When More Is Not Better

1. America's Economic Obsession with Efficiency is Unsustainable

In the forty-two years following the bicentennial, the growth in median income fell to an anemic 0.6 percent per year, meaning that the median family was only 31 percent better off after forty-two years—less than one-third the progress in almost 50 percent more time.

Stagnant prosperity. For nearly two and a half centuries, American democratic capitalism delivered consistent economic advancement for most citizens. However, since the mid-1970s, this progress has stalled for the median American family. While the average family income grew by 100% in the 29 years leading up to 1976, it grew by only 31% in the subsequent 42 years, leading to widespread frustration and disengagement from the political process.

Growing inequality. This stagnation for the majority contrasts sharply with unprecedented gains for the wealthiest. While the median family struggles, the top 1% (and even 0.1% and 0.01%) are thriving more than ever. This divergence is problematic because:

• Most of the anemic economic growth of recent decades is captured by the wealthy.
• The historical link between productivity growth and wage growth for non-supervisory workers has broken down since the 1970s.
• Economic mobility, once a hallmark of the American Dream, has declined.

Threat to democracy. The core issue is that democratic capitalism relies on the consent of the majority. If the system consistently fails to deliver for the median voter, they may eventually use their democratic power to choose an alternative, jeopardizing the very foundation of American society. This vulnerability is arguably greater now than during the Great Depression, when income hits were more evenly distributed.

2. The Economy is a Complex Natural System, Not a Perfectible Machine

The moral of these two stories is that the economy does not work like a machine.

Flawed metaphor. For decades, the prevailing mental model of the US economy has been that of a complicated machine, capable of being fine-tuned and optimized for maximum efficiency. This mechanistic view, championed by economists like Wassily Leontief, assumes that economic parts can be understood independently and then pieced together to form a predictable whole. However, real-world events, such as the 2008 financial crisis and the non-event of the "fiscal cliff," consistently expose the profound limitations of this model.

Natural system characteristics. A more accurate and useful metaphor is that of a natural system, like a rainforest, which is a complex adaptive system. Unlike machines, natural systems are:

• Non-additive: The whole is greater than the sum of its parts; interactions between elements produce emergent outcomes (e.g., low interest rates + aggressive mortgage securitization = housing bubble).
• Nonlinear: Causal relationships are ambiguous and unpredictable; small changes can have disproportionately large or unexpected effects (the "butterfly effect").
• Continuously adaptive: Participants constantly optimize for their own benefit, leading to evolving behaviors and system dynamics that render static solutions obsolete.

Gaming the system. In a rapidly evolving natural social system like the economy, intelligent players adapt their behavior to exploit rules and processes for personal gain. This "gaming" subverts the system's overall purpose, as seen with Lehman Brothers' Repo 105 accounting or high-frequency trading. This continuous adaptation means that attempts to "perfect" the system with fixed rules are doomed to fail, as gamers will always find new ways to exploit them.

3. Proxies for Efficiency Lead to Perverse Outcomes and Inequality

This type of error has a name, surrogation, a process whereby a measure for a desired outcome becomes a surrogate for that outcome.

The proxy problem. Models simplify reality, and to measure progress, they rely on proxies. However, a dangerous phenomenon called "surrogation" occurs when these proxies become indistinguishable from the desired outcome itself. This leads to perverse behaviors, as people optimize for the proxy rather than the true goal.

Examples of surrogation:

• Education: The No Child Left Behind Act used standardized test scores as a proxy for student learning. This led to teachers "teaching to the test" or even cheating, as seen in the Atlanta scandal, rather than fostering genuine education.
• Business: Wells Fargo's focus on "accounts per customer" as a proxy for deep customer relationships led employees to open millions of unauthorized ghost accounts to meet aggressive sales targets.
• Capital Markets: Today's stock price is surrogated for a company's true long-term value, incentivizing executives to manipulate expectations for short-term stock gains, often at the expense of sustainable growth.

Efficiency at all costs. This surrogation is amplified by an obsession with efficiency. Companies relentlessly pursue proxies like lower hourly labor rates, elimination of slack, and reduced procurement costs, often overlooking crucial nuances like worker quality, supply security, or long-term innovation. Similarly, antitrust policy now prioritizes easily measurable "production-cost efficiencies" over harder-to-measure benefits like competitive innovation or consumer protection.

4. Unchecked Efficiency Creates Fragile Monocultures and Systemic Gaming

In the Pareto distribution, an important dynamic is that the effect (having more followers) is the cause of still more of the effect (having still more followers), which causes yet more effect, and so on.

The Pareto shift. The relentless pursuit of efficiency, coupled with increased pressure and connectedness, systematically pushes economic outcomes from a Gaussian (bell-shaped) distribution, characterized by a large middle class, towards a Pareto (power law) distribution. In a Pareto distribution, a small number of "winners" accumulate a disproportionately large share of the rewards, while the majority stagnates or falls behind. This is evident in:

• Wealth and Income: The richest 1% of Americans own almost 40% of the country's wealth, a far more extreme concentration than Pareto observed in 19th-century Italy.
• Job Market: Rewards are increasingly concentrated in "creative-in-clustered" jobs, while "routine-in-dispersed" jobs stagnate.
• Company Profits: The top 100 most profitable US firms now earn 84% of all publicly traded company profits, up from 48% in 1978.

Rise of monocultures. This drive for extreme efficiency also fosters "monocultures" – systems where a single, highly efficient actor or method dominates. While efficient in a narrow sense, monocultures are inherently fragile and vulnerable to external shocks. The almond industry, with over 80% of global production concentrated in California's Central Valley, exemplifies this risk, as a single localized event could devastate global supply.

Gaming and fragility. The "machine" model encourages gaming, as intelligent agents exploit rules for personal gain. This creates a "gamer's paradise" where large financial incentives and long durations of payoff encourage massive investments in gaming the system (e.g., high-frequency trading, lobbying). This constant gaming, combined with the fragility of monocultures, makes the entire democratic capitalist system increasingly unstable and prone to catastrophic failure.

5. Balance Efficiency with Resilience Through Productive Friction and Continuous Improvement

The core design challenge for the future of American democratic capitalism is to achieve a much better balance between efficiency and resilience in the system than exhibited by these LBO disasters.

The critical balance. The relentless, unconstrained pursuit of efficiency, as seen in leveraged buyouts that saddle companies with crippling debt, saps systems of their resilience. While inefficiency leads to slow decline, a lack of resilience can lead to explosive, catastrophic failure, as demonstrated by the Fukushima nuclear disaster or the 2008 financial crisis. The key is to find a delicate balance between efficiency and resilience.

Design for complexity: Pressure vs. Friction. Since complex systems are inscrutable and unpredictable, applying unchecked pressure for efficiency is dangerous. The solution is to introduce "productive friction" – deliberate constraints that moderate pressure and protect against extreme, negative outcomes.

• Examples: Baseball's pitch-count restrictions prevent pitcher burnout; NASCAR's restrictor plates reduce dangerous speeds; the Federal Reserve's interest rate hikes cool an overheating economy.
• Benefit: Friction ensures that a system can "bounce back" from shocks and maintain long-term functionality, even if it means sacrificing some short-term efficiency.

Design for adaptivity: Perfection vs. Improvement. In an adaptive system, there is no perfect, permanent solution. The pursuit of perfection is delusional and dangerous, as it creates opportunities for gaming and leads to system dysfunction. Instead, the focus must be on continuous, incremental improvement.

• Approach: Treat regulations and policies not as fixed solutions but as prototypes to be continuously tweaked and refined based on observed outcomes and adaptive behaviors.
• Analogy: Like software development, where patches are constantly released to fix bugs and adapt to new challenges, economic policy needs relentless tweaking rather than grand, one-time fixes.

Design for systemic structure: Connectedness vs. Separation. While connectedness drives efficiency, tightly coupled systems are prone to catastrophic failure. The solution is to balance connectedness with "productive separation" – introducing firebreaks to prevent cascading failures.

• Examples: The Glass-Steagall Act (though later repealed) separated banking and securities; stock market circuit breakers halt trading during sharp declines; recognizing that bond-rating agencies are connected to bond trading desks (and thus prone to conflicts of interest) is crucial.
• Benefit: Separation builds redundancy and prevents a single point of failure from bringing down the entire system, enhancing overall resilience.

6. Business Leaders Must Reject Reductionism and Embrace Systemic Thinking

Four Seasons Hotels and Resorts, the world’s most successful luxury hotel chain, is a business that, like Joe’s, recognizes these key attributes.

Beyond reductionism. Most business executives are trained to view companies as machines, breaking them into silos and optimizing each part independently. This reductionist approach, however, leads to negative outcomes:

• It creates interchangeable "cogs" with downward pressure on wages, while a few "star" integrators command exorbitant compensation, leading to Pareto outcomes in employee income.
• It results in unsatisfactory customer experiences due to siloed responsibilities.
• Solution: Embrace a systemic view where all parts are interdependent, as exemplified by Joe's Stone Crab, which prioritizes employee well-being, supplier relationships, and diverse customer offerings over narrow cost-cutting.

Slack is not the enemy. The machine model equates "slack" with waste, leading to its relentless elimination through methods like zero-based budgeting. However, in a complex adaptive system, optimal slack is crucial for resilience and long-term performance.

• Example: Zeynep Ton's "Good Jobs Strategy" shows that retailers like Costco and Trader Joe's, by paying higher wages and building in "excess" staffing (slack), achieve higher sales per square foot and greater profitability due to superior customer service and employee engagement.
• Lesson: Thoughtful, intelligent slack acts as productive friction, allowing for flexibility, better service, and resilience against unforeseen challenges, unlike the detrimental cost-cutting seen at Kraft Heinz.

Guard against surrogation. Relying on single proxies for success leads to perverse behaviors. Businesses must use multiple, often contradictory, measures to ensure a balanced approach.

• Example: Southwest Airlines simultaneously aims for the lowest cost, highest customer satisfaction, highest employee satisfaction, and highest profitability. This forces them to find clever, integrated solutions (e.g., paying employees well but achieving high productivity) rather than optimizing for one metric at the expense of others.
• Tool: The "balanced scorecard" approach, with its financial, customer, operational, and innovation proxies, helps prevent surrogation and encourages holistic thinking.

Monopolization is unsustainable. While achieving a monopoly might seem like the ultimate business victory, it ultimately leads to stagnation and vulnerability. Monopolies, lacking competitive pressure, lose the motivation to adapt and innovate, becoming brittle monocultures.

• Historical lesson: AT&T's long-distance monopoly eventually crumbled when faced with competition, and Microsoft struggled to adapt to the smartphone era despite its PC operating system dominance.
• Principle: Great companies need great competitors to stay great. Aggressive competition, without the intent to eliminate rivals, fosters continuous learning from customers and ensures long-term dynamic efficiency and resilience.

7. Political Leaders Must Prioritize Long-Term Resilience Over Short-Term Efficiency

Rules—such as minimum capital requirements, leverage ratios, limits on activities—are important, but in the Canadian experience, the actual day-to-day supervisory oversight of financial institutions is just as significant . . .

Write revision into laws. US legislation often aims for permanent, comprehensive fixes, which are easily gamed in an adaptive system. Political leaders should instead adopt a continuous tweaking approach, like Canada's decennial (now quinquennial) review of its Bank Act.

• Benefit: Regular review and sunset clauses for legislation raise the cost and lower the value of gaming, as profits from exploitation cannot be accumulated indefinitely.
• Analogy: The NFL's Competition Committee constantly tweaks game rules to maintain balance and excitement, demonstrating how continuous adaptation can sustain a complex system.

Seek mental proximity. Policy design often relies on abstract assumptions about citizens. Leaders must engage in direct, ethnographic research to understand real-world needs and behaviors, leading to more effective and adaptable policies.

• Example: The UK's GOV.UK website service used in-depth interviews and user testing to understand how citizens actually search for information (e.g., "lost" vs. "stolen" passport), leading to more intuitive and user-friendly designs.
• Outcome: This approach allows for the introduction of "speed bumps" (productive friction) that, while seemingly inefficient, ultimately improve user experience and system resilience.

Dial up productive friction in trade. While free trade offers efficiency, unchecked liberalization can harm domestic industries and workers, leading to Pareto outcomes. US trade policy, already the world's most open, needs to rebalance by introducing more friction.

• Reality: Many developed countries, like Japan and Canada, employ subtle non-tariff barriers to protect sensitive sectors, even while advocating for free trade.
• Action: US leaders should be more cautious about removing trade frictions, recognizing that what seems like an efficiency barrier to some is a necessary protection for others, fostering resilience in the domestic economy.

Fight the giants. Antitrust policy, originally designed to prevent the accumulation of power by monopolists, has been weakened by an "efficiency defense." This allows dominant firms to grow, creating brittle monocultures.

• Example: The European Union has aggressively fined tech giants like Google and Qualcomm for monopolistic practices, demonstrating that it's possible to challenge these firms and protect competition, even if it means sacrificing some short-term "efficiency."
• Principle: Robust antitrust enforcement, by protecting innovative smaller firms, ensures dynamic efficiency and long-term resilience, even if it means some short-term "inefficiency."

Extend time horizons. Capital markets, driven by short-term metrics and activist investors, force companies into anti-resilient behaviors. Policy makers need to encourage longer-term investment.

• Initiatives: The SEC's approval of the Long-Term Stock Exchange (LTSE) and the Investors Exchange (IEX) "speed bump" are steps towards creating markets that reward long-term thinking and reduce the advantage of high-frequency trading.
• Proposal: Implement tenure-based voting rights (e.g., giving more votes to shares held for longer periods, as in France) to empower long-term investors and insulate management from short-term activist pressures.

Return to more-progressive tax rates. The four-decade experiment with historically low marginal tax rates on high incomes has contributed to increasing inequality and Pareto outcomes.

• Historical context: For half a century (1932-1981), top federal income tax rates averaged 80%, a period of exceptional US economic growth and progress for the median family.
• Argument: While not the sole solution, increasing top marginal tax rates is a proven method to moderate extreme wealth concentration and ensure that the benefits of economic growth are more broadly distributed, fostering a more resilient democratic capitalism.

8. Educators Must Prepare Students for a Complex, Adaptive World

While Grosso understands that part of her official job is to transmit a body of content from her head to those of the students, she thinks her real job—her most important job—is to help students become capable of thinking in a complex and uncertain world.

Temper the inclination to teach certainty. The current education system, heavily influenced by standardized tests, primarily teaches that there is one "right" answer. This fosters overconfidence in flawed models and discourages critical thinking.

• Alternative: Educators should teach that all models are interpretations, not absolute truths, and that human advancement comes from building better models, not just applying existing ones.
• Example: Beth Grosso's elementary classroom teaches students to build and evaluate models by exploring different data and interpretations, fostering confidence and curiosity rather than fear of being "wrong."

Stop teaching reductionism as a good thing. Education often silos knowledge into narrow disciplines, discouraging integrative thinking. This leaves students ill-prepared for a complex, interconnected world where problems rarely fit neatly into single categories.

• Challenge: Business schools, despite Peter Drucker's warnings, largely teach narrow disciplinary knowledge, failing to equip students with the skills to integrate across functions.
• Solution: Initiatives like the Rotman School's "integrative thinking" program and MIT's "system dynamics" teach students how to connect disparate ideas and make decisions that consider the interdependencies within complex adaptive systems.

Help students appreciate the power of directly observable data. Students need to learn to ground their models in real-world observation, not just abstract theories or second-hand interpretations.

• Method: Teach ethnographic approaches, where students gather qualitative and quantitative data by observing real people in real activities.
• Example: Stanford's d.school, through its "design thinking" curriculum, rigorously trains students in ethnographic methods to gain deep user understanding, leading to more effective and user-centered solutions.

Elevate the appreciation of qualities. The modern education system's obsession with quantifiable data leads to students who are strong in manipulating numbers but weak in appreciating non-quantifiable qualities like love, happiness, or beauty.

• Problem: This imbalance results in overly certain, unreflective individuals who struggle to understand nuanced perspectives and collaborate effectively in complex social systems.
• Solution: Integrate the appreciation of qualities, traditionally found in humanities and arts, into all fields of study. This fosters a more balanced perspective, enabling students to recognize that conclusions are interpretations, not facts, and that alternative viewpoints can lead to superior outcomes.

9. Citizens Must Actively Engage to Rebalance the System

It really shows you how much power consumers have when they want to be heard, and they’ve been heard.

Utilize purchasing power. Citizens, as consumers, possess significant power to influence corporate behavior and introduce friction into overly efficient markets.

• Buycotts: The "French's ketchup affair" in Canada demonstrated how consumers, by choosing to buy from a less dominant, more ethically aligned supplier, can reward desired behaviors and mitigate the effects of corporate efficiency drives on local economies.
• Multihoming: Instead of exclusively patronizing dominant providers (e.g., Amazon, Facebook, Uber), consumers can split their purchases across multiple providers. This introduces healthy competition and prevents the unchecked growth of monopolies, fostering redundancy and resilience in the marketplace.

Leverage collective action. Beyond individual purchasing decisions, citizens can organize collectively to create powerful countervailing forces against winner-take-all markets and political duopolies.

• Examples: Groups like Mothers Against Drunk Driving (MADD) successfully lobbied for stricter laws by combining large numbers, high commitment, unity, and a worthy cause. Similarly, private citizens in Canada organized to sponsor Syrian refugees, achieving what government alone could not.
• Principle: Collective action, whether through consumer boycotts, advocacy groups, or community initiatives, can push governments and businesses to act on issues they might otherwise ignore, introducing necessary friction into the system.

Insist on reciprocal political relationships. The current political dynamic often involves politicians making grand promises while expecting passive votes from citizens. This disengagement undermines democracy.

• Shift: Citizens must demand and actively participate in more reciprocal relationships with their elected officials, taking joint responsibility for making things happen.
• Example: Participatory budgeting, where citizens directly propose and vote on how a portion of public funds is spent (as in New York City), increases citizen engagement, especially among traditionally disenfranchised groups, and fosters a more resilient political process.

Make each vote count. Practices like gerrymandering dilute the power of individual votes, entrenching political duopolies and discouraging voter turnout.

• Challenge: Gerrymandering creates "safe seats" where election outcomes are predetermined, making many votes effectively meaningless.
• Solution: Citizens can take collective action at the state level to push for independent redistricting commissions, as successfully done in Arizona, Florida, and Michigan. Additionally, advocating for automatic voter registration (already implemented in Oregon and other states) can increase participation and ensure more voices are heard, injecting vital friction into the political machine.

Last updated: August 16, 2025