On Germs, Weeds, Companies, Governments and Skunks

Has it ever seemed like we, as a country, can't do anything anymore?  The country that built the Empire State building in a blink has a gaping hole where the World Trade Center used to be for 9 years?  The country that went to the moon from nothing in 10 years now takes 20 years just to decide if we want to?  There's a reason for that national arthritis that keeps us from moving: regulation and its bastard sibling litigation.  

Credit Borepatch with this long post.  This post last week got me thinking along these lines.

When I was but a newly hatched larval engineer at a major defense electronics contractor, a mentor systems engineer gave me a reprint of an article from Defense Electronics magazine for August 1979, by Norman Augustine, the CEO of Martin Marietta (now part of Lockheed - most of us call them Lock-Mart these days, your one-stop defense supermarket - watch for the flashing blue light special on cruise missiles…).  The article covered what's now called Augustine's Laws.  I see they are out in book form:  and some of them have been excerpted by Political Calculations blog, but the version I have has a mere 15 laws.

There's a lot of wisdom in here and it's worthwhile to see if the ensuing years have changed things much.  I don't have the space to go into everything, but a few of these are worth looking at.  The first law is "By the time of the tri-centennial, there will be more government workers in the United States than there are workers" based on the growth rate at that time.  I think he's a bit long on this; it'll be before 2076.  He goes on to say that the government will control all of the money in the US economy.  "This raises the interesting question of whether the last person employed in the private sector will have to support the entire nation's work force, or whether he or she will individually enjoy the full benefit of those residual funds not yet controlled by the government".  This raises the guardedly optimistic second law, "People working in the private sector should try to save money if at all feasible.  There remains a possibility it may someday be valuable again".  What a silly optimist: the Fed has had crosshairs and laser sights on the backs of savers for almost a hundred years!  He presents a wonderful comparison of a contract for muskets for the continental army in 1798 that was delivered in 1/3 more time than contracted, and a survey of military contracts from 1978 that were delivered, on average, in 1/3 more time than contracted.  Some things never change!

His most memorable law, and where I'm going with this, was "Systems of Regulations created as a management surrogate take on a life of their own and exhibit a growth history which closely parallels other living entities observed in nature".  He went on to show the number of pages in armed forces procurement regulation vs. time along with a curve of weed growth (from the journal "Weed Science"), and produced a graph any biology student will instantly recognize as the sigmoid growth curve of populations, also called the logistic function. 

A usual example is the common bacteria E. coli.  This species can divide and produce a new generation every 20 minutes; if conditions could remain optimum it would undergo geometric growth and produce a colony the size of the planet in 24 hours.  Because conditions can't remain optimum, it has a logistic growth curve, producing much smaller colonies. 

The normalized logistic function.  Credit

In regulations, there is a price for this.  Although the legislators and regulators never consider this, every regulation consumes some amount of time and money to comply with.  The new Finance Reform bill has been estimated to required the development of 250-300 new regulations.  Every regulation slows down, hinders and costs every honest business real money.  Despite the widespread talk of corrupt CEOs and general lack of corporate ethics, I've been working in the manufacturing industry since the mid 1970s, and every company has had an active, if not aggressive, ethics compliance program with requirements for training and seminars every year.  There are exceptions but most companies do their best to be honest and law-abiding.  Government seems to think it's mere coincidence that countries with lower tax rates and lower regulation attract business, and they demonize companies for moving to countries where the environment is better. 

A simple way of determining if someone you talk to has any economic sense is to ask them about corporate taxes.  The economically ignorant (I'll be polite) will scream to tax the corporations.  Those with sense will tell you corporations are fictitious and can't pay tax.  Tax is part of the cost of doing business and therefore passed on to the buyer (the people calling for them to be taxed).  Corporations can collect taxes for the government (for which they are punished with more costs, not paid) but cannot generate them.  Every penny a company has comes from its customers.  In a global market where they compete with companies in cheaper environments, they are at a disadvantage. 

At least in our society, regulation often leads to litigation, and companies are sued regularly for offenses (real or imagined) against the environment or against people; possibly employees, possibly customers, possibly people in the communities they work in.  When special interest groups, like environmentalist or animal rights for example, don't get the laws they want passed, they litigate to prevent companies from doing their business.  For example, some of the most verdant farm land in the country, the central valley of California, is currently not being farmed because a group got the courts to stop the irrigation on the basis that it harms a minnow, despite considerable scientific disagreement that irrigation has anything at all to do with the minnow's population.  (Summary here)  The human impact in terms of unemployment and lack of food production, however, is undeniable. 

Regulation and litigation are sand in the gears of society.  Big, sharp, 40 grain silicon carbide abrasive particles that grind the gears and shafts away.   

They have the awful side effect of discouraging companies to grow and innovate.  Industries can die off because of the threat of litigation, or because the regulations make it simply too expensive for the industry to survive.  Sometimes this is deliberate: we just survived the EPA banning lead ammunition, something that could well kill off hunting and recreational shooting in the country.  The requested regulation was a back-door attempt to do something that can't be passed as a law.   

Sometimes killing an industry is an unforeseen side effect.  The woodworking tool industry is in crisis right now.  A few months ago, a lawsuit was won against Ryobi tools' parent company, for producing a "defective" table saw.  The plaintiff was awarded $1.5 million when he sued for $250,000.  The defect?  It did not include an expensive safety option that was invented around year 2000; (the modern tilt-arbor table saw was invented in 1939; the basic idea goes back to 1813).  In 2000, an inventor produced a technology called a Saw Stop that senses when flesh touches the blade and stops the blade in milliseconds.  In the process of stopping the saw as fast as it does, it destroys the saw blade, and possibly other parts of the saw.  The user still gets cut, but typically will require stitches instead of having a body part cut off.  He shopped this invention to the major tool makers and none of them agreed to license his invention.  Their major concern was that the idea was untested; they had no idea how durable it would be (contractors' tools live a rough life); they had no idea if it could be added to existing products (were they rugged enough to survive the abrupt energy dump that destroys the blade?), or how to roll it out across their product lines.  The inventor started his own company, and sells table saws with this feature.  

This suit will end the production of low-priced and bench top table saws, seriously impacting hobbyist woodworkers as well as the tool industry.  Professionals will buy the more expensive saws and raise their prices to you and me.  
 
I'm most familiar with the electronics industry, so let me give you a story from my world.  Most people have heard about Silicon Valley, which certainly was, and may even still be, the innovation capital of the world.  A typical scenario might be like this.  In satellite communications, there is a couple, of large companies who dominate the industry.  Like all large companies, they have a large set of policy and procedure manuals that show everything that must be done for any situation that comes up.  Perhaps a new market is perceived; the company must conduct a study to see if there's enough money to be made to pursue the market.  They must do a developmental budget, have decision agreement ("buy-in") from many levels of management, and so on.  Perhaps a previous customer had sued them over delivery of a product that they thought didn't meet the contract promises, for example, so they may require marketing surveys to understand just what the market wants. 

Somewhere in that company is an experienced engineer; typically someone with 5-15 years of experience.  They see the opportunity and realize their company is so slow that someone else is going to beat them to it, and decide to be that "someone".  Perhaps doing the design on their kitchen table, or over lunch breaks, they come up with a concept that they believe will create a sellable product, if not the "killer app" product.  At this point, he quits the company, often with a few friends, and they form a start-up company that gets to market first, wins a lot of market share, and completely skunks the former employer.  All of this by being free to make decisions, do what they think needs to be done, and usually by working 60 hours a week for a while. 

The big companies have those manuals of policies and procedures for a reason.  To borrow a saying, good decisions come from experience and experience comes from bad decisions.  The big company is so afraid of someone doing something wrong, they try to write procedures that will eliminate all chances of errors, which means they eliminate all independent thought from the day to day running of the company. 

Smart companies, however, are aware of this conflict between carrying out procedures and try to remain nimble enough to be competitive.  Fads such as the 1980's Japanese Management techniques (e.g., Quality Circles), and this decade's Lean Manufacturing (also out of Japan) sweep the industrial world regularly as managers strive to understand how to walk this balance. 

As another example, a large company might want to try and compete with a lower cost company that is trying to edge into their marketplace; for example, a Defense contractor making a GPS receiver might fear a commercial competitor's cost advantages.  They might want to change their entire approach to design of a product, taking more risk, instead of exceeding their requirements by large margins, they may try to just meet them.  Instead of a receiver that will work from deep winter in Antarctica to the worst of the Sahara, they decide to make one that would work for a day-hiker.  When they try to do it, the company's process manuals haunt them, and internal organizations, desperate to prove they are adding value, force the "low cost" program to adopt the same high-cost approaches they use in all of their products.  This destroys the attempt to lower the cost and ensures the failure of the program. 

Smart companies have addressed these problems by spinning off what are called "skunkworks".  The original skunk works (note it's two words, not one) was an offshoot of Lockheed, and their most proud achievement (at least, that they could speak about) was the SR-71 Blackbird.  A group of talented engineers went off in isolation from the rest of the company and created the fastest aircraft in the world, in record time, in the 1950s.  Skunkworks as a single word is the term used for such a group set aside by any company for a similar purpose.  This has been shown to be a successful technique, but note that the original company is still there, still working as an arthritic bureaucracy. 

SR-71 Production line at the Skunk Works

This is where we find ourselves as a nation.  

We are strangling in a bureaucracy with a Code of Federal Regulations that has grown like a bacterial culture.  A nation that was founded by a constitution that fills about 14 printed pages in today's technologies, passes financial reform bills that go over 2000 pages, health care bills that go almost 3000 pages, and more.   Each bill creates hundreds of new regulations, which are so poorly written they have to be refined by hundreds of court cases.  The court cases effectively create new law and new regulations.  Since congress is in session every year and passes at least one new law every year, the total number of laws and regulations increases without limit and everything eventually becomes illegal. 

What can we do?  We can't form a "skunkworks country" that can get around our laws and create a more mobile, productive society.  We only have one option: we have to create a national process, like industries do, to become more "lean, mean and low to the ground".  Get rid of superfluous laws.  We simply must reduce the size of the CFR and reduce the destruction caused by the regulation and litigation in our society.  To me, Tort Reform is absolutely essential.  A big part of the industrial lean activities is to study what policies need to be gotten rid of because "we've always done it that way".  The same should be done with the CFR. 

To be honest, there's more than one option.  The second option will result in blood in the streets, the deaths of thousands or even millions, and suffering on a colossal scale.  When companies don't handle their tendencies to be become too arthritic they go out of business.  The equivalent for the country is collapse, civil war and chaos.  Something to be avoided if at all possible.  Without reform, and without throwing out large chunks of regulations,  we are headed there.

Edit 14:30  Link to Borepatch's Article had an extra space.