Kohr Blimey

The Guardian weekly had some excellent articles this week about the global crisis. My favourite one was by Paul Kingsnorth, extolling the philosophy of Leopold Kohr, who he called the most important economist we had never heard of. Well said Paul, I had indeed never heard of him.

Kohr was an Austrian Jew who formed most of his theories during the Spanish civil war and then the second world war, and then published “The Breakdown of Nations”. He later one a sort of secondary Nobel Prize and became the inspiration for “Small is Beautiful” and other seminal works. Not a bad CV.

His simple theory is that size destroys. As soon as things grow beyond human scale, they have a tendency to become inefficient and dangerous. In the end, the concentration of power creates destruction. Simple. And easy to see how a Jew living through the Hitler era might reach such a conclusion.

I find the theory attractive as well. I have long argued that in my work life I have seen far more examples of diseconomy of scale than of economy of scale. The bigger the enterprise, the less well motivated the employees, the more vanilla the direction, and the slower the response. There is also the problem of layers of bureaucracy in place to manage internal things rather than do anything of value to customers.

I saw one result of this when I visited Shell in Manila this summer (just as a tourist really) and read all the internal communications I could find. Nowadays, companies like Shell run most of their operations continent-wide or even globally. I was a victim of the early stages of this process in Europe, and always found it destructive of value. Well, now I saw the end game. For this business segment, there were clearly no leaders in a place as small as the Philippines (a mere 90 million people), merely supervisors relaying instructions from some remote centre. And since those instructions had to apply to every conceivable market circumstance, they were utterly devoid of content. If you have ever played Bullshit Bingo this was the ultimate example. The business was exhorted to be world-leading, customer-focused, best-in-class, innovative, to delight its customers, and much else besides, without any real description of what the people were actually supposed to do.

Another example was in a study in the Economist last week, with an American survey about how staff viewed their companies. Whereas most bosses thought their firms were inclusive and modern, staff overwhelmingly described them as command and control. Part of this must be a result of the distance created by scale. Dilbert is still a pretty fair reflection of business life.

The most compelling theoretical argument in favour of Kohr is the classical curve of the evolution of the firm. A firm starts bubbling along the bottom of the graph, as it creates its products and infrastructure. Then there is a growth spurt, with clear focus and strong management, and market impact of the firm’s distinctiveness. Then follows maturity, with little unit growth, as the internal processes of the larger firm clog up the works, and also when a single manager can no longer run the place effectively. In the end comes decline, as competitors overtake the slumbering giant.

There it is, in all the economics text books. And if it true for the firm, it is likely to be true for a country, an army, or even a Church, for the same basic factors are in play. When the bullshit bingo starts, you know the decline is on the way.

What the theory does not prescribe is how long each phase is or how big the firm is before it hits its plateau, as this will be decided by factors like context, skills and product of the firm. Some can fly very high before declining. Very occasionally, a new management team can engineer a rebirth, for example at IBM.

The pattern is obvious with empires through the ages, from the Greeks and Romans through the British. Another article in the same Guardian Weekly argued that when we look back on the current crisis we will see it as the decline of the age of American hegemony. Of course, most writers on the Guardian disparage the US, so this might be more wishful thinking then prescient analysis, but the may be some truth in the claim. Certainly, the poor education, dysfunctional politics, and even the rampant obesity do not auger well for a strong US future.

Then it will be China’s turn, and one lesson from Kohr is to recognise that even that era will have an end. We read about these wonderful Chinese companies – be careful not to invest too late, as what goes up must come down, in the end.

I suspect most of us would find that our personal experiences back up Kohr. When have you been most productive? In a corporate army, or within a small team with shared belief and autonomy?

There are social policy implications too. If the police is seen as a distant controlling body, we might try to outsmart it. If it is the guy in the village who drinks with Dad, we’ll find it a bit easier to understand and comply. If we feel part of a community, family or otherwise, we are more likely to have a mentality of service and support. An argument for the big society?

And while we are on British politics, Kohr would certainly find plenty of fault with Ed Miliband’s nascent industrial policy. What guff that was, somehow thinking the state could pick winners and punish those with the wrong motivation. Create conditions for innovation, then get out of the way, is surely a better plan.

We can take Kohr a bit further, and takes a global perspective. Is bigness not just destroying the US, but humanity? The EU responds to its crisis with more integration, creating more bigness and sowing the seeds of accelerated destruction? In the next era, might the successor to the UN even go the same way? Is climate change a classical Kohr symptom of diseconomy of scale? A fan of the EU, this certainly challenges some of my core assumptions. Then there is global finance. Is it possible that the real problem is that it has become too big, too integrated?

The theory is good, but perhaps we need a bit more to explain the world. Communications must help learning, yet communications needs scale to work. I for one am happy I have the internet. Is it possible to make good infrastructure advances while promoting smallness? I am not sure.

Of course, the big problem with Kohr is what to do about it. He was a sort of early hippie, advocating city sized states and autonomous communities within them. He was realistic enough to understand that there was no likelihood of this actually happening. Human nature looks for consolidation of power, for single repeatable solutions, for joining a winning team. Most firms in the decline phase respond my making acquisitions and managing ever more globally. You don’t see the Catholic Church devolving power from the Vatican. Not many US politicians or citizens advocate breaking the country up.

But what we can do is challenge our own assumptions, and consider giving more support to those who argue in a different way. The current UK coalition government started with an admirable intent to devolve decision making to local and regional bodies. It has lost its way, as so often is the case, swayed by the lazy “postcode lottery” brigade. In companies, some people do advocate genuine empowerment and even some internal competition, and I always tried to support them. I love the management concept of getting out of the way. The motive of the UK Eurosceptics may be unpalatable, but perhaps different logic could support some of their conclusions.

Thank you, Paul Kingsnorth, for bringing a valid alternative view to my attention.