no good reason why they can’t be a profitable avenue for investment.

The issue is one of structure and incentives. Good-faith business failure is OK, so long as the successes cancel out the failures. No investor should risk her entire life savings on one lifestyle business, but investment into the class of them, in a broad-based way, should be possible. Making that possible is a valid (and, likely, profitable) business goal. That’s not what we’re worried about. A 20-80 percent chance of failure isn’t a catastrophic problem in a portfolio of businesses, seeing as the successes among these “lifestyle companies” will be substantial: not the 1000x returns that the VCs seek, but plenty of 5x and 20x hits. The issue that must be addressed is “moral hazard”. How do we guard against bad-faith business failure, or against managerial looting of what should be profit?

How does a passive investor of a lifestyle business demand profit, when their executives would always favor personal compensation? Bank loans compensate by refusing to take equity and requiring personal liability on debt– meaning that good-faith business failure is punished as well; there is no discrimination in that– while VCs take control of businesses, and have a perverse and probably illegal reputation economy (that also punishes good-faith business failure). Yet, while it’s conceivable how one might fund a fleet of 50,000 lifestyle businesses, it’s a harder problem of how to keep them all of their founders honest. It will require equity financing, because there’s too much risk in them for debt. Yet there will too many of them to manage with a feudalistic, VC-istan reputation system. So what’s the answer?

Solve It!

It’s easier to solve two problems at once than one in isolation.

Reiner Knizia, world-famous board game designer, once said that it’s a lot easier to fix two design problems at once than a single issue. Chances are, the design’s position in the state space is already a local maximum, so changing one thing is likely to degrade fitness, while changing multiple might improve it. Here, I’m going to argue that solving cultural problems and the “moral hazard” issue of the lifestyle business aren’t separate issues, but actually two facets of the same problem.

First, let’s get back to financial theory. People with capital to put at risk are owners, and employees implement their financial strategies in exchange for stability. There’s a risk transfer here, and it seems symbiotic, but with the potential for adversity. It’s the classic “principal-agent problem“. How do the owners know that their employees won’t rob them blind? In a small business managed by the owner, that’s relatively straightforward, but often, owners are unable to execute their interests by dictation and need to hire a special kind of labor, management. Managers are especially dangerous, because their job (traditionally) is to enforce the owners’ interests while remaining indifferent to those of employees (including their own). People who will take (and enjoy) such a job are generally not the nicest people.

Ownership, here, pertains more to financial risk than to paper. When a bank writes a loan, the bank is in the ownership position (even if it is a debt-holder rather than in equity) and the business owner is a manager– until the debt is repaid. Once management comes into the mix, there are three tiers. It gets messier, morally speaking. Managers end up with information advantages over employees and owners both, and will sometimes exploit the other two sets of people. As soon as managers are being hired, the relationship between owners and employees becomes one where defection is possible and distrust is common.

The MacLeod process starts when a subset of managers becomes a fourth tier of proto-executives (MacLeod Sociopaths). These are the ones who turn their information advantages into overwhelming personal yield. If they’re smart about it, they won’t rob the company explicitly, but use their information advantages and control to make themselves look like high performers, increasing their relative position. Those who fail to do so end up, socially and financially, in the lower Clueless tier. Thus, a MacLeod degeneracy can be viewed as a process in which a subset of managers use their extreme advantages of information to conspire against the workers (who suffer a degraded work culture) and the owners (who are loaded with externalized downside risk they are rarely even aware of) as well as against any managers (proto-Clueless) who cannot or do not participate.

Lifestyle businesses keep the three parties (financial owners, management, and employees) in alignment on culture. In fact, a primary motivation for a manager of a lifestyle business is building a desirable culture, since she intends to work at that company for a long time. That’s not an investor-facing issue, but it’s of interest to investors as well. For long-term organizational health, culture becomes important. I discussed, previously, why a good corporate culture is expensive in the short term. It’s cheap in the long run– for everyone involved.

Where there is the potential for disalignment is on wages, and that’s where “profits shouldn’t exist” comes in. Managers and employees both want to push compensation up (until there are no profits) so investors would lose if that were taken to its logical extreme. That’s the fundamental fear one would have when investing in a lifestyle business– what if these people take the money and throw a huge party, leaving their backers out? In order to keep the arrangement fair to equity-holding investors, they need to have some authority over compensation. However, for most industries, investors are not authorities on what fair compensation is. That is something I intend to address.

VC-istan’s solution is for managers (especially founders) and investors to collude. Investors are not shafted by their hired small-business managers (founders) because they are in on the whole mess together. Culture and career development are thrown by the wayside as they work, together, to drive for rapid high valuation (stability optional) and acquisition. Workers get the shaft: bullshit token ownership in a world where hours are long, business models are unproven, firing is fast and usually without severance, and management is almost always incomptent. VC-istan solves one problem, by defusing the potential for managerial abuse of investors (who take an active role in directing the company). However, workers (investors of time) get screwed.

Notice, above, what I said about employees, especially in new and unproven businesses. They’re investors of time. This isn’t just a metaphor, but an actuality. This is one of the reasons that I think VC-istan is fundamentally careerist and mediocre. Typical employees such as software engineers are not treated with the respect that would be accorded to investors, but seen as third-class citizens. A VC-istan engineer typically faces an employment contract where he vests no equity if he is terminated before the end of the first year. It’s not uncommon for engineers to be fired (“cliffed out”) at 364 days. If you “cliff out” an investor, you go to jail and, when you get out, you never raise a dime again. Yet cliffing-out of employees (for bullshit “performance” reasons that are thinly-veiled extortion– a threat to the employee’s reputation if he fights back) is a VC-istan institution.

If employees are investors (again, of time) then there is a common interest between the two parties, both of whom are often excluded by a conspiratorial set of morally bankrupt executives. That’s interesting! Perhaps the moral hazard of funding lifestyle businesses and the cultural desires of employees are facets of the same problem. I believe that they are. Both low-level employees and investors have an interest in guarding themselves against managerial malefaction.

The typical business is extremely opaque with information, with every piece of it guarded as if it were a competitive advantage. Thus, employees have no idea whether they’re being fairly compensated, and investors rarely know if the business is well-managed. Investors and employees almost never talk to each other; it would be treated as inappropriate, and insubordinate, for an employee to even dream of initiating such interaction. (The firm’s executives would fire that employee for jumping rank.) So if investors find out that a company’s badly run, it’s almost always too late for them to fix it. Talented employees have already quit, external relationships are beyond damaged, and the criminals have already cashed themselves out.

Investors fear that management and employees will collude on compensation, effectively overcharging the company’s ownership for their services. One solution is for investors (as seen in typical corporations) is to set tight limits on compensation and risk allocation. Then, managers and employees compete with each other and, more interesting, managers compete with other managers. You get a MacLeod hierarchy quickly out of that; the managers who can hide risk (“heads, I win; tails, you lose”) and make themselves look like indispensable high performers become executives (Sociopaths). The other solution is for investors and business managers (or founders) to create a tightly-controlled reputation economy that aligns their incentives, but abuses employees. That’s VC-istan, and it only works when you have a pool of Clueless young talent and the means of convincing them they’re on a path to extraordinary compensation. That’s not sustainable, because the lie will eventually see daylight, and talented people will stop taking terrible offers from bad startups. In any case, it doesn’t seem like there’s a good resolution in any of this muck to investor/employee (especially investor/manager) competition. 

So, look again at the common MacLeod pattern. A subset of the management tier finds ways to transfer and hide risk. As important work becomes increasingly convex, it will be correspondingly difficult for anyone to prevent this (e.g. by contractual provision). Fighting against this behavior through normal means won’t work. The source of the problem must be addressed. In this case, it’s information asymmetry. A small set of managers can conspire against employees and investors (and other less-aware, Clueless, managers) because they hold the critical information. When abuse of information can’t be prevented (as it can’t, in a convex world) the alternative is transparency: democratize it. Investors and employees win. Sociopathic executives lose. Hey, that sounds like a fair trade!

The solution is to be transparent about both culture and compensation. Employees should know whether they’re getting a fair deal, investors should know what they’re paying for work. Cultural expectations should be explicit and spelled out in an “Employee Bill of Rights” over which employees, managers, and investors all have a say. Financial and strategic matters can come down to the traditional vote-per-dollar shareholder system. Everything cultural (e.g. closed or open allocation) needs to be on a one-person, one-vote system.

Details of how to make that work could stand to be fleshed out, and those would merit an essay of their own, but here’s a set of thoughts I had. It’s fundamentally hard to define what the “fair” value of anything is, which is one of the reasons why transparency is so important, but external market salaries are pretty easy to discover. That gives a reasonable starting point.

If I were running a technology company, everyone would get the market rate, plus 20%, based on objective job description, for salary. I would be upfront with investors about this. Yes, I am “overpaying” engineers, so I can be selective. I want this to be a destination company right now, and not hire cheaply to get a job done and then have to fire people when I decide to upgrade my quality bar. We are paying now for quality. That salary number would be published internally to employees and investors. Oh, there’s one other rule. There’d be only three levels of software engineer: Apprentice, Engineer, and Mentor/Fellow (equal; one for teaching and one for research). The Mentor/Fellow level would be maximum salary in the company. No one would get more in base salary. Not even me, and certainly not some damn non-technical executive. That’s to keep such people from robbing investors (and employees).

This is not hippy-dippy egalitarianism. It’s not altruism either. I’d be doing all this for purely selfish reasons: building a great company and getting rich, all without robbing people because, well, I don’t like doing bad things.

This company would be intended for slow growth (10-30% per year) and hire only the best technological talent. Now, when you employ 20-50 people (mostly software engineers) and pay them market-plus-20%, something funny happens. Mature technical enterprises can easily break $1 million per employee. That is, you generate a lot of profit. So, there’s a question of how to share it. Obviously, investors must get some. Employees should get some, too.

I’d favor profit sharing over equity, because I don’t think it’s good for a company to have hundreds of “owners”, many of whom are no longer part of it, and I don’t think the bullshit “partnership” of a 0.03% slice in an 50-person company is going to fool anyone for much longer. Also, we’re talking about lifestyle businesses which, while they might be sold at some time, are not intended specifically for that purpose. “Liquidity” might never happen. Let’s stop betting our lives on such things. Most employees would not have equity. They wouldn’t need to worry about options exercise or 83(b) election or liquidation preferences. Instead, they’d get considerable profit shares. Here’s a model for how that would work. About 20 percent of profit gets invested back into the business, no matter what, unless there’s a conscious decision to reduce cash holdings (and pay dividends) at business maturity. Thirty-five percent goes to equity-holders, who decide whether to reinvest it or take a dividend, and 45 percent is paid in compensation to employees.

I don’t know that 45 percent is exact right amount to give to employees, but it’s that neighborhood (35 to 65%). The intuition behind it is as follows. High-end investment vehicles (e.g. hedge funds, venture capital) charge a baseline management fee of 2%, plus and 20% of profits (“2-and-20″). That’s what wealthy investors have to pay to participate in the above-normal returns of these funds, and they’re happy to do it.  The elite quant funds (who can reliably deliver double-digit returns) charge more: as high as 5-and-44. I’d be charging no ongoing “management fee” (once capital is raised) but investing a high share of the proceeds into employee morale. Effectively, the model here is “0-and-45″ for access to elite technological talent (as opposed to 2-and-20 for access to elite financial strategies). I don’t know what the exact right number is, but I think 45 is in the neighborhood.

Employee profit-sharing would be in proportion to “points”. Here are the rules of profit points:

  1. Profit points are compensation, not equity. You keep them as long as you work for the company. If you leave before an annual payout, you get a pro-rated share on payout date. (It’s not like banking where leaving before “bonus day” means you get nothing.)
  2. Each employee has at least 1.0, with the intention of keeping the average at 1.5-1.75 (and never more than 2.0) per head. Meaning: no one has less than half an average slice. 
  3. The total number of points is published, and if anyone holds more than 3.0 points, that person’s amount is public within the company. Except in extreme crisis (read: desperate CxO search) no one is hired with more than 3.0, or raised to that point in the first year. Meaning: anyone with a large slice better be deserving, because it’s public information, and that may only occur after one year of work, so employees aren’t hoodwinked by executive implants who start on top.
  4. Anyone with managerial authority (should such an institution become necessary) has his or her share published automatically. Meaning: management is there to benefit investors and employees, and they have the right to know exactly what they’re paying for the service.
  5. Profit points should not, in general, be allocated faster than profits can increase. Meaning: business risk might reduce the value of profit points, but dilution shouldn’t. Your share as a percentage of the whole may go down; the expected value should be going up.

The reason I call these “points” instead of “shares” is because they need not be disbursed in whole numbers– an employee might have 1.5 profit points– and also to distinguish them from investor shares, which deserve to be separate (investors shouldn’t be diluted by employee hiring).

One other thing I would consider allowing, for very senior hires who might not be able to accept market-plus-20%– for example, you can’t raise a family in New York on 1.2 times the typical software engineer salary– would be zero-interest advances against profit points. The existence and structure of the program would be public; that someone is using it would be private. The purpose of this is to accommodate “HR expedient” hiring of people at compensation levels greater than what is fair (based on others’ compensation). Yes, it’s allowed to happen as a temporary measure, but the “advance” model keeps it from becoming perpetual inequality.

What’s above, I think, is a principled rubric for allowing some opacity (in fact, a lot of it, because a healthy software company would generate $50-250k+ per profit point under this model) in the pursuit of “HR expediency”, but keeping abuses from getting out of hand. If someone’s getting 10 times more than a colleague, the whole company will know and have a right to an opinion (possibly, including the right to vote on such things, just as investors would have) about it.  

How transparency Solves It

Ultimately, the principal-agent problem that currently blocks the financing of lifestyle businesses is that investors (who do not know enough about technology to evaluate decisions being made) don’t know if they’re getting screwed on compensation, because they don’t know what market salaries are. No one wants to fund such a business, out of the fear the a CEO will give himself and his employees high salaries, blowing up what could be a successful business by taking such pay, thereby stealing from investors. VC-istan solves this by having investors explicitly manage compensation, often to an overbearing degree. (VC: “You can’t pay an engineer $160,000! That’s too much for just a programmer!”) That kind of micromanagement doesn’t scale to a fleet of 50,000 lifestyle businesses. Compensation needs to be simple, obviously fair, and accessible to investors. My model is one in which, unless there is profit returned to investors, founders earn no more than senior engineers.

What’s also being thwarted, under this model, is self-perpetuating salary inequality. Since outsized salary takes the form of advances against profit points (that would only be extended if it’s likely that they’d be repaid) people who require high compensation (and are afforded it, for HR-expedient reasons) would not have be able to leverage their salaries into persistent, across-the-board improvements (in “performance” bonuses, calculated as a percentage, and in raises). The existing system is good for people who can negotiate amid opacity, because they tack market conditions (getting pay improvements when the market’s strong, negotiating for more autonomy when it’s weak) and move themselves forward via calculated job-hopping, but it’s not the best for the world.

I haven’t said much about how this solves cultural problems. Obviously, there’s no guarantee that it would. Those things come down to more than money alone. However, I believe I’ve made a start on it. Incentives are not the only thing that matters, and financial incentives are not the only kind of them, but there’s a start, here. If everyone at a specific job description is earning the same salary, and bonuses are based on (fairly allocated) profit points, then the incentive structure seems better. The employee’s question then isn’t, “How do I get a $10,000 raise?” (usual answer: get an offer elsewhere) but “How do I improve the company so my profit points are worth $10,000 more?”

VC-istan startups rarely deliver raises and their equity compensation is, for the most part, pathetic. A software engineer joining a 50-person company is lucky to get 0.04%. What that means is that his financial incentive isn’t to improve the company’s value, because the difference between delivering average and “10X” work for a year, on a 0.04% slice, won’t even pay his Starbucks budget. Rather, his incentive is to become an executive and get a real slice. If you don’t see how this is a recipe for an engineer-hostile, fucked-up culture, you don’t understand technology.

My system wouldn’t entitle an engineer to that token ownership, but it would allow a much greater non-owning participation and that, for such a minority share, is preferable. With the numbers above, the least-compensated engineer of the 50-person startup would be entitled to 0.45% of the annual revenue, not 0.01% per year (minus a bunch of wonky VC robberies like “participating preferred”, over which the employee has no control) of some highly unknown (median: zero) value at “liquidity” in the future.

This “uncanny valley” of trivial ownership is, in my opinion, worse than the total (and mutually understood) non-ownership of an employee in a traditional corporation. The non-owning corporate employee has no expectation of getting a ten-fold increase in “equity” because he has none (unless it’s a publicly-traded company and he bought stock on the market). He’s just there to trade labor for money at an agreed-upon and well-known rate. If he’s playing for comfort and stability (MacLeod Loser) he’ll be happy with a 4% raise each year, to account for costs of living. If he’s going for rapid career growth and personal yield (MacLeod Sociopath) he’ll probably “job hop” if he’s not on track for 15%-per-year. But it’s obvious who the players are and what they want. There’s no “You’ll get rich on this!” mythology devised to turn the MacLeod Losers into Clueless. VC-istan, on the other hand, is all about cutthroat social climbing. Engineers want to become executives and get real equity slices (although they seem to harbor a delusion that they’ll still be able to code, and use their control of the division of labor to give themselves the best projects, in such positions… instead of having their lives eaten by useless meetings, which is what actually happens when they become executives). Executives without investor contact want to become executives with investor contact, so they can break off and be founders next year. Founders want to be “angel investors” (read: rich, but still considered important by smart people). It’s a world powered by the young and the Clueless– Clueless who are trying to be Sociopaths, and often very bad at it.

Transparency on all fairness issues (compensation, employee autonomy, cultural guarantees) is the antidote to Cluelessness. If there’s no Cluelessness, then there aren’t “Clueful” sociopaths robbing investors and exploiting employees. Then the goal isn’t to “become an executive” but actually to fulfill a role well and make the company great. Imagine that! It’s not a magical antidote that will cure all forms of cultural malfeasance. I don’t think it can be expected to solve all problems, but it starts the conversation.

Gervais / MacLeod 15: What is being rich?

After the 14 previous essays, we now have a deep understanding of why business organizations degenerate (i.e., why, for most people, work sucks). We’ve got a working taxonomy of the players by rank (MacLeod hierarchy) and moral behavior (alignment). We know about the social substructures that keep corporate hierarchies internally stable, even while enervating them and leaving them exposed to external risks, such as obsolescence. We have an understanding of why MacLeod institutions were successful in the past, but won’t be in the future. We know how (internal) corporate evil works, and why it exists. We have a sense of why previous (financial and social) risk transfers enabled the corporation to exist, and the chaotic, playful force that will undermine a centuries-old way of doing things. We have the language to discuss workplace cultures and organizational health. We’ve even taken a glance at the creative emptiness of chaos (the source of growth and risk) and, with an expanded alignment model, derived the importance of the The Fringe– the barrier between well-adjusted and ill-adjusted alignments that generates a highly ambitious “ring-shaped” space that sets up the eternal struggle between lawful evil (psychopathy) and chaotic good (technocracy). God sent me to kick some philosophical ass. I can’t judge my own work, but I’d like think ‘dem boots got broke in.

Yet before we can solve individual or organizational problems, we have to answer one more question: what the hell do all these players actually want? If you say, “Money”, I’ll put a dunce cap on your head. Money just enables the trade of stuff people want. It must be of low intrinsic utility, so people will happily let it go to get things they actually want, but legibly scarce enough to hold value. People generally get money from corporate institutions and use it to get services from other corporations, so there’s another interesting question: what the hell do corporations want?

First, I’m going to discuss individual material desires and aspirations. Then I’ll get into the concepts of wealth and work and how they’ve evolved from the primal to agricultural to industrial eras and, additionally, how they’ll change again in the (future) technological age. We’ll encounter some surprises there. Then I’ll get into what organizations want (and should want) for themselves.

Individual material aspirations

Why do people want to be rich? What is it about material wealth that drives people? There seems to be a five-tiered hierarchy of material aspiration:

  • Survival: Basic, inflexible needs like food, shelter, and health care. 
  • Leisure: Freedom-to. Meaningful activities and pursuits such as reading, sports, travel, and social engagement.
  • Comfort: Freedom-from. Purity of experiences (e.g. first-class travel). Liberation from time-wasting chores, unpleasant side effects of Leisure, and artifacts of low social or economic status.
  • Status: Social resourses to maintain an undeserved income and (for some) extremes of sexual access and libertinism.
  • Power: Capacity to raise or lower others’ Status levels, whether through political, business, cultural, or religious dominion.

I might be showing my cynical (in the classical sense) bias here, insofar as this depiction places a virtuous “getting off” point somewhere in the middle of the Comfort tier. The first two levels (Survival, Leisure) have an obvious natural necessity and inclination toward virtue, and the third (Comfort) has clear hedonic value but can tend toward excess. Status and Power, on the other hand, pertain to the raw, zero-sum bickering that often makes people miserable and morally bankrupt. There are moral notions of status and power– rooted in earned elevation and in technical excellence– but those tend to be focused toward progress and health (Technocratic ideals) rather than zero-sum socioeconomic squabbling.

A simplified model would claim that people “max out” one tier and go to the next. That’s about right– one tends to claim primary focus for a given person at a given time– but, of course, it’s not so cleanly delineated. No tier is ever perfectly maxed-out, as made evident by the fact that we die, precluding perfect Survival. There are also trade-offs. A person with moderate means could decide to travel further, to more exotic locations (more Leisure) or, instead, to travel nearer but with better accommodations (more Comfort). That inclination comes down to individual taste.

Let’s look at how these tiers worked at various points in history, and attempt to project them into the technological era.

Material aspiration in history and future

In the primal era, work and play were so intertwined that Survival and Leisure were intimately linked, because the activities people did to survive (hunting, trapping, collecting and gathering) fulfilled most peoples’ primal industrious needs. Comfort, however, was utterly unimaginable. There simply was no such thing. The gods might afflict you with illness, or you might be wiped out by a more fearsome tribe that sweeps into your range. Status pertained to sexual access and reproduction. What was Power? It started when primal people began to speculate on the whims of the gods, and developed protocols for resolving status disputes. Those who managed to win others’ trust in divination became priests and, probably, the first law-makers. One presumes that there was a selection process in humanity’s priesthoods, evolving from random pretense to principles that, in their contexts, worked more often than not. Over time, this favored free-standing logical principles that became the first laws.

As humanity moved toward the agricultural era, ownership (of land, people, and resources) was invented, and that became the new Status. People who controlled and enforced the laws pertaining to ownership had Power. Leisure separated from Survival, because most of the activities people did for their sustenance were no longer fulfilling. The Comfort tier– nonexistent in a primal world– emerged, but in a form that was deeply intertwined with the Leisure and Status tiers below and above. Ownership enabled permanent social classes, and they developed divergent ways of pursuing leisure. Non-owning poor hunted for edible animals on foot, and ate them. Rich owners chased small or inedible animals on horseback, and made them trophies. The stratification of Leisure by Status generated the first notions of Comfort: different modes of doing things, some with obvious hedonic superiority over others.

The five-tiered hierarchy is most prominent in the (current) industrial age, with business sectors and commodity markets pertaining to each category of need. Whole companies are dedicated to peoples’ Leisure, or Comfort, or Status needs. Employed people will generally have their Survival needs met and abundant access to Leisure. Comfort has advanced to levels that would be considered heavenly a hundred years ago, but it’s still somewhat scarce. Most people can’t afford first-class plane tickets at full fare, or to live in the nicest neighborhoods, or even to live less than 30 minutes from work. Status is necessitated by the fact that it’s still impossible for the vast majority of people to fulfill Comfort without a parasitic lifestyle and the social access to enable it. Power pertains to control over such social arrangements and that interpersonally exploitative resource: connections. (I don’t use this view of connections to denigrate genuine relationships; I’m talking about “I’ve got connections, bitch.”) Corruption no longer happens in “smoke-filled rooms”, and bribes to sleazy politicians (almost all of them) are no longer bags of cash, but invitations to important parties. “You have a kid in high school? Every Ivy League admissions dean comes to my winter party. Keep me a friend, Senator.” That’s how Power works.

I contend that we’re not yet in the technological age, but we’re coming to it, and the successful institutions of the 21st century will be those that embrace it. At some point– and this is not a pre-requisite for advancement to a technological state, but a likely byproduct of it– we may reach a point where average people can have Comfort and obviate the nasty, socially destructive competition for Status and Power. We might move toward a world where people focus on the virtuous notions of status (patterns of excellence) and power (expansive, enlightened altruism). That would obviate a host of nasty human problems that seem intractable at our current level of advancement. Or, we might discover that people are boundlessly greedy and competitive, and then see no real progress. I tend to believe it will be a mix of the two– people will still compete over stupid shit, but it will be less harmful to outsiders, as one sees with the ridiculous but externally inconsequential/harmless ego-fest surrounding Manhattan nightclub admissions– but there are too many variables involved to make firm predictions. That world is probably 30 to 150 years out, in any case.

What makes someone rich?

In the primal world, persistent wealth was probably rare, and not universal. A person was rich in his tribe if he had high status. A tribe was rich if it could use and defend a large range for hunting, gathering, and proto-agricultural return-and-forage practices. What wealth existed was probably connected to religion: objects (fetishes in the true sense of the word) believed to convey connection to, or favor from, the gods. Of course, such wealth wasn’t transferrable; it only had value to those who believed in the same gods.

Persistent wealth came into the fore in the agrarian era, as societies invented permanent ownership relations, backed first with claims of divine sanction, and later with social-contract arguments and political force (states). Still, culture and religion only went as far as others bought into them, so there was a need for societies to agree mutually on stores of value that made sense between them. Grain could rot, and land could only be “owned” as far as it was defended, so something else was required. Furthermore, the need to maintain power relationships (land ownership, slavery) necessitated force, and that required hiring soldiers. It was best to pay them with a currency of universally legible value, like gold. Whatever bought the sword became money. Being rich, in the agrarian era, was owning lots of stuff and having the means to defend it and to extract its value.

The industrial era moved away from physical wealth and toward debt currency. While industrial labor is (for most individual workers) concave, industrial processes are (at least as one scales from zero to completion) still convex, due to nonlinear synergies. This meant that an industrialist would have to take control of others’ time and resources (a natural source of debt) for some time, running a loss for a while, before there was any payoff. Finance formalized this, and also enabled risk transfer. People with financial capital could put it at risk (for expected profit) and, thus, enable entrepreneurs to pay workers immediately (removing risk, for them). This allowed macroscopically convex (thus, risky) endeavors to be taken on by large numbers of people, while the risk was passed to those who could afford it. In the industrial era, to be rich is to have access to financial capital.

In the previous eras, but most especially the industrial one, wealth was intimately connected to control of time. What we’re learning in a world of ubiquitous computing and 24/7 connectivity is that time doesn’t have anything close to a uniform value. For me, the 8:00 am hour is much more productive than the 8:00 pm hour; but for many people, it’s the opposite. The semi-bored passive time that advertisers cultivate is of minimal value, but an interesting commodity in its own right because there’s such a massive quantity of it.

More interesting than the static non-uniform value of time, however, is the concept of progressive timewhich is compounding interest of skill and knowledge derived from heterogeneous experience. In the late industrial era, time became money; work was all about the trade of one for another. However, with the micro-convexity (as opposed to the macro-convexity of all industrial efforts) of creative endeavors becoming the norm in all important work, we’re finding some extreme nonlinearities. There’s immense value in “10,000 hours” (I won’t debate exact numbers, but it’s the right order of magnitude) of deliberate, focused, and progressive practice. There’s very minimal value in 10,000 hours of non-progressive commodity labor. The programmer who spends 10 years doing difficult, creatively taxing, educational work can justify $500 per hour of economic value to her future time commitments. Yet a programmer (similar on paper) who did the more typical bland corporate drudge work for that same amount of time (i.e., he has the same year of experience, repeated 10 times) is probably worth less per-hour than he was when he started. So time can no longer be valued in isolation (whose time it is, what work will be completed) but it must be connected with both past (previous skill investment) and future (potential long-term yield).

To refine a numerical intuition for this, let’s say that you’re building technical infrastructure that will double the value of your business. If you hire the best specialist you can get, he’ll get it done in 4 months: a doubling in that time is 19% per-month growth. If you hire a 1.8-level (above-average, but not exceptional) programmer like me, outside that specialty, I’ll take 12 months (6% per-month) as I get up to speed and learn from mistakes; unlike the veteran specialist, I’d need to ramp up on the clock. If you hire a 1.1-level (mediocre) “commodity” developer used to curiosity-starving corporate programming, it’ll take 5 years including “rejection cost”– the task may not take that long, but you’ll have failures and restarts. That’s 1.1% per-month growth. If we could project these rates over $1,000 for two years with a compounding-interest model, we’d see that the world-class expert turns it into $64,000; the above-average programmer like me turns into $4,000, and the mediocre delivers only $1,320. That is progressive time in action.

Progressive time is a source of discomfort to corporations as well as the workers who have to deal with them. On one hand, micro-convexity generates the rampant job volatility for which trigger-happy employers and job-hopping employees are known. On the other, such a world creates short-sighted institutions with no desire to invest in talent (taking the risk that it leaves them). Yet competence with progressive time’s nonlinearity has become crucial, because machines are taking over the non-progressive work, and the only thing for humans to do is the progressive, micro-convex stuff.

With industrial macro-convexity, banks could intermediate between (a) those with capital to put at risk and (b) people judged highly competent to use it. Not many “highly competent” people were needed, so one could select them based on career trajectory and personal buy-in: only give money to the well-established guy putting up a substantial amount of his own capital. This excluded some talented people (like me) who could never meet such a bar, but it wasn’t a major loss back then; we didn’t need many convex thinkers. Sparse finance was OK. Society did not need a large number of people with the executive freedom conferred by access to capital. Micro-convexity is different. It creates an intractably self-executive world. Raw talent matters in a way that it never did before. The good ideas need to come from everywhere: not just seasoned, unobjectionable gray-haired men.

In short, being rich in an agrarian world meant that you had the gold to hire soldiers or to pay the government (taxation) to uphold your property rights. Being rich in the industrial era meant having the financial resources to direct others’ time– their commoditized time, presumed not to have progressive nonlinearities to it. In the technological era, progressive time (more concretely realized in access to talent, knowledge, and skill) is king. Most startups are failing in the 21st century not because there is a lack of capital, but because they don’t know how to attract, assess, and develop talent.

What do organizations want?

I think I’ve modeled the material aspirations of people well. What do companies want? The answer is, of course, that they are not living beings. “They” don’t want anything; people within them do. They do seem, however, to develop an emergent character that is some conglomerate of the people within them. When the organization’s small and selective in its people, that tends to amplify group strengths more than it converges to the gray-goo, muddled weakness for which corporate groupthink is known. However, as it grows, the MacLeod process seems to set in, and that group character (derived from its executive nerve center, which is increasingly pathological) evolves into something bland and somewhat psychopathic.

Two people can have a brilliant, interactive conversation, but a hundred people can’t. Either a few will speak, with ninety-some listeners, or they’ll break off into separate cliques. That’s fine. At a dinner party, the subgroup conversations coexist concurrently and don’t conflict. To a very mild extent, they’ll develop their own social languages, but that’s fine. However, what is a corporation? To the eyes of those who interact with it on a regular daily basis, it’s a Giant Fucking Pile of Resources– money, people engaged in a pattern of time-limited subordination, and relationships based on institutional reputation. Naturally, there will be competition as peoples’ visions of what to do with those resources conflict. People might have the best intentions and charitable vision, but to their opponents, they’re “bike shedding”. They clobber each other, and anything with an individual color is washed out, and there’s very little agreement on anything with a creative or socially positive character, which some in the group will view as wasteful. What’s left is the common social language. Profit. The Pe-en-ell. Dominance (of a market sector, or of a relationship). Growth for growth’s sake.

The Corporation is a god for the godless. Ancient people first created fictional psychopaths to justify actions that, while judged to be abstractly beneficial for the group, were dangerous or harmful to some. There was, at least, still some character to that supernatural being. It had a gender. He or she had a face, a body, some scriptures, and probably a cult. Over time, most of us realized that these gods don’t exist. (I’m not saying that a God doesn’t exist; only that concrete, interventionist ones don’t.) Late in the agrarian era, we replaced concrete ethnic deities with abstract ethnic ones called nation-states. Those lost power over time in favor of more universal fictitious psychopaths called corporations, who dropped all pretenses of “godness” and focused full-throttle on fitness as measured by the crass common language of a typical executive suite: revenue growth. So that’s where we are, but it’s not where we have to be.

The large, hierarchical business corporations are going to struggle in the technological era. To be competitive, a company will need to harness self-executivity. But corporations don’t keep small executive suites only because they’re elitist. That’s a part of it (okay, a big part) but it’s also logistically difficult for a company to have a large number of people in its nerve center. Startups struggle with this, and often cease maintaining a self-executive culture, at about 20 people. I think that gigantic, unified conglomerates of people might be on their way out. In 2000, the typical high-impact company had a core of 30 executives and 2,000 human workers. In 2050, such a company might have 30 self-executive humans and 200,000 CPUs. The “big” companies of 2050 might have a couple thousand employees. 

With the increasing importance of progressive time and self-executive behavior, the typical hierarchical goons– and the internal police forces that mandate subordination through laughably ineffective HR policies– are goners. There’s about as much of a place for them in the future as there is for headsmen and alchemists.

What large institutions will surive? Universities (but of a less exclusive sort, enabled by technology) have a good shot, being inherently pushed toward progressive guild culture. Guild culture can’t grow quickly, but it can tolerate scale. A few of these business corporations will reinvent themselves into forms that can coexist with self-executive free agents. For an analogy, medieval Rome was a prosperous city of about 30,000 people– still impressive by the standard of its time, but no longer a belligerent continental empire. Google, for its part, will probably live on into the 22nd century as a prestigious think tank, but the zombie dinosaurs who invented “calibration scores” (a mean-spirited and psychotic performance review process) will be the stuff of history books.

With the large, uninspiring conglomerates headed toward extinction, doesn’t this render growth– the boundless desire to subsume more people and become of those giant corporations– self-defeating? Perhaps. That deserves discussion.

Obscene growth is a drive emerging out of fear. In a zero-sum world, entities are either pressing their borders forward, or something is pressing in on them. Expansion in all dimensions (financial footprint, geographical reach, headcount) is required. The good news is that we don’t live in a zero-sum, Malthusian world anymore. That was the way things worked up until 1800: economic growth was slow (below 1% per year) and lower than the rate of human population increase, but the former is accelerating (almost 5%, globally) while the latter seems to be leveling off. Human potential productivity has grown, thanks to technology. One no longer needs to control a large number of people to do something excellent and sustainable. It can involve a small number of people, and they need not be controlled.

In the zero-sum world, dominance was requisite because it was the only source of stability in a winner-take-all world. Rapid growth in footprint was essential, in order to claim critical corners before a competitor does. This sort of speedy expansion is deeply risky, the result of it being that organizations needed to compensating by annihilating many beneficial (e.g. creative) risks. It’s a good thing that we don’t have to live in such a world anymore. With economic growth strong and accelerating (taking a global perspective) due to technology, we’ll be able to focus on health rather than growth for it’s own sake. And we should.

A brilliant dark age

As I’ve developed the almost metaphysical concept of chaos (creative emptiness) I like it more and more. I could be wrong, but it seems that we are moving toward a “dark age”, with the crumbling of an institutionalized, regimented way of life. Most of our going assumptions about what Work is and how it must be done won’t survive, but creativity will accelerate. It’s a brilliant darkness ahead.

Gervais / MacLeod 13: Separability, work and play

We are close. Close, that is, to having done sufficient exploration into the role and operations of economic organizations (such as the corporations or nation-states we love and hate) to start solving some of these organizational problems– to attempt to invent the future.

My role now, in analyzing the organization, is to watch for The Shark. Creative divergence is fun, but at some point, convergence becomes necessary. One needs to make a coherent whole– to solve the problems one has set forth. This can be brutally difficult to do. It’s why the sixth and seventh books of the Harry Potter series are so long and complex, and why some doubt that any person (even a clearly strong storyteller like George R. R. Martin) can handle the monstrous convergence task existing after the first 5 books of A Song of Ice and Fire. To his credit, I think Martin has the right idea– to put the continuing world exploration into a companion book, and finish the damn story in the next two books. Divergence is the fun, playful, erotic part: branching. Convergence is the difficult, thanatoptic pruning task. Writers refer to it as “killing your darlings”. Steve Jobs said it succinctly, for consumer technology: real artists ship. If you diverge for too long without tying everything back into a coherent whole, you Jump The Shark. That’s not something that happens when people are “out of ideas”, as if there were a finite pool of them. When a narrative reaches The Shark, changing writers and hiring an untapped, relief writer won’t help. Shark-jumping occurs when further new stuff (e.g. new characters, motifs, and ideas) can be added, but there’s no good place to put them without loss of clarity. After the shark is jumped, more neat stuff can be added, but the whole (degrading in quality) no longer provides its own reason to care about that stuff.

This isn’t just “meta” wankery. I wouldn’t pollute this series (already tens of thousands of words) with my own problems as a writer. Creative divergence and convergence are at the core of the topics I intend to discuss today. This is the fun topic. It’s why work can, if conditions are right, not suck. I discussed, in Part 9, the role of the organization of a computation problem for an optimization problem, while the “fitness landscape” grows increasingly complicated. In Part 12, I tackled chaos and risk. Financial risk has been commoditized and can generally be measured, sold and bought. Performance risks, at concave labor, tend to be normalized by the Central Limit Theorem when there is a large team of people. Companies want to be able to do this with all kinds of risk, but creative and chaotic risks are harder to manage. The concept involved is separability.

If I had an asset (a security) that, in one hour, would either be worth $10 million or zero based on a coin flip, I’d be inclined to sell it for a middling value. As I alluded in Part 12, this is identical to having $5 million (expected value, my financial wealth) and a zero-mean random variable: 50% chance of +5 million, 50% chance of -5 million. I’d do best to keep the former but have the latter risk off my books.

I might find a wealthy, risk-neutral person and sell him the security. Since it’s not worth it for him to buy it at its expected value, I’d probably sell around $4.99 million, the other $10,000 being a risk premium I pay to him to have that coin-flip out of my portfolio. That’s a case of separable risk. In that scenario, I have financial wealth of $5 million and pay $10,000 to cancel out a risk source threatening a sudden (and possibly catastrophic) swing in income. Here, my making the trade has no effect on the outcome of the coin flip. Risks can be moved around (and, from a cynical perspective, hidden) when they are separable.

Let’s change the game. I’m building a company, or writing a novel, or engaging in some creative effort that involves a lot of work. Let’s keep the same payoff structure, 50/50 chance, $10 million but include individual performance. If I’m diligent, it might be higher than 50%. If I’m lackadaisical, it will be less. If I’m noncompliant (don’t do it at all) then it’s zero. It would no longer be wise for someone to buy at the “expected value” of $5 million.  If I get all the risk off my books, I have no incentive to perform. I might be able to sell that “chance at $10 million” for $100,000 if I’m lucky, in which case, I’m an employee.

There’s a partial solution, which would be to sell some of my risk. I might reach an agreement with a counterparty where I take a $2 million advance and offer him 50% of my upside. He loses $2 million (paid to me, either way) if I fail, and nets $3 million if I succeed. From my perspective, I’m paying a risk premium of $500,000– hefty, but the fact that I’m selling my own performance risk (read: hedging against myself) doesn’t entitle me to the best terms. From his perspective, he’s making a winning deal so long as he believes that, even with my reduced incentive, there’s better than a 40% chance that I succeed. This seems like a win-win.

Here’s the problem: let’s say I make two deals of that sort, getting $4 million with no risk, then I don’t perform. That’s fraudulent and undesirable. I could potentially go further and make twenty such deals. I collect $40 million but am negatively exposed to my own performance (with $10 million coming in, and $100 million owed to counterparties). Not only would that leave me without incentive to perform, but I’d be unable to afford success. So I don’t perform and rob my counterparties blind (and, one hopes, end up in jail). Sold in these large, incentive-affecting blocks, my performance risk isn’t commoditizable.

Clearly, financial markets have regulations in place to prevent those types of abuses: for an obvious starter, executives can’t short-sell their own companies. With commoditized risk, the corrupt cases are few enough that laws can be written to preclude abuses. “Insider trading” can be defined and banned because the set of people who have privileged information is sparse and that set of people isn’t hard to define. Creative and chaotic risks don’t work that way; information asymmetries and incentive effects are much more brutal and fairness is impossible to define. A sane, just regime of risk commoditization is hard to put in place for chaotic risk. It’s an unsolved problem.

Why is risk commoditization so important? It keeps society and the economy fresh. Left to their own devices, economies will converge to a “power law” arrangement where a few have the bulk of the wealth and most have none. It’s not about talent, nor is it about intentional malice or greed. It’s just the result of a mixture of random drift and the feedback cycle of wealth that exists when its many forms (social status, financial capital, access to jobs) are transferrable. It becomes pathological because elites tend toward entrenchment. Then, the executive nerve center (of an organization, or a society) is characterized by complacent mediocrity. Talent desires to break through, but is increasingly far from the resources (capital) needed to put it to use. Risk commoditization is the only mechanism that will connect talent and resources, which are often far away from each other due to the tendency of both to have lopsided (non-democratic) distributions. With commoditized risk, talent (traits that confer favorable odds regarding chaotic and performance risks) and capital (put at risk for mutual benefit) can find each other.

This has always been a hard thing to get right. How is good-faith business failure separated from negligence, incompetence, or outright fraud? It’s not as easy problem to solve at scale. Additionally, talent often has no collateral. Bank loans require personal liability and some capital investment, as such deals probably require, but that limits access in a major way. One needs money to play, and can’t go into high-risk sectors. Venture capital doesn’t require personal financial liability, but views its (otherwise benighted, and somewhat illegal because of the collusion) small-town reputation economy as the machinery that keeps entrepreneurs honest. All of these mechanisms have scaling limitations. They’re only available to a small set of talented people who are in access to some resources; the financial transfer just gets them more. They can connect resources with talent but in a limited, much-to-few, way. A small number gold-stamped “worthy individuals” get the credibility and right to some risk. The rest of the talent is seen as unneeded and, therefore, not developed. Such people are consigned to implement the ideas of others with more social access and credibility. This could be tolerated in a time when most of the work that society needed to be done, and done by humans because there was no alternative, was rote, mechanical, and uninspiring. That was the case for thousands of years, and isn’t anymore. Let’s focus on the history of work– and, later, its purported opposite, play.

Some people fetishize the hunter-gatherer existence, whether they’re talking about prehistoric humans, nomads who coexisted with (or parasitized) agrarian societies, or even contemporary cultures of that kind. One good thing about such lifestyles is that the toxic separation of work and play doesn’t seem exist. People do, and the things they do to subsist don’t seem painful. They enjoy hunting, gathering fruit, teaching others how to do these things, and learning about the natural world. People in such societies seem to spend about 50 hours per week on productive or resource-gathering activity, but without the clock-punching, mind-numbing monoculture of activity, or the required unhealthy arrangements (10-hour block, ass-in-chair, constant visibility). I don’t mean to imply that the more primal lifestyle is superior. It ended for many reasons. It terms of the ability to support a large population, it’s not nearly as fit as agriculture. There’s no way the Earth could support even a tenth of its current population as hunter-gatherers. A stable hunter-gatherer world would entail control of population growth, which requires the dominance of some humans over others. Since it’s mostly subordination (and not productive activity, which humans seem to enjoy) that makes Work such a life-ruining, millennia-long, species-wide clusterfuck, I don’t see primality as any solution. The evidence is strong that Work sucks not because agriculture or technology are unnatural, but because of who we are. The dreamed-of primal utopia is quite flimsy against the same greed that ruins work.

If primal humanity can be described in moral terms, it’s sociopathic– certainly in the MacLeod sense, and often in the truer sense. Lives were nasty, brutish, and short. Positional violence among men, in order to increase social status, was common, with a per-year death rate of men in violence being comparable to those experienced by modern gang members, prisoners, and soldiers. Female sexuality was under male control, with the strongest men having exclusive sexual rights to tens of women– their consent being irrelevant– and the shut-out men angry and tempted toward positional murder. This was the state of affairs in which psychopathy conferred an individual advantage. Most modern people wouldn’t consider it desirable. Yet, there was a way in which the primal and nomadic people were, for lack of a better phrase, more alive than the sedentary, often servile, and often less healthy agricultural people. I’m going to crib the some observations from Paul Graham, in “You Weren’t Meant To Have a Boss“:

I was in Africa last year and saw a lot of animals in the wild that I’d only seen in zoos before. It was remarkable how different they seemed. Particularly lions. Lions in the wild seem about ten times more alive. They’re like different animals. I suspect that working for oneself feels better to humans in much the same way that living in the wild must feel better to a wide-ranging predator like a lion. Life in a zoo is easier, but it isn’t the life they were designed for.

[...]

Having seen that happen so many times is one of the things that convinces me that working for oneself, or at least for a small group, is the natural way for programmers to live. Founders arriving at Y Combinator often have the downtrodden air of refugees. Three months later they’re transformed: they have so much more confidence that they seem as if they’ve grown several inches taller. Strange as this sounds, they seem both more worried and happier at the same time. Which is exactly how I’d describe the way lions seem in the wild.

“More worried and happier” is a great observation. The YC founders left their corporate factory farms for the MacLeod-Sociopathic world of business formation, and found that it’s more fun out there. It’s also much harder, much higher in risk, and much more chaotic than the monoculture of bare-minimum subordinate busywork. Is it better than corporate junk work? That depends.

First, longevity is a problem. Almost no one can commit a 480-month block of time (with no departure longer than 2-3 weeks) to that kind of intense work, or even one-fifth of that amount without a break. Second, it would be unwise for most of us 99-percenter poors to bet our incomes on that kind of work, when we need fairly regular paychecks. Even people who have enough savings to last a few months need to worry about their resumes. Paul Graham’s thesis is that neither of these concerns is in force anymore. With the returns available from technology startups (rapid generators of value) being what they are, longevity isn’t an issue (cash-out, travel the world, come back fresh) and neither is the day-job economically competitive. That’s the theory.

There’s much truth in Paul Graham’s ideological commitment to the technology startup as the organization of the future. The uncertainty pertains to the timeframe and also the logistics– it would be good for society for the world’s smartest 10 million (or more) people to have implicit autonomy over their own time, but who will pay for that? It will pay for itself over time, but who takes the initial risk? An investment model (with returns enriching the backers) is obviously requisite, but how is that going to be set up at scale? VC-istan takes a much-to-few model: a lot of resources go to a small number of in-crowd-approved, people deemed actually to have the right to be founders. The advantage it gets out of a much-to-few topology is that it generates a reputation economy discouraging defection. Founders are kept in check by the investors’ ability to lock them out of ever again receiving investment (which is also used for extortion).

VC-istan, in 2013, has met congestion, as seen in the sobering market performance of the genuine concerns (e.g. Facebook) and the proliferation of batty, nonsensical operations (e.g. “Groupon for pets”). VC-istan is now a big company, bereft of real vision, as high-profile investors have congealed into one executive suite. It will be obsoleted by a fleet of smaller, long-term-oriented lifestyle businesses not focused on get-huge-or-die gambits in deep-red oceans. How this will be funded– i.e. what process will discover and enable the relevant talent, and connect it with appropriate risk and capital allocations– is a completely open question. Perhaps that is the problem of the early 21st century. It’s clear that work and money require redefinition, as machines take over the grunt work to which semi-coercive labor was originally directed.

Returning to the primal world in which the evil of institutionalized, subordinate Work had not been invented, we see that it was still sociopathic. Positional violence and warfare among men were common, for one thing. The primal state had its appeals– living under the sun, not caring whether it’s a Tuesday or a Saturday– but people had strong reasons to move away from it as they discovered agriculture (a process that, in truth, occurred gradually over thousands of years) and, later on, writing, law, and the division of labor. There was one inherent problem with this new world. Something horrible became possible: slavery.

When the idea of slavery emerged, it was probably seen as merciful and humane. A fully primal tribe, if victorious in war, would be inclined to kill off the defeated group– at least the men, and probably the women, who were also quite capable of being deadly– to avoid retribution. Primal societies couldn’t use captives as slaves, because they engaged in work activities (such as hunting) that were dangerous, as a defector could murder his masters out in the wild. Agricultural societies, however, could delegate work that was undesirable and free of risk to the superior to a class of permanent subordinates. Primal and agricultural societies both began partaking in one of the most profitable, yet morally rancid, businesses ever devised: the capture and sale of humans.

This created a stratification of work. Most slave-owning societies had multiple tiers of slave. Above them were a class of servants given the work that could only be trusted to free people, followed by financially independent yeomen, and finally the slave-owning leisure class. With productive activities being intertwined with social class– some being desirable, others being dishonorable– and therefore often divorced from intrinsic motivation, it was necessary to separate work from leisure.

As the agricultural era evolved into the industrial one, slavery fell in favor of semi-coercive wage labor. Conditions like morale mattered enough in the industrial context that such economies could not make use of enslaved people. Companies needed to provide financial risk reduction and uniformity in working conditions, setting up the MacLeod Loser trade (facilitated by the Clueless) with people who had a very limited ability to refuse. The industrial era’s sunset will see the semi-coercive model go into obsolescence, pulling society toward fully non-coercive self-executive labor. That, however, is still in the future for most.

Even for high-status people, work became a psychological monoculture (making it unhealthy and, worse yet, boring) in the agrarian and industrial eras. Slave sellers had to run auctions, keep books, and haggle. Monarchs had to hear petitions and pay attention to castle intrigue. Low-status people were subsumed in painful and rote physical labor, while high-status people found their lives devoured by a 24/7 job of social maintenance and posturing. At all levels of society, there emerged a common and unifying thought: I kinda hate this shit. So what did people do when they got away from it? Something that is often called play.

I can’t do justice to play in a few thousand words. As a game designer in addition to the other stuff I do, I know better. It’s emergent activity that is not generally oriented toward production, although there are often echoes of productive activity within it. For most of our history, the ultimate form of upper-class play was hunting– work, in a primal context; play, in one where the activity was irrelevant to the lord’s soul-destroying job of maintaining social position. Play is work-like, but helps people escape into something real that provides a genuine sense of accomplishment.

Indeed, for a lot of people, their play is more like work– open-source software, altruistic travel, amateur art– than the subordinate junk activity that they’re paid to do. Play seems frivolous and indulgent, but it actually leads somewhere. It goes into (as I defined the concept in the last essay) chaos. I mentioned in the previous essay that chaos can be viewed as a creative emptiness. In the vacuum, something new emerges. Play is the chaos that exists when extrinsic direction is removed form activity, often enabling creation that would never occur in a subordinate or mercenary context. Sometimes, that creation is much greater value than anything produced in typical “work”.

Heading into chaos is not profitable, most of the time, but when something novel and useful is discovered, the rewards are immense because so few people can navigate any specific neighborhood of chaos. In this metaphor of chaos as “like” a physical space, we can get a physical sense of the divergent and convergent aspects of the creative process. Divergent creativity (branching) is heading deep into chaos. The issue is that most paths “into chaos” don’t lead anywhere. One needs, at some point, to pop back out and explore a new path. Convergent creativity (pruning) is an anchoring process that extends order and refines the understanding of what kinds of chaos are potentially desirable. Convergence kills off the explored but useless branches, and it reminds us why “chaos” is viewed as a desolate void by most. With divergence only, one will explore limitlessly without return. But if convergence is over-emphasized, one will not go far enough into chaos to find anything that is of value.

Large organizations eventually get to a point where they view their role as keeping chaos out. Law and order are the business of business. Salaries must be paid, deliverables must be met, and work must be defined to leave as little room for variation as is possible. This might induce a psychological monoculture that is unhealthy, bizarre, and probably causative of early cognitive decline, but that’s what the money’s for. This variance reduction serves these firms well in a concave world. Reining in slackers and incompetents compensates for the management’s (counterproductive) interference with the stars, who might only be 1.25 times more productive than the average. To be competitive and functional, organizations in concave labor must drive out variance as much as they can. That means they push away chaos, and drive out play.

Divergent creativity might be called free play. That’s Calvinball. The rules don’t exist yet. Things should be explored. At some point, however, limitless divergence fails to satisfy certain needs. Players want feedback on performance and, often, direction and rules. This necessitates structure that kills off some of the less beneficial or important fruits of chaos. Convergent creativity is discipline. It directs play and makes it more beneficial and focused. The “darling killing” convergence of the novelist produces a coherent story instead of an orderless array of ideas, characters, and settings. Convergence is less “fun” than the divergent part of creativity– it’s demanding and feels more like work– but it’s equally important.

Organizations typically allocated the iota of divergently creative work that they needed done to the caste of people called executives. A very limited role in the convergence process (related to trimming away pesky human chaos, but involving no real control or creative input) went to managers. Workers got no room for risk, no play, no creative control. That model worked for more than 200 years, and it took something radical (widespread, commoditized, and extremely cheap computing) to kill it.

In the concave world, risks are separable and can be commoditized. The top executives can bicker over who gets how much risk to play with, and manage accordingly. The convex world’s risks are non-separable. Move the rewards to one party, the idea generation to another, implementation to a third, and responsibility to a fourth, and you’ll get deceit and dysfunction. If anything worthwhile is being done, there’s just too much chaotic risk that can’t be moved around. People need the right to risk, and they need to be trusted with their own time, or what they produce will be of so low value as to render the enterprise unable to compete. Convexity mandates that people become more self-executive, and that their companies let them do so. The semi-coercive wage labor of the industrial world is dying out. What’s replacing it is fully non-coercive work: disciplined play.

If disciplined play and self-executive, well-treated labor shall carry us forward, then what is the role of the organization? Given how exceedingly difficult it seems to be for a corporate organization to avoid falling into dysfunction, are they desirable in the first place? Why not have some utopian “market state” of self-executive free agents, with no need for these stodgy and often corrupt corporate employers? The answer is that it won’t work. So long as people need an income to survive– and a high one, thanks to corrupt influences on the housing market, a transportation regime that stopped improving in the 1960s, the 9/11 every 24 days that we call our healthcare system, and the expensiveness and exclusivity of the educational institutions that can still place children decently in this imploded economy– they live in a tough-culture reality. The 99%, out of panic, make disadvantageous Loser/Clueless trades that hurt not only them but, in a convex world, society by depriving the world of talent’s proper applications.

The obvious solution to that is a guaranteed basic income. One major advantage of the technological era is that autonomy with one’s own time is often enough “capital” to build something great, computing costs being minimal. But we’re about as likely to see a basic income in the U.S. as we are to change the weather with complaint. Europe’s recent economic crises also show us that, while such states have desirable features, the bigger problem remains unsolved. Europeans have a far better healthcare system and humane vacation allotments (20 days, generous by U.S. standards, is an EU minimum) but their work life isn’t exactly a self-executive paradise. The ideal of a welfare state, to me, is not that it enables people not to work, but it that liberates them to work.

Europe’s systems, with harsher personal bankruptcy laws and more resistance to business formation, haven’t achieved self-executivity much better than we have. With sweeping social reforms (such as basic income) off the table– not impossible, and certainly not unreasonable ideas, but far out of my power– we need to focus on what technocratic individuals can actually do. We can harness individual, mostly localistic, energies. We have one source in those who are starting companies and genuinely want to build great organizations: companies actually worth caring about. That may be a “selfish” motive, and it’s certainly a pragmatically localistic one, but it’s what will save us: people who (for a mix of selfish and altruistic reasons) want to build excellent businesses.

Most of VC-istan, in my mind, doesn’t qualify. These build-to-flip gambits are mostly marketing experiments designed to exploit existing technological trends. Since most of them aren’t building real technology (which requires investment) and measure their own health by “virality”, the get-big-or-die mentality is appropriate for them. We can preach the virtues of open allocation, but cultural health just isn’t important to executives of a company who plan to sell it in 3 years. We need to talk to the people building lifestyle businesses expecting to last 20 years or more. Even if the material ambitions of such firms seem lower– a steady few million per year, instead of corporate Big Swinging Dickery– it’s from a fleet of some 50,000 (plus or minus) small technology companies that we’ll probably get the first successful approach to convexity. In technology, there aren’t as many of those. No one is funding lifestyle businesses yet. One of the biggest financial questions of the 21st century is how to get money into that market. Now that securities markets have been shown to be vulnerable to manipulation, with the housing market continually exposed to execrable corruption, is there really a good reason not to find a way for a much larger pool of capital (not only venture) to connect with talent? While an individual business is certainly too risky for less sophisticated, middle-class investors (hence, the regulations pertaining to accredited investors) there should be a broad-based, relatively de-risked way for them to put money into independent talent.

Financial risk is, of course, one of the foremost problems with the concept of a “self-executive utopia”. There’s another important issue to address, however. While self-executive disciplined play can handle convexity, where does that discipline come from? When and where do people learn the skills necessary to perform convex work at a level even close to what people will pay for? A fully self-executive world still leaves unanswered the question of progress. Who pays people to learn how to become great at things?

Concave labor seems dull; convexity seems sexy and exciting. There is, however, one virtue in concavity. It favors equality. If the best people are only 1.5 times as productive as the mediocre, there’s benefit in bringing the laggards up to speed and giving the competent less attention. The contemporary Theory-Z cult of teamism makes a lot of sense. Convexity, however, seems to reward doubling down on successes and discarding failures. In the short term, that’s correct. That’s exactly what one should do, if optimizing for immediate payoff. Having the best and oldest people mentor the new and young inflicts an opportunity cost– a loss. Guild cultures (lawful good) tolerated that, expecting to be repaid in loyalty from developed talent, but self-executive cultures (chaotic good) struggle with it.

Becoming great at something requires a balance of law and chaos. For example, there’s no educational program in existence that can train someone to be at the forefront of technology. It requires a lot of independent learning (self-execution; disciplined play). Such a person needs enough fluency with law (and humility) to stand on the shoulders of giants, but enough chaotic capability to get out there into chaos where no one will tell a person to go.

There are a number of interesting subproblems that come out of this understanding of convexity. How do we get the desired productivity out of disciplined play? How do we get the right kind of play? Where does the discipline come from? Finally, from a manager’s standpoint, how do we handle convexity’s risks, given the innate non-separability that hasn’t been seen at such scale before? After 13 very long essays, it looks like we finally have the tools to solve some of these problems and, one hopes, the insights necessary to make it possible for business organizations not to suck.

Gervais Principle questioned: MacLeod’s hierarchy, the Technocrat, and VC startups

The MacLeod Model of organizational sociology posits that workplaces tend toward a state in which there are three levels:

  • Losers, who recognize that low-level employment is a losing deal, and therefore commit the minimum effort not to get fired.
  • Clueless, who work as hard as they can but fail to understand the organization’s true nature and needs, and are destined for middle management.
  • Sociopaths, who capture the surplus value generated by the Losers and Clueless. Destined for upper management.

Venkatesh Rao has a brilliant analysis of these three tiers as they play out in the sit-com, The Office

I’m going to propose the existence of a fourth subset: the Technocrat. Before doing that, it’s important to assess the forces that generate these tiers, and why I think the MacLeod classification isn’t adequate.

Effort and strategy

Losers are not “losers” in the sense of being unpopular or contemptible people. Here, “Loser” means “one who loses”. In fact, they’re often well-liked and good people. However, they’re aware that employment is a better deal for the other side than it is for them. What they want most is to be comfortable. They don’t want job insecurity or too much change. They’re not “losing”, so much as they’re selling risk, in their poorly-paid jobs. They prefer contests where the points don’t matter (e.g. the Party Planning Committee in The Office) and the comfort of a stable group that will protect them. At work, they generally aim for the Socially Accepted Middling Effort (SAME). They’re not lazy, but the largest influence on how hard they work is social approval. They don’t want to be perceived as slackers, nor as overachievers, so they manage their performance to the middle.

Clueless are the hardest workers. They work as hard as they can, out of a sense of loyalty and ethical obligation. There’s an adverse selection at play that favors the untalented, because people who are naturally talented and hard workers tend to threaten Sociopathic colleagues and will be sabotaged. The survivors tend to be the less capable. Michael Scott, again borrowing from The Office, is a clear example of this. While he’s incompetent, he clearly puts everything he has into his work, having no social life outside of it. If he were more intelligent, he’d either have been tapped for a better role, or he’d be perceived as a threat and be sabotaged by an ambitious Sociopath. However, the less effective and capable Clueless are clearly destined for terminal middle-management roles that Sociopaths don’t want, so this adversity doesn’t often befall them. 

Sociopaths are strategic in their work ethic, but also flexible. As Venkat describes, they’ll fall to the outright bottom, effort-wise, if that frees up resources to impress someone who matters. They have no qualms about reducing their effort to zero in an environment where social attractiveness is more important. However, they’ll also contribute immense bursts of energy when a promotion is available. One core Sociopath skill is assessing whether it’s advantageous to work hard and, when not, to slack off and focus on social polish.

Common traits of the tiers

Of these three subsets, each pair of them has a unifying trait that is considered an asset by the corporate world. Losers and Sociopaths are strategic, Clueless and Sociopaths are dedicated, and Losers and Clueless are team-players. Each of these deserves assessment.

Team-playing (Losers and Clueless)

Companies prefer employees who will prioritize social approval from the team over personal ambitions or needs, and call such a person a team player. The alternative is the out-for-herself careerist who expects interesting work and upward mobility. The selling trait of team players is that they don’t have to be explicitly motivated “from above”. Wanting to do good by the people around them will motivate them organically “for free”, and they’ll ignore being underpaid, ignored, and given few opportunities to advance if the group’s approval is enough to indulge their esteem needs.

Losers are team-players because they want social approval. They want the comfort of being in rather than vying for up. They’re happy with the trophy of ascent into a meaningless in-crowd (in The Office, the Finer Things Club). Their goal is to be cool. Clueless, however, want to be “in charge”. What turns them into team players is the fact that they can be motivated with meaningless leadership accolades, or even undesirable tasks dressed up as positions of power (in The Office, Dwight). Clueless, in general, can’t recognize the difference between the genuine power sought by Sociopaths, social approval sought by Losers, and the ceremonial non-power that Sociopaths and other Clueless generate to keep them motivated.

Of the three traits I will analyze (team-playing, dedication, and being strategic) the most important one for a subordinate position is team-playing. Even if a person is highly competent, if she’s not well-liked by her team, she won’t be effective in a low-level position, because no one will help her. Subordinate positions never involve enough autonomy for a person to have a real achievement on her own. As Venkat Rao correctly assesses it, Sociopaths in subordinate roles have a short lifespan, limited by their willingness to run a team-player charade. It’s up-or-out for them. Ryan, in The Office, does this brilliantly. He uses his relationship with air-headed Loser Kelly to hide his true nature and underplay his threatening intelligence– seeming like an incompetent Loser– but once he finds common ground (his MBA degree) with CFO David Wallace, he takes the chance to jump and, on success, dumps her immediately.

Dedication (Clueless and Sociopaths)

For Losers, most of life is outside of work. Losers will put in their 40 hours, but if you ask one to work a weekend or do undesirable tasks that are way outside of her job description, you’ll get resistance. For the Loser, it’s “just a job”, and not something that has the right to dominate a person’s entire life. Losers aren’t lazy or apathetic, but they’re rationally disengaged. A loser recognizes that she can get an equivalent job at another company, so it’s group cohesion only that keeps them in place.

Clueless and Sociopaths, on the other hand, can work 90 hours per week without complaint. They’ll do their best to meet unreasonable requests from above, but their motivations are very different. Clueless are driven by a misguided sense of corporate loyalty, both above and below them. The Clueless middle-manager (or over-performing team member) is willing to please her boss, on whom she depends for her connection to the company (to which she feels a debt of gratitude). She’s also willing to pick up the slack of the Losers on her team, out of a sense of personal and possibly parental loyalty to them.

Sociopaths are dedicated for a different reason. Like anyone else, a Sociopath would prefer not to work long hours or do unpleasant tasks, but their pain tolerance is extremely high, because the corporate game is fun to them. For a Sociopath, a 90-hour work week is like spending that much time playing a video game. It’s not how most adults would choose to spend their lives, but it’s not taxing, boring or painful either. If the rewards are there, the Sociopath will drop everything and put in the hours.

For a middle manager, dedication is the most important trait. Middle managers frequently find themselves in two jobs that are often at odds. On one hand, they have to clean up the messes left by rationally disengaged Loser subordinates. On the other hand, they must please the hard-driving Sociopaths above them. This generates not only a lot of work, but an incoherent, heterogeneous mess of it. Frequently, they end up working on “whatever’s left” and putting in a lot more energy than the tiers below and above them. The Loser subordinates don’t work as hard as they do. The Sociopath executives have enough power to control the division of labor and definition of “performance”, so they don’t have to work hard. Middle-managers get stuck in the middle, and it takes dedication to survive it.

Strategy (Losers and Sociopaths)

Losers and Sociopaths might seem to be polar opposites, but they also share an important trait: they’re strategic. They’re realistic in their assessment of what efforts will be fruitful and, unlike the Clueless with their unconditional work ethic, they allocate their time and energies only toward work that seems to be worth a damn. In this, they tend also to be able to relate amicably, because their strategies rarely conflict.  They want different things. Losers want to minimize discomfort and to be “cool” as defined by the in-crowd where they are. Sociopaths want to maximize personal reward and rise into the in-crowd that actually has power.

Strategic workers tend not to waste time. Losers work efficiently but tend to do as little as they need to retain social acceptability. Contrary to stereotype, they don’t do “the minimum not to get fired”. They modulate their efforts to the middle, not wanting a slacker reputation, but not wanting a “busy bee” reputation that will overload them with undesirable work. Sociopaths (and Technocrats, to be discussed later) work on the stuff that benefits their careers, and ignore whatever doesn’t.

For upper-management roles, being strategic is the most important trait. A non-strategic manager or executive will put a lot of effort into pursuits of low or even negative value. That can be acceptable for a middle manager. The Sociopaths above will set priorities, and direct him, while the social-approval mechanisms of the strategically-aware Losers will keep the team from going completely off the rails. Teams can protect themselves, in the short term, from off-the-rails Clueless management. A non-strategic executive is dangerous, if not untenable. Losers, in fact, tend to be better picks for executive roles than Clueless. This explains why, after Peter outs himself as a disengaged Loser to “The Bobs” in Office Space– while office conformity demands that subordinates fake Clueless earnestness around authority– they describe him as “a straight shooter with upper management written all over him”. He’s strategic. He understands that his current job is not worth doing.

Other possibilities…

All three of these traits are attributes that corporations view as assets: being a team-player, dedication, and being strategic. I’ve painted a picture in which each of the three MacLeod tiers has exactly two of the three. Losers are strategic team players, but not dedicated. Clueless are dedicated team-players, but not strategic. Sociopaths are dedicated and strategic, but not team players. This brings us to the question: why should an employee have exactly two of these seemingly orthogonal capabilities? What happens to people with zero, one, or three?

Deficient categories (0/3 and 1/3 traits)

If someone’s neither dedicated nor strategic, it doesn’t matter much whether that person’s a team player or not. A team player sacrifices personal ambitions for the health of the team, but people who are neither dedicated nor strategic have nothing credible to sacrifice. These fall into the bottom of the Loser category: Lumpenlosers.

Dedicated, non-strategic, non-team-players are Loose Cannons (see: Andy in The Office). They’re driven by ego, but have no insight into whether what they’re doing serves any purpose (personal or organizational) at all. They tend to eagerly throw themselves into battles with no idea where they will lead. Either they are fired, or they become Lumpenlosers as well, being tolerated for the amusement they provide.

Finally, to be strategic but neither a team-player nor dedicated is almost a contradiction in terms. A strategic person will recognize that one or the other is necessary in order to retain employment in the long term. So, the only time this constellation occurs is when a person has little interest in staying with a company. They usually quit or get fired.

Unicorns? (3/3 traits)

Are there people out there who are strategic, dedicated, and team players? I would also argue that this arrangement is contradictory, at least in a subordinate role. A strategic person will either aim for minimal discomfort and pain, or for maximal benefit. The first category will avoid conflict and disharmony (team player) but not work long hours, especially not to an extent that hurts the group (by making others look bad in comparison). On the other hand, the yield-maximizer will work very hard (dedication) but not for the benefit of a social group coalesced around someone else’s purpose. People who are strategic and dedicated will demand important roles and interesting work, which means they’re not likely to be perceived as team players.

This is not to say, however, that it’s impossible or even rare for a person to be strategic, dedicated, and a good person. What I do mean to imply is that strategic and dedicated people don’t accept subordination. Although they will work for altruistic purposes or the good of “the team”, they do it on their terms. In fact, I would argue that among the most important players in the modern economy, a fair number of them fit this exact description. Like MacLeod Sociopaths, they’re dedicated and strategic. However, the term “Sociopath” doesn’t apply, because they aren’t bad people, and they’re not willing to rise by being unethical. They want to win, but fairly. This requires revisiting the Sociopath category.

Are MacLeod Sociopaths really sociopaths?

I would argue that the Sociopath category should be split into two subsets: Technocrats, and the true Psychopaths.

It’s important to address the term sociopath. It’s no longer used in psychiatry, having been replaced by psychopath. A psychopath is a person without a conscience, and that’s about as close as modern psychiatry gets to calling someone “a bad person”. Most psychopaths are, as typically defined, bad people. Their lack of empathy and concern for others leads then toward reckless and harmful behavior. Whether this is mental illness or sane moral depravity is almost a religious question, but either way, psychopaths aren’t desirable in an organization, but many are very successful climbers of institutional ladders. The lower classes of psychopaths end up as common criminals, but the smartest and most socially adept psychopaths develop strategies for externalizing costs and taking credit for others’ accomplishments. They are disproportionately common in the upper ranks of corporations.

Sociopath is a pop-psychology synonym for “psychopath”, most likely persisting because the popular ear conflates the latter with “psycho” or “psychotic”, which psychopaths are clearly not. It is not even clear that psychopaths are mentally ill. I would argue that, in a prehistoric evolutionary context, their lack of emotional attachment to others made them individually successful (high rates of reproduction, at least for men) at the expense of group harmony and stability. In modern society, they are the cancer cells– individually fit at the expense of the large, complex body of civilization. This is different from typical mental illness (especially psychosis) which is undisputedly pathological, making the individual less fit.

Psychopaths are egotistical and usually unethical. Above all, they desire social status. Money and power are only interesting to them so far as they confer an elevated position over others. This characterization, one hopes, does not apply to everyone who is strategic and dedicated within an organization. I find it clear that it does not. There are good people who are strategic and dedicated. So I add a fourth category: the Technocrat. So I discard MacLeod’s Sociopath category, and split it into the Technocrat and the true Psychopath.

In this usage, Technocrat pertains more to the abstract principle of technology– the use of knowledge in pursuit of mutual benefit– than to any concrete device. Technocrats are dedicated and strategic and, like Psychopaths, they want to win. What differentiates them is that they don’t want to make others lose. Technocrats have a positive-sum mentality and a desire to make improvements that benefit everyone. True psychopaths despise what they perceive as human weakness and want to dominate people. Technocrats are competing against “the world” in the effort to make it better than it has ever been.

Because Technocrats like to improve things, they extend this mentality to their work and themselves. They want to be more skilled, and more autonomous, so they can achieve more. They’re dedicated, because it requires work to find “win-win” opportunities. They’re strategic, because what they do tends to require creativity. In general, they’re not team players. Losers are team players because they fear social disapproval, and Clueless if they perceive their role as leadership (even if it’s objectively not). Psychopaths view the team as something to exploit (for personal gain) and to dominate (for enjoyment). Technocrats want to improve the team, often in spite of itself. This makes them good leaders, but they turn out to be shitty subordinates. That, in fact, is the Technocrat’s downfall. Of the four classes, they are the absolute worst in subordinate positions. Psychopaths hate subordination as well, but they’re better at failing silently for long enough to move up.

The MacLeod model correlates psychological traits with organizational position, and the Technocrat is difficult to pin down. Other categories are much easier. Losers cannot typically rise into management because they aren’t dedicated. Clueless should not become executives because they aren’t strategic. (It happens, but they usually get fired at some point.) Psychopaths can rise without limit, but their lack of a team-player ethos means they’re fired if they can’t find a route. There isn’t a clear position in the traditional managerial hierarchy for the Technocrat. Organizations would probably prefer to have Technocrats over Psychopaths in upper management, if they were rational entities. They’re not, and for a variety of reasons, when Technocrats and Psychopaths battle, the Psychopaths usually win.

Technocrats don’t have a well-defined home in the white-collar corporation. They despise the pointless busywork of subordinate positions, so they don’t do well in the Loser circuit. They tend to be logical truth-seekers, so the Clueless world of middle-management is too full of self-deception for them. Finally, amid the zero-sum in-fighting of Psychopaths in the executive suite, they often lose. Why do they often lose? That I will address below.

Some Technocrats have found a way to become highly-paid individual contributors, such as in academia, research, and software engineering. Unfortunately, this isn’t a stable arrangement for most. Academia has taken a Clueless direction of late: graduate students and pre-tenured professors are grunts, and tenured professors are (semi-autonomous) middle managers chasing rainbows. I consider most of them non-strategic because they lack interest in the practicality of their work, a behavioral pattern that has reduced their social status over time. Software engineering, on the other hand, is mostly a (better-paid) Loser’s world, because most of the work that professional developers get is line-of-business dreck that isn’t intellectually challenging, and not worth the dedication that a genuinely important or interesting project would deserve.

The typical career of a Technocrat looks similar to one of a Psychopath: job hopping, up-or-out gambits, and the obvious prioritization of a personal strategy over “team player” social acceptability. The difference is the purpose toward which she aims. The Technocrat wants to become really great at something and do something good for the world. The Psychopath wants to climb old-style, increasingly anachronistic, industrial hierarchies and dominate (or, at least, exploit) others. Both are after power, but they define it differently. Technocrats seek the power to help people; Psychopaths want power over people.

One might suspect that Technocrats should succeed as entrepreneurs, and this is probably the Technocrat’s best bet. Rather than attempting to find a decent role in an existing, dysfunctional organization that it will be impossible for her to fix, she should create a new one. Then, she has no conflict between her strategic and dedicated nature and being a “team player”, because she has built and defined the team.

What I would say, however, is that the venture-capital-funded startup ecosystem (VC-istan) is not a Technocrat’s paradise, despite its pretensions to that effect. The actual ethical behavior of the leadership at most of these VC darling startups is old-style managerial Psychopathy. Why is it this way? To answer that, one needs to understand what VC-istan actually is: one of the first postmodern corporations. VCs are supposed to be in competition with one another, but they collude. They decide, as a group, who’s hot and who’s not, and what valuations will look like in each season, and they get together and co-fund startups. There is no market economy. Rather, funding decisions are made by a command economy driven by social consensus among an in-crowd (partners at influential VC firms) and those who wish to join them.

One might think that VC-funded startup founders are Technocrats. Not likely. These so-called CEOs are actually mid-level Product Managers within the postmodern corporation of VC-istan. Some are ascendant Psychopaths seeking a transition to a more senior (“entrepreneur-in-residence”, VC associate, corporate executive) role and others are Clueless “true believers” who fail to recognize that, due to their investors’ unilateral control not only over their current projects but over their long-term reputations, they’re nothing but eager middle managers.

So where are the Technocrats, then? Over time, they tend to fail out of hierarchical organizations, being ill-equipped to fight against the Psychopaths who tend to defeat them. As VC-istan increasingly devolves into a postmodern corporation (rather than a real market, with– imagine this!– actual competition among investors) they will be increasingly out-of-home there, as well. I don’t know where they’ll go. My guess is that the rising generation of Technocrats will find a way to democratize business formation, with crowdfunding (e.g. Kickstarter) being an obvious first step in that direction, and presumably a lot more to come.

Why Psychopaths beat Technocrats

Why do the zero-sum, destructive Psychopaths defeat the positive-sum, creative Technocrats? To answer this, it’s important to understand credibility, which is an umbrella term for intangible assets that institutions create in order to rank people by perceived merit.

How do organizations decide how to compensate people, and whom to promote? When a person starts a new job, her salary is based on economic conditions and her negotiation skill much more than any objective definition of merit. Companies, begrudgingly, accept this. They recognize the tradeoff between operational efficiency and fairness in compensation, and will gladly adapt salaries to conditions. However, companies prefer to believe that they get the division of labor and recognition right. It’s important for them to maintain this fiction, because it allows them to believe that, although they know their compensation schedule to be unfair, they know exactly how unfair it is and can reduce the injustice (not out of ethical principle, but because it’s a morale risk) over time. If Bob and Mark are both Level IV software engineers making $100,000 and $120,000 per year, respectively, Bob can receive better annual raises until they’re at parity.

This is what professional ladders and job titles are for. The firm wants to believe (or, at least, wants the Clueless to believe, that often being enough) that, while small injustices are tolerated in specific individual compensation, that salary ranges shall be set according to job descriptions, which will be assigned according to pure merit. Someone who is “platonically” at Level IV might get a higher salary based on prior compensation, negotiation skill, and market conditions, but he should never get a Level-V title… until he earns it. Titles, as the organization perceives them, must correspond to personal merit and work performance, not external conditions.

This is credibility, which represents the company’s degree of trust in an individual. Compensation is what a person takes out of a company. Credibility is what the firm thinks the person puts into it. Job titles are a powerful form of credibility, being transferrable to some degree across companies. So-called “performance” reviews exist to calibrate private credibility based on a person’s work history, and may eventually result in public credibility changes through promotions (or demotions and terminations). Societies understand that resources (power, money, information) sometimes accrue to unworthy or even dangerous individuals, and that there is nothing to prevent “the bad rich” from acquiring mere commodities once this has happened, but the sacred intangible of trust is supposed to be above that. Credibility is the corporate analogue of trust, invented because interpersonal trust becomes sparse at scale. Large organizations recognize that genuine trust, built through direct interaction, is not enough to tie people together, so they need to invent a legible pseudo-trust in order for anything to get done. Credibility is a currency that corporations mint in order to make statements about how far a person can be trusted. You’re not supposed to be able to get credibility through trade. It should be a reward for the demonstration merit only.

Credibility isn’t just a vague, academic notion. It has actual effects. For example, a common way for a company to do a layoff is to select levels at which it is overstaffed, and terminate the highest-compensated at that level. The idea is that employees at each level are equal in productive value. It’s corporate consistency. Thus, the most marginal employees, who should be let go first, are the highest-paid at the targeted level. Let’s say that the Level IV salary range is $80,000 to $120,000 and the Level V range is $100,000 to $160,000. It’s dangerous to be a Level IV at $120,000– but very safe to be a Level V at the exact same salary.

Is this regime exploitable? Of course. Clueless might believe that there’s such a thing as a “platonic” Level IV, and that people will be accurate assessed and promoted to their level of ability. That’s not true. There is no “platonic” Level IV or Level V. There will be guidelines based on work experience and interview performance, and then myriad possible exceptions. A wise negotiator slotted for Level IV, if he knew the company’s HR infrastructure, would target his salary history and expectations toward $125,000, making him ineligible for a Level-IV position. Would the hiring manager say, “We can’t meet that”, and turn him away? Or would she bump him to Level V, not only justifying his salary, but improving his job security, leadership opportunities, and level of respect within the company? Unless he were very clearly ineligible for a Level-V position, the latter would happen. So he would, in effect, be using his negotiation skills to win credibility. In the real world, credibility is just as negotiable and tradable as “harder” currencies like money, power, and information. It’s not “supposed” to be that way, but it is.

Losers care about credibility, but only enough to retain employment. Once they have enough of it, they focus on side games in which those games’ local definitions of credibility and status don’t really matter, in that they have no effect on personnel decisions or compensation. Clueless believe deeply in credibility and go about earning it “the old-fashioned way”, which is to earn it through hard work. Psychopaths, on the other hand, are the quickest to actually realize what credibility is: a corporate fiction. In reality, it’s a commodity like any other. If they need someone to vouch for them, they find a way to buy it. Psychopaths bribe and extort their way into credibility. They take credit for others’ work, they lie, and they find ways to trade social assets (including titles and “job performance”) that aren’t “supposed” to be for sale.

How do Technocrats handle credibility? I’m not sure. Since the intended effect of corporate credibility is to create a global social status in large groups that would otherwise not have a clear rank ordering, thus generating a sort of “permanent record” that’s ripe for abuse by power, it seems naturally opposed to the Technocrat ethos. However, it’s also clear that corporations need to invent credibility, because interpersonal trust is too sparse at scale for large organizations to function, and credibility becomes a lubricant. To the extent that Technocrats accept credibility’s existence, they tend to treat it as an engineering problem. I think the Technocrat’s objective is to fix credibility: to redefine it so that it can’t be traded, bought, or won through extortion, and to make it an actual dimension of merit. Of course, this is a hard, if not impossible, problem. Psychopaths take a much easier route with more personal benefit: they find ways to exploit it.

Indeed, these four categories can be framed in terms of psychological reactions to the divergence between true merit and corporate credibility:

  • Clueless deny it and persist in the just world fallacy. Indeed, credibility’s root power is in its ability to motivate and impress the Clueless. 
  • Losers accept the crookedness of the corporate game and disengage, grabbing just enough credibility to avoid adversity.
  • Psychopaths become crooked themselves, which is the fastest path to personal benefit, and ultimately win not only credibility for themselves but the capacity to modulate others’ credibility, which is corporate power.
  • Technocrats attempt to fix the game, often altruistically through openness, transparency, and anti-hierarchical corporate structures. So far, they haven’t shown much success in deploying their vision at scale.

Between Psychopaths and Technocrats, who is more likely to climb the corporate ladder? Unfortunately, the advantage is with the former. Technocrats have to change people, while Psychopaths exploit them as they are.

Corporations, being pre-industrial in their ideology, have relied heavily on credibility and personal relationships for an obvious reason. There weren’t many hard problems for these institutions (rent-seekers that used technological innovation, but rarely created it) to solve, and there was no other way to evaluate people. Once the hard intellectual challenges have been overcome and it’s a risk-averse, stable organization, then how does it define the “best” who deserve leadership positions? How does one define “merit”? The Losers don’t attend that debate, because they don’t care. The Clueless say, “Hard work”. Technocrats argue for creativity and insight, still wanting to tackle hard problems that the now-stable and risk-averse organization believes it has outgrown. Psychopaths form an alliance with the Clueless, recognizing them as effective (in well-defined roles) but non-threatening. What’s built up, then, is a concept of “performance” that, to the Clueless, looks like a commodity earned only through hard work: a credibility. Clueless provide the muscle and blind support that enable credibility to be manufactured; Psychopaths define it. However, the Psychopaths are always careful to define performance with enough back-doors that they can win, regardless of whether they wish to work hard. At the top, this is especially easy. If you control the division of labor, you get to write your own performance review.

What Psychopaths recognize is that credibility can always be bought on a black market. There are always ways to get it, and often the illicit ones are more effective than the straightforward path. Technocrats understand this as well, but they often find it morally objectionable to start trading. It feels like cheating to them, and the worst varieties of credibility-trading (which generally amount to professional extortion) they refuse to use at all.

Can Technocrats win?

Psychopaths and Technocrats are destined for conflict. Psychopaths invent social credibilities to win the support of the Clueless and put themselves at the top of organizations. Technocrats see a crooked game and try to fix it, often with radical honesty. If the Technocrats succeed, they’ll undermine the work of the Psychopaths. This becomes a fight to the death. The character of an organization will be determined by which of these two categories wins. Ultimately, most organizations will be run by Psychopaths who superficially adopt the appearance of Technocrats. This becomes increasingly the case as corporations become risk-averse and self-protective. The positive-sum “win-win” outcomes that Technocrats seek exist, and they’re all over the place, but they never come without risk. Once the company decides that creative risks are intolerable, what’s left is zero-sum social-status-driven squabbling.

The MacLeod hierarchy applies best to the modern white-collar corporation, whose modern incarnation was developed in the 1920s. At the time, there were a decent number of Technocratic leaders, but over time, corruption set in. By the mid-1970s, it was clear that Psychopaths were going to take over, and the “greed is good” 1980s saw that through. Basic research was cut, academia turned into a pyramid scheme, and well-positioned corporate executives made millions. Psychopaths gutted and looted corporations, leaving husks– large, powerful institutions whose beneficial purposes had been discarded, leaving mere patterns of externalized costs and value-capture by the Psychopaths. Where’d the excluded Technocrats go? Well, all over the place, but the most well-known cohort moved to Silicon Valley– before it was cool.

Silicon Valley is not a Technocrat haven any more. If nothing else, one need only look at house prices in the Bay Area. In cases of extreme geographic scarcity (e.g. San Francisco, Manhattan) house prices might be explicable by supply and demand in a fair, because supply responds slowly to economic circumstances while the demand curve moves quickly. However, when extreme housing prices persist over the long term, and over a large and mostly suburban area where there is no natural geographic scarcity, this suggests market manipulation and NIMBYism. That’s the surest sign ever that Psychopaths are winning. I am not saying this to rag on California. (I live in Manhattan; we have expensive real estate and Psychopaths, too.) In fact, had California’s real estate problem reversed itself, I’d argue that it was a transient market phenomenon and not Psychopathic victory. However, even when the economy softened, Bay Area real estate remained pricey. That’s a primary indicator that the Psychopaths have started to win. Psychopaths love when real estate is expensive, because they can use physical position to display dominance. Technocrats, on the other hand, love New Places, because New Places are positive-sum– you can build cool things on inexpensive, unused territory and improve it. The Technocrats poured into California when it was a geographic New Place and land was cheap. Now the New Places are elsewhere. It’s not clear what the next Technocratic New Place is, or even if “Place” still needs to be a geographic location, but it’s no longer Northern California.

If I had to guess, though, I’d bet that within the next 10 years, VC-istan will fall under the weight of its own organizational Psychopathy. I don’t have enough personal experience to opine on whether VCs themselves are Psychopathic, but the VC darlings thatI’ve known well have been run by some horrible people. Mark Pincus has been most overt about his psychopathy, but his behavior is far from atypical among the sorts of people who win in this bubble-world. Once, I had to leave a junior-executive position (for which I had left Google) at a brand-name, VC-funded startup at 3.5 months because I refused to sign an affidavit that not only contained perjury, but probably would have Pincus’d ten on my colleagues who had joined early and had “too much” equity. The Psychopathic management of that company spent months afterward attempting to destroy my reputation. How I overcame that adversity deserves its own essay, for another time…

Psychopaths defeat Technocrats in an organization where the work is intellectually easy, creatively non-demanding, and social status ends up trumping ability. That describes most organizations, because most companies are too risk-averse to do anything hard or important. Needless to say, Psychopaths love economic bubbles– exploitable, chaotic optimism without substance– and the 2010-13 “social media” affair clearly qualifies. However, this bubble’s very different from the last one. In the 1997-2000 bubble, startups were overvalued by the market. Wall Street provided the fools. In this one, market valuations appear reasonable. Investors aren’t going to fall for that one again. This bubble is in the unduly high value assessed, by young talent, to subordinate positions in these startups. (I wrote this, last summer, to contribute to its inevitable “pop”.) The fools aren’t coming form Wall Street, but fresh out of school. Most employees of these VC-funded “tech startups” believe they’re 6 months away from investor contact, real job titles, and the chance to be a founder in the next startup. They’re wrong. Long before they can collect the career assets they’ve been promised, this bubble will have popped and washed back to sea, leaving them with useless work experience and, thanks to the high cost-of-living in the startup hubs, no savings. The 1990s dot-com bubble wrecked a few careers and spilled a lot of rich peoples’ money. The 2010s bubble will spill a little bit of rich peoples’ money and wreck a lot of careers– mostly, those of young technologists trying to establish themselves. I would argue that this makes it worse.

What I hope to see during 2013, and the coming years, is a Flight to Substance. I want the best people– investors, entrepreneurs, engineers– to realize that they’ve been hoodwinked by VC-istan’s shallow reinvention of the corporate system as something different and “cooler”, and to demand a return to Real Technology. I want to see better ideas, better companies, and better cultures. I want to see funding for research and development, so that people can do intellectually interesting work without being thrown into the secondary labor market that academia has become. I want to see a world in which people actually care about solving hard problems and delivering real value. When this happens, the Technocrats can win again.