Searching for ITC Emergent Intelligence in Economic Systems & Corresponding Shifts in the Wealth of Nations

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Power Distribution

Rumored Chinese curses of increasing severity:

  1. May you live in interesting times
  2. May you come to the attention of those in authority
  3. May you find what you are looking for

Ancient Chinese society illustrates the dynamics of power shifts. Empire after empire rose and fell. Power was given to the peasants through revolution; followed by a period of economic growth; culminating in the concentration of power in the hands of the Emperor and economic stagnation. This was then followed by revolution and redistribution of power to the peasants, etc. It's a textbook example of the principle that centralized power is bad for economic growth and broadly distributed power is good for economic growth.

The notion of "distribution of power" is simultaneously the most subtle and potentially the most powerful concept in all of economics. It's an idea which is not adequately covered in textbooks, the popular media, or in any other public forum.

Nonetheless, I am convinced that it's the distribution of power, and it's migration during life cycles of nations and businesses, that explains the rise and fall of empires and major corporations. It's the broad re-distribution of power that makes companies go "from good to great"; it resolves the "innovator's dilemma"; and helps companies produce superior results in the stock market. It simultaneously sheds light on the rise new religions and current economic growth in industrialized nations.

Craig Venter once estimated that the minimum number of genes necessary to sustain life was less than 500. I've often wondered what the minimal set of economic rules would be to create competitive national economies. It's clear that basic requirements include transportation, communication, defense, legal (law enforcement), law setting (legislature/parliament), and feedback/judgment (judicial system) systems. More highly evolved economies will have more elaborate sets of rules. Hong Kong did well under British rule under a minimal set. Taxes were capped at 10% and not much social infrastructure was provided beyond the legal & police, utilities and education. Yet, prior to being absorbed into China in 1997, Hong Kong ranked among the most competitive and prosperous economies in the world. We know that laws and procedures that centralize power is generally bad for economies. To understand why, we need to look at the dynamics of nation building and business building. It's here that the distribution of power stands out as a useful concept and we can find abundant examples of its relationship to prosperity.

In entrepreneurial situations for businesses, or at the moment of creation of nations, power is distributed broadly among the various employees or citizens. In the case of business, there are not yet rules and procedures in place that confine the options available to employees. In the case of nations, it is a "level playing field", in which any man can become mayor/governor/president... not those that are born to wealthy/noble classes.

I am particularly fascinated that the concept of "distribution of power" can explain so much of the success or failure of today's businesses. This is what I'll concentrate on on the following pages.

I'll start with an example from the Ritz-Carlton Hotel chain, move to Southwest Airlines, then to the books "Good to Great" and the "The Innovator's Dilemma".

In the Ritz-Carlton Hotel, every employee is given a budget of $2000 to spend immediately, with no authorizations required, to address any exceptional need of any guest in the hotel. If a guest were to cut his finger and approache a bellhop, the bellhop would at that point acquire the responsibility of seeing that the cut finger is attended to by a physician. If this requires getting into a taxi to go to a doctor's office, the bellboy has the authorization, responsibility, and financial power to carry out the task. The rules of the hotel are that the employee who first learns of a guest problem must own it and not refer the guest to anyone else. In addition, the hotel make certain that the employee is empowered financially to deal with the problem. This policy of distributing responsibility, and the power to act, to all employees is one of the reasons for the extraordinary success of the Ritz-Carlton hotel chain both financially ( profit margins can be as high as 40%) and guest satisfaction scores as gathered by the Gallup organization (which are some of the highest in the hotel business.)

 

What is the Economic DNA that is transforming these scenes, typical of thousands of generations, to the scenes below within the life span of a single individual ?

 

Shanghai cityscape

 

Ritz-Carlton