The objectives we reach are rarely those we had set at the start. British economist and columnist John Kay,(www.johnkay.com), calls this salutary deviation "obliquity".
The zeitgeist seems anything but oblique. Businesses and managers are asked to focus all their efforts on one goal only: to reward their shareholders, namely maximize their wealth. To fulfill this task managerial metrics are legion "Economic Value Added", "Cash Flow Return on Investment", "Risk Adjusted Return on Capital" etc ... Similarly, we measure the wealth of nations in terms of the gross domestic product (GDP) despite its numerous defects. GDP is the goal. To correct the GDP deficiencies, it has been suggested to use an Gross Happiness Product (GHP). GHP should be the next goal. Shall we really abide by these metrics? Or shall we be skeptical about their merits?: It is indeed easy to game them especially if one is handsomely rewarded for outperforming them. Are metrics good guides for action in the hyper-connected world in which we live assuming they are not gamed?
John Kay has a nice oblique story to show that we should beware. This is the story of the American Department of National Parks. One of the priority tasks of the Department is to protect forests and prevent them from being devastated by fires. There was a time when that mission took a very simple form: zero tolerance. Any fire should be extinguished. No fire outbreak was tolerated. In practice, this firm policy turned into rather embarrassing statistics. Instead of a reduction in fires, US officials observed an increase in fires. Their mission had failed. The objective was not reached. How come rigor was so poorly rewarded?
We must let the ground speak. The forests are dense environments in which bushes and trees coexist. These bushes are a potential threat. They can fuel major fires. It is therefore advisable, in addition to manual undergrowth clearing, to let small fires complete the job. Thus, instead of implementing a drastic zero fire tolerance policy, the Department would have been wiser to let rangers on the ground gauge the situation and decide whether or not to intervene. This holistic approach prevails today.
Such an adaptive approach is particularly relevant in systems where small variations may entail subsequent changes of great magnitude. The flagship example is the butterfly whose flapping wings in Africa trigger a violent tropical storm in the Caribbean a few weeks later. What this example essentially says is that complex systems are very sensitive to initial conditions. A slight change in a parameter (the wing flapping) is followed by a radically different system response. The system nonlinearities route the new response along brand new and, more often than not, unexpected paths. Complex systems like forests, fires, weather behave in a nonlinear fashion which implies they are unpredictable.
The digital economy exhibits a similar nonlinear behavior. Its complexity increases at the hectic Internet connectivity pace. This never ending branching process creates a vast archipelago whose many islands are no longer independent of each other. Its growth is such that what gets big is deemed to get bigger or to vanish. Moreover, our societies have moved from a mainly physical economy of perspiration (which Jack London documents in the Abyss Society) to an inspiration driven (digital) economy. Does it make a difference? Yes it does!
Secondly, it does because the economy of ideas is characterized by a very particular production cost structure. A standard perspiration good must be manufactured unit after unit to be sold. Each unit requires the mobilization of fixed and variable costs. It comes at a strictly positive marginal cost. An inspiration good is different. The original unit requires a significant initial investment outlay. The next units are copy/paste of this original unit. Hence their marginal cost is close to nil. Take the celebrated example of Microsoft's Windows software. Microsoft charges a hefty price for each copy of the software despite the fact that the cost of each extra copy is almost zero. Microsoft is able to extract a rent, a float from its clients. It enjoys monopoly power. Economists teach that the best way for an economy to be prosperous is to foster competition. Competition will eliminate rents as long as prices are not equal to the marginal cost. At this level profits are said to be normal, to be fair. But if we were to apply this competitive pricing rule to, say, Microsoft it would go bust. It would have to charge zero for its software as indeed its marginal cost is nil. It would be unable to recoup the initial outlay. In order to survive and be profitable, Microsoft needs market power. If things go well, it becomes the winner, the winner who takes all.
The question is then obvious. How does Microsoft reach this "managerial nirvana" without prematurely passing away? To answer this question, American economist Brian Arthur of the Santa Fe Institute compares the world of the British economist Alfred Marshall (1842-1924) to that of increasing returns to scale. The world of Marshall is an industrial world with capacity constraints (a plant cannot produce more than its capacity) and diminishing returns (once the capacity is reached returns tank). In this world, one day or the other, the profits converge to their "normal" level. In his Principles of Economics, Marshall demonstrates that this result obtains through optimization techniques, derivatives of cost functions etc...
The world of increasing returns to scale is totally different. This is a world where things move potentially very quickly: those that increase increase even faster, those that fall down shrink even faster. The typical example is network effects à la eBay. Sellers join eBay because they know that buyers are there. Buyers join too because they know they will find sellers there. The winner, eBay in this case, takes all. The more it does, the more it does! We can say the same about Twitter, Instagram or Facebook. The consequences of such a world are well known: imperfect competition (must be able to charge more than the marginal cost), uncertainty (a small change, a mistake can upset all), unpredictability (can't predict in fast changing nonlinear world), "winner take all" and record profits for the winner (2 + 2 = 8). This is how Microsoft got its Windows market power. This is how the most sought after Unicorns are born!
How should individuals, institutions, businesses and governments behave in a world so different from that of Marshall? Should they optimize, fine-tune metrics and try to outperform them? Or should they adopt a holistic behavior like US forest rangers?Well, it seems sensible in our world (which is a mixture of the Marshallian world and the Arthurian world) to develop a strong sense of adaptation. The world of increasing returns is really an oblique world that can play tricks on us. To garner "hits", metrics, whatever their "sex appeal", won't work. They are the sure recipes for failures. A slight mistake in the metrics and everything falls apart for good or bad. One cannot, for example, understand why Facebook paid so dearly to acquire Instagram or What's App using standard Marshall thinking. Facebook, despite its sheer size, is not immune to the digital flapping. Facebook was created at a time when the mobile smartphone revolution had not yet been "fomented". Instagram however is a genuine product of the smartphone phenomenon. This is its DNA. Instagram or What's App wing flapping may cause a storm at Facebook: A team of thirteen person and a small app were able to attract millions of users. At the time of its difficult IPO, Facebook could not take the risk of either Twitter or Google rounding up Instagram or What's APP. This is certainly a costly but ultimately very oblique bet. For, no one can say today what future "business model" will eventually justify or invalidate the amount paid. What is sure is that Facebook did not want to miss the smartphone crowd, the related advertising money and of course the the formidable data aspirator that both apps constitute.
Digital obliquity should also be pondered by governments and regulators. Governments in charge of drafting the institutional framework conducive to the prosperity of their nations must accept that the digital economy they contributed unleash requires a flexibility incompatible with their partisan ideologies. The cherished (linear) cause to effect link no longer works. Governments must adopt a Louis Pasteur stance: "chance favors the prepared mind." Serendipity must become the keyword of their programs even if serendipity seems to deprive them of any control on events.
Regulators should resist the urge to regulate everything, to codify everything, and above all to do it too soon. Regulation that wants to eradicate piracy (zero tolerance to fires) is an example. Moreover, it is the exact opposite of the "habeas corpus" dear to the Anglo-Saxon. The presumption of guilt becomes the rule. It is up to the innocent to demonstrate that he really is. It is not by enacting such drastic legislation (inspired mostly by incumbent corporate interests), by not listening to what pirates are saying that one prepares the nest of future business models.
The eagerness with which the French law on e-book prices has been passed is a vivid testimony of what not to do. In short this law says that only the publishing house can set the price of an e-book. This price has to apply to all distributors at the same time. The truth is that the sole purpose of the law is to protect the print book chain (from authors to readers through publishing houses, distributors and booksellers), to duplicate it in the digital world. A chain that becomes truly one, unable to unchain, unleash and redistribute productivity gains. This law is everything except oblique. It tries to freeze things instead of providing market players with the proper incentives to digitally adapt and innovate.
Famous British detective Sherlock Holmes would have clearly objected to it. In the Valley of Fear he reminds one of the protagonists the extraordinary value of being oblique:
"Breadth of view, my dear Mr. Mac, is one of the essentials of our profession. The interplay of ideas and the oblique uses of knowledge are often of extraordinary interest."
And he was not living in the digital gilded age where obliquity is the name of the game!