Clay Shirky posted a much-discussed
on the inability of complex business models to adapt in the face of
shifts in the economic or cultural climate, which goes directly to one of the
points I made in Young World Rising
about the hidden costs of legacy infrastructure.
Shirky, in analyzing Joseph Tainter's 1988 book The Collapse of Complex Societies, noted
that complex societies "hadn't collapsed despite their cultural sophistication,
they'd collapsed because of it."
This is an important
observation because it is counterintuitive. Complex organizations are supposed
to derive an advantage from their complexity, or at least from their size. That's
the whole idea behind economies of scale, where large organizations benefit
from the ability to amortize high up-front development costs with
highly-efficient manufacturing and distribution. This is a concept we tend to
associate with industrial mass production, but this advantage should be
magnified in an information economy. The production of new information is a
complex and sophisticated process. A giant broadcast network like NBC already
has a critical mass of creative resources to produce new content, and should be
better positioned to distribute it using new, less costly channels. They should
be better at it than some random guys in their garage producing a webcast. And they
are, at scale. So why are they having such a hard time?
Shirky talks about the problems that complex organizations
have in changing their orientation toward changing tastes and market
requirements. Cultural inertia has built up around certain processes and values
within the organization, creating a kind of institutional osteoporosis that
renders the business brittle in the face of changing conditions.
true, but I think the bigger issue is the declining advantages of scale due to
networks. Shirky touches on this, summing up Trainer's position: "Early on, the
marginal value of complexity is positive-each additional bit of complexity more
than pays for itself in improved output-but over time, the law of diminishing
returns reduces the marginal value, until it disappears completely. At this
point, any additional complexity is pure cost."
I made a similar point in the introduction of Young World Rising, in discussing
why new knowledge-based businesses arising at the frontiers of the global
economy find themselves in a better competitive position today, despite the
persistence of the old limitations of poor governance, poverty and
In the past, the well-developed
infrastructures of the Old World centers of production provided a consistent
advantage in scale, knowledge and innovation. Today, the benefits of scale are
mitigated by the power of networks to rapidly mobilize communities that don't
require the overhead of organized management. The advantages of established
infrastructure are diminished by the need to constantly overhaul aging capital
and modernize outdated practices in work and government that have developed
significant constituencies over the years. Innovation used to rely on proximity
to the centers of knowledge and production, but now technology makes time and
In other words, the economics haven't changed: the idea of
scale has. In the past, organizations had to aggregate all their resources
within an institutional framework. They had to lock up their talent and impose
a whole superstructure of management, reporting, distribution of authority, and
hierarchy, which added enormous amounts of complexity and drained away enormous
sums of money and manpower. If you wanted to be big and well-coordinated, you
needed these kinds of systems, and you needed to build them yourself for your
exclusive use. This was the cost of scale, but it was also handy as a barrier
to entry for new competitors.
Now those costs have nearly vanished - and with them, the
barriers to entry that kept insurgents at bay.
Whereas in the past, large organizations had to provide
social capital and communication/collaboration infrastructure at their own
expense (and were the only ones who could afford to do so), those resources now
reside in the network platform, which is already built and common to all. Previous
examples of organizations and societies that failed due to their complexity did
not have to deal with this dynamic - at least not in the sense that it exists
today with the rapid spread of ubiquitous, high-quality access to the Internet
around the globe.
Startup organizations can use networks to "borrow" the scale
they need when they need it, by assembling ad hoc teams and communities around
specific projects, then take advantage of the same low-cost distribution
networks as their larger competitors. Because the costs are so much lower, new
organizations can survive at much lower levels of income, and devote
proportionately more of their revenue to the creation of new content and new
innovation, rather than the upkeep of outdated infrastructure.
The only remaining constraint facing organizations operating
according to this model is that the practices for managing a networked,
distributed organization are not well-established and many of the most senior,
knowledgeable individuals are not familiar with, or comfortable in, that kind
of environment. They will make a lot of mistakes, but they will make them fast and
get better. And then, watch out.
As this happens, large-scale organizations will fall back on
the only recourse available to them: naked power - the ability to influence governments and
markets. Typically, the larger systemic collapse of complex societies result
from the power struggle between incumbents desperate to protect their
privileges and nimble upstarts pressing their claims for a higher share of
resources. That appears to be the situation we are headed towards, and its
outcome is by no means certain.