Gervais / MacLeod 18: more on trust, Square Root Syndrome, Brownian and Progressive Time

In Part 17, I discussed the financial considerations of starting a technology company financed by passive equity-holders. In that model, these investors are enabled to enjoy the high rate of return associated with human creative risk, but do not take an active management role. I used the term “lifestyle business” but I’ve since realized that I’m talking about something more specific: mid-growth businesses. “Lifestyle”, as I’m using it, isn’t about size, but about intended growth rate. It refers to businesses that prioritize long-term cultural health over rapid expansion, but that have a clear interest in growth itself. It’s not headcount or revenue growth that the mid-growth business optimizes for, but healthy growth: growth that doesn’t compromise the culture.

A low-growth business might be a restaurant with inherent scale limitations, or a “4-hour work week” business intended to run itself later in time. The ceiling is fairly low, and consequently there’s not a lot of interest in passive equity financing. Banks will make loans (debt financing) and usually require personal liability. Failure rates are considerable (business is always risky) but not so high as to make this completely untenable. On the contrast, a high-growth business is insistent on rapid growth– in headcount, revenues, footprint, and market dominance. 100 percent per year is barely socially acceptable; 150-200% is expected. Investors take an active managerial role and lose interest if growth falls short of 10% per month. The major downside of the high-growth business is that the vast majority run out of money and fail.

I’ve been trying to figure out a way to address the needs of the 1%- and 2%-per-month growth businesses. That doesn’t deserve to be sneezed at! If one could invest $10,000 into a business whose value grew reliably at 1.5% per month, that would turn into $356,000 after 20 years. That’s not the kind of thing that screams “fuck-you money” to thrill-seeking prospectors, but it certainly would make most passive investors happy. The conclusion I’ve come to is that we need passive equity financing of a very large number (a “fleet”) of highly capable but slow-growing (by VC-istan standards) businesses. Right now, regulations exist to keep “dumb money” away from such “lifestyle” businesses, judging small investors incapable of getting a decent deal, considering the “principal-agent problem” involved. My methodology (in the previous essay) fixes that by making compensation and profit sharing extremely simple and transparent while handling “HR expediencies” in a such a way that they don’t compound over time. Good. Solved that problem, at least on a technical front. That’s one of the major obstacles right now against my vision of connecting passive capital with human creativity in a way that doesn’t involve the career volatility and ethical compromises of VC-istan. It’s not the only obstacle, but it’s the biggest one.

Compensation is the harder of the two trust problems in organizations: do the owners (principals) trust the workers (agents) not to steal from them by overcharging or through various devious manipulations (e.g. “holding the company hostage” with key information)? Extreme transparency on compensation and culture helps a lot there. The more openness there is about the way decisions are being made, the more it is made clear that devious play-the-company-against-itself tricks won’t result in outsized personal yield, the less likely defection is. There’s a second question of trust, which is traditionally left to managers (owners don’t get involved): can we trust people to get the work done? That’s a fun one, too. Why do so many projects fail to ship? Why are so many people seemingly incompetent at self-executivity (including many actual executives)? That requires introducing the phenomenon of wasted time in an interesting context: Brownian time.

Brownian Time

I once found myself in a discussion about the value of an hour of time. A friend of mine were trying to determine whether it was possible to value work on hour-by-hour basis? We realized that, for most work days, only 3 hours (the square root of 9) actually mattered. The other 5-6 were spent in meetings, goofing off, or general “zoned out” low productivity, for most people. This seems to be the norm, and it’s not an intentional or morally bad thing. People just can’t hold intense concentration over an 8-hour contiguous block of time that someone else picked, five days in a row at the exact same time. It’s not possible.

We realized that this idea (“Square Root Syndrome”) applied to more than just hours in the day; it was visible at larger scales. Three hours of the workday really matter; the rest is wasted. Days in a week? It seems typical to have real victories on 2 out of the 5; the other 3 are unstellar and see minimal useful work. Stuff gets done, but rarely important stuff. Apply this to the 49 weeks in a typical work-year: 7 weeks pertain to real highlights– macroscopic achievements, lines on the resume– and the other 42 are forgettable. Then look at a 36-year software engineering career. Six years of the typical engineer’s career are spent on jobs that really deliver– lead to promotions, “fuck you money”, interesting contributions to humanity. The other 30? Wasted on executive pet projects, startups that go nowhere, ingrate bosses, and bad ideas. That’s not how it is for everyone, but those numbers seem pretty typical.

The depressing conclusion of this is that out of a whole career, only a little bit counts: 3 hours/day times 2 days/week times 7 weeks/year times 6 years gives us 252 hours that are really worth a damn. Of course, that’s not how actual careers work. It could be zero hours in a person’s career that count, meaning that there’s no progress and it isn’t really a career. It could be several thousand that matter. I’ll get to that later on.

This recursive “square root” relationship is what I call Brownian Time. It shows us the downside of unstructured, chaotic behaviors. If there’s no feedback or conscious work at using time properly, you get square-root scaling.  So you get twice as much out of a 4-hour meeting as you get out of a 1-hour meeting. (That’s generous; for most 4-hour meetings, one gets less.) I don’t know that the actual human pattern follows an exact power of 0.5, but it’s not far off. Why is it Brownian? It pertains to the a fractal pattern called Brownian Motion, which is a model for a variety of random processes including stock prices. If a stock has volatility (variance) of 1% per day, its volatility over a 256-day year is 16%. Most of the ups and downs cancel each other out. If one could call the good days in advance (and, of course, one can’t) then one could hold the stock for only a few days that year and realize all of its gains (or losses) in that small slice of the year. Brownian Motion is random “drift” that scales with the square root of time. If your goal is twice as far away, it’ll take 4 times as much drifting to get there.

In practice, I don’t care much for “Agile” software development practices, which often become the opposite. If you have mutual trust between managers, software engineers, and customers, then it can work well, but it’s not needed. If there isn’t that trust, Agile breaks down horribly and becomes not only a justification for intense micromanagement that borders on emotional bullying (several status checks per day) but with rigidity in such micromanagement that generates undesirable process complexity. Good teams are already doing things that look like Agile without necessarily calling that: keeping each other informed, taking full ownership of quality issues, and prioritizing important issues over silly and egotistical ones, without going nuts if (oh, my God!) something goes into version control without an associated “story”.

Yet I decided to read into “the dark side” and found a good talk about Agile by Mike Cohn, and I got a sense of what Agile really is and why it exists. Cohn isn’t trying to give evil managers a cudgel or mire teams in 45-minute “standups” where managers get to sit down. He’s trying to fix the Brownian Time problem. Between the burndown charts and time-management protocols, he’s trying to create a framework in which a team’s use of time show linear productivity rather than a square-root relationship. That, I’d say, is admirable.

Related to “Brownian Time”, of course, is Brownian Management. Requirements accumulate with no discrimination regarding which are the real requirements and which are “nice-to-haves” and which are fourth quadrant bullshit laid on because it’s free to tell someone what to do. Managers squabble over headcount and people are moved. Authority topologies change and expectations (always poorly laid out) shift. People are pushed left, than right. Ninety percent of work exists to counteract side effects of other work. From a microscopic level, people seem busy, but from a macroscopic perspective, nothing’s getting done. From an outside perspective, it looks infuriating. Ten thousand people are being paid to accomplish what looks like it should be done by 100. In other words, Square-Root Syndrome seems to apply to groups of people just as it does to time.

Progressive Time

If all the value in a creative person’s career could be condensed into 252 hours, that would be quite an unhappy conclusion. An incredible amount of time would be wasted. If we’re going to graph the per-hour economic yield of a typical person’s career (which rarely tells the whole story, because there are interactions between one hour and the next) we’ll probably find something like that. Nassim Taleb made almost all (over 98%, if I recall correctly, of his $40 million lifetime P&L) of his lifetime earnings as a trader in one day: the October 1987 stock market crash (“black swan”). This is why narratives work for us: they capture the small number of high-impact moments; Rocky Music plays in a “practice montage” of three minutes that stands in for 3 years of intense training. Sure, one can put the most critical parts of a drama (unfolding over five years) in a 3-hour movie, and that tells the whole story. Yet we know, from experience, that you can’t get to any level of readiness for the critical moments with a measly 3 hours of preparation. It takes deliberate practice. It requires progress, and that involves making sure future hours are informed by the past and present, so the right decisions are made, and the best ideas are had, in those 252 critical hours.

One neat thing about learning as opposed to economic “doing” is that it scales better. You don’t get Square Root Syndrome with building up a knowledge base. In fact, you probably get synergy: faster-than-linear scaling of economic value. However, economic value itself is not what I intend to measure. Here’s I’m just talking about productivity: the pushing forward of a project (which might be to learn a new concept). With well-structured learning processes, people continue to push forward at an approximately linear rate, rather than experiencing the Square Root Syndrome of Brownian Time.

Most individual productivity strategies (such as the Pomodoro Technique) are designed to bring peoples’ awareness and planning up to a level where linear Progressive Time is common, rather than square-root Brownian Time. The idea behind Agile, executed well, is the same: to put enough microscopic consciousness of time into the process to remove the drift that causes Brownian Time. If a team is getting bogged down with Brownian Management, escalating technical debt, or other scaling problems, it should show up on the burndown chart.

I still don’t like Agile, because it’s built on fundamental closed-allocation assumptions. I dislike the idea of having a totalitarian Product Owner with unilateral priority-setting authorities, on the assumption that engineers will “just go do it”. Totalitarian “get it done” management is appropriate for existential threats, but those are rare and shouldn’t be assumed in normal planning. It would also be better if engineers were empowered to push for Progressive Time on their own terms (self-executivity). I think there are some good ideas in “Agile” that deserve further inspection, but I wouldn’t buy the thing wholesale, and I’ve seen it become a disaster in practice.

Square-Root Syndrome and Hierarchy’s Role

I’ve already stated my hypothesis that something like a Square-Root Syndrome applies to people. If there are 100 people in an organization, then it’s probably doing the work of 10 people. Again, I don’t know that 0.5 is the exact right power to apply, but it’s not a far-off guess for a start. I’ll get back to that.

Why is “bigness” maladaptive? Why aren’t biological cells 20 meters in diameter? The answer is simple. At that size, it will starve. Surface area grows quadratically in the diameter of the cell, while mass and need for nourishment grow as the cube. In other words, a cell’s ability to nourish itself grows as the 0.6667th power of the size. The same seems to hold with organizations, although we’re no longer talking about a 3-dimensional physical space, but an N-dimensional abstract space– ideas, information, social connections, business strategies. I’m keeping this hand-wavy intentionally, but let’s focus on the N (it works as metaphor, at least) and talk about dimensionality.

Let’s say that we’ve hired four people whose fluencies (0 to 10) in various programming languages are as follows:

Person | Java | Python | Haskell |  C  |
Alan   |    6 |      2 |       0 |  7  |
Barb   |    7 |      6 |       0 |  3  |
Carl   |    5 |      5 |       5 |  4  |
Diana  |    0 |      7 |      10 |  5  |

Who is the best programmer? Clearly, there’s no good way to answer that. Alan is the best at C, Barb is the best at Java, and Diana is the best at Haskell and Python. What about Carl? He’s not especially strong in any of the languages, but if there’s a project that requires Java and Haskell, he’s the only one who is ready (non-zero fluency) to do it! At 4 dimensions, we already have a world in which there’s no well-defined concept of the “best” or “worst” of these four programmers.

Dimensionality is relevant to organizations because, even though organizational dimensionality isn’t well-defined (there isn’t a clear set of “4 meaningful dimensions” that exist platonically, because what dimensions are relevant is somewhat subjective) it pertains to the optimal size of an organization. The more dimensionality there is in a business problem, the more it favors larger organizations with more specialized players. At least as metaphor, the idea of a cell in N-dimensional space works. Capacity for nourishment grows (in size p) as p^(N-1), and need for it grows as p^N, so overall organizational productivity grows as p^(N-1)/N and per-person productivity evolves in proportion to p^(-1/N)– it decreases.

What is the appropriate N for a typical corporation? Surprisingly, it’s disappointingly low. Businesses need a lot of different skill sets to operate, so one might expect this to make the case for high underlying dimensionality. If there are 10 dimensions on which people are evaluated for fit, then we get N = 10 and we scale as p^0.9, meaning we only get 7% more inefficient for each doubling in size. However, let’s consider two things. First, the proper value for N might not be an integer; it could be something like 2.35. This is a “fuzzy logic” situation where it’s subjective which dimensions matter, and how much. (This is an abstract fractal space, not a clean geometric one.) Does it matter if Carol speaks German (a candidate 5th dimension)? It depends on what the company is doing and what it needs. So the matter of which dimensions are included and excluded (a social phenomenon, not an explicit mathematical one) is unclear and could be akin to dimensions “possibly mattering, but intermittently and not all that much”. The effective N is much lower than the number of actual candidate dimensions (which is, at least, in the hundreds and arguably infinite). Second, organizational decision making is executed by humans, who can’t even visualize more than 2 dimensions easily. Three is possible, but a stretch. Four is just way outside of our experience. People making important “big company” decisions are not going to take stock of all the possible candidate dimensions. Everything gets collapsed into 2 dimensions: vertical (social status, importance, proximity to decision makers) and horizontal or “lateral” (all that other crap). Then, N = 2, and one gets exactly the square-root scaling. Since the “lateral” dimension is treated as inherently inferior (anything important would live in the vertical dimension) it might be more reasonable to treat the effective N as some lower value: 1.9? 1.85? 1.1? I won’t even begin to claim what the right number is, but it’s between 1 and 2 for most companies, and that induces something worse than square-root scaling.

If one finds this fractalized organizational pseudomathematics to be “hand wavy”, I’ll agree that it is, but there’s an important message in it. The more hierarchical and social-status driven an organization is (i.e. the lower the effective dimensionality, or the more social forces there are that collapse the organization into an org-chart or a “ladder”) the worse its capacity for nourishment (in this case, information rather than physical food) will fall behind its need. It will starve.

This is one of the inherent problems with big organizations. Their high underlying (“true”) dimensionality of needs requires size, but humans can only visualize two dimensions well as they work out their social plans, and this low effective dimensionality leads to information starvation, opacity, and inefficiency.

Management as a factor

The metaphor above discusses the biological cell, which does not scale to enormous size because of its surface-area-to-volume ratio would become too low to sustain it. Organizations have this issue as they get big: important players are on the surface, while most sit in the starving interior. This is made worse by the exertion of hierarchy, whose effect is to prioritize one point on the surface– the executive apex. (That’s where the low effective dimensionality, above, comes from.) How does this pathetic scaling relate to Brownian Management? It comes down to the MacLeod Clueless.

Losers sit away from the information surface area. They like the interior– it’s warm and comfortable and someone is closer to the outside than you in any direction– and avoid the edge. Clueless tend to be nearer to that edge, but are starved of important knowledge, or lack the competence to get it. Incidentally, they’re also the culprits in the bumbling, non-strategic, inconsistent direction of others’ time that becomes Brownian Management. They play a major role in the duplication of efforts, the go-nowhere projects, and overall waste of such a large amount of time. They get the information handed to them, which is rarely what they’d need to be properly strategic, and if the Sociopaths at the surface are engaged in zero-sum squabbling, they’ll cancel each other out. Why don’t Losers, who tend to be more strategic, fight back against the waste of Brownian time? The answer is that it won’t get them anything. They’re more likely to get fired than noticed in a good way, so they keep their heads down and implement ideas they know to be bad. Only when the ill-conceived project starts demanding above-board personal sacrifice (i.e. it becomes a “death march”) do they push back, and usually by leaving.

Solving It

Understanding of organizational efficiency usually comes down to discussions of percentages. “I was only at half speed today.” That’s not the right way to understand this particular problem. First, there’s the matter of faster-than-linear returns on performance (convexity). Even without that, though, we see that often organizational inefficiency isn’t some percentage cut. That would be tolerable. Eighty percent efficiency, meaning 20 percent is dropped on the floor? That’s a cost of doing business. Square-root scaling, however, means that efficiency goes to zero with growth. You might start out at an acceptable 80% efficiency, but find yourself at 8% when you scale up by an order of magnitude.

Preventing personnel congestion is a matter of conservative hiring. Only hire multipliers who will make the whole group more productive. It’s not that mere adders should be considered unacceptable. For commodity labor, that’s perfectly fine. However, if the work is a commodity, you can specify it contractually and hire it on the market. Why bring a new person on board (and increase communication complexity) for that? I’m loathe to use the word synergy because it has become such an MBA buzzword, but that’s exactly what I’m talking about.

I believe that a company that grows conservatively can avoid Square-Root Syndrome in its people. Communication topologies and political complexities will get more complicated, but that can be offset by sharing of ideas and collaboration. So long as growth is slow enough to remain strategic and cooperative, it’s a good thing and will probably improve per-person efficiency. The problem that VC-istan companies seem to inflict on themselves is that they grow so fast that internal competition (for larger equity shares, executive roles) emerges and the whole thing implodes.

However, if you hire for synergy and avoid the Square-Root Syndrome of rapid expansion and turnover, you get to a point where the second trust problem (investors’ ability to trust in the organization to do the work) solves itself. Hire great software engineers and give them just enough direction to outline the problem, and just enough incentive (profit sharing, not equity in some far-off liquidation that might involve horrible investor preferences that wiping out common stock) to care about the profit motive, and they’ll get their work done.

Thus, most important on a day-to-day level is avoiding Square-Root Syndrome in time: getting employees to work in Progressive Time. That doesn’t mean that every idea has to come to fruition or that failure won’t be tolerated. Instead, it’s the opposite. It’s okay to fail so long as you can affirmatively answer the question: did you learn something? The difference between Brownian and Progressive Time is that the latter has a memory. The first is bumbling blindly and retracing worn paths, usually under (MacLeod Clueless) managerial dictation. The second is exploration that builds a knowledge base and enables future explorations to be more successful.

VC-istan, by the way, lives in Brownian Time. Now that M&A has replaced R&D, institutional knowledge of failures just dissipates, resulting in massive duplications of effort that swell up every few years. There is progress, but it’s at the Brownian drift rate (with selection imposing macroscopic forward movement; in other words, mindless evolution) rather than anything that could legitimately be considered deliberate forward progress.

What’s the practical way to do all of this? How does one inject these principles into a software company?

  1. Self-Executivity in Progressive Time. Personnel reviews aren’t about “How loyal were you to your boss’s career goals this year?” No, they’re about: did you work in Progressive Time? What did you learn? What did you teach? What multiplier effects did you have that made the whole company better? Why is this a better place to work in 2013 than it was in 2012? Why are you better in 2013 than in 2012?
    • By the way, I fucking hate the term performance review. If I were running a company, there’d be no such thing. There’d be regular impact reviews. You’re assumed to be performing. You’re trusted (and those who prove unworthy of trust are packaged out) to be working hard and in good faith. The impact meeting is to discuss unintended effects (that he or she might not see) of a person’s work and behavior on the company. Very low (or negative) impact doesn’t mean you’re a horrible person who deserves to be humiliated; it’s assumed to be no-fault but means that you need to do things differently.
  2. “10-Year Fit” / Invest in Employees. I will confess that I’m somewhat of a “job hopper“, and I’m shameless about it. Most companies (and even many managers in the more progressive firms) don’t invest in their peoples’ careers and don’t deserve loyalty. Progressive Time is not compatible with a head-down-and-following-orders attitude toward work. However, I am personally tiring out of the job-hopping lifestyle. So instead of the typical corporation where one has to be a lucky protege to have a real career, I’d build a company around the concept of the 10-year fit, and aim to invest in employees and get progressive returns amid convexity. Fuck aiming for 10 years, let’s make it 50. You can leave and I’ll make sure that you have a great title and reference, but my job is to make things so great that you never want that option.
  3. Agile that Doesn’t Suck. The good thing about Agile is that it exists to coerce time into a linear, progressive march rather than the haphazard, Brownian stumbling of managed work when it isn’t monitored. The problem with it is that it involves closed-allocation assumptions and limitations of self-organization. Perhaps Agile could be adapted to an open-allocation world, however. That deserves a lot more investigation.
  4. Three-hour Workday. Employees are expected to work full-time in spirit, not in hours. Project plans will be based on 3 dedicated hours: that’s three hours of “metered work”, certainly not inlcuding goofing off and eating and water-pooler chat. Three is intended as the minimum obligation; of course, no one will be tracking and a person who delivers the typical corporate workday (9 hours at 33% efficiency) is in good standing instead of three solid hours. Three hours is also a right: 180 minutes of uninterrupted “building time” per day during daylight hours without meetings or those god-awful impromptu status pings. Employees should ideally be spending the other 4-7 “off-meter” hours each day to learn new skills (Progressive Time) or experiment or use Coursera or share ideas with each other.
    • In practice, few people would be able to get away with a strict 3-hour day. It’s somewhat of a planning fiction that accounts for the difficulty of estimation and the extreme long-term importance of off-meter time. In this model firm that I’m building up, I can’t see anyone working less than 6 hours per day and fulfilling the softer, off-meter obligations such as continuing education, and the average would be the standard 8.
  5. Culture of Mentoring. The most junior engineers are expected to use their off-meter hours to learn from more senior people. The most highly-compensated people, if they wish to remain so, are expected to share knowledge and multiply their expertise across the company. This expectation of mentoring (for senior hires) and progress (for junior hires) would be the only interference with self-executive culture. If we are to stay self-executive, we must be competitive in the market place; to be competitive, we must be progressive in the growth of internal skill.
  6. Well-defined Audit Cycle. With the overall goal being to have each employee in Progressive Time, there’d need to be some sort of incremental work monitoring. As much as “status” meetings are disliked, there’d need to be an understanding of how often a person or team is expected to ship or demo something. Demos would invite the whole company (not one manager). I think I’d have junior hires on a 3-week audit cycle (in which, “here’s what I’ve learned” is perfectly acceptable) and senior engineers expected to demo once every 8 weeks (as a minimum; I’d encourage the same 3-week cycle). The most senior, fellow-level, engineers wouldn’t have an audit cycle; since they’d be expected to be continuously multiplying their expertise across the company and mentoring new people, such a thing would be irrelevant.

So, that solves the second trust problem: how does one ensure people get their work done? You need the right structure. It’s not about Agile or gamification or anything out of management books, and self-executivity is a necessary but not sufficient condition. You also need to put everyone in linear (Progressive) rather than square-root (Brownian) time. You need to make that a cultural pillar: not working hard, but working mindfully.

Gervais / MacLeod 17: building the future, and financing lifestyle businesses

I’ve opined quite a bit on the VC-funded ecosystem (“VC-istan”) and put forward the hypothesis that we’d be much better served by a fleet of 50,000 so-called “lifestyle businesses” than 500 red-ocean, get-big-or-die future corporate megaliths. It’s not that I dislike VCs. I have no issue with them, as people. However, I think that centralized power is generally undesirable. The information-theoretic incompetence of central authority is why command economies don’t work. The current system for financing high-risk technology businesses is out of whack. There are a small number of investors, and they all know each other, and the career matrix of their industry requires them to collude rather than compete. It’s not that they’re explicitly price fixing, but that their careers rise and fall on access to black-albatross deals (black swans are not big enough) that come once in a decade, so they optimize for social access rather than economic efficiency. They compare notes in a way that is almost certainly illegal, but it’s hard to hate them for doing so if one understands their career concerns.

VCs also exist in a framework where making quick returns is more important than building great companies, which favors aggressive-growth businesses bent on upsetting established players in winner-take-all markets (or, more often, threatening to upset those established behemoths and getting acquired in a panic) but overlooks concepts that might be “niche” today but that will build out the future. What we have is a system that overlooks a massive space, favors large companies with horrible management structures, and worst of all, keeps a large amount of capital out of the human creative process.

VC overlooks a massive space

Creativity doesn’t come from large organizations. It comes from people. Large companies can encourage creativity by providing resources and autonomy and, then, getting out of peoples’ way. Or, they can stifle it, via subordination and corrupt, creaky permission systems. Most go toward the latter. If your business truly requires creativity, your only option is to set up an R&D environment that trusts people with their own time. Provide direction, keep incentives aligned, and keep them on-task enough that their work benefits the company. Then get the hell out of their way. Goldman Sachs did this with their “core strategies” division, giving a set of software engineers and quantitative analysts (“quants”) a level of autonomy that was unheard-of by Wall Street standards, especially then. This generated a technical infrastructure far superior to what its competitors had, and they’re still catching up. It’s due to core strats that Goldman didn’t melt down during the Crisis of 2008 as other banks did; because of the software they built, Goldman could assess its financial risk on a firm-wide basis and hedge.

If you want creativity, put your most talented in an R&D center and let them get to work. The researchers are trusted, implicitly, with their own time, and the executive’s role is to be a filter, deciding when creative assets are “ready for prime time” and when they need more refinement. Typical, risk-reductive management will destroy their creativity and you’ll get nothing.

Self-organizing and generally small teams are, in general, where creativity will come from. It doesn’t require a corporate megalith. You’ll get your best performance from small groups of people who picked each other (rather than being glued together by a manager saying, “be a Team, now!”) and who are deeply invested in trying out a new idea. This can happen inside a large corporation, but it’s atypical. We’re going to need a lot of small organizations if we’re serious about building the future.

The future’s not going to be built by well-connected, materially ambitious, and usually already independently wealthy “credible founders” trying to build 750-person companies, get their pictures on the cover of Forbes, and sell to Yahoo for the GDP of a small island nation. Those people have made their beds and are half asleep. Those “founders” are well-connected early retirees playing startup. They aren’t interesting. Don’t waste a minute thinking about them. Rather, the future’s going to be built by the rebellious sorts of people that VCs wouldn’t even touch, because they carry mediocre paper (note to all: “we don’t invest in ideas, but in people” means “we invest in resumes“).

I don’t think that most venture capitalists can detect the people who are capable of building the future. I don’t even think I can do it well on a person-by-person basis, and I’m one of the smartest fuckers out there, so I know that they can’t. It’s just naturally very hard to predict, for highly convex creative endeavors, who and what will succeed and what will not. That’s why you need a fleet. A fleet is more than a portfolio. Portfolios are manageable; that’s even a title and job description: portfolio manager. With a fleet of 50,000 “lifestyle” businesses, there’s no central authority that will be able to manage it. The solution will be to fund creativity on a broad-based scale and passively enjoy the rewards. The moral problem, here, is that we need a structure that guarantees that investors participate in rewards. That’s actually a hard one to solve. I’ll get back to that. 

VC favors fast-growing companies with horrible management and culture

In truth, venture capitalists don’t care about corporate culture. It’s not that they’re bad people; of course, most of them aren’t. It’s just not their job to babysit. Ideally, they want to hand a wad of cash over to those they fund, and get a much larger wad of cash back. They’ll only intervene if the macroscopic performance of the company falters (and if the cause of macro-scale failure is microscopic cultural corruption, it’s far too late; just shoot the fucking thing in the head and liquidiate). Founders are implicitly trusted to deal with the internal, cultural issues, unless the company starts to fail in a macroscopically visible way.

Fast growth is what often ruins the culture. Consider Valve’s self-executive open allocation, for an example of what is good. This is a great way of doing things, but it actually makes it very hard to hire “credible” executives. If you make employee autonomy an inflexible pillar of your company, you can’t hire entitled, semi-retired executives who want the fall-back of authority as opposed to genuine leadership. Employee autonomy isn’t usually eaten by messianic founders. That can happen, but more often it’s sold off to parasitic executive implants. Often, the founders don’t even have a choice. One of the perks of being a venture capitalist is the ability to give executive sinecures and portfolio companies to your underachieving drinking buddies from business school.

A company that wants to have a culture worth caring about is going to have to put the brakes on the malignant sorts of growth, in order to prevent the culture from being sold off entirely in a managerial hiring frenzy. It will even have to give low-level employees some veto power over executive hires, which is not that radical because proper management works for the managed (as well as for investors; interests shouldn’t oppose). It will need to seriously consider an Employee Bill of Rights. It will be able to grow fast (possibly 20 to 30 percent per year, and at twice that rate in early stages) by normal-people standards, but not at the “rocket fueled” rate expected by typical VCs.

VC excludes a large pool of capital

Right now, a middle-class family has two main options regarding direct financial investment in capitalistic activity. One is to buy debt, and the other is to buy stocks, both cases, in large and established companies. Regulations exist to keep their “dumb money” out of the small, much riskier endeavors like new businesses such as VC-istan corporations and lifestyle businesses. Now, I fully agree that a retired widow shouldn’t be putting her $400,000 life savings in one lifestyle startup. It’s too risky. She should have the option of putting that money into lifestyle startups, plural, in some broad-based way that protects her from the swings of any one company, but allows her to participate financially in human creativity, which can be expected to deliver better average returns than established, rent-seeking corporations with no interest in inventing the future.

What is a “lifestyle business”?

I don’t think “lifestyle businesses” deserve their negative reputation. Who says that it can’t become a more ambitious project over time? Nintendo was founded in the 1880s– as a playing-card company. It wasn’t founded with the intention of creating the dominant gaming console 100 years later. To me, “lifestyle” simply means that the founder intends to be with the company for a long time, and would rather grow at a modest (10-30% per year) rate than keep doubling up to appease investors hell-bent on a quick exit. What’s wrong with that? To be blunt, I think it’s a luxury of the already-loaded to consider something growing at 2% per month “mediocre”.

When founders expect to be with a company for 20 years, they’re going to take the long-term cultural issues seriously. They won’t bring in the human garbage that rapid-growing startups often hire when their investors say, “It’s time to hire real executives”, because they don’t want to subject themselves and their employees to atrocious middle management. A founder who can’t say, “that’s our acquirer’s problem”, is going to think differently.

I see lifestyle businesses as an increasingly tenable alternative to the get-big-or-die gambits. Why increasingly tenable? The global economy now grows at 5% and that’s accelerating. (Developed-world economies are stagnating, however; nation-states are becoming obsolete and that, temporarily during this period of adjustment, hurts those of us under the auspices of highly successful nation-states.) Prevailing poverty is turning over to prevailing prosperity. This won’t happen overnight; it’ll be 100 years before the tyranny of geography is over, and there some utterly dire ecological problems we need to solve along the way. However, it doesn’t need to happen overnight. A business thrives if it turns less into more, and with “the pie” growing annually at 5%, that’s a fortunate and “un-level” playing field. The zero-sum, Malthusian mentality of a 10,000-year agrarian era with almost no growth is obsolete. Winner-take-all, “red ocean” markets still exist, but those tend toward natural monopoly, which leads to commoditization and regulatory interference. They’re not that interesting anymore. In the seven minutes that it takes the average adult to read one of my blog posts, the world will become over $1 billion wealthier. In a few minutes, progressive, positive-sum interactions between people just generated enough wealth to make 1,000 people millionaires. 

What this means is that dominate-or-die will no longer be the prevailing business reality. Yes, growth will still be required, but it will be increasingly possible to grow (explore, improve, profit) without domination.

However, economic growth is not “magic”. It happens, minute by minute, as people discover better ways of doing things. It’s the process of “mining chaos” that I’ve discussed earlier. It’s impossible to measure, but I would be surprised if I haven’t added $1 million to the economy over the past year, by helping the most talented people better understand the market and allocate their assets more efficiently. (My estimate of my impact is $2.4 million.) Growth happens because people (for a variety of reasons, some altruistic and some selfish) go out and do things. They take a “why not” approach, not a “why me” approach. The vast, vast majority of them were not drinking buddies with venture capitalists at Harvard Business School and, therefore, they cannot access traditional funding for these red-ocean gambits designed to be “X killers”, where X is some powerful corporate behemoth that the VC hopes will not just be typically inefficient and (as corporations generally are) reduced to 10% of its strength, but so inefficient that it can’t fight back with even 1 percent of its strength.

The financial problem

There’s a deep economic problem with the funding of lifestyle businesses, however, and here it is. Many economists will argue that “profits shouldn’t exist”. What does this mean? No economist would seriously argue that they do not exist, or that there aren’t good logical reasons for them to exist, rooted in imperfect information and the fuzzy question of where the line between labor and profit (for small businesses, managed by their owners) lives. Just as financial arbitrage is possible for people with superior technical infrastructure (competitive advantage) it is possible for a firm to make a profit based on its advantages. What these economists mean is that in an ordered, fair, and stable world, no one would be able to sell something for a price higher than the sum value of the capital, materials, and labor required to make it. Profit comes from the same place as economic growth, from which things that aren’t “supposed to exist” emerge: chaos.

One important distinction that average people often fail to make about “greedy corporations” is that profit is not the corporate economy’s true evil. If a large company is making “too much profit” off of its customers, there’s usually an appropriate response: buy stock. Rather, the robbery takes the form of executive markup. Being extremely technical on terminology, even CEOs are “labor”. Almost every large company has been hijacked by an entrenched, entitled caste of useless parasites whose compensation is justified by social access and failures of self-regulation (i.e. corruption in wage setting) instead of a fair market value for the work. In fact, if corporate executives had full authority to set compensation, there would never be such a thing as profit. They’d take it all for themselves, and owners would get shafted just like employees do. Corporate boards are supposed to step in and prevent this, but the “country club” mentality is so severe among that set that this self-policing is effectively a joke. They all go to the same parties and sit on each others’ boards. No, there isn’t one capital-C Conspiracy “to rule them all”, but there’s enough upper-class collusion to keep anyone else from getting a fair shake. Not wanting to lose executives’ jobs in a shareholder revolt, companies will allow just enough profit to appease equity owners, but deploy it in a different way. They have replaced dividends with “buybacks” that enable next year’s gigantic executive stock grants, nominally tied to “performance”.

These phenomena are important for analysis to show that one can’t reflexively or implicitly trust labor, insofar as even the looting executive sleazebags who periodically ruin the economy are, technically speaking, still “labor”. There’s a natural conflict of interest. Profit is return on capital, and labor would prefer increases in baseline compensation. Labor that controls its own compensation is especially dangerous.

This brings us directly to the moral problem of business finance, and separability of risk. A substantial number of people would be more productive and effective as key operators in small businesses (if they could raise money) than as subordinates in large companies. The problem is one of trust. If there’s a passive financial backer, and a working entrepreneur with no “money in the show”, then the latter holds all the operational power. Once the check clears, very little explicitly prevents the newly-crowned executive from defection. Banks require personal liability on loans, in order to keep people honest. Venture capitalists, having an in-crowd that compares notes to an extent that’s almost certainly illegal, can use its reputation economy as a cudgel. Entrepreneurs are terrified of the barbaric violation that will be inflicted on their reputations if they even hint at defection. (This keeps founders honest, but it also allows extortive terms like multiple liquidation preferences and participating preferred, which would never exist if founders could decline term sheets without reputation risk.)

The problem here is that there’s an underserved valley of business concepts. What’s the actual failure rate of businesses? No one really knows, because the terms are somewhat subjective, but the most credible estimates seem to refute the claim that “90% of new businesses die in 5 years”. It seems that about 40-50 percent of companies given full-time investment will survive 5 years, with much of that failure in the first year, and higher per-year survival rates as time goes on. Think of that as a 15% per year rate of job loss, which is worse job security than typical corporate employment (~4% per year) or incumbent politicians (~2% per year). It’s risky, but not as horrible as it’s made out to be, and would be tolerable if such job loss weren’t packaged with personal financial risk. Moreover, not all businesses that are closed were money-losers in the first place. A large number of them made money, but at low margins that were not enough to justify the managerial labor (from the owner, usually) required. They “failed” when for accounting for the owner’s opportunity cost, but not always objectively. What I mean to say is that the gargantuan failure rate of VC-istan is not the norm across all of small business.

Let’s consider the spectrum of business possibilities by survival rate. VCs want to fund the 0-20% category that, if they succeed, will deliver massive returns. They’re only concerned with expected value. For bank loans that require personal liability, it’s just not wise (and probably impossible to get funding) for anything riskier than 80%. So banks can cover that 80-100% range where, even if the business is closed, the loan will probably be mostly repaid. Technology lifestyle companies live in that 20-80% range that is, right now, completely unfundable. There is too much risk in this “no-man’s land” for bank loans, but almost no chance of them being billion-dollar concerns in less than 15 years, but there’s no good reason why they can’t be a profitable avenue for investment.

The issue is one of structure and incentives. Good-faith business failure is OK, so long as the successes cancel out the failures. No investor should risk her entire life savings on one lifestyle business, but investment into the class of them, in a broad-based way, should be possible. Making that possible is a valid (and, likely, profitable) business goal. That’s not what we’re worried about. A 20-80 percent chance of failure isn’t a catastrophic problem in a portfolio of businesses, seeing as the successes among these “lifestyle companies” will be substantial: not the 1000x returns that the VCs seek, but plenty of 5x and 20x hits. The issue that must be addressed is “moral hazard”. How do we guard against bad-faith business failure, or against managerial looting of what should be profit?

How does a passive investor of a lifestyle business demand profit, when their executives would always favor personal compensation? Bank loans compensate by refusing to take equity and requiring personal liability on debt– meaning that good-faith business failure is punished as well; there is no discrimination in that– while VCs take control of businesses, and have a perverse and probably illegal reputation economy (that also punishes good-faith business failure). Yet, while it’s conceivable how one might fund a fleet of 50,000 lifestyle businesses, it’s a harder problem of how to keep them all of their founders honest. It will require equity financing, because there’s too much risk in them for debt. Yet there will too many of them to manage with a feudalistic, VC-istan reputation system. So what’s the answer?

Solve It!

It’s easier to solve two problems at once than one in isolation.

Reiner Knizia, world-famous board game designer, once said that it’s a lot easier to fix two design problems at once than a single issue. Chances are, the design’s position in the state space is already a local maximum, so changing one thing is likely to degrade fitness, while changing multiple might improve it. Here, I’m going to argue that solving cultural problems and the “moral hazard” issue of the lifestyle business aren’t separate issues, but actually two facets of the same problem.

First, let’s get back to financial theory. People with capital to put at risk are owners, and employees implement their financial strategies in exchange for stability. There’s a risk transfer here, and it seems symbiotic, but with the potential for adversity. It’s the classic “principal-agent problem“. How do the owners know that their employees won’t rob them blind? In a small business managed by the owner, that’s relatively straightforward, but often, owners are unable to execute their interests by dictation and need to hire a special kind of labor, management. Managers are especially dangerous, because their job (traditionally) is to enforce the owners’ interests while remaining indifferent to those of employees (including their own). People who will take (and enjoy) such a job are generally not the nicest people.

Ownership, here, pertains more to financial risk than to paper. When a bank writes a loan, the bank is in the ownership position (even if it is a debt-holder rather than in equity) and the business owner is a manager– until the debt is repaid. Once management comes into the mix, there are three tiers. It gets messier, morally speaking. Managers end up with information advantages over employees and owners both, and will sometimes exploit the other two sets of people. As soon as managers are being hired, the relationship between owners and employees becomes one where defection is possible and distrust is common.

The MacLeod process starts when a subset of managers becomes a fourth tier of proto-executives (MacLeod Sociopaths). These are the ones who turn their information advantages into overwhelming personal yield. If they’re smart about it, they won’t rob the company explicitly, but use their information advantages and control to make themselves look like high performers, increasing their relative position. Those who fail to do so end up, socially and financially, in the lower Clueless tier. Thus, a MacLeod degeneracy can be viewed as a process in which a subset of managers use their extreme advantages of information to conspire against the workers (who suffer a degraded work culture) and the owners (who are loaded with externalized downside risk they are rarely even aware of) as well as against any managers (proto-Clueless) who cannot or do not participate.

Lifestyle businesses keep the three parties (financial owners, management, and employees) in alignment on culture. In fact, a primary motivation for a manager of a lifestyle business is building a desirable culture, since she intends to work at that company for a long time. That’s not an investor-facing issue, but it’s of interest to investors as well. For long-term organizational health, culture becomes important. I discussed, previously, why a good corporate culture is expensive in the short term. It’s cheap in the long run– for everyone involved.

Where there is the potential for disalignment is on wages, and that’s where “profits shouldn’t exist” comes in. Managers and employees both want to push compensation up (until there are no profits) so investors would lose if that were taken to its logical extreme. That’s the fundamental fear one would have when investing in a lifestyle business– what if these people take the money and throw a huge party, leaving their backers out? In order to keep the arrangement fair to equity-holding investors, they need to have some authority over compensation. However, for most industries, investors are not authorities on what fair compensation is. That is something I intend to address.

VC-istan’s solution is for managers (especially founders) and investors to collude. Investors are not shafted by their hired small-business managers (founders) because they are in on the whole mess together. Culture and career development are thrown by the wayside as they work, together, to drive for rapid high valuation (stability optional) and acquisition. Workers get the shaft: bullshit token ownership in a world where hours are long, business models are unproven, firing is fast and usually without severance, and management is almost always incomptent. VC-istan solves one problem, by defusing the potential for managerial abuse of investors (who take an active role in directing the company). However, workers (investors of time) get screwed.

Notice, above, what I said about employees, especially in new and unproven businesses. They’re investors of time. This isn’t just a metaphor, but an actuality. This is one of the reasons that I think VC-istan is fundamentally careerist and mediocre. Typical employees such as software engineers are not treated with the respect that would be accorded to investors, but seen as third-class citizens. A VC-istan engineer typically faces an employment contract where he vests no equity if he is terminated before the end of the first year. It’s not uncommon for engineers to be fired (“cliffed out”) at 364 days. If you “cliff out” an investor, you go to jail and, when you get out, you never raise a dime again. Yet cliffing-out of employees (for bullshit “performance” reasons that are thinly-veiled extortion– a threat to the employee’s reputation if he fights back) is a VC-istan institution.

If employees are investors (again, of time) then there is a common interest between the two parties, both of whom are often excluded by a conspiratorial set of morally bankrupt executives. That’s interesting! Perhaps the moral hazard of funding lifestyle businesses and the cultural desires of employees are facets of the same problem. I believe that they are. Both low-level employees and investors have an interest in guarding themselves against managerial malefaction.

The typical business is extremely opaque with information, with every piece of it guarded as if it were a competitive advantage. Thus, employees have no idea whether they’re being fairly compensated, and investors rarely know if the business is well-managed. Investors and employees almost never talk to each other; it would be treated as inappropriate, and insubordinate, for an employee to even dream of initiating such interaction. (The firm’s executives would fire that employee for jumping rank.) So if investors find out that a company’s badly run, it’s almost always too late for them to fix it. Talented employees have already quit, external relationships are beyond damaged, and the criminals have already cashed themselves out.

Investors fear that management and employees will collude on compensation, effectively overcharging the company’s ownership for their services. One solution is for investors (as seen in typical corporations) is to set tight limits on compensation and risk allocation. Then, managers and employees compete with each other and, more interesting, managers compete with other managers. You get a MacLeod hierarchy quickly out of that; the managers who can hide risk (“heads, I win; tails, you lose”) and make themselves look like indispensable high performers become executives (Sociopaths). The other solution is for investors and business managers (or founders) to create a tightly-controlled reputation economy that aligns their incentives, but abuses employees. That’s VC-istan, and it only works when you have a pool of Clueless young talent and the means of convincing them they’re on a path to extraordinary compensation. That’s not sustainable, because the lie will eventually see daylight, and talented people will stop taking terrible offers from bad startups. In any case, it doesn’t seem like there’s a good resolution in any of this muck to investor/employee (especially investor/manager) competition. 

So, look again at the common MacLeod pattern. A subset of the management tier finds ways to transfer and hide risk. As important work becomes increasingly convex, it will be correspondingly difficult for anyone to prevent this (e.g. by contractual provision). Fighting against this behavior through normal means won’t work. The source of the problem must be addressed. In this case, it’s information asymmetry. A small set of managers can conspire against employees and investors (and other less-aware, Clueless, managers) because they hold the critical information. When abuse of information can’t be prevented (as it can’t, in a convex world) the alternative is transparency: democratize it. Investors and employees win. Sociopathic executives lose. Hey, that sounds like a fair trade!

The solution is to be transparent about both culture and compensation. Employees should know whether they’re getting a fair deal, investors should know what they’re paying for work. Cultural expectations should be explicit and spelled out in an “Employee Bill of Rights” over which employees, managers, and investors all have a say. Financial and strategic matters can come down to the traditional vote-per-dollar shareholder system. Everything cultural (e.g. closed or open allocation) needs to be on a one-person, one-vote system.

Details of how to make that work could stand to be fleshed out, and those would merit an essay of their own, but here’s a set of thoughts I had. It’s fundamentally hard to define what the “fair” value of anything is, which is one of the reasons why transparency is so important, but external market salaries are pretty easy to discover. That gives a reasonable starting point.

If I were running a technology company, everyone would get the market rate, plus 20%, based on objective job description, for salary. I would be upfront with investors about this. Yes, I am “overpaying” engineers, so I can be selective. I want this to be a destination company right now, and not hire cheaply to get a job done and then have to fire people when I decide to upgrade my quality bar. We are paying now for quality. That salary number would be published internally to employees and investors. Oh, there’s one other rule. There’d be only three levels of software engineer: Apprentice, Engineer, and Mentor/Fellow (equal; one for teaching and one for research). The Mentor/Fellow level would be maximum salary in the company. No one would get more in base salary. Not even me, and certainly not some damn non-technical executive. That’s to keep such people from robbing investors (and employees).

This is not hippy-dippy egalitarianism. It’s not altruism either. I’d be doing all this for purely selfish reasons: building a great company and getting rich, all without robbing people because, well, I don’t like doing bad things.

This company would be intended for slow growth (10-30% per year) and hire only the best technological talent. Now, when you employ 20-50 people (mostly software engineers) and pay them market-plus-20%, something funny happens. Mature technical enterprises can easily break $1 million per employee. That is, you generate a lot of profit. So, there’s a question of how to share it. Obviously, investors must get some. Employees should get some, too.

I’d favor profit sharing over equity, because I don’t think it’s good for a company to have hundreds of “owners”, many of whom are no longer part of it, and I don’t think the bullshit “partnership” of a 0.03% slice in an 50-person company is going to fool anyone for much longer. Also, we’re talking about lifestyle businesses which, while they might be sold at some time, are not intended specifically for that purpose. “Liquidity” might never happen. Let’s stop betting our lives on such things. Most employees would not have equity. They wouldn’t need to worry about options exercise or 83(b) election or liquidation preferences. Instead, they’d get considerable profit shares. Here’s a model for how that would work. About 20 percent of profit gets invested back into the business, no matter what, unless there’s a conscious decision to reduce cash holdings (and pay dividends) at business maturity. Thirty-five percent goes to equity-holders, who decide whether to reinvest it or take a dividend, and 45 percent is paid in compensation to employees.

I don’t know that 45 percent is exact right amount to give to employees, but it’s that neighborhood (35 to 65%). The intuition behind it is as follows. High-end investment vehicles (e.g. hedge funds, venture capital) charge a baseline management fee of 2%, plus and 20% of profits (“2-and-20″). That’s what wealthy investors have to pay to participate in the above-normal returns of these funds, and they’re happy to do it.  The elite quant funds (who can reliably deliver double-digit returns) charge more: as high as 5-and-44. I’d be charging no ongoing “management fee” (once capital is raised) but investing a high share of the proceeds into employee morale. Effectively, the model here is “0-and-45″ for access to elite technological talent (as opposed to 2-and-20 for access to elite financial strategies). I don’t know what the exact right number is, but I think 45 is in the neighborhood.

Employee profit-sharing would be in proportion to “points”. Here are the rules of profit points:

  1. Profit points are compensation, not equity. You keep them as long as you work for the company. If you leave before an annual payout, you get a pro-rated share on payout date. (It’s not like banking where leaving before “bonus day” means you get nothing.)
  2. Each employee has at least 1.0, with the intention of keeping the average at 1.5-1.75 (and never more than 2.0) per head. Meaning: no one has less than half an average slice. 
  3. The total number of points is published, and if anyone holds more than 3.0 points, that person’s amount is public within the company. Except in extreme crisis (read: desperate CxO search) no one is hired with more than 3.0, or raised to that point in the first year. Meaning: anyone with a large slice better be deserving, because it’s public information, and that may only occur after one year of work, so employees aren’t hoodwinked by executive implants who start on top.
  4. Anyone with managerial authority (should such an institution become necessary) has his or her share published automatically. Meaning: management is there to benefit investors and employees, and they have the right to know exactly what they’re paying for the service.
  5. Profit points should not, in general, be allocated faster than profits can increase. Meaning: business risk might reduce the value of profit points, but dilution shouldn’t. Your share as a percentage of the whole may go down; the expected value should be going up.

The reason I call these “points” instead of “shares” is because they need not be disbursed in whole numbers– an employee might have 1.5 profit points– and also to distinguish them from investor shares, which deserve to be separate (investors shouldn’t be diluted by employee hiring).

One other thing I would consider allowing, for very senior hires who might not be able to accept market-plus-20%– for example, you can’t raise a family in New York on 1.2 times the typical software engineer salary– would be zero-interest advances against profit points. The existence and structure of the program would be public; that someone is using it would be private. The purpose of this is to accommodate “HR expedient” hiring of people at compensation levels greater than what is fair (based on others’ compensation). Yes, it’s allowed to happen as a temporary measure, but the “advance” model keeps it from becoming perpetual inequality.

What’s above, I think, is a principled rubric for allowing some opacity (in fact, a lot of it, because a healthy software company would generate $50-250k+ per profit point under this model) in the pursuit of “HR expediency”, but keeping abuses from getting out of hand. If someone’s getting 10 times more than a colleague, the whole company will know and have a right to an opinion (possibly, including the right to vote on such things, just as investors would have) about it.  

How transparency Solves It

Ultimately, the principal-agent problem that currently blocks the financing of lifestyle businesses is that investors (who do not know enough about technology to evaluate decisions being made) don’t know if they’re getting screwed on compensation, because they don’t know what market salaries are. No one wants to fund such a business, out of the fear the a CEO will give himself and his employees high salaries, blowing up what could be a successful business by taking such pay, thereby stealing from investors. VC-istan solves this by having investors explicitly manage compensation, often to an overbearing degree. (VC: “You can’t pay an engineer $160,000! That’s too much for just a programmer!”) That kind of micromanagement doesn’t scale to a fleet of 50,000 lifestyle businesses. Compensation needs to be simple, obviously fair, and accessible to investors. My model is one in which, unless there is profit returned to investors, founders earn no more than senior engineers.

What’s also being thwarted, under this model, is self-perpetuating salary inequality. Since outsized salary takes the form of advances against profit points (that would only be extended if it’s likely that they’d be repaid) people who require high compensation (and are afforded it, for HR-expedient reasons) would not have be able to leverage their salaries into persistent, across-the-board improvements (in “performance” bonuses, calculated as a percentage, and in raises). The existing system is good for people who can negotiate amid opacity, because they tack market conditions (getting pay improvements when the market’s strong, negotiating for more autonomy when it’s weak) and move themselves forward via calculated job-hopping, but it’s not the best for the world.

I haven’t said much about how this solves cultural problems. Obviously, there’s no guarantee that it would. Those things come down to more than money alone. However, I believe I’ve made a start on it. Incentives are not the only thing that matters, and financial incentives are not the only kind of them, but there’s a start, here. If everyone at a specific job description is earning the same salary, and bonuses are based on (fairly allocated) profit points, then the incentive structure seems better. The employee’s question then isn’t, “How do I get a $10,000 raise?” (usual answer: get an offer elsewhere) but “How do I improve the company so my profit points are worth $10,000 more?”

VC-istan startups rarely deliver raises and their equity compensation is, for the most part, pathetic. A software engineer joining a 50-person company is lucky to get 0.04%. What that means is that his financial incentive isn’t to improve the company’s value, because the difference between delivering average and “10X” work for a year, on a 0.04% slice, won’t even pay his Starbucks budget. Rather, his incentive is to become an executive and get a real slice. If you don’t see how this is a recipe for an engineer-hostile, fucked-up culture, you don’t understand technology.

My system wouldn’t entitle an engineer to that token ownership, but it would allow a much greater non-owning participation and that, for such a minority share, is preferable. With the numbers above, the least-compensated engineer of the 50-person startup would be entitled to 0.45% of the annual revenue, not 0.01% per year (minus a bunch of wonky VC robberies like “participating preferred”, over which the employee has no control) of some highly unknown (median: zero) value at “liquidity” in the future.

This “uncanny valley” of trivial ownership is, in my opinion, worse than the total (and mutually understood) non-ownership of an employee in a traditional corporation. The non-owning corporate employee has no expectation of getting a ten-fold increase in “equity” because he has none (unless it’s a publicly-traded company and he bought stock on the market). He’s just there to trade labor for money at an agreed-upon and well-known rate. If he’s playing for comfort and stability (MacLeod Loser) he’ll be happy with a 4% raise each year, to account for costs of living. If he’s going for rapid career growth and personal yield (MacLeod Sociopath) he’ll probably “job hop” if he’s not on track for 15%-per-year. But it’s obvious who the players are and what they want. There’s no “You’ll get rich on this!” mythology devised to turn the MacLeod Losers into Clueless. VC-istan, on the other hand, is all about cutthroat social climbing. Engineers want to become executives and get real equity slices (although they seem to harbor a delusion that they’ll still be able to code, and use their control of the division of labor to give themselves the best projects, in such positions… instead of having their lives eaten by useless meetings, which is what actually happens when they become executives). Executives without investor contact want to become executives with investor contact, so they can break off and be founders next year. Founders want to be “angel investors” (read: rich, but still considered important by smart people). It’s a world powered by the young and the Clueless– Clueless who are trying to be Sociopaths, and often very bad at it.

Transparency on all fairness issues (compensation, employee autonomy, cultural guarantees) is the antidote to Cluelessness. If there’s no Cluelessness, then there aren’t “Clueful” sociopaths robbing investors and exploiting employees. Then the goal isn’t to “become an executive” but actually to fulfill a role well and make the company great. Imagine that! It’s not a magical antidote that will cure all forms of cultural malfeasance. I don’t think it can be expected to solve all problems, but it starts the conversation.

Gervais / MacLeod 16: Healthy culture vs. “Why you?”

I’ve discussed a number of problems that businesses face, and started work on at solutions. There’s one major issue that I still need to address. A good organizational culture is expensive. It’s not enormously so, and it pays for itself over time, making it far cheaper than the alternative, but one has to make the conscious decision to pay for culture, or most often it won’t exist. MacLeod pathologies, most pronounced in the stable but undesirable corporate rank culture, seem inevitable because, without ongoing investment in culture, they are. One has to knowingly stand apart from such pathology to prevent it, at least at scale.

Here are a few major ways that it is more expensive for a company to have a healthy organizational culture than the default, broken one. These points are inspired by technology, because it’s what I know. Most of these pertain to risk rather than expense, but the former is generally perceived as the latter, since the real business of business often tends to be risk transfer.

  • Thoughtful and strategic growth. VC-istan startups collect smart people and leave them to fend for themselves, as the company grows ambitiously but not strategically. Healthy culture requires personnel growth in tandem with the legitimate workload (essential or interesting work; not fourth-quadrant executive nice-to-haves). If the workload grows, you must hire more people. If it doesn’t, you shouldn’t. Slow growth might seem less risky, but in the context of VC-istan, it’s much more risky; it’s seem as appropriate for niche “lifestyle businesses” but likely to fail in winner-take-all “red ocean” markets. 
  • Progressive hiring. Most technology companies look for “plug and play” hires who already know the technologies they have and can turn a profit over salary in 1 month instead of 6 months. The tight deadlines of a VC-istan startup seem to necessitate this adversity to ramp-up time. If you’re hiring for culture, though, you need to take account of future potential and you can’t, in practice, be selective for cultural coherence and plug-and-play. You have to hire the people who will make your company great in the long term, rather than for immediate technical-stack fluency.
  • Mentoring. Most companies talk about this lofty ideal, inherited from the guild cultures of old, but few actually do it. One negative side effect of convexity is that, because the time of a seasoned veteran has an order of magnitude more short-term economic value than that of a competent intermediate, mentoring is generally seen as too expensive by executives. Demands placed on the most productive people (by senior people, with power) are already so high that mentorship of new hires (with no power) invariably gets the shaft.
  • Open allocation. Employees are directly responsible for making their work useful to the company, without managerial interference. This is more managerially challenging because it relies genuine motivation, rather than extortion. The upshot of it is that even undesirable work will be done well, because if it’s genuinely important, someone will want to do it after some time. The drawback is that, with work direction coming from the demand rather than supply side, it tends toward “eventual consistency” rather than having the quick-but-sloppy immediacy of managerial edict.
  • Innovation time. So-called “20% time” is not the same thing as open allocation. A healthy company needs both. Open allocation means that a person has the right to move to another sanctioned project without requiring permission, but it’s not “work on whatever you want”. Innovation time means that the employee can work on anything, as part of a team or entirely self-directed, that benefits the company. It enables people to work on 3rd quadrant (interesting but discretionary) work that might have a major payoff (convexity) in the future, but the limited amount of innovation time keeps divergent creativity (which might never pay off) from going off into the weeds.
  • Severance. You’ll need to fire people who just don’t work out. If you fire someone without a severance package, you’re gambling with your reputation. Startups don’t fear termination lawsuits, knowing they’ll either be big or dead by the time that one would conclude– it’s tomorrow’s problem. But severance is also about PR. Reputation risk is more immediate. People talk. Internet happens. If you’re in dire financial straits and everyone knows it, you can lay people off and they probably won’t expect a large package, and the good faith coming from mutual suffering will keep them from disparaging you. If, however, you’re flush with cash and you fire a basically decent “no-fault lack of fit” employee without severance, you’re an asshole and deserve what happens to your reputation.
    • Oh, and don’t even think of using “Performance Improvement Plans”, which allow HR departments to claim they “saved money” on severance while externalizing costs to the team and manager. The morale toxicity of having a “walking dead” employee in the office for one month (hell, even one week) is more expensive than a 3-month severance. Also, most “low-performer initiatives” are dishonest layoffs that turn into politicized witch hunts. You’ve been warned.
  • Firing and demoting toxic high-performers. People can be individual high-performers but damaging to the group. If you can isolate them and demote them out of managerial authority, then fine. Often, the only separation that will work is termination. Toxic people tend to have a desire for control over others that exceeds their leadership ability. They need to be fired, even if they seem “essential”. They aren’t. No one is essential. If someone is insistent on controlling others or, worse yet, bullies or harasses them, you must get rid of that person. You’re a business, not a day care.

All of these efforts pay off in the long term, but are costly enough in the short run to introduce risk. VC-istan, with its disposable-company attitude and obsession with fast growth, is rarely going to pay for any of those. This might seem contradictory: isn’t VC-istan all about embracing risk? It’s not that simple. Organizations tend toward “risk-against-risk compensation”, where increasing risk of one variety requires a zero-tolerance crack down on the other forms of risk, in order to keep total risk below some accepted level (“risk budget”). VC-istan loads up on one kind of it– business-model risk– while being extremely risk-averse with regard to the rest, explaining why most of these “VC darling” startups have horrendous corporate cultures. Messianic founders (often, people with VC contacts who are also too narcissistic to be anything but “serial entrepreneurs”, because they can’t keep normal jobs for longer than 3 weeks) have a tendency to take all the creative risk for themselves. At the interface level of the company, they exhibit an extreme (and not always undesirable) affinity for rapid, sudden changes (pivots) in business model and vision. However, the firm’s entire risk budget is allocated to people at the interface. The interior (where engineers live) is neglected and gets no risk budget (read: only what one can hide). While the company is swift and small, it’s more like a tough culture in which it can still be enjoyable to be a low-level employee– one thrives by hiding risks, working very hard, and getting lucky. Once professional managers (who reduce risks, even of the good kind, because it’s what they’re trained to do) are hired, rank culture sets in and the company is no longer with caring about, except for true shareholders (and not people sacrificing their careers to vest tiny slices of equity).

Good and bad risks– and why the distinction used to not matter, and now does

Companies exist to shift around risks, but this raises a question. Is moving risk the only thing we should care about?

Clearly, there are some good and some bad risks. Most business risks that companies take are beneficial to them and, sometimes, to society at large. Those are good risks. Funding basic research is a good risk; the worst-case scenario is a well-understood financial loss, and the upside is immense. Playing Russian Roulette is a bad risk: it has no upside for anyone, and there’s a 1-in-6 chance of a bullet in the head. Risk can have an irremovable moral character, and the business world tends to ignore that.

Financial risk can be commoditized and transferred, due to separability. This leaves the risk (which can be traded on a market) without a directional moral character or color. All that matters is the (explicitly quantifiable) amount of it that there is. With separability, you can take the attitude that there’s a fixed, quantifiable “pool” of risk that may be taken, and risk allowance will be allocated according to political standing. When you’re dealing with separable commodity risk, it doesn’t matter who has the allowance or what kind of risk it is. As an owner or top executive, you set a maximum amount, let the politically empowered or daring take risks (for personal and corporate benefit) until that limit is reached, and hope for the best.

The problem, in a fully convex technological economy, is that most risks are no longer separable, meaning raw amount of risk (e.g. statistical variance) isn’t the only vital concern. Why? First, there are too many important risks to set up a market for transfer. With industrial commodity labor, individual efforts were concave. Now, each employee is a source of convexity. Creative risks, in the technological world, are individualistic and non-fungible. The payoff distributions are not Gaussian. Old models break down, and management according to risk allowances and principled reduction result in lost upside. In the concave, industrial world, this was tolerable. Concavity, which favors risk aversion, means there’s little value to extreme high performance. Taking a haircut on the upper end was fine: a “Maserati problem”. Convexity’s different. Without that “fat tail” upside, one cannot compete. Losing the upper end means losing almost everything.

Good risks generally involve growth and building: “blue sky” R&D is an example. Bad risks usually involve damage and harm: “low performer” witch hunts might reduce costs, but can demolish morale forever. Bad risks tend to be concave (downside-heavy) and good ones convex (upside-heavy) but that isn’t strictly or uniformly true. In any case, typical industrial-era, MBA-toting management never bothered to learn the difference between good and bad risks because, until recently, it didn’t matter. Risk was a measurable but fungible (thus, always financial) quantity to be sloshed around. Loss induced by sloshing costs was minimal: a rounding error. With inseparable risks, sloshing is infeasible. Risk must be “allocated” and executed where it “naturally” lives. The concrete result of this, amid widespread convexity, is that employees must be trusted with their own time and risk. Not taking that approach will hamstring a business.

What do the players want?

MacLeod organizations exist to transfer certain kinds of risk– especially the personal risk of income volatility that has little to do with business, but is a motivating factor for people to go to work, even under disadvantageous (MacLeod Loser) conditions. If one wanted to see it this way, one could perceive the (idealized) corporation as a purification plant that takes peoples’ personal income risks (bad risk) and turns it into an engine that can provide them steady employment while delivering high average returns for those who can tolerate volatility (good risk). This is the sort of thing that becomes possible in a world of separable risks.

Regarding risk, individual people generally don’t want sudden losses of income or painful or disruptive changes in their daily routines. They especially hate involuntary geographical mobility, one of the strongest predictors of mental illness. The first (and legally inviolable) provision of the corporate social contract is that the employee gets paid speedily for work furnished. Implicitly, they also harbor expectations regarding career management, fair warning of job loss, and fairness– those are delivered with less of a scrupulous reliability, because they can’t be legally enforced. Ultimately, however, most people are looking to be separate from the potentially life-ruining risks that they’d face on a daily basis if they interacted directly with the market. These are the MacLeod Losers. They take a steady wage that falls short of their expected productivity (and that they will lose if severely unproductive) and the difference is the risk premium they pay. The risk-seeking and entrepreneurial MacLeod Sociopaths collect these risk premiums and often get rich.

Intermediate management (which, in a risk-analytic perspective, includes executives, insofar as they are “upper management” but sit between risk-exposed owners and risk-selling workers) is a disease and a treatment. The problem with such people is that they often find ways to take upside risks while externalizing the downside (“heads, I win; tails, you lose”). Executives combine the ambition of ownership and the risk-aversion of management, and often the most fit personality type for this is a thief with a mature and nuanced understanding of risk and a preternatural skill for externalizing and hiding risks. At some point, an Effort Thermocline forms and the true executives, collecting only upside, are less accountable and less productive than the downside-laden chumps below them. Those who succeed in the trade of risk and credibility (the right to take organizational risk in one’s own direction) become the MacLeod Sociopaths. Those who fail become the Clueless, who inadvertently serve as a countervailing force to the mounting pathology and sociopathy of the shell-gaming Sociopaths. The Losers, on the other hand, are aware of the risk transfer that’s going on and, as long as their personal risk is reduced, they don’t care who wins or loses.

The new fourth category of the Technocrat has a different attitude. Clueless are laden with bad risk and unaware of it, thinking they’re doing right by their companies. Losers want to get rid of personal income, location, and condition-change risk. Sociopaths try to take existing good risk for themselves and externalize bad risks, but their main goal is their personal balance (good risk, minus bad risk). Technocrats actively seek good risks, biased toward the convex-friendly opinion that taking desirable risks (rather than reducing disliked ones) is the optimal strategy. They want improvement, hard problems to solve, and creative endeavor.

The Miser’s Question: Why you?

When does emotionally neutral (and justifiable) corporate risk aversion turn into resentment, bad faith, and moral corruption? The answer is the Miser’s Question.

When a person tries to pursue creativity that entails risk (especially, the financial kind) for others, he’s going to run to into the Miser’s Question. Why you? It’s not rejection of the idea. It is to say: the idea sounds like it has merit, it could be a good one, but what makes you the one to execute it? What’s your competitive advantage over the other guys? Shouldn’t we bring in an expert to make those calls?

For a brilliant cinematic example of the Miser’s Question, there’s a scene in Fargo where Jerry Lundegaard– the protagonist, an emasculated and fairly stupid man turned to crime in desperation– discusses a business proposal with his father-in-law, a wealthy banker. For maximal humiliation, the banker recognizes the deal as a good one, takes it for himself, and offers Jerry a trivial finder’s fee. The banker didn’t perceive Jerry as having the competence to execute it. (To his credit, the banker was probably right. The movie is about Jerry’s incompetent execution at, well, a lot of things.)

Worse is a move that I call the Miser Bomb. It’s when a boss takes a subordinate’s idea and gives it to someone else he perceives to be more credible. That’s evil. Once the Miser Bomb falls, the relationship between that manager and the employee is over. Having an idea rejected is just business. The Miser Bomb is rejecting (and insulting) a person. It’s a good idea, but we don’t trust your judgement. That wound never heals. It leads irreversibly to resentment, adversity, and sabotage.

A true-blue Sociopath would fire a subordinate as soon as he drops the Miser Bomb. At that point, it’s probably the only reasonable thing to do: summarily terminate this guy who will never be invested in his work, and will almost certainly desire to undermine his superiors.

I don’t like “why you?” and I especially dislike “why you?” cultures. Having grown up in blue-collar Pennsylvania, I can say there’s clearly a set of hard-working, intelligent people who end up not achieving much because they feel that ambition and upper-tier achievement “just aren’t for our kind”. (Of course, that’s bullshit.) In the Philippines, this is referred to as the “crab mentality“, which refers to the tendency for captured crabs in a bucket (that, individually, one could escape) to pull each other down, so that none get out and all die. It’s militant mediocrity. “Why you?” is the crab-mentality conviction that anything interesting (executive-level business problems, hard-core machine learning, self-executive direction of one’s own career) can only be performed by anointed “special” people, rather than learned through trial and error. Startups are supposed to be beyond that, but I find the opposite often be true. Often, a good idea will be met with, “That would require hiring a real X with production experience at scale.” Never is approached the idea that “real X”es didn’t descend from heaven, but learned those skills by, you know, doing X without asking for permission from risk-averse, emasculated imbeciles who use words like “scaling” without knowing that they mean. This “real X” obsession is often related to a disgusting, social-climbing “our people aren’t good enough” attitude that I’ve seen in many startups, and it must be run away from with extreme prejudice.

Given the toxicity of “Why you?”, why does it still exist? There’s an amazing saying (often falsely attributed to Eleanor Roosevelt) that explains it:

The best minds discuss ideas, middling minds discuss events, weak minds discuss people.

Apply this maxim to business and investment. The most progressive thinkers want to participate in human creativity, so their goal is to validate new concepts in a calculus that balances their divergent creative needs (exploration) with the convergent, pragmatic motive of turning a profit (exploitation, here used non-pejoratively). Middling businessmen want to see numbers about the market, some projections and charts, and fetishistic buzzwords that make them feel safe. The small-minded and deficient operate based on emotion, superficial assessments of character, and credibility. They’re the ones who ask “Why you?”

VC-istan, as I see it, is still a “Why you?” culture. Investors are looking for “track record”. What galls me is when they say, “we don’t invest in ideas; we invest in people”. That’s supposed to sound agile and progressive. Actually, the people who say that sound like small-minded dipshits. If you’re an investor or executive, then your goal should be to invest in human creativity (not “people”, meaning resumes or superficial reputations) and, while pragmatic compromise is always necessary, if creative excellence isn’t your aspiration as an executive/investor, you’re a supernumerary, conformist bag of waste and you should just sit this life out. If you’d rather invest in “track record” than potential, then I’m sorry but the future just isn’t for you.

The answer to “Why you?”: Why not?

The problem with “why you?” is that people internalize it, especially after 20 years of disempowerment. If you’re obsessively questioning whether you’re “good enough” to try something, you’re wasting time that could be spent either learning the requisite skills, or just going the fuck out and doing it. There are a million things worth doing, and if we leave them to “special” or “credible” people, most of them will never be done. There are only about 23 people in the world who are perfectly and implicitly credible (Google’s Jeff Dean is one) at any given time, and each can do a maximum of maybe 6 things-worth-doing at a time, which leaves 999,862 things worth doing that won’t be attended.

The only business organizations that are worth caring about have “why not?” cultures where people focus on doing rather than jockeying for permission to do things.

“Why not?” is not about irresponsible permissiveness. It’s a real question, not rhetoric. There are often good reasons not to take risks. That question must always be examined, and any reasons considered. If, however, the worst-case scenario is merely an affordable expense of time, people should go for it. That should be encouraged in all levels of an organization. People should be implicitly trusted with their own time, and encouraged to take beneficial risks.

The reason I don’t see a future in VC-istan is that it’s doomed to continue along with its “Why you?” mentality, if for no other reason than its centralization of power. VC may be a slight improvement over the traditional corporate culture that peaked in the 1970s, but it’s every bit as doomed to MacLeod stratification, upper-crust entitlement, and pervasive mediocrity. It’s so far along that path that it can’t come back. We need a genuine “why not?” culture; that, more than anything, is going to define creative health over the next several decades.

What will overwhelm VC-istan and drive it into obsolescence? I’d put my money on an armada of 50,000 or more small companies, not focused obsessively on rapid growth. These are derided as “lifestyle businesses”, but I trust them more than anything else that is out there to build out the future. The lifestyle business is viewed as a failure because, in the current regime, it’s too small to be safe. A competitor can kill it, and the owners’ lives are probably ruined. That’s a real problem. It makes a lot of great people not want to do lifestyle businesses, because there is this serious risk. VC-istan is there to provide a safety hatch for good-faith business failure, which lifestyle businesses don’t have. Good-faith failure at a lifestyle business still fucks up your life. If we can provide a reliable, working path for talented entrepreneurs to start lifestyle businesses without egregious personal risk, we’re headed in the right direction. Nothing can (or should) protect businesses that fail in the market from dissolution and reallocation of the (underused) resources, but we should make it easier for the people who fail in good faith to try again. We need to make “yeoman capitalism” a legitimate and sustainable mode of existence.

Moreover, a fleet of 50,000 strong but not gigantic businesses is, in my opinion, a hell of a lot more robust than VC-istan’s few hundred red-ocean “X killers”, where X is some giant corporation that, while sluggish and mediocre in the development of internal talent, still has the means and will to fight viciously against (and possibly demolish) anything with any real chance of killing hit. VC-istan despises lifestyle businesses not because there’s anything wrong with them, but because it favors get-big-or-die “X killer” gambits that are continually reliant on external capital.

The solution to our problem is coming into view, but we still have questions to answer. It would be a great thing to have 50,000 lifestyle businesses building real technology. How on earth are we, as a society, going to pay for it? We come back to age-old economic problems of risk and finance. I’ve painted the broad strokes; the finer ones are where I intend to go next.

Gervais / MacLeod 15: What is being rich?

After the 14 previous essays, we now have a deep understanding of why business organizations degenerate (i.e., why, for most people, work sucks). We’ve got a working taxonomy of the players by rank (MacLeod hierarchy) and moral behavior (alignment). We know about the social substructures that keep corporate hierarchies internally stable, even while enervating them and leaving them exposed to external risks, such as obsolescence. We have an understanding of why MacLeod institutions were successful in the past, but won’t be in the future. We know how (internal) corporate evil works, and why it exists. We have a sense of why previous (financial and social) risk transfers enabled the corporation to exist, and the chaotic, playful force that will undermine a centuries-old way of doing things. We have the language to discuss workplace cultures and organizational health. We’ve even taken a glance at the creative emptiness of chaos (the source of growth and risk) and, with an expanded alignment model, derived the importance of the The Fringe– the barrier between well-adjusted and ill-adjusted alignments that generates a highly ambitious “ring-shaped” space that sets up the eternal struggle between lawful evil (psychopathy) and chaotic good (technocracy). God sent me to kick some philosophical ass. I can’t judge my own work, but I’d like think ‘dem boots got broke in.

Yet before we can solve individual or organizational problems, we have to answer one more question: what the hell do all these players actually want? If you say, “Money”, I’ll put a dunce cap on your head. Money just enables the trade of stuff people want. It must be of low intrinsic utility, so people will happily let it go to get things they actually want, but legibly scarce enough to hold value. People generally get money from corporate institutions and use it to get services from other corporations, so there’s another interesting question: what the hell do corporations want?

First, I’m going to discuss individual material desires and aspirations. Then I’ll get into the concepts of wealth and work and how they’ve evolved from the primal to agricultural to industrial eras and, additionally, how they’ll change again in the (future) technological age. We’ll encounter some surprises there. Then I’ll get into what organizations want (and should want) for themselves.

Individual material aspirations

Why do people want to be rich? What is it about material wealth that drives people? There seems to be a five-tiered hierarchy of material aspiration:

  • Survival: Basic, inflexible needs like food, shelter, and health care. 
  • Leisure: Freedom-to. Meaningful activities and pursuits such as reading, sports, travel, and social engagement.
  • Comfort: Freedom-from. Purity of experiences (e.g. first-class travel). Liberation from time-wasting chores, unpleasant side effects of Leisure, and artifacts of low social or economic status.
  • Status: Social resourses to maintain an undeserved income and (for some) extremes of sexual access and libertinism.
  • Power: Capacity to raise or lower others’ Status levels, whether through political, business, cultural, or religious dominion.

I might be showing my cynical (in the classical sense) bias here, insofar as this depiction places a virtuous “getting off” point somewhere in the middle of the Comfort tier. The first two levels (Survival, Leisure) have an obvious natural necessity and inclination toward virtue, and the third (Comfort) has clear hedonic value but can tend toward excess. Status and Power, on the other hand, pertain to the raw, zero-sum bickering that often makes people miserable and morally bankrupt. There are moral notions of status and power– rooted in earned elevation and in technical excellence– but those tend to be focused toward progress and health (Technocratic ideals) rather than zero-sum socioeconomic squabbling.

A simplified model would claim that people “max out” one tier and go to the next. That’s about right– one tends to claim primary focus for a given person at a given time– but, of course, it’s not so cleanly delineated. No tier is ever perfectly maxed-out, as made evident by the fact that we die, precluding perfect Survival. There are also trade-offs. A person with moderate means could decide to travel further, to more exotic locations (more Leisure) or, instead, to travel nearer but with better accommodations (more Comfort). That inclination comes down to individual taste.

Let’s look at how these tiers worked at various points in history, and attempt to project them into the technological era.

Material aspiration in history and future

In the primal era, work and play were so intertwined that Survival and Leisure were intimately linked, because the activities people did to survive (hunting, trapping, collecting and gathering) fulfilled most peoples’ primal industrious needs. Comfort, however, was utterly unimaginable. There simply was no such thing. The gods might afflict you with illness, or you might be wiped out by a more fearsome tribe that sweeps into your range. Status pertained to sexual access and reproduction. What was Power? It started when primal people began to speculate on the whims of the gods, and developed protocols for resolving status disputes. Those who managed to win others’ trust in divination became priests and, probably, the first law-makers. One presumes that there was a selection process in humanity’s priesthoods, evolving from random pretense to principles that, in their contexts, worked more often than not. Over time, this favored free-standing logical principles that became the first laws.

As humanity moved toward the agricultural era, ownership (of land, people, and resources) was invented, and that became the new Status. People who controlled and enforced the laws pertaining to ownership had Power. Leisure separated from Survival, because most of the activities people did for their sustenance were no longer fulfilling. The Comfort tier– nonexistent in a primal world– emerged, but in a form that was deeply intertwined with the Leisure and Status tiers below and above. Ownership enabled permanent social classes, and they developed divergent ways of pursuing leisure. Non-owning poor hunted for edible animals on foot, and ate them. Rich owners chased small or inedible animals on horseback, and made them trophies. The stratification of Leisure by Status generated the first notions of Comfort: different modes of doing things, some with obvious hedonic superiority over others.

The five-tiered hierarchy is most prominent in the (current) industrial age, with business sectors and commodity markets pertaining to each category of need. Whole companies are dedicated to peoples’ Leisure, or Comfort, or Status needs. Employed people will generally have their Survival needs met and abundant access to Leisure. Comfort has advanced to levels that would be considered heavenly a hundred years ago, but it’s still somewhat scarce. Most people can’t afford first-class plane tickets at full fare, or to live in the nicest neighborhoods, or even to live less than 30 minutes from work. Status is necessitated by the fact that it’s still impossible for the vast majority of people to fulfill Comfort without a parasitic lifestyle and the social access to enable it. Power pertains to control over such social arrangements and that interpersonally exploitative resource: connections. (I don’t use this view of connections to denigrate genuine relationships; I’m talking about “I’ve got connections, bitch.”) Corruption no longer happens in “smoke-filled rooms”, and bribes to sleazy politicians (almost all of them) are no longer bags of cash, but invitations to important parties. “You have a kid in high school? Every Ivy League admissions dean comes to my winter party. Keep me a friend, Senator.” That’s how Power works.

I contend that we’re not yet in the technological age, but we’re coming to it, and the successful institutions of the 21st century will be those that embrace it. At some point– and this is not a pre-requisite for advancement to a technological state, but a likely byproduct of it– we may reach a point where average people can have Comfort and obviate the nasty, socially destructive competition for Status and Power. We might move toward a world where people focus on the virtuous notions of status (patterns of excellence) and power (expansive, enlightened altruism). That would obviate a host of nasty human problems that seem intractable at our current level of advancement. Or, we might discover that people are boundlessly greedy and competitive, and then see no real progress. I tend to believe it will be a mix of the two– people will still compete over stupid shit, but it will be less harmful to outsiders, as one sees with the ridiculous but externally inconsequential/harmless ego-fest surrounding Manhattan nightclub admissions– but there are too many variables involved to make firm predictions. That world is probably 30 to 150 years out, in any case.

What makes someone rich?

In the primal world, persistent wealth was probably rare, and not universal. A person was rich in his tribe if he had high status. A tribe was rich if it could use and defend a large range for hunting, gathering, and proto-agricultural return-and-forage practices. What wealth existed was probably connected to religion: objects (fetishes in the true sense of the word) believed to convey connection to, or favor from, the gods. Of course, such wealth wasn’t transferrable; it only had value to those who believed in the same gods.

Persistent wealth came into the fore in the agrarian era, as societies invented permanent ownership relations, backed first with claims of divine sanction, and later with social-contract arguments and political force (states). Still, culture and religion only went as far as others bought into them, so there was a need for societies to agree mutually on stores of value that made sense between them. Grain could rot, and land could only be “owned” as far as it was defended, so something else was required. Furthermore, the need to maintain power relationships (land ownership, slavery) necessitated force, and that required hiring soldiers. It was best to pay them with a currency of universally legible value, like gold. Whatever bought the sword became money. Being rich, in the agrarian era, was owning lots of stuff and having the means to defend it and to extract its value.

The industrial era moved away from physical wealth and toward debt currency. While industrial labor is (for most individual workers) concave, industrial processes are (at least as one scales from zero to completion) still convex, due to nonlinear synergies. This meant that an industrialist would have to take control of others’ time and resources (a natural source of debt) for some time, running a loss for a while, before there was any payoff. Finance formalized this, and also enabled risk transfer. People with financial capital could put it at risk (for expected profit) and, thus, enable entrepreneurs to pay workers immediately (removing risk, for them). This allowed macroscopically convex (thus, risky) endeavors to be taken on by large numbers of people, while the risk was passed to those who could afford it. In the industrial era, to be rich is to have access to financial capital.

In the previous eras, but most especially the industrial one, wealth was intimately connected to control of time. What we’re learning in a world of ubiquitous computing and 24/7 connectivity is that time doesn’t have anything close to a uniform value. For me, the 8:00 am hour is much more productive than the 8:00 pm hour; but for many people, it’s the opposite. The semi-bored passive time that advertisers cultivate is of minimal value, but an interesting commodity in its own right because there’s such a massive quantity of it.

More interesting than the static non-uniform value of time, however, is the concept of progressive timewhich is compounding interest of skill and knowledge derived from heterogeneous experience. In the late industrial era, time became money; work was all about the trade of one for another. However, with the micro-convexity (as opposed to the macro-convexity of all industrial efforts) of creative endeavors becoming the norm in all important work, we’re finding some extreme nonlinearities. There’s immense value in “10,000 hours” (I won’t debate exact numbers, but it’s the right order of magnitude) of deliberate, focused, and progressive practice. There’s very minimal value in 10,000 hours of non-progressive commodity labor. The programmer who spends 10 years doing difficult, creatively taxing, educational work can justify $500 per hour of economic value to her future time commitments. Yet a programmer (similar on paper) who did the more typical bland corporate drudge work for that same amount of time (i.e., he has the same year of experience, repeated 10 times) is probably worth less per-hour than he was when he started. So time can no longer be valued in isolation (whose time it is, what work will be completed) but it must be connected with both past (previous skill investment) and future (potential long-term yield).

To refine a numerical intuition for this, let’s say that you’re building technical infrastructure that will double the value of your business. If you hire the best specialist you can get, he’ll get it done in 4 months: a doubling in that time is 19% per-month growth. If you hire a 1.8-level (above-average, but not exceptional) programmer like me, outside that specialty, I’ll take 12 months (6% per-month) as I get up to speed and learn from mistakes; unlike the veteran specialist, I’d need to ramp up on the clock. If you hire a 1.1-level (mediocre) “commodity” developer used to curiosity-starving corporate programming, it’ll take 5 years including “rejection cost”– the task may not take that long, but you’ll have failures and restarts. That’s 1.1% per-month growth. If we could project these rates over $1,000 for two years with a compounding-interest model, we’d see that the world-class expert turns it into $64,000; the above-average programmer like me turns into $4,000, and the mediocre delivers only $1,320. That is progressive time in action.

Progressive time is a source of discomfort to corporations as well as the workers who have to deal with them. On one hand, micro-convexity generates the rampant job volatility for which trigger-happy employers and job-hopping employees are known. On the other, such a world creates short-sighted institutions with no desire to invest in talent (taking the risk that it leaves them). Yet competence with progressive time’s nonlinearity has become crucial, because machines are taking over the non-progressive work, and the only thing for humans to do is the progressive, micro-convex stuff.

With industrial macro-convexity, banks could intermediate between (a) those with capital to put at risk and (b) people judged highly competent to use it. Not many “highly competent” people were needed, so one could select them based on career trajectory and personal buy-in: only give money to the well-established guy putting up a substantial amount of his own capital. This excluded some talented people (like me) who could never meet such a bar, but it wasn’t a major loss back then; we didn’t need many convex thinkers. Sparse finance was OK. Society did not need a large number of people with the executive freedom conferred by access to capital. Micro-convexity is different. It creates an intractably self-executive world. Raw talent matters in a way that it never did before. The good ideas need to come from everywhere: not just seasoned, unobjectionable gray-haired men.

In short, being rich in an agrarian world meant that you had the gold to hire soldiers or to pay the government (taxation) to uphold your property rights. Being rich in the industrial era meant having the financial resources to direct others’ time– their commoditized time, presumed not to have progressive nonlinearities to it. In the technological era, progressive time (more concretely realized in access to talent, knowledge, and skill) is king. Most startups are failing in the 21st century not because there is a lack of capital, but because they don’t know how to attract, assess, and develop talent.

What do organizations want?

I think I’ve modeled the material aspirations of people well. What do companies want? The answer is, of course, that they are not living beings. “They” don’t want anything; people within them do. They do seem, however, to develop an emergent character that is some conglomerate of the people within them. When the organization’s small and selective in its people, that tends to amplify group strengths more than it converges to the gray-goo, muddled weakness for which corporate groupthink is known. However, as it grows, the MacLeod process seems to set in, and that group character (derived from its executive nerve center, which is increasingly pathological) evolves into something bland and somewhat psychopathic.

Two people can have a brilliant, interactive conversation, but a hundred people can’t. Either a few will speak, with ninety-some listeners, or they’ll break off into separate cliques. That’s fine. At a dinner party, the subgroup conversations coexist concurrently and don’t conflict. To a very mild extent, they’ll develop their own social languages, but that’s fine. However, what is a corporation? To the eyes of those who interact with it on a regular daily basis, it’s a Giant Fucking Pile of Resources– money, people engaged in a pattern of time-limited subordination, and relationships based on institutional reputation. Naturally, there will be competition as peoples’ visions of what to do with those resources conflict. People might have the best intentions and charitable vision, but to their opponents, they’re “bike shedding”. They clobber each other, and anything with an individual color is washed out, and there’s very little agreement on anything with a creative or socially positive character, which some in the group will view as wasteful. What’s left is the common social language. Profit. The Pe-en-ell. Dominance (of a market sector, or of a relationship). Growth for growth’s sake.

The Corporation is a god for the godless. Ancient people first created fictional psychopaths to justify actions that, while judged to be abstractly beneficial for the group, were dangerous or harmful to some. There was, at least, still some character to that supernatural being. It had a gender. He or she had a face, a body, some scriptures, and probably a cult. Over time, most of us realized that these gods don’t exist. (I’m not saying that a God doesn’t exist; only that concrete, interventionist ones don’t.) Late in the agrarian era, we replaced concrete ethnic deities with abstract ethnic ones called nation-states. Those lost power over time in favor of more universal fictitious psychopaths called corporations, who dropped all pretenses of “godness” and focused full-throttle on fitness as measured by the crass common language of a typical executive suite: revenue growth. So that’s where we are, but it’s not where we have to be.

The large, hierarchical business corporations are going to struggle in the technological era. To be competitive, a company will need to harness self-executivity. But corporations don’t keep small executive suites only because they’re elitist. That’s a part of it (okay, a big part) but it’s also logistically difficult for a company to have a large number of people in its nerve center. Startups struggle with this, and often cease maintaining a self-executive culture, at about 20 people. I think that gigantic, unified conglomerates of people might be on their way out. In 2000, the typical high-impact company had a core of 30 executives and 2,000 human workers. In 2050, such a company might have 30 self-executive humans and 200,000 CPUs. The “big” companies of 2050 might have a couple thousand employees. 

With the increasing importance of progressive time and self-executive behavior, the typical hierarchical goons– and the internal police forces that mandate subordination through laughably ineffective HR policies– are goners. There’s about as much of a place for them in the future as there is for headsmen and alchemists.

What large institutions will surive? Universities (but of a less exclusive sort, enabled by technology) have a good shot, being inherently pushed toward progressive guild culture. Guild culture can’t grow quickly, but it can tolerate scale. A few of these business corporations will reinvent themselves into forms that can coexist with self-executive free agents. For an analogy, medieval Rome was a prosperous city of about 30,000 people– still impressive by the standard of its time, but no longer a belligerent continental empire. Google, for its part, will probably live on into the 22nd century as a prestigious think tank, but the zombie dinosaurs who invented “calibration scores” (a mean-spirited and psychotic performance review process) will be the stuff of history books.

With the large, uninspiring conglomerates headed toward extinction, doesn’t this render growth– the boundless desire to subsume more people and become of those giant corporations– self-defeating? Perhaps. That deserves discussion.

Obscene growth is a drive emerging out of fear. In a zero-sum world, entities are either pressing their borders forward, or something is pressing in on them. Expansion in all dimensions (financial footprint, geographical reach, headcount) is required. The good news is that we don’t live in a zero-sum, Malthusian world anymore. That was the way things worked up until 1800: economic growth was slow (below 1% per year) and lower than the rate of human population increase, but the former is accelerating (almost 5%, globally) while the latter seems to be leveling off. Human potential productivity has grown, thanks to technology. One no longer needs to control a large number of people to do something excellent and sustainable. It can involve a small number of people, and they need not be controlled.

In the zero-sum world, dominance was requisite because it was the only source of stability in a winner-take-all world. Rapid growth in footprint was essential, in order to claim critical corners before a competitor does. This sort of speedy expansion is deeply risky, the result of it being that organizations needed to compensating by annihilating many beneficial (e.g. creative) risks. It’s a good thing that we don’t have to live in such a world anymore. With economic growth strong and accelerating (taking a global perspective) due to technology, we’ll be able to focus on health rather than growth for it’s own sake. And we should.

A brilliant dark age

As I’ve developed the almost metaphysical concept of chaos (creative emptiness) I like it more and more. I could be wrong, but it seems that we are moving toward a “dark age”, with the crumbling of an institutionalized, regimented way of life. Most of our going assumptions about what Work is and how it must be done won’t survive, but creativity will accelerate. It’s a brilliant darkness ahead.

Gervais / MacLeod 14: expanding alignment, plus well-adjustedness

I didn’t intend this to be part of the Gervais / MacLeod series. It was just for fun. Yet, here we are with the 14th essay that answers a burning question. I’ve talked about alignment a great deal and tendency for organizations’ fates to come down to a battle royale between chaotic good and lawful evil. Why? What causes it to form this way? Why don’t lawful good and chaotic evil, instead, end up in an existential armageddon for once? I’ll explain that, and more.

The classic model of alignment comes with two spectra– moral and civil– and three levels in each. This gives us the tools to talk about various approaches to life. The moral spectrum (good vs. evil) is a primary motivator for action– especially the dangerous action that role-playing systems tend to model– and the civil spectrum (law vs. chaos) helps us understand alternative approaches, and conflicts within morally united teams– lawful good wanting to work with established players, chaotic good wanting to overthrow them.

This two-dimensional model captures a lot of truth. However, there are some issues with it:

  • How does one differentiate the True Neutral zealot– ideologically committed to neutrality– from the garden-variety neutrality of unaligned humans (or animals)?
  • Neutral Evil is typically viewed as inherently more evil than lawful or chaotic evil, due to its civil fluency. Is this fair? Can’t a person be moderately evil but without civil bias? Dick Cheney and Adolf Hitler are both “neutral evil”, but the latter was a lot more evil.
  • Moral neutrality almost sounds pejorative. To call someone lawful neutral or chaotic neutral is to imply that she’s not a good person, but corrupted by civil bias and amoral. If we’re keeping with the idea that the “morally middling” 80 percent are in fact “neutral”, then this isn’t exactly fair, especially to the 75-ish percentile people who are quite decent. That’s a wide range and a lot of people in it are mostly good, but not just not far enough in that direction for it to be an alignment in the old-school sense.

I’d go further and say that alignment is somewhat of a misnomer, because it implies taking an abstract stand. Lawful people don’t uphold all laws, because that would be contradictory. Each has a set of laws in which she believes. Good people don’t all have the same concept of moral good, and the same applies to evil. Furthermore, most evil people aren’t aligned with evil at all. Most evil people respect force and power– not evil on its own. Many of these additional concerns can’t be accommodated in a two-dimensional model, but they are important.

Expanding to 9 levels

I’m going to propose a system where morality and civility have nine levels. At this level of granularity, we can accommodate most human variation while retaining enough of a distinction at each level to give insight into how an RPG character should be played, or (in the real world) how such a person might act. Each of the traditional three levels is split three ways, like so:

  • good => Virtuous, Heroic, and Exemplary.
  • moral neutral => Pliable, Natural, and Humane.
  • evil => Calamitous, Sadistic, and Corrupt.
  • lawful => Compliant, Authoritarian, and Fanatic.
  • civil neutral => Skeptical, Pragmatic, and Affable.
  • chaotic => Entropic, Rebellious, and Free-minded.

The Moral Scale

Exemplary people (+4; 0.05%) will seek opportunities for self-sacrifice. They’ll gladly take on pain, suffering, and risk of death for the benefit of others. This doesn’t mean that they’re stupid, and they’re not going to take on degenerate risks, but they tend strongly toward selflessness. That said, some people find them to be narcissistic and exhausting. Because of their inflexible commitment to, at the least, what they perceive as moral good, they can’t have strong civil alignments or ties to human institutions. In many circumstances, such a person is “too good”.

Heroic people (+3; 0.95%) have a strong moral code and a self-sacrificing streak, but not necessarily the overarching or messianic ambitions. The Exemplary seem often to have desire to die for a good cause, while Heroic people are unflinchingly accepting of Good’s perils but not drawn to them. For example, a Heroic person would risk death to save a child and expect no reward, but not seek opportunities to do that.

Virtuous people (+2; 9.00%) have firm commitments to what they perceive as moral goodness. There’s a philosophical strength to the Virtuous person. Such people are restrained by their strong moral bearings– they won’t rob others, except in dire circumstances– but rarely sacrificial. Under extreme duress, one might show weakness. Still, they have strong principles that they will go into harm’s way to fulfill, and they consciously make positive action a routine in daily life. Typically, these people have the most balanced ideology of moral virtue. There’s an altruistic code, but enough flexibility to depart from it in unusual circumstances. This often takes the form of “humble good”, and it’s where many of our moral role models actually were.

Humane people (+1; 20.0%) are the neutral-leaning-good category. They generally don’t have a moral code, but want to do the right thing for other people. These people show a clear bias toward the good, but without the principled resolution of the Virtuous. They tend to act according to local definitions of virtue that make sense based on the information they have, but don’t have the hunger or commitment to refine that definition of virtue or expand their locality.

Natural people (0; 40.0%) favor good slightly, but tend to be most strongly influenced either by self-preservation, or by ideology (such as civil bias). They’ll dutifully follow a morality that seems about right to them, and they generally frown on malice, but they’ll break from their values with sufficient payoff, and especially when fear is involved. Hedonic, economic, and pragmatic concerns dominate their moral calculus.

Pliable people (-1; 20.0%) have notable weaknesses. With nothing to lose or gain, they’d prefer to do the altruistic or beneficial thing, but that tends to manifest as superficial politeness rather than ethical resolution. The Pliable are untrustworthy and often greedy.

Corrupt people (-2; 9.0%) are the first level of true evil. They don’t delight in harm and pain for their own sake. They’ll eagerly do the wrong thing for benefit, and might seek out opportunities to do so, or to exploit others, but harm is not of free-standing value. It doesn’t matter to them who gets hurt. These people use evil toward neutral and selfish ends (self-enrichment, power). From a morbidly individualistic perspective, this is the “most fit” alignment of the typical psychopath.

Sadistic people (-3; 0.95%) enjoy others’ suffering. They are less “fit” than the Corrupt because this desire to harm others has become so intense as to become a weakness. They will actually work against their own advancement in pursuit of others’ pain. Sadistic people rarely have personal ambitions other than raw dominance over others, and they tend to shy away from typical rewards (fame, fortune) insofar as these make it harder to engage in such behaviors. Serial killers tend to be Sadistic rather than Corrupt.

Calamitous people (-4; 0.05%) are the closest to cosmic or “satanic” evil that humans get. Corrupt people will do evil things for personal gain, and Sadistic people enjoy evil at a hedonic level, but Calamitous people actually have a vision of evil that usually motivates belligerence. Widespread depravity is their ultimate goal. It’s not enough to harm and dominate other people; they actively run campaigns of broad-based moral ruin, even knowing that such will probably result in a dishonorable and possibly horrible death. This level of evil is practically “selfless” and thus hard for people to comprehend and, when it meets power, absolutely devastating. Moral weakness (Pliable) and failure (Corrupt) are things that people understand. Sadistic people are generally held to be psychopathic and perverse. The Calamitous level is beyond most peoples’ comprehension.

With this expanded spectrum, we can now differentiate between the “neutral good” of Jesus (Exemplary-Skeptical) and that of Paul Graham (Virtuous-Affable)– as well as the “neutral evil” of Dick Cheney (Corrupt-Affable) versus Hitler (Calamitous-Pragmatic).

Good, evil and society

For both the moral and civil scales, two points seems to represent the barrier between well-adjustment and imbalance, with three being unambiguously maladaptive. Virtuous (+2) people have a hard time rising to the top, being limited by principle in what they can do. Heroic (+3) seem self-defeating in their uncommon adversity to moral compromise. Corrupt (-2) people can rise to power if they hide themselves, but the Sadistic (-3) are often sidetracked by opportunities for malice that don’t serve coherent goals.

Calamitous evil, although disastrous when it gains power, is quite rare in stable human societies. Even George W. Bush– one of our most deservingly detested political leaders– is merely Pliable (neutral-leaning-evil). He’s a weak and incurious person, and as a member of our parasitic and malignant upper class, he’s certainly been an operator for evil generated in his milieu, but not a principal originator. It’s not in his nature to be evil, but it’s within his capability. Dick Cheney and his warmongering neoconservative friends are solidly Corrupt careerists with, probably, a few Sadistic people thrown in. I’m not saying that these aren’t awful people (they are, clearly) but they’re not in the same category as Hitler. Calamitous evil is just at another level. It’s not even the perverted self-indulgence of the Sadistic, but a frighteningly clear vision of hatred and misery.

One perverse advantage that the higher degrees of evil sometimes have is in their incomprehensibility (to normal people) and their apparent selflessness. Sadistic evil, from a distance, has an erotic allure. In reality, it’s boring and revolting– de Sade’s writing is, like any fetish pornography, repetitive and bland to people without such tastes, and so devoid of interest that you’ll go back to your homework– but the perverted intensity of it makes it superficially attractive. Typical people (even good people) have, at the least, intellectual interest in whether there’s a hedonic benefit to the misery and pain of innocents. (If you’re wired properly, there’s none.) Calamitous evil has an even greater power, in that it appears deeply selfless. For a concrete example, Hitler’s being a bachelor (he was “married to the Aryan race”, and presented himself as celibate) was an effective political asset because it showed singular dedication to his (depraved) vision. In that peculiar time, the incomprehensibility of Hitler’s Calamitous evil made it possible for him to disguise how evil he actually was.

Evil societies tend to form concentric circles of decreasing evil in order to recruit the whole spectrum. Calamitous evil (Hitler) provides the intensity of vision and belligerent ambition. The Sadistic level of evil (Mengele) becomes useful to it in its willingness to go into pursuits that most people (even the Corrupt) would find distasteful and horrible. At the Corrupt level, there are careerists driven by the potential for immense personal gain; most of the Nazis, in truth, were in this category. Finally, the Pliable level of neutral-leaning-evil (especially when there is a lawful civil bias) provides an army of “useful idiots”.

This capacity to mobilize is almost never seen in the good, which might be why good societies are so damn rare (and good organizations usually small). Evil has no qualms about recruiting, exploiting, and mobilizing the moral middle classes. It realizes the need to corrupt them if it is going to get its way given humanity’s desire to think of itself as democratic. The selfish greed of the Pliable, the fear of the Natural, and the indignation of the Humane (which can be misdirected via dishonesty) can be evil’s friends.

Once evil is mobilized, it tends toward civil fluency. When evil is out of power (Beer Hall Putsch) it will rally the chaotic and mutinous. When it is in power (Third Reich) it will use the lawful, rigid, and self-limiting. Good lacks this exploitative desire. Even the lawful good wish for justice and consent rather than forceful subordination or dishonest subversion. Good wins over evil in the game of culture, soft influence, and eventual progress; but evil wins when it comes to coercion, power, and immediate force.

The Civil Scale

Fanatic people (+4; 0.05%) have an extreme bias derived from some set of principles and traditions, usually of human origin. At this level of “extreme lawful” alignment, it’s important to specify what set of laws is to be fanatically obeyed, it being different for each person. It might be a religious scripture or a political ideology, but there’s an intent to follow some set of existing principles so literally as to leave no room for judgment. The Fanatic will override his own conscience, or selfish desires, to fulfill what is perceived as inerrant and, quite often, perfectly constant law. Fanatics rarely get along even with conservative institutions, because they are more insistent on following law than the people in power are. Predictably, Fanatics often oppose other lawful or Fanatic people who support different conceptions of law.

Authoritarian people (+3; 0.95%) recognize the need for some human judgment and improvisation, but take an extremely conservative view of it. That sort of thing is best left to a very small set of carefully vetted people who are well-educated in the principles of law, which should change slowly if at all. Those who depart from authority, even with the best intentions, are seen as dangerous and should be opposed reflexively. Civil authorities can only be opposed if a higher constitutional principle necessitates it. People at this level of lawfulness tend to be organizationally or politically ambitious, finding most competition for powerful positions to be too lax to get the job done.

Compliant people (+2; 9.0%) believe that it is almost always right to obey laws and social mores. They’re probably the most tolerant of subordinate positions, without the strong belief in a higher principle of law that motivates Authoritarians and Fanatics (the latter, sometimes into conflict with authority) or the burning desire to become its executor. They follow laws and meet social expectations in order to minimize discord and resistance, but will oppose authority, in the face of objective evidence, if they find it distasteful.

Affable people (+1; 20.0%) want social harmony, but fully accept the need for change and occasional revolution. They’re not likely to start insurrections, but they recognize the necessity of occasional chaotic breakthroughs. Still, they prefer to avoid conflict and proximity to rapid change. They like the abstract idea of reform, but aren’t likely to get mixed up with reformers.

Pragmatic people (0; 40.0%) are devoid of civil bias. They judge power, establishment, and institutions on their own observed merits and have no strong tendency to attribute positive or negative aspects regarding what they can’t see. They will take prestige and reputation as having some signal, but they’re not inclined to buy into them inflexibly.

Skeptical people (-1; 20.0%) believe that organizations tend to be slightly worse than their people, and to dislike extremes of power, believing (as Lord Acton said) that power corrupts.While individualistic, they tend to have faith in institutions and powerful people if they get to know them well, and they prove trustworthy. Even though the Skeptical person’s trust in authority is weak, however, there is still often a lingering belief that establishment confers validation. A Skeptical person would be inclined to distrust college admissions, but still be more interested in talking to a Harvard graduate than someone from a lesser-known school; there’s a lot of noise, but some signal there.

Free-minded people (-2; 9.0%) dislike being told what to do. They don’t have an ideological dislike of authority, but they would prefer not to have it intrude in their lives. If it works for others, fine. They recognize the need for laws and obey them (at least in spirit) the vast majority of the time for pragmatic reasons, but they tend to distrust authority. Opposition to ineffective or malignant authority is, of course, seen as a virtue. The free-minded alignment might be seen as the most libertarian, because the more chaotic alignments prefer to topple organizations even if they’re supported by democratic consensus.

Rebellious people (-3; 0.95%) see authority as inherently wrong and vicious. They dislike it, and enjoy the process of overthrowing it. To them, almost all institutions are either undesirable, or so pregnant with future malignancy, as to deserve overthrow. Establishment, power, and reputation are taken as negative validations. Periodic revolution is viewed as a necessity. Rebellious people will sometimes ally with, and even develop admiration for, the very few institutions they find to be in concord with their values, but the set of organizations they do not find to be disgusting is small.

Entropic people (-4; 0.05%) thrive on conflict and volatility. As maladjusted as the Fanatic, they have an almost obsessive hatred for any attempt to create order or persistence in human affairs. Such people are not necessarily cruel– typically, they are not– but they have an overpowering will to summon chaos. Entropic people often tend toward anarchism.

One of the most interesting things about the civil spectrum is that it has a certain near-circularity to it at +4. Entropism tends toward self-contradiction, and Entropic people are Fanatic about a certain abstract principle or law, but that is chaos itself. An interesting debate could be had about how to classify the ideologically dedicated “true neutral” (as rare as I think such people are). Is someone who is radical in neutrality being fanatic in adherence to the principle, or entropic out of an inflexible desire to thwart any moral or civil direction? It’s not clear. In order to keep a firm separation between Fanaticism and Entropism, I insert this distinction: Fanatics believe there is some conscious, organic, or otherwise positive entity (law) to be upheld. It might be the will of a god, a human cultural vision, or concern for the ecosphere, but there’s something that must be protected from natural disorder. The Entropic, however, believe that chaos is an ideal. This might be a self-defeating ideology, since I’ve noted before that chaos is a fundamentally creative emptiness. It will always be filled. The perfect void is unattainable except, perhaps, in death (the matter of afterlife being unknown). 

Extremity and well-adjustment

There are some interesting “derived statistics” that can come out of alignment. Since these spectra have a fairly clear ordering but no obvious mathematical placement (i.e. it’s not clear how distances between categories compare) I’m going to use the “city block” (L^1) metric for simplicity’s sake. The distance between two alignments (m1, c1) and (m2, c2) is |m1 – m2| + |c1 – c2|.

First, let’s examine extremity, which is distance from (0, 0), or the Natural-Pragmatic alignment. Are there useful insights that can be attained about an alignment based on this statistic?

In general, I believe that extremity has a limit at 5 points, so I’ll exclude extreme corner alignments.

This means that:

  • Fanatic and Entropic people can only be morally middling: Humane, Natural, or Pliable. Extreme civil bias gets in the way of a directional moral position. 
  • Rebellious and Authoritarian people can also be Virtuous or Corrupt.
  • Free-minded and Compliant people can, additionally be Heroic or Sadistic.
  • Skeptical, Pragmatic, and Affable (civilly middling) are compatible with the whole moral spectrum.

Looking at it from a 90-degree angle, this is the same as saying:

  • Exemplary and Calamitous people can only be civilly middling: Skeptical, Pragmatic, or Affable. Extreme good or evil require fluency with order and disorder alike.
  • Heroic and Sadistic people can additionally be Free-minded or Compliant.
  • Virtuous and Corrupt people can be Rebellious or Authoritarian as well.
  • Humane, Natural, and Pliable (morally middling) are compatible with the whole civil spectrum. 

This seems about right. While someone might have a philosophical alignment exceeding 5 points of extremity in theory, it’s hard to imagine how that would be played out in his everyday life.

Those with extremity of 0 or 1 are the Central. That’s about half the population. Such people tend to be idiots in the classic sense: unconcerned with global affairs or ideology. This is a highly adaptive state to be in, because Central people can tolerate most social arrangements. Whatever the circumstances, they’ll usually find a way to fit in. They tend not to rise in organizations or societies, however, specifically because they’re adaptive. Societies know how to make them happy at the bottom and in the middle.

At extremity 2 and 3, subsuming about 45% more, we have Ideological people. They tend to take strong stands and have notable levels of ambition. They’ll have discernable opinions and tastes. Most politicians are here, including George W. Bush (Pliable/Affable; extremity 2) and Barack Obama (Virtuous/Affable; extremity 3).

At extremity 4 and 5, with only 1 out of 20 people here, we have the Radicals. This is an interesting place to be, but it’s not very adaptive. Radical people tend not to succeed through established channels.

Extremity doesn’t tell the whole story, however. From its perspective, one who is Virtuous/Compliant (2, 2) is as extreme as a Corrupt/Free-minded (-2, -2) person, but the former is more likely to get along well in society than the latter. The first might be taken as self-righteous, and occasionally go too far out of his way to help someone, but he’s not going to end up in the jail. The second probably will. Extremity gives us a good sense of how likely a person is to oppose her immediate interest or to disregard her instincts in a natural environment. However, it paints a distorted view of adaptability to modern society, which favors law over chaos and (so long as its moral immune system functions) good over evil.

So let’s look at a different statistic: well-adjustment. This is derived from one’s distance from (1.5, 1.5)– lawful but not too lawful, and good but not too good. The closer one is to this point, the more people comfortable people will be, in general, around that person. For reasons that will become clear later, I’m going to define the well-adjustment statistic like so:

W(m, c) = 4 – |m – 1.5| – |c – 1.5|

In other words, it’s 4 minus that distance. The reason for this seemingly arbitrary choice will become clear later. Remembering my constraint that extremity can’t exceed 5 points, we get a value between -4 and +3 at the integer points, and a maximum of +4.0 allowing mid-points.

Here’s what’s interesting about the well-adjustment statistic. The magnitude of it isn’t that important. Much more crucial is the sign. Positive, negative, and zero (or “near zero”, if including non-integral alignment statistics) each have social meanings, but the difference between +1 and +4 is minuscule.

Why is that? Trust relationships and personal affinities tend to be pretty binary, with occasional mid-grades but most results either “yes” or “no”. We can model that with an ”S-shaped” logistic function. Each point of well-adjustment might represent a factor of 2 in terms of a person’s ability to win the trust of others: a person at +1 is trusted with 2:1 odds (66.7%), one at +2 is trusted with 4:1 odds (80.0%) while one at -1 is trusted with 1:2 odds (33.3%). Trust is a subjective thing, and it doesn’t matter what these numbers precisely are. I think this model is conceptually correct.

An organization, however, is a convoluted network of these S-shaped trust and credibility functions, and it tends (groupthink) to amplify small signals and even noise. The result is that instead of the factor of 2 per point of well-adjustedness, we might see 10. The person at +1 may irritate a few people and cause disagreement, but won’t make so many enemies as to get himself kicked out of the organization. The person at -1 might get lucky and have a supportive manager, but will never make enough friends to climb the corporate ladder. The sharpness of this S-curve– rapid switch from near-zero values to near-one– makes it look almost like a step function. The inflection point is right around a well-adjustedness of 0.

If it isn’t clear what I’m talking about, here’s a graph of a logistic function, and here’s one of the social acceptability function. (In the real world, it probably looks more like this. Whether the island of well-adjustedness has a perfect diamond shape is irrelevant: that’s an artifact of the model. In our discrete, integer-point, space it’s close enough to get right the points we care about.)

So now we can look at three sociological categories, noting that sign of well-adjustedness (unless we deal with non-integer values and care about defining “near zero”) is predominantly what matters. A person would be happier, all else being equal, to be at +2 than +1, but it’s not going to have a major and discrete effect (promoted vs. fired) on his career.

Positive well-adjustment (1 to 4 points): this is a contiguous “island” of space containing most of the central, common, alignments with a bias toward lawful good. In this space are:

  • Skeptical/{Humane, Virtuous}
  • Pragmatic/{Natural, …, Heroic}
  • Affable/{Pliable, …, Exemplary}
  • Compliant/{Pliable, …, Heroic}
  • Authoritarian/{Natural, Humane, Virtuous}
  • Fanatic/Humane

People of such alignments generally can find a home in almost any organization. They’ll be well-liked and accepted, most of the time, in the typical neutral-aligned organization. Winning others’ trust won’t be a problem for them, and they won’t have to work hard to do it. That said, because they’re well-adapted to organizations, they’re not especially unhappy at the bottom, so they aren’t the fastest climbers. In the MacLeod organization, they tend toward Loser and Clueless levels because, as they’re well within the organization’s comfort zone, it can always find a comfortable place for them.

Negative well-adjustment (-1 to -4 points): these “far out” alignments generally lead to social rejection in large groups, unless that person’s alignment is hidden (as the evil tend to do). A person sitting at -1 might have a shot at finding his own tribe but, in general, the odds of such a person in a large organization are poor, unless it has a directional alignment of its own (which is rare, at scale). These alignments are:

  • Entropic/Any
  • Rebellious/Any
  • Free-Minded/{Sadistic, …, Natural | Heroic}
  • Skeptical/{Calamitous, …, Pliable | Exemplary}
  • Pragmatic/{Calamitous, …, Corrupt}
  • Affable/{Calamitous, Sadistic}
  • Compliant/Sadistic
  • Authoritarian/Corrupt
  • Fanatic/Pliable

People might look at these alignments and say, “that’s not true, I know someone exactly like that in power!” Of course. I don’t doubt it. There are means of getting power that don’t require winning the trust of large numbers of people or of organizations, and there are always outlier cases where a marginally under-adjusted person (-1) gets through. Additionally, there are groups with directional alignments, in which case the well-adjustedness formula changes. My argument is only that people in this space rarely win enough social approval through typical means to be a commonplace organizational force.

The Fringe! (0 points)

Perhaps the most interesting space is the diamond-shaped region (technically open in the lawful good quadrant, because of my 5-point limit on extremity) where well-adjustedness equals 0. People of positive well-adjustment are used to social acceptance and take it for granted. Those of negative well-adjustedness experience social rejection and tend to change their alignment, to hide it, or to accept permanent exclusion. Yet the border region has its own character. These people, experiencing social acceptance some 50-ish percent of the time, have plenty of experience with both sides of the social approval function. They tend to be loyal to organizations that treat them well, but they also tend to be highly ambitious. Fringe players have to move up before conditions change and exclude them. They’re always on the bubble– never comfortable. One might thing of these as akin to the MacLeod Sociopaths. Alignments in the fringe region are:

  • Free-minded/{Humane, Virtuous}
  • Skeptical/{Natural | Heroic}
  • Pragmatic/{Pliable | Exemplary}
  • Affable/Corrupt
  • Compliant/Corrupt
  • Authoritarian/Pliable
  • Fanatic/Natural

In the mathematical model I’ve created, this zero-contour has the shape of an open diamond. In reality, it might be more like a crescent shape or something else. Who knows? Its specific shape is not important. But look at the club we have here! There could not be a more heterogeneous group of people. Let’s cluster them a bit based on similarities in behavior. Then we have:

  • Fanatic/Natural live on the fringe, being lawful to a degree that others find absurd. They go in their own set. There aren’t enough Fanatics, in general, for them to have macroscopic importance. We’ll ignore those. 
  • Lawful evil cluster. Compliant/Corrupt are deep into lawful evil territory; the not-fully-evil {Pragmatic, Authoritarian}/Pliable and not-fully-lawful Affable/Corrupt cluster generally have no problem working with them.
  • Chaotic good cluster. Free-Minded/Virtuous are core of chaotic good. They are also able to recruit the Free-Minded/Humane, the Skeptical/Heroic, and the Pragmatic/Exemplary.
  • Swing players: the Skeptical/Natural have no moral bias, but tend to wind up on the fringe of organizations for what is perceived as apathy. However, they can join with whichever of the two clusters above they perceive to be stronger.

This, in a nutshell, is probably why so many organizations’ cultures and futures come down to a battle between lawful evil and chaotic good.

Gervais rehash, part III: Markov and management, plus a 4th culture

This is a follow-up to the pair of essays I wrote earlier this week. First, I amended the MacLeod organizational hierarchy to include a fourth category, the Technocrat. Secondly, I began to explore different workplace cultures. Now I’m going to extend the three-culture model to include a fourth. Before I do that, let me revisit the assumptions of the first two essays.

The MacLeod Model assigns unflattering labels to the three tiers of the modern corporation. Workers are Losers, managers are Clueless, and executives are Sociopaths. Examining the behaviors associated with each, we get three baseline traits that organizations use to evaluate the quality of its people: subordinacy, dedication, and strategic orientation. Call these traits the “3 S’s” that organizations use to evaluate the quality of its people. If we treat these traits as binary and look at them in combination, we get up to 8 categories of employees:

Subordinacy  Dedication  Strategy  Category           MacLeod destination
False        False       False     Passive            Fired or Lumpenloser
True         False       False     Yes-Person         Lumpenloser
False        True        False     Loose Cannon       Fired or Lumpenloser
True         True        False     Workhorse          Clueless (middle manager)
False        False       True      Passive-Aggressive Highly variable!
True         False       True      Team-Player        Loser (subordinate)
False        True        True      Self-Executive     Sociopath (executive)
True         True        True      Protege            (unclear)

My original analysis focused on the team-players (MacLeod Losers), the workhorses (MacLeod Clueless), and the self-executives (MacLeod Sociopaths, whom I further divided between the “good Sociopath” Technocrats and the toxic Psychopaths). The assumption I held was that an employee with fewer than two of these three assets would not retain employment, while those with all three were a contradiction in terms. On further inspection, I’ve realized that neither is fully true. The other five possible employee types do exist, and they’re worthy of study. 

The toxic categories (0 or 1 assets)

Passive employees are averse to discomfort, insubordinate, and indiscriminate in their uselessness. They aren’t very interesting, and they tend to be remarkably unsuccessful in any context. Related is the Passive-Aggressive, who is lazy and ornery, but strategic about how lazy to be. Passives almost never rise beyond the lowest levels, but the Passive-Aggressive’s destination is quite variable. In dysfunctional organizations, they can rise high. The Loose Cannon is insubordinate and not strategic, but dedicated. He will work hard toward something, but it may be detrimental. Ultimately, his complete lack of strategy means that his egotism and explosive nature are discovered early and he’ll rarely rise. Finally, the Yes-person is willingly subordinate, but neither strategic nor dedicated, the result of which is that he tends to support management verbally, but not follow through on account of incompetence. 

The normal categories (2 assets)

The Team-Player is the MacLeod Loser. She’s strategic and optimizes for minimal discomfort. Because of this, she aims for social approval. She’d rather be well-liked and “cool” than rise in the organization. She’ll manage her performance to the middle and do what it takes to get along with the team and her boss, but she won’t stay after 5:00. The Workhorse (MacLeod Clueless) is subordinate and sacrificial, but not strategic. She doesn’t recognize a good idea from a bad one and, therefore, indiscriminately works hard on the project put in front of her. Finally, the Self-Executive (MacLeod Sociopath) employee is strategic and dedicated, but not especially subordinate. Self-executive employees tend to view themselves as already in authority over their own careers. In subordinate roles, they see themselves as CEOs of one-person operations.

The conditional category (3 assets)

As I originally set this model forward, I assumed it to be contradictory to be subordinate, strategic, and dedicated. Someone who is strategic will either maximize personal benefit (dedicated, not subordinate) or minimize discomfort (subordinate, not dedicated). What I missed is that it can sometimes be strategic to be subordinate and dedicated– if there’s a career benefit in doing so. This is the elusive and rare eighth category, the Protege. This is the Self-Executive employee who has decided that the best thing for her career is to be taken under the wing of someone more experienced, and to sacrifice some autonomy in exchange for mentorship. It’s a trade. She gets executive buy-in to her career advancement and, in return, the superiors get work with a set of qualities (loyalty, dedication, and strategic insight) that would otherwise be paradoxical.

The Protege category is conditional because if the manager stops investing in her career, she becomes an ordinary Self-Executive. She’s conditionally subordinate, and will seek her own interests if the mentor abandons her. It’s also the most politically tricky, because it requires management to abandon neutrality. Taking one self-executive employee as protege can be seen (correctly) as “playing favorites” by the rest of the team. Workhorses (Clueless) won’t know they’re being disfavored and Team-players (Losers) won’t care enough to do anything about it, but the other Self-executive employees will be alienated.

The organizational destination of Proteges is unclear because it’s often an unstable arrangement. While they are typically fast-tracked to important roles, they are also vulnerable to the political standing of their mentors. Additionally, I should note that the Self-Executive vs. Protege classification is orthogonal to my split of the MacLeod Sociopath into the beneficial (Technocrat) and toxic (Psychopath) categories. Technocrats and Psychopaths are both capable of being strategically subordinate– or strategically insubordinate.

More on work cultures

Originally, I set forth the supposition that there are three types of work cultures:

  • rank cultures, which value subordinacy.
  • tough cultures, which value sacrifice.
  • self-executive (originally market) cultures, which value strategy.

I’m going to make a couple changes to this model. The first is to note that tough and self-executive cultures share some similarities and both deserve the name of “market culture”, which I originally assigned only to the latter. The second is to add a fourth culture. That’s a guild culture, which is driven by the Protege’s conditional subordination. Guild and rank cultures are command cultures. We can again separate these four cultures based on two dimensions. The first dimension is whether the culture is centrally planned (command) or organic (market). The second is whether it is functioning or pathological.

The guild culture is a functioning command culture. There are masters and apprentices, and the relationship is one of mutual benefit. The one with more knowledge and experience is the mentor, and the less experienced inferior is the protege. This is the rarest of the four cultures, being associated with protectionism and pre-capitalistic intent, but the ideas behind it are still seen: most notably, in education. A guild culture’s purpose is to create value through the sharing of knowledge, and to capture it through loyalty in the well-taught. In 2013, with corporate loyalty seen as anachronistic, it’s a dying way of doing things. Companies are not likely to invest in employees when they live under the constant fear of them departing.

Rank culture, on the other hand, is a pathological command culture. Your manager is just your boss. He’s not expected to teach you anything or help you rise in the organization. He gives you orders and you follow them. Rank cultures are extortionate economies in which managers leverage their authority to unilaterally terminate an employee or, at the least, reduce her credibility to zero. In rank cultures, employees don’t work for the company, but for their immediate managers.

Self-executive culture is a functioning market culture. Employees are trusted with their own time and resources and form teams organically, and they’re responsible for delivering value to the business. In software, this is the open allocation methodology, which is sometimes mischaracterized as “work on whatever you want” when it is better described as “work directly for the firm”. This is a great arrangement for intermediate-level employees (who can direct their own progress) and experts, although it’s often not the best at mentoring beginners.

Finally, tough culture is a dysfunctional market culture. Like self-executive cultures, they emphasize individual accountability. However, they don’t trust the employee far enough to create a reasonable market for innovation. Employees must demonstrate value on a daily rather than yearly basis. Autonomy is reduced, deadlines are tighter, and performance and status assessments become so intrusive that they often cause underperformance.

Common transitions

Among these four types of work cultures, there seem to be four common transitions, two in which a functioning culture turns into its dysfunctional counterpart (guild into rank, self-executive into tough) and two in which a dysfunctional culture type evolves into the other (rank into tough, tough into rank). I’ll assess each of these, and what drives them.

Guild cultures turn into rank cultures when the organization either ceases to reward mentorship, or grows too fast to coach people along toward better capabilities. Managers are forced to balance the interests of their superiors against those of their subordinates, and are often required to side with those that sign their checks. If the organization doesn’t maintain a culture of mentorship, that goes away as psychopathic managers who “manage up” get promoted over those who favor their subordinates’ career interests. In the hyperfluid modern economy, most organizations are too paranoid about departing talent to make the long-term investment in their people that a guild culture requires. As the culture of the company’s management becomes increasingly psychopathic, the guild culture disappears and rank culture– serve your boss– is what’s left. Masters and mentors are replaced with rent-seeking position-holders.

Self-executive cultures devolve into tough cultures through a similar managerial devolution in which trust for lower level employees decays. Market cultures hold employees individually accountable for delivering something of value the organization, but the time interval (audit cycle) could be anything from minutes to years. What is the greatest amount of time with which the individual employee is implicitly trusted? Executives with itchy trigger-fingers tend to reduce that time interval and, as it goes to zero, what emerges is tough culture as deadlines become increasingly unreasonable.

Rank cultures are not stable because they tend to harbor underperformers. The best people leave, while those who commit mediocre work but keep their bosses happy are able to stay. Ultimately, this can only go so long before the top executives notice the problem and decide to intervene. Instead of firing being a rare thing that happens to the obviously toxic, some percentage of people will be fired “for performance” each year. Middle managers are not only unsafe, but targeted at higher rates than subordinate employees since they, for tolerating underperformance, are held responsible for the problem. The certainty and stability of the loyalist strategy disappear and people fight for visible work and to make their dedication and sacrifice visible. This turns the rank culture into a tough culture, a reinvention it must undergo because the long-term path of a rank culture is underperformance, lethargy, and death.

Tough cultures, similarly, are unstable. Normal people just can’t stand to work in them for longer than a few months, and very few companies will accept the constant turnover that tough culture induces. For the sake of personal and corporate stability, people start cutting deals, and the people who control the performance assessments become the new rank-holders, first informally, but with their status increasingly formalized over time as they win promotions through deal-making and extortion. One who can guarantee a positive review (which may not be the immediate manager) becomes one’s real boss. Thus, tough cultures return to rank cultures and, the tougher the culture is, the faster this occurs.

Are other transitions possible? Certainly they are, but I contend that they’re uncommon. Pathological work cultures rarely reinvent themselves as functional ones, so regeneracy seems rare. Moving from one pattern of dysfunction to another is easy and can be accomplished with top-down HR initiatives, but executives of large companies don’t really have the tools or incentives to bring a broken culture to fix itself. This seems to induce an “arrow of time” where the entropic direction is cultural failure.

We can model this as a Markov process. Let’s say that, each time step, 10% of self-executive cultures become tough cultures, 10% of guild cultures become rank cultures, 10% of rank cultures become tough cultures, and 40% of tough cultures become rank cultures. The healthy cultures have no in-flow, while there’s a shuffling back between tough and rank cultures. The long-term outcome is that an organization, left to its own devices, will spend four-fifths of its time as a rank culture, and one-fifth of its time as a tough (“crackdown”) culture. That seems about right. The process seems to be punctuated by upper management changes. The new bosses are chagrined by the inefficiency and underperformance they observe (or, perhaps, they were brought in because of underperformance). They kick the organization a few times and it becomes a tough culture. Toughness being unsustainable and deal-making surrounding credibility being inevitable, the best traders of credibility (or extortionists, for the black hat) congeal into the new definition of “rank”. Soon, they themselves become complacent and entitled… and the cycle repeats.

Gervais followup: rank, tough, and market cultures.

This is a follow-up to yesterday’s essay in which I confronted the MacLeod Hierarchy of the organization, which affixes unflattering labels to the three typical tiers (workers, managers, executives) of the corporate pyramid. Subordinate workers, MacLeod names Losers, not as a pejorative, but because life at the bottom is a losing proposition. Lifelong middle managers are the Clueless who lack the insight necessary to advance. Executives are the exploitative Sociopaths who win. I looked at this and discovered that each category possessed two of three corporate traits: strategy, dedication, and subordinacy (which I called “team player” in the original essay). I replaced team player with subordinacy because I realized that “team player” isn’t well-defined. Here, by subordinacy, I mean that a person is willing to accept subordinate roles, without expectation of personal benefit. People who lack it are not constitutionally insubordinate, but view their work as a contract between themselves and manager. They take direction from the manager and show loyalty, so long the manager advances their careers. Since they show no loyalty to a manager or team that doesn’t take an interest in their careers, they get the “not a team player” label.

MacLeod Losers are subordinate and strategic, but not very dedicated. They work efficiently and generally do a good job, but they’re usually out the door at 5:00, and they’re not likely to stand up to improve processes if that will bring social discomfort upon them. Clueless are subordinate and dedicated, but not strategic. They’ll take orders and work hard, but they rarely know what is worth working on and should not advance to upper management. MacLeod Sociopaths are strategic and dedicated, but not subordinate. The next question to ask is, “Is insubordinacy necessarily psychopathy?”, and I would say no. Hence, my decision to split the Sociopath tier between the “good Sociopaths” (Technocrats) and the bad ones, the true Psychopaths.

People who have one or zero of the three traits (subordinacy, dedication, strategy) are too maladaptive to fit into the corporate matrix at all and become Lumpenlosers. People with all three do not exist. A person who is strategic is not going to dedicate herself to subordination. She might subordinate, in the context of a mutually beneficial mentor/protege role, but general subordination is out of the question. Strategic people either decide to minimize discomfort, which means being well-liked team players in the middle of the performance curve– not dedicated over-performers– or to maximize yield, which makes subordinacy unattractive.

What I realized is that, from these three traits, one can understand three common workplace cultures.

Rank Culture

The most common one is rank culture, which values subordinacy. Even mild insubordination can lead to termination, and for a worker to be described as “out for herself” is the kiss of death. Rank cultures make a home for the MacLeod Losers and Clueless, but MacLeod Sociopaths don’t fare well. They have to keep moving, preferably upward.

While the MacLeod Clueless lack the strategic vision to decide what to work on, their high degree of dedication and subordinacy makes them a major tactical asset for the Sociopath. The Clueless middle manager becomes a role model for the Losers. He played by the rules and worked hard, and moved into a position of (slightly) higher pay and respect. 

Rank cultures have, within them, a thermocline. From worker to middle manager, jobs get harder and require more effort to maintain and achieve. Below the thermocline, one really does have to exceed expectations to qualify for the next level up. Above the thermocline, in Sociopath territory, the power associated to rank starts paying dividends and jobs get easier as one ascends, rising into executive ranks where one controls the performance assessment and can either work only on “the fun stuff”, or choose not to work at all. Rank cultures require this thermocline, an opaque veil, to keep the workers motivated and invested in their belief that work will make them free. That is why, in such cultures, the strategically inept Clueless are so damn important.

Tough Culture

Rank culture’s downfall is that, over time, it reduces the quality of employees. The best struggle to rise in an unfair, politicized environment where subordination to local gatekeepers (managers) is more important than merit, and eventually quit or get themselves fired. The worst find a home in the bottom of the Loser tier, the Lumpenlosers. At some point, companies decide that the most important thing to do is clear out the underperformers. Thus is born tough culture. Rank culture values subordinacy above all else; tough culture demands dedication. Sixty hours per week becomes the new 40. Performance reviews now come with “teeth”.

Enron’s executives were proud of their “tough” culture, with high-stakes performance reviews and about 5% of employees fired for performance each year. The firm was berated for its “mean-spirited” and politicized review system that, in reality, is no different from what exists now in many technology companies. This is the “up-or-out” model where if you don’t appear to be “hungry”, you’ll be gone in a year or two. Those who appear to be coasting have targets on their heads.

Over time, tough culture begets a new rank culture, because the effort it demands becomes unsustainable, and because those who control the new and more serious performance review system begin using it to run extortions based on loyalty and tribute rather than objective effort. They become the new rank-holders.

Market Culture

Rank culture demands subordinacy, and tough culture demands dedication. Market culture is one that demands strategy, even of entry-level employees. You don’t have to work 60-hour weeks, nor do you have to be a well-liked, smiling order-follower. You have to work on things that matter.

Rank and tough cultures focus on “performance”, which is an assessment of how well one does as an individual. If you work hard to serve a bad boss, or on an ill-conceived project, you made no mistake. You were following orders. You had no impact, but it wasn’t your fault, and you “performed” well. Market cultures ignore the “performance” moralism and go straight to impact. What did you do, and how did it serve the organization? Low-impact doesn’t mean you’ll be fired, but you are expected to understand why it happened and to take responsibility for moving to higher impact pursuits.

People who serially have low impact, if the company can’t mentor them until they are self-executive, will need to be fired because, if they’re not, they’ll become the next generation’s subordinates and generate a rank culture. Firing them is the hard part, because most of the people who conceive market cultures are well-intended Technocrats (or, in the MacLeod triarchy, “good Sociopaths”) who want to liberate peoples’ creative energies. They don’t like giving up on people. But any market culture is going to have to deal with people who are not self-executive enough to thrive, and if it doesn’t have the runway to mentor them, it has to let them go.

A true market culture is “bossless”. You don’t work for a manager, but for the company. You might find mentors who will guide you toward more important, high-impact pursuits, but that’s your job. In technology, this is the open allocation methodology.

Why Market Culture is best

Market culture seems, of the three, the most explicitly Sociopathic (in the MacLeod sense). Rank cultures are about who you are, and how well you play the role that befits your rank. Tough cultures are about how much you sacrifice, and democratic in that sense. Market cultures are about what you do. Your rank and social status and “personality” don’t matter. Is that dehumanizing? In my opinion, no. It might look that way, but I see it from a different angle. In a rank culture, you’re expected to submit (or subordinate) yourself. In a tough culture, your contribution is sacrifice. In a market culture, you submit work. Of these three, I prefer the last. I would rather submit work to an “impersonal” market than a rank-seeking extortionist trying to rise in a dysfunctional rank culture. 

What I haven’t yet addressed is the cleavage I’ve drawn within the MacLeod Sociopath category between Technocrats and Psychopaths. The most important thing for an organization is the differential fitness of these two categories. Technocrat executives are, on average, beneficial. Psychopaths are unethical and usually undesirable.

Pure rank cultures do not seem to confer an advantage to either category. Tough cultures, on the other hand, benefit Psychopaths who find an outlet for their socially competitive energies. Ultimately, as the tough culture devolves into an emergent rank culture, Psychopaths thrive amid the ambiguity and political turmoil. Tough cultures unintentionally attract Psychopaths.

What about market cultures? I think that Psychopaths actually have a short term advantage in them, and that might seem damning of the market culture. This is probably why rank cultures are superficially more attractive to the Clueless middle-managers, with their dislike of “job hopping” and overt ambition. On the other hand, and much more importantly, market cultures confer the long-term advantage on Technocrats. They’re “eventually consistent”. To thrive in one for the long game, one must develop a skill base and deliver real value. That’s a Technocrat’s game.

Gervais Principle questioned: MacLeod’s hierarchy, the Technocrat, and VC startups

The MacLeod Model of organizational sociology posits that workplaces tend toward a state in which there are three levels:

  • Losers, who recognize that low-level employment is a losing deal, and therefore commit the minimum effort not to get fired.
  • Clueless, who work as hard as they can but fail to understand the organization’s true nature and needs, and are destined for middle management.
  • Sociopaths, who capture the surplus value generated by the Losers and Clueless. Destined for upper management.

Venkatesh Rao has a brilliant analysis of these three tiers as they play out in the sit-com, The Office

I’m going to propose the existence of a fourth subset: the Technocrat. Before doing that, it’s important to assess the forces that generate these tiers, and why I think the MacLeod classification isn’t adequate.

Effort and strategy

Losers are not “losers” in the sense of being unpopular or contemptible people. Here, “Loser” means “one who loses”. In fact, they’re often well-liked and good people. However, they’re aware that employment is a better deal for the other side than it is for them. What they want most is to be comfortable. They don’t want job insecurity or too much change. They’re not “losing”, so much as they’re selling risk, in their poorly-paid jobs. They prefer contests where the points don’t matter (e.g. the Party Planning Committee in The Office) and the comfort of a stable group that will protect them. At work, they generally aim for the Socially Accepted Middling Effort (SAME). They’re not lazy, but the largest influence on how hard they work is social approval. They don’t want to be perceived as slackers, nor as overachievers, so they manage their performance to the middle.

Clueless are the hardest workers. They work as hard as they can, out of a sense of loyalty and ethical obligation. There’s an adverse selection at play that favors the untalented, because people who are naturally talented and hard workers tend to threaten Sociopathic colleagues and will be sabotaged. The survivors tend to be the less capable. Michael Scott, again borrowing from The Office, is a clear example of this. While he’s incompetent, he clearly puts everything he has into his work, having no social life outside of it. If he were more intelligent, he’d either have been tapped for a better role, or he’d be perceived as a threat and be sabotaged by an ambitious Sociopath. However, the less effective and capable Clueless are clearly destined for terminal middle-management roles that Sociopaths don’t want, so this adversity doesn’t often befall them. 

Sociopaths are strategic in their work ethic, but also flexible. As Venkat describes, they’ll fall to the outright bottom, effort-wise, if that frees up resources to impress someone who matters. They have no qualms about reducing their effort to zero in an environment where social attractiveness is more important. However, they’ll also contribute immense bursts of energy when a promotion is available. One core Sociopath skill is assessing whether it’s advantageous to work hard and, when not, to slack off and focus on social polish.

Common traits of the tiers

Of these three subsets, each pair of them has a unifying trait that is considered an asset by the corporate world. Losers and Sociopaths are strategic, Clueless and Sociopaths are dedicated, and Losers and Clueless are team-players. Each of these deserves assessment.

Team-playing (Losers and Clueless)

Companies prefer employees who will prioritize social approval from the team over personal ambitions or needs, and call such a person a team player. The alternative is the out-for-herself careerist who expects interesting work and upward mobility. The selling trait of team players is that they don’t have to be explicitly motivated “from above”. Wanting to do good by the people around them will motivate them organically “for free”, and they’ll ignore being underpaid, ignored, and given few opportunities to advance if the group’s approval is enough to indulge their esteem needs.

Losers are team-players because they want social approval. They want the comfort of being in rather than vying for up. They’re happy with the trophy of ascent into a meaningless in-crowd (in The Office, the Finer Things Club). Their goal is to be cool. Clueless, however, want to be “in charge”. What turns them into team players is the fact that they can be motivated with meaningless leadership accolades, or even undesirable tasks dressed up as positions of power (in The Office, Dwight). Clueless, in general, can’t recognize the difference between the genuine power sought by Sociopaths, social approval sought by Losers, and the ceremonial non-power that Sociopaths and other Clueless generate to keep them motivated.

Of the three traits I will analyze (team-playing, dedication, and being strategic) the most important one for a subordinate position is team-playing. Even if a person is highly competent, if she’s not well-liked by her team, she won’t be effective in a low-level position, because no one will help her. Subordinate positions never involve enough autonomy for a person to have a real achievement on her own. As Venkat Rao correctly assesses it, Sociopaths in subordinate roles have a short lifespan, limited by their willingness to run a team-player charade. It’s up-or-out for them. Ryan, in The Office, does this brilliantly. He uses his relationship with air-headed Loser Kelly to hide his true nature and underplay his threatening intelligence– seeming like an incompetent Loser– but once he finds common ground (his MBA degree) with CFO David Wallace, he takes the chance to jump and, on success, dumps her immediately.

Dedication (Clueless and Sociopaths)

For Losers, most of life is outside of work. Losers will put in their 40 hours, but if you ask one to work a weekend or do undesirable tasks that are way outside of her job description, you’ll get resistance. For the Loser, it’s “just a job”, and not something that has the right to dominate a person’s entire life. Losers aren’t lazy or apathetic, but they’re rationally disengaged. A loser recognizes that she can get an equivalent job at another company, so it’s group cohesion only that keeps them in place.

Clueless and Sociopaths, on the other hand, can work 90 hours per week without complaint. They’ll do their best to meet unreasonable requests from above, but their motivations are very different. Clueless are driven by a misguided sense of corporate loyalty, both above and below them. The Clueless middle-manager (or over-performing team member) is willing to please her boss, on whom she depends for her connection to the company (to which she feels a debt of gratitude). She’s also willing to pick up the slack of the Losers on her team, out of a sense of personal and possibly parental loyalty to them.

Sociopaths are dedicated for a different reason. Like anyone else, a Sociopath would prefer not to work long hours or do unpleasant tasks, but their pain tolerance is extremely high, because the corporate game is fun to them. For a Sociopath, a 90-hour work week is like spending that much time playing a video game. It’s not how most adults would choose to spend their lives, but it’s not taxing, boring or painful either. If the rewards are there, the Sociopath will drop everything and put in the hours.

For a middle manager, dedication is the most important trait. Middle managers frequently find themselves in two jobs that are often at odds. On one hand, they have to clean up the messes left by rationally disengaged Loser subordinates. On the other hand, they must please the hard-driving Sociopaths above them. This generates not only a lot of work, but an incoherent, heterogeneous mess of it. Frequently, they end up working on “whatever’s left” and putting in a lot more energy than the tiers below and above them. The Loser subordinates don’t work as hard as they do. The Sociopath executives have enough power to control the division of labor and definition of “performance”, so they don’t have to work hard. Middle-managers get stuck in the middle, and it takes dedication to survive it.

Strategy (Losers and Sociopaths)

Losers and Sociopaths might seem to be polar opposites, but they also share an important trait: they’re strategic. They’re realistic in their assessment of what efforts will be fruitful and, unlike the Clueless with their unconditional work ethic, they allocate their time and energies only toward work that seems to be worth a damn. In this, they tend also to be able to relate amicably, because their strategies rarely conflict.  They want different things. Losers want to minimize discomfort and to be “cool” as defined by the in-crowd where they are. Sociopaths want to maximize personal reward and rise into the in-crowd that actually has power.

Strategic workers tend not to waste time. Losers work efficiently but tend to do as little as they need to retain social acceptability. Contrary to stereotype, they don’t do “the minimum not to get fired”. They modulate their efforts to the middle, not wanting a slacker reputation, but not wanting a “busy bee” reputation that will overload them with undesirable work. Sociopaths (and Technocrats, to be discussed later) work on the stuff that benefits their careers, and ignore whatever doesn’t.

For upper-management roles, being strategic is the most important trait. A non-strategic manager or executive will put a lot of effort into pursuits of low or even negative value. That can be acceptable for a middle manager. The Sociopaths above will set priorities, and direct him, while the social-approval mechanisms of the strategically-aware Losers will keep the team from going completely off the rails. Teams can protect themselves, in the short term, from off-the-rails Clueless management. A non-strategic executive is dangerous, if not untenable. Losers, in fact, tend to be better picks for executive roles than Clueless. This explains why, after Peter outs himself as a disengaged Loser to “The Bobs” in Office Space– while office conformity demands that subordinates fake Clueless earnestness around authority– they describe him as “a straight shooter with upper management written all over him”. He’s strategic. He understands that his current job is not worth doing.

Other possibilities…

All three of these traits are attributes that corporations view as assets: being a team-player, dedication, and being strategic. I’ve painted a picture in which each of the three MacLeod tiers has exactly two of the three. Losers are strategic team players, but not dedicated. Clueless are dedicated team-players, but not strategic. Sociopaths are dedicated and strategic, but not team players. This brings us to the question: why should an employee have exactly two of these seemingly orthogonal capabilities? What happens to people with zero, one, or three?

Deficient categories (0/3 and 1/3 traits)

If someone’s neither dedicated nor strategic, it doesn’t matter much whether that person’s a team player or not. A team player sacrifices personal ambitions for the health of the team, but people who are neither dedicated nor strategic have nothing credible to sacrifice. These fall into the bottom of the Loser category: Lumpenlosers.

Dedicated, non-strategic, non-team-players are Loose Cannons (see: Andy in The Office). They’re driven by ego, but have no insight into whether what they’re doing serves any purpose (personal or organizational) at all. They tend to eagerly throw themselves into battles with no idea where they will lead. Either they are fired, or they become Lumpenlosers as well, being tolerated for the amusement they provide.

Finally, to be strategic but neither a team-player nor dedicated is almost a contradiction in terms. A strategic person will recognize that one or the other is necessary in order to retain employment in the long term. So, the only time this constellation occurs is when a person has little interest in staying with a company. They usually quit or get fired.

Unicorns? (3/3 traits)

Are there people out there who are strategic, dedicated, and team players? I would also argue that this arrangement is contradictory, at least in a subordinate role. A strategic person will either aim for minimal discomfort and pain, or for maximal benefit. The first category will avoid conflict and disharmony (team player) but not work long hours, especially not to an extent that hurts the group (by making others look bad in comparison). On the other hand, the yield-maximizer will work very hard (dedication) but not for the benefit of a social group coalesced around someone else’s purpose. People who are strategic and dedicated will demand important roles and interesting work, which means they’re not likely to be perceived as team players.

This is not to say, however, that it’s impossible or even rare for a person to be strategic, dedicated, and a good person. What I do mean to imply is that strategic and dedicated people don’t accept subordination. Although they will work for altruistic purposes or the good of “the team”, they do it on their terms. In fact, I would argue that among the most important players in the modern economy, a fair number of them fit this exact description. Like MacLeod Sociopaths, they’re dedicated and strategic. However, the term “Sociopath” doesn’t apply, because they aren’t bad people, and they’re not willing to rise by being unethical. They want to win, but fairly. This requires revisiting the Sociopath category.

Are MacLeod Sociopaths really sociopaths?

I would argue that the Sociopath category should be split into two subsets: Technocrats, and the true Psychopaths.

It’s important to address the term sociopath. It’s no longer used in psychiatry, having been replaced by psychopath. A psychopath is a person without a conscience, and that’s about as close as modern psychiatry gets to calling someone “a bad person”. Most psychopaths are, as typically defined, bad people. Their lack of empathy and concern for others leads then toward reckless and harmful behavior. Whether this is mental illness or sane moral depravity is almost a religious question, but either way, psychopaths aren’t desirable in an organization, but many are very successful climbers of institutional ladders. The lower classes of psychopaths end up as common criminals, but the smartest and most socially adept psychopaths develop strategies for externalizing costs and taking credit for others’ accomplishments. They are disproportionately common in the upper ranks of corporations.

Sociopath is a pop-psychology synonym for “psychopath”, most likely persisting because the popular ear conflates the latter with “psycho” or “psychotic”, which psychopaths are clearly not. It is not even clear that psychopaths are mentally ill. I would argue that, in a prehistoric evolutionary context, their lack of emotional attachment to others made them individually successful (high rates of reproduction, at least for men) at the expense of group harmony and stability. In modern society, they are the cancer cells– individually fit at the expense of the large, complex body of civilization. This is different from typical mental illness (especially psychosis) which is undisputedly pathological, making the individual less fit.

Psychopaths are egotistical and usually unethical. Above all, they desire social status. Money and power are only interesting to them so far as they confer an elevated position over others. This characterization, one hopes, does not apply to everyone who is strategic and dedicated within an organization. I find it clear that it does not. There are good people who are strategic and dedicated. So I add a fourth category: the Technocrat. So I discard MacLeod’s Sociopath category, and split it into the Technocrat and the true Psychopath.

In this usage, Technocrat pertains more to the abstract principle of technology– the use of knowledge in pursuit of mutual benefit– than to any concrete device. Technocrats are dedicated and strategic and, like Psychopaths, they want to win. What differentiates them is that they don’t want to make others lose. Technocrats have a positive-sum mentality and a desire to make improvements that benefit everyone. True psychopaths despise what they perceive as human weakness and want to dominate people. Technocrats are competing against “the world” in the effort to make it better than it has ever been.

Because Technocrats like to improve things, they extend this mentality to their work and themselves. They want to be more skilled, and more autonomous, so they can achieve more. They’re dedicated, because it requires work to find “win-win” opportunities. They’re strategic, because what they do tends to require creativity. In general, they’re not team players. Losers are team players because they fear social disapproval, and Clueless if they perceive their role as leadership (even if it’s objectively not). Psychopaths view the team as something to exploit (for personal gain) and to dominate (for enjoyment). Technocrats want to improve the team, often in spite of itself. This makes them good leaders, but they turn out to be shitty subordinates. That, in fact, is the Technocrat’s downfall. Of the four classes, they are the absolute worst in subordinate positions. Psychopaths hate subordination as well, but they’re better at failing silently for long enough to move up.

The MacLeod model correlates psychological traits with organizational position, and the Technocrat is difficult to pin down. Other categories are much easier. Losers cannot typically rise into management because they aren’t dedicated. Clueless should not become executives because they aren’t strategic. (It happens, but they usually get fired at some point.) Psychopaths can rise without limit, but their lack of a team-player ethos means they’re fired if they can’t find a route. There isn’t a clear position in the traditional managerial hierarchy for the Technocrat. Organizations would probably prefer to have Technocrats over Psychopaths in upper management, if they were rational entities. They’re not, and for a variety of reasons, when Technocrats and Psychopaths battle, the Psychopaths usually win.

Technocrats don’t have a well-defined home in the white-collar corporation. They despise the pointless busywork of subordinate positions, so they don’t do well in the Loser circuit. They tend to be logical truth-seekers, so the Clueless world of middle-management is too full of self-deception for them. Finally, amid the zero-sum in-fighting of Psychopaths in the executive suite, they often lose. Why do they often lose? That I will address below.

Some Technocrats have found a way to become highly-paid individual contributors, such as in academia, research, and software engineering. Unfortunately, this isn’t a stable arrangement for most. Academia has taken a Clueless direction of late: graduate students and pre-tenured professors are grunts, and tenured professors are (semi-autonomous) middle managers chasing rainbows. I consider most of them non-strategic because they lack interest in the practicality of their work, a behavioral pattern that has reduced their social status over time. Software engineering, on the other hand, is mostly a (better-paid) Loser’s world, because most of the work that professional developers get is line-of-business dreck that isn’t intellectually challenging, and not worth the dedication that a genuinely important or interesting project would deserve.

The typical career of a Technocrat looks similar to one of a Psychopath: job hopping, up-or-out gambits, and the obvious prioritization of a personal strategy over “team player” social acceptability. The difference is the purpose toward which she aims. The Technocrat wants to become really great at something and do something good for the world. The Psychopath wants to climb old-style, increasingly anachronistic, industrial hierarchies and dominate (or, at least, exploit) others. Both are after power, but they define it differently. Technocrats seek the power to help people; Psychopaths want power over people.

One might suspect that Technocrats should succeed as entrepreneurs, and this is probably the Technocrat’s best bet. Rather than attempting to find a decent role in an existing, dysfunctional organization that it will be impossible for her to fix, she should create a new one. Then, she has no conflict between her strategic and dedicated nature and being a “team player”, because she has built and defined the team.

What I would say, however, is that the venture-capital-funded startup ecosystem (VC-istan) is not a Technocrat’s paradise, despite its pretensions to that effect. The actual ethical behavior of the leadership at most of these VC darling startups is old-style managerial Psychopathy. Why is it this way? To answer that, one needs to understand what VC-istan actually is: one of the first postmodern corporations. VCs are supposed to be in competition with one another, but they collude. They decide, as a group, who’s hot and who’s not, and what valuations will look like in each season, and they get together and co-fund startups. There is no market economy. Rather, funding decisions are made by a command economy driven by social consensus among an in-crowd (partners at influential VC firms) and those who wish to join them.

One might think that VC-funded startup founders are Technocrats. Not likely. These so-called CEOs are actually mid-level Product Managers within the postmodern corporation of VC-istan. Some are ascendant Psychopaths seeking a transition to a more senior (“entrepreneur-in-residence”, VC associate, corporate executive) role and others are Clueless “true believers” who fail to recognize that, due to their investors’ unilateral control not only over their current projects but over their long-term reputations, they’re nothing but eager middle managers.

So where are the Technocrats, then? Over time, they tend to fail out of hierarchical organizations, being ill-equipped to fight against the Psychopaths who tend to defeat them. As VC-istan increasingly devolves into a postmodern corporation (rather than a real market, with– imagine this!– actual competition among investors) they will be increasingly out-of-home there, as well. I don’t know where they’ll go. My guess is that the rising generation of Technocrats will find a way to democratize business formation, with crowdfunding (e.g. Kickstarter) being an obvious first step in that direction, and presumably a lot more to come.

Why Psychopaths beat Technocrats

Why do the zero-sum, destructive Psychopaths defeat the positive-sum, creative Technocrats? To answer this, it’s important to understand credibility, which is an umbrella term for intangible assets that institutions create in order to rank people by perceived merit.

How do organizations decide how to compensate people, and whom to promote? When a person starts a new job, her salary is based on economic conditions and her negotiation skill much more than any objective definition of merit. Companies, begrudgingly, accept this. They recognize the tradeoff between operational efficiency and fairness in compensation, and will gladly adapt salaries to conditions. However, companies prefer to believe that they get the division of labor and recognition right. It’s important for them to maintain this fiction, because it allows them to believe that, although they know their compensation schedule to be unfair, they know exactly how unfair it is and can reduce the injustice (not out of ethical principle, but because it’s a morale risk) over time. If Bob and Mark are both Level IV software engineers making $100,000 and $120,000 per year, respectively, Bob can receive better annual raises until they’re at parity.

This is what professional ladders and job titles are for. The firm wants to believe (or, at least, wants the Clueless to believe, that often being enough) that, while small injustices are tolerated in specific individual compensation, that salary ranges shall be set according to job descriptions, which will be assigned according to pure merit. Someone who is “platonically” at Level IV might get a higher salary based on prior compensation, negotiation skill, and market conditions, but he should never get a Level-V title… until he earns it. Titles, as the organization perceives them, must correspond to personal merit and work performance, not external conditions.

This is credibility, which represents the company’s degree of trust in an individual. Compensation is what a person takes out of a company. Credibility is what the firm thinks the person puts into it. Job titles are a powerful form of credibility, being transferrable to some degree across companies. So-called “performance” reviews exist to calibrate private credibility based on a person’s work history, and may eventually result in public credibility changes through promotions (or demotions and terminations). Societies understand that resources (power, money, information) sometimes accrue to unworthy or even dangerous individuals, and that there is nothing to prevent “the bad rich” from acquiring mere commodities once this has happened, but the sacred intangible of trust is supposed to be above that. Credibility is the corporate analogue of trust, invented because interpersonal trust becomes sparse at scale. Large organizations recognize that genuine trust, built through direct interaction, is not enough to tie people together, so they need to invent a legible pseudo-trust in order for anything to get done. Credibility is a currency that corporations mint in order to make statements about how far a person can be trusted. You’re not supposed to be able to get credibility through trade. It should be a reward for the demonstration merit only.

Credibility isn’t just a vague, academic notion. It has actual effects. For example, a common way for a company to do a layoff is to select levels at which it is overstaffed, and terminate the highest-compensated at that level. The idea is that employees at each level are equal in productive value. It’s corporate consistency. Thus, the most marginal employees, who should be let go first, are the highest-paid at the targeted level. Let’s say that the Level IV salary range is $80,000 to $120,000 and the Level V range is $100,000 to $160,000. It’s dangerous to be a Level IV at $120,000– but very safe to be a Level V at the exact same salary.

Is this regime exploitable? Of course. Clueless might believe that there’s such a thing as a “platonic” Level IV, and that people will be accurate assessed and promoted to their level of ability. That’s not true. There is no “platonic” Level IV or Level V. There will be guidelines based on work experience and interview performance, and then myriad possible exceptions. A wise negotiator slotted for Level IV, if he knew the company’s HR infrastructure, would target his salary history and expectations toward $125,000, making him ineligible for a Level-IV position. Would the hiring manager say, “We can’t meet that”, and turn him away? Or would she bump him to Level V, not only justifying his salary, but improving his job security, leadership opportunities, and level of respect within the company? Unless he were very clearly ineligible for a Level-V position, the latter would happen. So he would, in effect, be using his negotiation skills to win credibility. In the real world, credibility is just as negotiable and tradable as “harder” currencies like money, power, and information. It’s not “supposed” to be that way, but it is.

Losers care about credibility, but only enough to retain employment. Once they have enough of it, they focus on side games in which those games’ local definitions of credibility and status don’t really matter, in that they have no effect on personnel decisions or compensation. Clueless believe deeply in credibility and go about earning it “the old-fashioned way”, which is to earn it through hard work. Psychopaths, on the other hand, are the quickest to actually realize what credibility is: a corporate fiction. In reality, it’s a commodity like any other. If they need someone to vouch for them, they find a way to buy it. Psychopaths bribe and extort their way into credibility. They take credit for others’ work, they lie, and they find ways to trade social assets (including titles and “job performance”) that aren’t “supposed” to be for sale.

How do Technocrats handle credibility? I’m not sure. Since the intended effect of corporate credibility is to create a global social status in large groups that would otherwise not have a clear rank ordering, thus generating a sort of “permanent record” that’s ripe for abuse by power, it seems naturally opposed to the Technocrat ethos. However, it’s also clear that corporations need to invent credibility, because interpersonal trust is too sparse at scale for large organizations to function, and credibility becomes a lubricant. To the extent that Technocrats accept credibility’s existence, they tend to treat it as an engineering problem. I think the Technocrat’s objective is to fix credibility: to redefine it so that it can’t be traded, bought, or won through extortion, and to make it an actual dimension of merit. Of course, this is a hard, if not impossible, problem. Psychopaths take a much easier route with more personal benefit: they find ways to exploit it.

Indeed, these four categories can be framed in terms of psychological reactions to the divergence between true merit and corporate credibility:

  • Clueless deny it and persist in the just world fallacy. Indeed, credibility’s root power is in its ability to motivate and impress the Clueless. 
  • Losers accept the crookedness of the corporate game and disengage, grabbing just enough credibility to avoid adversity.
  • Psychopaths become crooked themselves, which is the fastest path to personal benefit, and ultimately win not only credibility for themselves but the capacity to modulate others’ credibility, which is corporate power.
  • Technocrats attempt to fix the game, often altruistically through openness, transparency, and anti-hierarchical corporate structures. So far, they haven’t shown much success in deploying their vision at scale.

Between Psychopaths and Technocrats, who is more likely to climb the corporate ladder? Unfortunately, the advantage is with the former. Technocrats have to change people, while Psychopaths exploit them as they are.

Corporations, being pre-industrial in their ideology, have relied heavily on credibility and personal relationships for an obvious reason. There weren’t many hard problems for these institutions (rent-seekers that used technological innovation, but rarely created it) to solve, and there was no other way to evaluate people. Once the hard intellectual challenges have been overcome and it’s a risk-averse, stable organization, then how does it define the “best” who deserve leadership positions? How does one define “merit”? The Losers don’t attend that debate, because they don’t care. The Clueless say, “Hard work”. Technocrats argue for creativity and insight, still wanting to tackle hard problems that the now-stable and risk-averse organization believes it has outgrown. Psychopaths form an alliance with the Clueless, recognizing them as effective (in well-defined roles) but non-threatening. What’s built up, then, is a concept of “performance” that, to the Clueless, looks like a commodity earned only through hard work: a credibility. Clueless provide the muscle and blind support that enable credibility to be manufactured; Psychopaths define it. However, the Psychopaths are always careful to define performance with enough back-doors that they can win, regardless of whether they wish to work hard. At the top, this is especially easy. If you control the division of labor, you get to write your own performance review.

What Psychopaths recognize is that credibility can always be bought on a black market. There are always ways to get it, and often the illicit ones are more effective than the straightforward path. Technocrats understand this as well, but they often find it morally objectionable to start trading. It feels like cheating to them, and the worst varieties of credibility-trading (which generally amount to professional extortion) they refuse to use at all.

Can Technocrats win?

Psychopaths and Technocrats are destined for conflict. Psychopaths invent social credibilities to win the support of the Clueless and put themselves at the top of organizations. Technocrats see a crooked game and try to fix it, often with radical honesty. If the Technocrats succeed, they’ll undermine the work of the Psychopaths. This becomes a fight to the death. The character of an organization will be determined by which of these two categories wins. Ultimately, most organizations will be run by Psychopaths who superficially adopt the appearance of Technocrats. This becomes increasingly the case as corporations become risk-averse and self-protective. The positive-sum “win-win” outcomes that Technocrats seek exist, and they’re all over the place, but they never come without risk. Once the company decides that creative risks are intolerable, what’s left is zero-sum social-status-driven squabbling.

The MacLeod hierarchy applies best to the modern white-collar corporation, whose modern incarnation was developed in the 1920s. At the time, there were a decent number of Technocratic leaders, but over time, corruption set in. By the mid-1970s, it was clear that Psychopaths were going to take over, and the “greed is good” 1980s saw that through. Basic research was cut, academia turned into a pyramid scheme, and well-positioned corporate executives made millions. Psychopaths gutted and looted corporations, leaving husks– large, powerful institutions whose beneficial purposes had been discarded, leaving mere patterns of externalized costs and value-capture by the Psychopaths. Where’d the excluded Technocrats go? Well, all over the place, but the most well-known cohort moved to Silicon Valley– before it was cool.

Silicon Valley is not a Technocrat haven any more. If nothing else, one need only look at house prices in the Bay Area. In cases of extreme geographic scarcity (e.g. San Francisco, Manhattan) house prices might be explicable by supply and demand in a fair, because supply responds slowly to economic circumstances while the demand curve moves quickly. However, when extreme housing prices persist over the long term, and over a large and mostly suburban area where there is no natural geographic scarcity, this suggests market manipulation and NIMBYism. That’s the surest sign ever that Psychopaths are winning. I am not saying this to rag on California. (I live in Manhattan; we have expensive real estate and Psychopaths, too.) In fact, had California’s real estate problem reversed itself, I’d argue that it was a transient market phenomenon and not Psychopathic victory. However, even when the economy softened, Bay Area real estate remained pricey. That’s a primary indicator that the Psychopaths have started to win. Psychopaths love when real estate is expensive, because they can use physical position to display dominance. Technocrats, on the other hand, love New Places, because New Places are positive-sum– you can build cool things on inexpensive, unused territory and improve it. The Technocrats poured into California when it was a geographic New Place and land was cheap. Now the New Places are elsewhere. It’s not clear what the next Technocratic New Place is, or even if “Place” still needs to be a geographic location, but it’s no longer Northern California.

If I had to guess, though, I’d bet that within the next 10 years, VC-istan will fall under the weight of its own organizational Psychopathy. I don’t have enough personal experience to opine on whether VCs themselves are Psychopathic, but the VC darlings thatI’ve known well have been run by some horrible people. Mark Pincus has been most overt about his psychopathy, but his behavior is far from atypical among the sorts of people who win in this bubble-world. Once, I had to leave a junior-executive position (for which I had left Google) at a brand-name, VC-funded startup at 3.5 months because I refused to sign an affidavit that not only contained perjury, but probably would have Pincus’d ten on my colleagues who had joined early and had “too much” equity. The Psychopathic management of that company spent months afterward attempting to destroy my reputation. How I overcame that adversity deserves its own essay, for another time…

Psychopaths defeat Technocrats in an organization where the work is intellectually easy, creatively non-demanding, and social status ends up trumping ability. That describes most organizations, because most companies are too risk-averse to do anything hard or important. Needless to say, Psychopaths love economic bubbles– exploitable, chaotic optimism without substance– and the 2010-13 “social media” affair clearly qualifies. However, this bubble’s very different from the last one. In the 1997-2000 bubble, startups were overvalued by the market. Wall Street provided the fools. In this one, market valuations appear reasonable. Investors aren’t going to fall for that one again. This bubble is in the unduly high value assessed, by young talent, to subordinate positions in these startups. (I wrote this, last summer, to contribute to its inevitable “pop”.) The fools aren’t coming form Wall Street, but fresh out of school. Most employees of these VC-funded “tech startups” believe they’re 6 months away from investor contact, real job titles, and the chance to be a founder in the next startup. They’re wrong. Long before they can collect the career assets they’ve been promised, this bubble will have popped and washed back to sea, leaving them with useless work experience and, thanks to the high cost-of-living in the startup hubs, no savings. The 1990s dot-com bubble wrecked a few careers and spilled a lot of rich peoples’ money. The 2010s bubble will spill a little bit of rich peoples’ money and wreck a lot of careers– mostly, those of young technologists trying to establish themselves. I would argue that this makes it worse.

What I hope to see during 2013, and the coming years, is a Flight to Substance. I want the best people– investors, entrepreneurs, engineers– to realize that they’ve been hoodwinked by VC-istan’s shallow reinvention of the corporate system as something different and “cooler”, and to demand a return to Real Technology. I want to see better ideas, better companies, and better cultures. I want to see funding for research and development, so that people can do intellectually interesting work without being thrown into the secondary labor market that academia has become. I want to see a world in which people actually care about solving hard problems and delivering real value. When this happens, the Technocrats can win again.

Tech Wars

Any creative field undergoes periods of divergence and convergence, and technology is no exception. Right now, we’re in the late swing of a divergent phase, with a plethora of new languages, frameworks, paradigms and methodologies so vast that it’s impossible, at this point, even to know a respectable fraction of them. There are “back-end programmers” who know nothing of Javascript, and “front-end guys” who’ve never used a profiler. That will end, as people grow tired of having to learn a new technology stack with every job change, and also as the dimensionality of the bilateral matching problem between engineers and employers becomes intolerable. As painful as convergence can be, such a time will come out of necessity.

For a single company, convergence is often enforced internally, with “approved tools” lists and style guides. Often the communication that drives these decisions takes a familiar form: flame wars.

These partisan fights are common in technology. There’s one set of programmers who believe Java is the only language that has a right to exist and that, if you’re not using an IDE, you’re using “stone tools”. There’s another contingent that thinks everything should be written in Ruby, because that’s what Rails is in and why do we need another goddamn language? There’s a third that’s fixated on C++ on the basis that, if you can’t manage memory, how can you make sure an application performs? For now, I don’t care who’s right in this– really, that depends on the problem, because there clearly isn’t “one language to rule them all”– and language or style comparisons are not what I care to discuss today. I think we can all agree these flame wars are stupid and counterproductive. Do tabs/spaces debates really require long email chains? No, they don’t.

This, if anything, is the thing I dislike second-most about programmers. The worst thing about programmers is that most of them (although this is a largely a product of a corporate environment that rewards mediocrity) lack taste and curiosity, and therefore never become competent. The second-worst is that, among those who have taste, most of the heated debates come down to superficial nonsense. Yes, code quality matters. It’s critically important; it can make or wreck a company. Cosmetic differences, on the other hand, are just not that important or interesting. Tooling choices are important, but rarely as critical as opinionated engineers make them out to be, in the sense that they’re rarely existential matters for the company. Closed allocation is cultural death, and unethical management will ruin your startup, but the difference between Python and Scala is unlikely to be lethal. Can you write performant systems using mostly Python? Of course. Can high-quality, attractive code be written using an inelegant language like C++? Yes, it can. I have strong preferences regarding languages, but I’ve learned over the years not to take them too seriously. More dangerous than picking a suboptimal language is not getting any work done because of partisan bickering.

Language and tool wars are an outgrowth of a careerist idiocy that one would expect software engineers to be above. Engineers engage in this hyperbolic mudslinging because their career needs, in a typical corporate power struggle, often necessitate some control over the technical environment– and that’s often a zero-sum squabble. The software industry isn’t a real meritocracy, but it insists on looking like one, so the object of the game is to convince the team to use the tools with which one is most familiar, in order to become (because of tool fit, not intrinsic superiority) the most productive. This is the problem with technology in the late-autumn phase of a divergent spell: an engineer’s job performance is going to be more of a function of his match with the work environment and tools than of his overall competence, so there’s an enormous incentive to change the game if one can. There’s more individual gain in changing existing technical choices than grinding away at regular work. Most software engineers have learned this, and I can’t count on one hand the number of times I’ve seen a company go through a scorched-earth code rewrite because some douchebag managerial favorite only knew one language, and (of course) that language became the only possible option for the firm. This is terrible for the company that has to reinvent all of its technical assets, but beneficial to the favorite who naturally becomes the master of the new technical universe.

In a world of tight deadlines, short employment stints, and extremely detailed job requirements, this is only getting worse. It’s no longer acceptable to spend months in a “ramp up” period on a new job. It won’t get a person fired, but you’re unlikely to get the best projects if you don’t blow someone away in your first 3 months. So you need to find or carve out a niche where you can use tools you already know, in order to get some macroscopic achievement (a “launch”) as soon as possible. This forces companies into one of two undesirable alternatives. The first (sprawling divergence) is to let everyone use the tools they like, and the predictable result is “siloization” as engineers stick to the tools they already know how to use, rather than take the time to understand what other people are doing. Taking these systems into production and supporting them becomes a nightmare, because they often have 7 different NoSQL databases to support what’s essentially a CRUD app. The other (enforced convergence) is to require certain uniformity in development. The company becomes an “X Shop” for some specific language (or database, or methodology) X. That’s when the flame wars begin, because everyone is going to have an enormous stake in the choice of X. Now, it’s not enough for X to be the best tool for your project; you have to shove X down other peoples’ throats in the company, or you won’t be able to use it at all. This also falls down as necessity requires exceptions to the uniformity requirements, and the decision of who can get an exception becomes immensely political.

In truth, we as programmers are, in many companies, behaving like executives, spending more time arguing about how to do work than doing the actual work.

This, I think, is the fall-down calamity of the software industry. It’s why 50 percent of people who are professional programmers won’t be, seven years from now. Software engineering is all about improvement– building things that didn’t exist before, automating tedious processes– and it’s only natural that we want to improve ourselves. In order to get better, one needs a reliable stream of increasingly high-quality projects. What makes great software engineers extremely rare (and they are) isn’t a lack of talent alone; the limiting factor is the paucity of quality work. At a certain point, one reaches a level where it’s difficult to get quality work, even for a qualified (or overqualified) engineer. You end up spending more time convincing managers to give you good projects (playing politics, acquiring control of the division of labor) than you actually get to spend on the work. People get enervated and drop out, or they become managers and lose touch with the day-to-day process of writing code. Tooling wars are one component of this nasty slog that programmers have to enter in order to have a shot at the best work.

What’s the solution? I mentioned the alternative to uniformity, which is the “everyone uses whatever they want” divergent approach that often generates an intolerable support burden. It can work, but it will fail in the typical hierarchical corporation. When you have this proliferation of creativity and ideas, you need two things. First, there has to be a pruning process, because some of what is produced won’t be very good. Managers never get this right. Their decisions on what modules to keep (and, thereby, force engineers to maintain and use) and which ones to burn will be based on political factors rather than code or product quality. Second, it requires extremely strong cross-hierarchical communication, because it requires that people begin to make technical choices based on the long-term benefit of the group rather than short-term “productivity” in an attempt to acquire status. People who are building technical assets will need to actually give a damn about making their clients succeed, as opposed to the selfish, parochial goal of pleasing managers. You won’t get this kind of communication and pay-it-forward attitude– not as prevailing behaviors, rather than occasional serendipities endowed by the comfortable– in a closed-allocation company.

The open-allocation sociology is one in which there is cross-hierarchical collaboration because the conceptual hierarchy necessitated by the problem doesn’t congeal into a rigid hierarchy of people. Because there’s so much internal mobility, other teams are potential future teammates, and people will generally treat them well. What this means is that, while there will be divergence in the name of exploration and creative license, people will also take care of the convergence tasks, such as integrating their work with the rest of the company and teaching other teams how to use the assets they generate.

For a contrast, the closed-allocation sociology is one in which people strive, in the short term, for the image of superior productivity, in order to advance rapidly into a role where they control the division of labor instead of being controlled by it. This encourages people to diverge carelessly, for the twin purposes of (a) appearing highly productive and useful, and (b) creating personal security by generating technical assets that, although management can be convinced of their importance through political means, become so opaque to use as to leave other teams beholden to their creator. Of course, this productivity is illusory, the reality being that costs are externalized to the rest of the company. The heavy-handed, managerial antidote is to mandate convergence, but that inducing battles regarding which technologies and approaches live and which die. The result are hyperbolic, counterproductive and fear-driven arguments that devolve into the technical flame wars we all know and loathe.

As long as we have hierarchical corporations and closed-allocation regimes where one must either control the division of labor or be controlled by it, we will have endless flame wars over even the smallest of technical choices. The stakes are too high for them not to exist.

Psychopathy and superficial reliability

Lord Acton says: judge talent at its best and character at its worst. This is a wise principle, yet it fails us miserably when misapplied, as it often is in modern society. Why is that? The world is large, so our knowledge of each is extremely sparse. We often lack the information necessary to judge either talent or character well well. The consequence of information sparsity in judgment of talent is the existence of celebrity. It’s better to have everyone know that you’re a 6, than to be a 10 in secret. This itself is not so dangerous, but the contest for visibility, even in supposed meritocracies like the software industry, gets destructive quickly. Even in small companies, more effort is often expended to gain control of the division of labor (thus, one’s own visibility and reputation) than is spent actually completing the work. The fact that awful people are excellent at office politics is so well-known that it requires no documentation. It becomes visible within the first 6 months of one’s working life. This makes assessment of character as important as the judgment of skill and talent. Is the guy with the flashy resume a legitimate 99.99th-percentile talent, or a degenerate politicker and credit-taker who managed to acquire credibility? Reference checking is supposed to solve that, and it doesn’t work. I’ll get to that, a little bit later.

Information sparsity in the assessment of talent is a known danger, but I tend to see it as a short-term and minor threat. There’s probably an eventual consistency to it. Over time, people should converge to levels of challenge, responsibility, and influence commensurate with their ability. More dangerous, and infinitely more intractable, is the information sparsity that pertains to character. People tend to overestimate, by far, their ability to judge other peoples’ ethical mettle. In fact, the vast majority of them are easy to hack, and their excessive confidence in their own assessment is, in truth, easily used against them by the bad actors.

This problem is pretty much impossible to solve. Most people know from experience that the worst people– the psychopaths– are superficially charming, which means that personal impressions are of low value. What about getting access to the person’s history? In employment, that’s what reference checks are for, but shady characters often have great references. Why? Because they lie, extort, and manipulate people until their histories become not only socially acceptable but outright attractive. They hack people with as much skill and malice as the worst black-hat “crackers”. The people who are harmed by intensive reference checks are honest people with difficult histories, not the degenerate and dishonest who are the real threat.

My experience is that people lack the tools to judge others for character, at least at scale. Any fair punitive structure is predictable, and the most skilled of the bad actors will adapt. Any unpredictable punitive structure will be unfair, and rely on decisions made by influential humans, who are more likely than average to be psychopaths, and will certainly have psychopathic courtiers (whom the powerful person has not yet detected). The best one can do is to judge people by their actions, and to punish bad deeds swiftly and objectively. This is not a trivial art, of course.

Laws and imprisonment serve this punitive purpose, but most of the people in our jails are impulsive people of low social class, with only moderate overlap between the imprisoned population and the psychopaths. In employment, there’s a naive hope that, while psychopaths can climb high within corporations, they will eventually be unable to escape their histories and be flushed out of respectable careers. It never happens that way. Moral degenerates don’t get blacklisted. They acquire power and do the blacklisting.

One acquired strategy for dealing with such people is “Distrust everyone”. That’s how most seasoned managers and executives, having been robbed a couple times by dishonest subordinates, tend to view the people below them– with implicit, prevailing distrust. That strategy fails especially badly. Why? First, there are degrees of trust and distrust. Becoming a managerial favorite (managers are not always psychopaths, but managerial favorites almost always are) simply requires superiority in relative trust, not any level of absolute trust. Second, it’s functionally impossible to get a complex job done (much less lead a team) with prevailing total distrust of everyone, so people who “distrust everyone” are desperate for people they can give partial trust. Psychopaths play people with that attitude quite easily. It’s not even work for them. A boss who thinks his subordinates are all morons is surprisingly easy to hack.

The conclusion of all this is that, in defending scalable institutions such as corporations against psychopaths, we’re basically helpless. We don’t have the tools to detect them based on affability or social proof, and any strategy that we devise to deal with them, they will subvert to their own ends. We can’t “beat” them when they look exactly like us and will be undetected until it’s too late. Our best shot is not to attract them, and to avoid engaging in behaviors that make our institutions and patterns most easily hackable.

Despite our complete lack of ability to assess individuals for character at scale, we develop metrics for doing so that often not only fail us, but become tools of the psychopath. A going assumption that people make is that the small is indicative of the large. If Fairbanks is chilly in the summer, it must be frigid in the winter. (This applies to most climates, but not to San Francisco.) People who make occasional misspellings in email must be stupid. People who have mediocre accomplishments (by adult standards) at young ages are destined for adult brilliance. People who regularly take 75-minute lunches are “time-stealing” thieves.

Talent is judged in the workplace based on minor accomplishments, largely because there are so few opportunities for major accomplishment, and those are only available to the well-established. The guy who reliably hits a “6″ is judged to be capable of the “9″ (see: Peter Principle) while the one who gets bored and starts dropping “5″s is flushed out. Character is judged, similarly, based on useless and minor signals. The person who regularly arrives at 9:00, never says the wrong thing, and projects the image of a “team player” (whatever the fuck that means) gets ahead. What takes the place of character– which, I contend, cannot be assessed at scale and amid the extreme information sparsity of modern society– is superficial reliability. The people who pass what a company thinks are character and “culture fit” assessments are, rather than those of pristine character, the superficially reliable.

Who wins at this game? I wouldn’t say that it’s only psychopaths who win, but the best are going to be the psychopaths. The earnestly honest will break rules (formal and informal) to get work done. They care more about doing the right thing than being perceived the right way. Psychopaths are not by-the-word rule-followers with regard to formal policies, but they always follow the informal social rules (even to the breach of formal and less-powerful informal rules). They figure them out the quickest, have few distractions (since they rarely do actual work; that’s not what the office game is about!) and, fairly early on, find themselves in the position to make those rules. 

Superficial reliability works in favor of the worst people. Why? It evolves into a competition. Once everyone is in the office from 9:00 to 6:00, the new standard becomes 8:00 to 7:00. Then it’s 7:00 to 8:00, with expected email checking to 11:00. People start to fail. The noncompliant are the first to drop away and judged by the organism (the team, management) to have been the least dedicated, so it’s not seen as a loss. The next wave of failures are the enervated compliant, who meet the increasingly difficult standards but underperform in other ways. They spend their 13 hours at the office, but start making mistakes. They turn into temporary incompetents, and are flushed out as well. They’re not seen as a loss either. “We have a tough culture here.” As those burn off, people who were formerly at the center of the bell curve (in reliability, status, and performance) are now on the fringe, which means that there’s an atypically large set of people on the bubble, generating a culture of anxiety. They become catty and cutthroat now that the middle is no longer a safe place to be. People fight, and some come out of it looking so terrible that their reputations are ruined. They leave. Psychopaths rarely enter these contests directly, but evolve into puppet masters and arms dealers, ensuring that they win regardless of each battle’s outcome. Soon, the psychopath has entrenched himself as a key player in the organization. He’s not doing most of the work, but he’s feared by the actual stars, enough that they’ll let him take credit for their work and (in management’s eye) become one.

Most reliability contests work this way. There’s some performance metric where the bottom few percent justly deserve to be fired. As a limited measure, such a “sweep” is not a bad idea. (“Let’s stop paying the people who never show up.”) Management, however, is not measured or limited. It’s faddish, impulsive, absolute, and excessive. Whatever policy is used to separate from true underperformers (about 2%) must also be used to “stack rank” the other 98 percent. It’s no longer enough to enforce an honest 8-hour day; we must require an 11-hour day. This overkill damages the work environment and culture, and psychopaths thrive in damaged, opaque, and miserable environments.

Another example is reference checking in employment. The real purpose of the reference check is to discourage the morally average from lying about their histories, and it works. The moral “middle man” at the center of the ethical bell curve would probably lie on his resume given the right incentives, but would stop short of asking 3 friends to support the lie by posing as peers at jobs the person did not hold. Most people won’t make that kind of demand of people who aren’t close to them, but few people want to be seen as unethical by close colleagues. That is the point where the average person says, “Wait a minute, this might be wrong.” The classic, three-reference check also filters out the honest but undesirable candidates who just can’t find three people to recommend their work. It’s a reliability test, in that anyone who can’t find 3 people in his last 5 years to say good things about him is probably in that bottom 2% who are undesirable hires for that reasonl alone. Yet, at senior ranks in large companies, reference checking becomes a reliability contest, with 10 to 20 references– including “back channel” references not furnished by the candidate– being required. At that point, you’re selecting in favor of psychopaths. Why? Most honest people, playing fair, can’t come up with 20 references, nor have they engaged in the intimidation and extortion necessary to pass an intensive “back-channel” reference check in a world where even a modestly positive reference means no-hire. It’s those honest people who fail those cavity searches. A psychopath with no qualms about dishonesty and extortion can furnish 50 references. Beyond the “classic 3″, reference checking actually selects for psychopathy. 

Why do psychopaths never fail out, even of reliability contests designed to cull those of low character? The answer is that they have a limited emotional spectrum, and don’t feel most varieties of emotional pain, which makes them exceptionally good at such contests. They don’t become upset with themselves when they produce shoddy work– instead, they plan a blame strategy– so they don’t mind 15-hour days. (Office politics is a game for them, and one they love to play, so long hours don’t bother them.) They are emotionally immune to criticism as well. While they care immensely about their status and image, they have no reason to fear being dressed down by people they respect– because they don’t actually respect anyone. While psychopaths seem to despise losing, given the awful things they will do to avoid a minimal loss, even defeat doesn’t faze them for long. (This is an erroneous perception of the psychopaths; when we see psychopaths doing awful things to avoid minor losses, we assume they must have a desperate hatred of losing because we would require extreme circumstances in order to do such bad things. In truth, the difference is that they have no internal resistance against bad action.) Losses do not depress or hamper them. They pop right back up. Psychopaths are unbeatable. You can’t find them out until it’s too late, and whatever you try to kill them with is just as likely to hit someone innocent. Indeed, they thrive on our efforts to defeat them. When they are finally caught and prone, our punishments are often useless. There is truly “no there there” to a psychopath, and they have nothing to lose.

For an aside, I am not saying that we are powerless to curtail, punish, or rehabilitate the larger category of “bad actors”. Laws, social norms, and traditional incentives work well for normal people. Petty theft, for example, is rare because it is punished. Plenty of non-psychopaths would– out of weakness, desperation, curiosity, or even boredom– steal if they could get away with it. Jail time deters them. Prison is an environment to which normal people adapt poorly, and therefore an undesirable place to be. Psychopaths are different in many ways, one of which is that they are extremely adaptive. They love environments that others cannot stand, including prisons and “tough” workplace cultures. Punishing a psychopath is very hard, given his imperviousness to emotional pain. You could inflict physical pain or even kill him, but there would be no point. He would suffer, but he would not change.

Why does psychopathy exist? It’s useful to answer this question in order to best understand what psychopathy is. My best guess at it is that it has emerged out of the tension between two reproductive pressures– r- and K-selection– that existed in our evolutionary environment. An r-selective strategy is one that maximizes gross reproductive yield, or “spray and pray”. K-selective strategies are focused more on quality– fewer, more successful, offspring. The r-selective “alpha” male has a harem of 20 women and 200 children, most neglected and unhealthy. The K-selective “beta” has one wife and “only” 8 or 9 offspring, and invests heavily in their health. Neither is innately superior to the other; r-selective strategies repopulate quickly after a crisis, while K-selective quality-focused strategies perform well in stability. Human civilization has been the gradual process of the K-strategist “betas” taking over, first with monogamy and expected paternal investment, which was later extended to political and economic equality (because high-quality offspring will fare better in a stable and just world than a damaged one). Almost certainly, all humans possess a mix of “alpha” and “beta” genes and carry impulses from both evolutionary patterns, with the more civilized beta strategy winning over time, but not without a fight. Indeed, what we view as morally “good” in many societies is intimately connected with beta patterns– sexual restraint, nonviolence, positive-sum gradualism– while our concept of “sin” is tied to our alpha heritage. Psychopathy seems to be an adaptation in which the beta, or K-selective, tendencies of the mind are not expressed, allowing the alpha to run unchecked. In evolutionary terms, this made the individual more fit, although often at the expense of society.

Psychopaths (for obvious evolutionary reasons) like sex, status, and resources, but that alone doesn’t identify them, since almost everyone does. What differentiates the psychopath is the extreme present-time orientation, as well as the willingness to make ethical compromises to get them. The future-oriented, positive-sum mentality is absent in the psychopath. Unhampered by conscience, psychopaths quickly acquire resources and power, these being key (at least, throughout most of our evolutionary history) to reproductive proliferation. In business, their sexual appetites are not of major interest. What’s most relevant to our problem is their attraction to power and status. That is what they want. It’s only about money for them so far as it confers social status.

If we cannot defeat psychopaths, then what should we do? This turns out not to be a new problem– not in the least. Why, for example, do American elected officials draw such mediocre salaries? Why do we need all the checks and balances that make even the presidency so much damn work? Making power less attractive is one of the first principles of rational government, as the concept was developed during the Age of Reason. The reactionary clergies and hereditary aristocracies had to go– that much was clear– but how could one prevent a worse and more brutal lord from filling the vacuum? The idea was to compensate for power’s natural attractiveness by limiting it and attaching responsibilities. In the U.S., this even came to the matter of location, with the nation’s capital being chosen deliberately in an undesirable climate. In elected politics, I would say that this has mostly worked. We’ve had some downright awful political leaders, but a surprisingly low number (by corporate comparison) of psychopaths in top political positions. I wouldn’t go so far as to say that elected office doesn’t attract them, but other positions of power attract them much more. With the first-rate psychopaths making millions in the corporate world, the psychopaths who are attracted to elected political positions are the C-students in psychopath school.

Taking a macroscopic perspective, psychopathy is a very hard problem to solve. A closed system such as a nation-state has some probably invariant population of psychopaths that, inevitably, will be attracted to some variety of social status and dominance over other people. Flush them out of politics, and they end up in business. Yet if business were made unattractive due to an overpowered state (e.g. left-wing authoritarianism) they would end up back in government. They have to go somewhere, and it is impossible to identify them until they’ve done their damage (and, often, not even then). Yet the microeconomic problem for an individual firm is much easier– don’t attract psychopaths.

In technology, one strategy is Valve-style open allocation, under which employees are permitted to work for the firm directly rather than requiring managerial approval. Want to change projects? Move your desk and start. The typical extortion that middle managers use to build their careers– work for me or you don’t work here at all– doesn’t exist, because no one has that authority. Managerial authority attracts psychopaths like little else– more than money or prestige– and if one can do without it, one should consider doing so.

Much of the appeal of startups in technology is the perception (sometimes, an inaccurate one) that small technology companies haven’t yet been corroded and politicized by managerial extortions. In the ideal case, a startup operates under a constrained open allocation. It’s not yet “work on whatever you want”, because the startup requires intense focus on solving a specific problem, but employees are trusted to manage their own contribution. When do those companies go to closed allocation? Often, “hot” companies lose their cultural integrity in the process of hiring executives. The flashy career office-politician with impressive titles and “a track record” demands authority from the go, and it’s given to him. Five direct reports is not enough; he demands ten. He gets 15. Over time, employees lose status and autonomy as it’s chipped away to feed these people.

Most of the cultural losses that companies endure as they grow are suffered in the quest to hire executives from the outside, but what kind of person are you going to attract if you’re immediately willing to sell off your employees’ autonomy to “close a deal”? The people you’re most likely to get are those who enjoy power over people. Not all of these are psychopaths (some are mere narcissists or control freaks) but many are. Your culture will disappear rapidly.

If you’re running a typical VC-funded, build-to-flip operation, then hiring power-hungry external executives might be the way to go. A great way to buy an important decision-maker (an investor, an executive at an acquirer) is to give his underperforming friend an executive position at your company. You might take on a psychopath or few, but you’re not going to be in the company for very long, so it’s not your concern. On the other hand, if you want to build a stable company whose culture and values will still be worth a damn in 20 years, then you can’t do that. To the extent that your organization needs positions of power to function, you need to make them undesirable to the psychopath. This is one of the major reasons why you need intrinsic limits (checks and balances) on power.

Unfortunately for corporate executives, making a company less psychopath-friendly means equalizing the distribution of power and reward within companies. It means moving away from the CEO-as-king model and the eight-figure pay packages. Over the past forty years, we’ve been paying more and getting less when it comes to corporate management. Flushing out the psychopaths requires that we pay less, both financially and in terms of authority over other people, for managerial positions. The whole concept of what it means to be an “executive” will require reinvention as radical as the replacement of hereditary monarchs by elected legislators.

The stupid, superficial reliability contests that corporations use to assess character and protect themselves against psychopaths don’t work. In fact, they do the opposite, becoming the psychopath’s favorite tools. Companies that want to avoid being invaded and controlled by such people will have to reinvent themselves in a form radically unlike the traditional, hierarchical corporation.