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 necessary 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.

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.

This is a continuation of last week’s analysis of various work cultures and the patterns of degeneracy. I’ve analyzed hierarchies that form in organizational cultures and the relationship between ascendancy and bad behavior (in particular, psychopathy). I’ve touched on the VC-funded startup ecosystem (VC-istan) but don’t think I’ve done it justice. In these small, agile companies, does the MacLeod classification apply? Or has this dysfunctional and unfair arrangement been rendered obsolete? If so, then how? If not, then who are the Sociopaths, Clueless, and Losers? I’ll answer that. Today, I’m going to focus on the sociology of VC-istan, perhaps the first truly postmodern corporate body.

VC-istan likes to believe that it has evolved beyond the traditional corporate dysfunctions, meaning that the MacLeod hierarchy might be outdated or inaccurate. I will show that this is not the case.

VC-istan, as a post-modern corporate organization, has figured out that companies are disposable. I’m not talking about shell companies, but full-fledged corporate organizations where people actually go to work. These firms have a team and a product. People get hurt when they melt down. The product manager gets to call himself a “CEO” and the technical lead is a “CTO”. They identify as “a startup”, which has some attractive features. If it’s a startup, programmers are unlikely to confront 20-year-old legacy code, and divisions of labor may be undefined enough that an engineer who enters in the right way can get a very high quality of work. It almost looks like these entities are free-standing companies, as they would be, were it not for their dependence on continuing financial investment. That need to be hooked in to prominent investors and VC-istan press keeps them from being truly independent, but they have just enough independence that VC-istan looks like a pattern of separate companies merely flying in formation.

At the top of the VC-istan social pyramid are the venture capitalists. Rather than compete with one another, they collude in order to collectively determine which courtier projects deserve funding and which deserve to lose. As such, they’re effectively one executive team. These are the MacLeod Sociopaths and, as discussed, that doesn’t mean they’re all bad people or sociopaths in the true sense– only that bad people have a disproportionately high likelihood of rising to that tier. A better, more neutral, term would be Manipulators.

To understand why VCs behave in this way, it’s important to assess the mechanics of their industry. Most investments will lose, but the few that succeed will return 10, 100, or even 1000 times their original investment, and it’s nearly impossible to predict how a company will perform until it’s flat-out obvious to all in the know. This puts information and social access at a premium. Whether a VC will succeed has more to do with his access to emerging bargains than anything else. Most investors, therefore, would rather do right by other investors (in order to get an allocation in the next great deal) than by their entrepreneurs, who (as social inferiors) have no leverage. This creates the clubby, collusive nature for which VC-istan’s top echelons are known.

Where are the other two MacLeod tiers, the Clueless and the Losers? Here’s where it gets exciting. The rest of VC-istan is (almost) all Clueless– from the independent project managers called CEOs to the lowest-rung entry-level software engineers. Recall that the MacLeod Loser is, because he’s aware that he’s taking a raw deal, rationally disengaged and manages his performance toward socially acceptable averageness. Loser-level employees trade autonomy, time, self-respect and expectancy (average-case compensation) for minimized variance in compensation and social conditions. In The Office, they are the Stanleys and Phyllises and Angelas. They’ll get their assigned work done, stick around till 5:00, and follow orders… but they’re not likely to do more than that. VC-istan doesn’t want people like that.

The VC-istan culture emphasizes “leanness”, which is a code word for “No Losers”. Startups often say they’re looking for “true believers” (read: Clueless). Then there is the “brogrammer” culture (Clueless machismo) and the age discrimination problem, and it should be obvious what that’s about. Older people are likely either to have climbed the ranks (and, yes, VC-istan circa 2013 has ranks and its own ladder) or to be rationally disengaged Losers. Even the perks touted by many startups are aimed toward the Clueless. I know of one startup that brags about its free dinner (lunch is not provided). Losers would rather have more cash than a 7:00 dinner with co-workers; perks like that are for the Clueless. 

Venkat’s theory of corporate genesis ascertains that companies are started by Sociopaths, generate a Loser tier shortly afterward to handle dead-end administrative work, and then (in maturity) build a Clueless middle to handle growth as the social and economic distance between the company’s base and apex expands to the point that a buffer class is necessary. What causes corporate dysfunction, he argues, is the expansion of the Clueless tier, who lack the economic self-sacrifice (in exchange for social approval and comfort) of Losers and execution skill of the Sociopaths. VC-istan seems to prove, on the other hand, that companies can prosper not only with, but because of, a Clueless monoculture, if directed right.

What about the Sociopaths? Does VC-istan function without them? Well, no. There are Sociopathic founders and, among the people who are really in charge– investors, board members– there will probably be quite a few more. In VC-istan, however, they cleverly keep themselves out of view. Typical corporate culture celebrates the Sociopath lifestyle as something to which all should aspire, while tacitly understanding that the Losers, knowing their odds of making it are pathetically low, won’t depart from their rational disengagement. VC-istan, however, is supposed to be for the Clueless. Sociopaths just sign off on executive-level hires, move into top roles at VC-istan companies once they’re de-risked, and sign the checks.

How does VC-istan function without Losers? Or, are Losers necessary? Are they beneficial, or harmful? My opinion is that they’re beneficial to a large or stable organization. Losers are not really losers, so much as they trade opportunities for social status and economic expectancy for risk reduction and comfort. In addition to their desire for stability, they are stable. They’re loyal, willing to follow orders, and capable of delivering more economic value than they expect the company to provide for them (which is why they might be called “losers”). Rather than compete for better positions, they’ll perform well enough in the roles they have. For a stable, well-defined organization, hiring Losers is a winning proposition. You know that, on average, you will get more than you pay. However, fast-growing startups that can’t afford to tackle the communication problems of larger organizations are going to need to focus on average yield per employee rather than total yield. For this reason, they’d rather hire overachieving Clueless than rational Losers.

This Clueless-mania generates, as it were, a lot of terrible startups with stupid ideas. I’ve noted that Clueless aren’t strategic, and that shows. Most of these companies have silly ideas and crash and burn. For venture capitalists, this is not only tolerable but desirable. If VC-istan were a regular company, it would have to pay salaries month-to-month and pay severance when executives lost faith, projects were cancelled, and (for macroscopic reasons) there was no place to put the people. That gets expensive. With disposable companies, there’s no need to “waste” money on these “soft landings”. Investors can stop funding the companies and, to minimize harm to those they care about, soften the landings of any friends in those companies by handing out executive positions in other, healthier, firms.

I am, for my part, not averse to a tolerant attitude toward good-faith business failure. That’s one of the best things about American business culture. We aren’t perfect, but we’re far better than most other societies on this issue with our forgiving bankruptcy laws and (comparably) low level of small-business regulation. That said, I don’t think VC-istan holds moral high-ground here. VC-istan is tolerant of good-faith business failure, but only because companies are disposable. This also means that it’s tolerant of bad-faith business failure, which is what most “acq-hires” (which benefit executives, and screw employees) are. Furthermore, VC-istan’s tolerance of failure is superficial. It’s a world in which one is expected to be a CxO by 35, and in which the only socially acceptable role for someone after age 45 is investor. This harsh age-grading encourages the same kind of risk-aversion and backstabbing as the stodgy, old-style corporate world that VC-istan was supposed to replace. So how much progress has really been made?

There’s a question that remains about VC-istan’s attempt to “lean” itself down by eliminating the Loser class. Is that stable? Losers make a rational trade that has them “losing” from an economic point of view, but provides comfort and risk reduction. Unlike Clueless, they’re low maintenance. MacLeod Sociopaths embrace risk (and the truly psychopathic ones, as Venkat Rao observes, take “heads, I win; tails, you lose” positions) that Losers wish to sell. Clueless, for their part, are unaware of any risk trading that goes on. They are enticed with a delusion. They expect to rise through the ranks and win someday. To keep a Clueless-only world going, no one can lose. Everyone must win. The Technocrat’s positive-sum resolutions are ideal, but those opportunities are rare, and Clueless lack the skills to tell genuine world-improvers from pipe dreams. Also, the flashiest and often most effective Sociopaths are those who generate transfer (beneficial to them) through elaborate networks of zero-sum transactions. That requires that others lose, right? Not if today’s losers can be tomorrow’s winners…

VC-istan works this way. Every VC-istan engineer expects to be a “tech lead” in the next gig. Every tech lead expects to be an executive at his next startup. Every executive expects investor contact in order to be a founder in two years. Most VC-istan founders want to be investors so they don’t have to suffer the 90-hour workweeks, low salaries, and career volatility associated with starting a company. In a 100-person VC-istan company, there are 2 founders and 98 people figuring out a way to turn their current employment into a launch pad for future founderdom. That is the real selling point of VC-istan; the founders (and, later, executives) say, “You’ll have my job in two years.” That excuses the laughably low equity allotments that, otherwise, would in no way compensate for the drop in salary and the risk associated with such unproven businesses. Huge promises are made to attract the Clueless, and delivery almost never occurs.

An effort to propagate losses of zero-sum transactions into the future looks a lot like an economic bubble, and that’s exactly where I intend to go with this analysis. When you have Sociopaths and Clueless but no Losers, that’s BubbleWorld. You have a pipeline of zero-sum transfers that looks like value creation, with the losses merely being propagated into the future and delivered to people who are powerless to retaliate.

The first dot-com bubble was a textbook financial bubble.Wall Street didn’t know how to value this new class of companies, and “mistakes were made”. However, that bubble was a lot less evil than many. First, there was genuine, lasting economic value in the Internet, and the bubble was more of a result of humanity’s collective inability to evaluate this new thing than malicious manipulation. Second, the commodity in which the bubble existed (technology stock) was not something people needed to survive; the ongoing housing bubble has been a different matter. Wall Street, for its part, learned a lesson. In the current technology bubble, valuations have been fairly reasonable– for Facebook investors, disappointingly so. This time around, startups are overvalued by young talent. That’s the bubble. There are a lot of people eager to be Clueless in order to try at “a startup”. Since they have no idea how to evaluate equity allotments, growth companies, or job titles in a world where they are poorly defined, they often fall into jobs that are terrible deals for them.

The dot-com crash of 2000 was ugly, but the loss was in paper financial assets, meaning that most of the cost was borne by wealthy individuals. This one’s different. Some of the most talented young people are wagering their time on “social media” concerns in exchange for executive positions and investor contact that will not be delivered. When this bubble pops, they will have lost time that they can never get back.

In this light, we can understand the function that Losers perform, and arrive at an alternative formulation of how the MacLeod tiers form.

As I’ve discussed, Sociopaths can be split into the true Psychopaths and the Technocrats, but this delineation deserves certain scrutiny. It’s tempting to assume that, because the Psychopaths are clearly “bad guys”, that the Technocrats are the “good guys”. This would require us to make it a “true Scotsman” category of limited use. In fact, there are bad Technocrats. Some are inept, some are ruthless, and some are even unethical. What differentiates a Psychopath from a Technocrat is the type of goal that he has. Psychopaths want to play zero-sum games and win; the millennia-old, zero-sum fight for status is what they live for. Technocrats believe they can profit personally through positive-sum endeavors that enable them to win personally because a surplus is generated. It’s important to note that positive-sum does not mean “good” or “right”. It only means that more value is generated to the winners than is lost by the losers. Add to this the subjectivity of “value” or “utility” and one can see that incompetent Technocrats would be actively harmful. Most left-leaning people dislike Ayn Rand and find her to be psychopathic, but I would hazard the guess that she was actually technocratic in her aim: she legitimately believed that her ideas were the foundation of a superior society.

Psychopaths are harmful and generally evil, and they’re self-consistent in this. Technocrats believe they are doing good. Both categories of people can externalize harm. Psychopaths do it callously because they only care about their personal victories and dominance over other people. Technocrats often do it under the belief that more is being won than lost. Many ugly things have been built by Technocrats who believed they were doing the best thing for the world. Some were right, and some were wrong.

Novel organizations are started by MacLeod Sociopaths– Technocrats who embrace risk and disruption, and Sociopaths seeking new ways to eke out advantages over others– because Losers would rather play on an existing, proven team and Clueless don’t know how to start anything. Shortly after genesis, the organization must define a division of labor. Discrepancies in labor beget differences in leverage, which produce variation in compensation. Inequality forms, and the Sociopaths have two strategies for dealing with it. The first is to set up a trade, in which low-status employees win comfort and stability while relinquishing access to high-quality labor and outsized compensation. They won’t get rich, but they’re unlikely to be fired, and can leave at 5:00. That generates a Loser tier that will happily “eat” economic loss (the difference between wages and value rendered) in exchange for these intangible assets that only exist in a low-importance organizational role. The second strategy is to mislead people about their futures within the company and, because of the natural human tendency toward optimistic bias, this isn’t hard to do. That generates the Clueless tier, which is a mechanism for propagating losses into the future.

The typical organizational hierarchy presents the Clueless and a buffer between Losers and Sociopaths, but the Losers also form a buffer between Clueless and Sociopaths. Measured in social status and economic yield, Clueless outrank Losers. However, measured in hedonic terms (yield minus pain and discomfort) the Losers outrank the Clueless. This is a fairly stable arrangement, because both the Losers and Clueless think they’re getting the better deal.

MacLeod Losers probably comprise 80 percent of what we call “Corporate America”. They show up, do enough work to maintain adequate social standing, and go home. They care enough to want to do a good job, but not enough to fight authority or get into “vision” disputes. They’re the muscle of the working world. So why doesn’t VC-istan want them? The answer is that these companies cannot afford to make the Loser trade. Losers are strategic, and many of them are smarter than the Sociopaths who run companies. They want comfort and stability, so when undesirable change comes their way, they realize that the trade offered to them– low status and compensation, in exchange for a secure job where little changes– has ended, and they react. The Loser deal is just intolerable if the stability disappears. Most leave, and a few “wake up” and try to play the Sociopath game, but the Loser tier, as a bulwark of social stability and continuity, ceases to exist. When it melts down, it also clues-in the (formerly?) Clueless who tend to want to “protect” the Losers (cf. Michael Scott’s paternalism). Fast-changing VC-funded startups would rather that it not form in the first place.

The result is that one must recruit the Clueless solely into a tier that merges Clueless and Loser traits and functionality. However, it’s hard to predict how a person will assimilate into the organization. Since these tiers have a contextual nature to them, the game comes down to “pattern matching”: bring in the ones who look Clueless. This gets gendered and racial (favor the risk-seeking gender and the privilege-associated complexion) but especially ageist. VC-istan luminaries (investors and founders) claim that they prefer young people because they haven’t been “corrupted” yet by dysfunctional corporate cultures. (Yet they have no qualms about creating new pathological cultures.) As I’ve gotten older, I’ve realized that this isn’t what happens. Older people don’t, in general, get “corrupted”. They get less Clueless.

In truth, VC-istan is a society of the Clueless, by the Clueless… and for the Sociopaths (who justify the high housing costs in the Bay Area). The MacLeod hierarchy hasn’t been rendered obsolete. It has only been re-adapted into a different form. The loss of the Loser class induces instability, and VC-istan compensates for this by making companies themselves disposable. VC-istan is a world without MacLeod Losers, but not without losers.

Today, I continue my analysis of the MacLeod hierarchy and the Gervais Principle. (See: Part 1, Part 2, Part 3, Part 4.) I’m going to analyze the interfaces between the three MacLeod tiers in order to tease out the magic that makes it all work. How do three disparate types of people get along seamlessly? What prevents the existence of the Sociopaths and Losers from “cluing in” the Clueless?

In doing this, I’ll also analyze the concept of “meritocracy” in the corporate world. Every company seems to think its internal mechanics are meritocratic. VC-istan sees itself (despite the heavily manipulated market) as the ultimate in meritocracy. Is there truth in this? That I’ll address.

The Loser/Clueless interface: differential social status

The separation between the Loser and Clueless tiers comes down to differential social status (DSS). Here, “social status” includes not only in-crowd membership and popularity, but also the hard currencies: job titles, division of labor and compensation. Based on work experience, education, and negotiation skills, people have certain “market levels” of social status that they can expect to get in a new company. The difference between what a person has at a current job and what she can get on the market in a new job is DSS.

It’s not uncommon for a person’s DSS to become negative, when she improves faster than her company allows her career to advance. She can improve her standing by finding another job. In fact, in slow-to-promote organizations, negative DSS becomes common over time. “Familiarity breeds contempt.” This may explain why most organizations do a poor job of promoting from within– they have a systematic tendency to downgrade their own people relative to outsiders, the latter being untarnished by years of political fighting. People who grow “too fast” for most companies become used to negative DSS and underestimation, and end up with a “job hopping” trajectory.

That said, most people will have DSS close to zero. Relative to the noise factor inherent in taking a new job and the tendency of social status toward illegibility, whatever they have effectively a rounding error. For our purposes, we will say people with such close-to-zero DSS have “zero DSS”. Losers, when they play social games, tend to form in-crowds that don’t matter, such as the “Finer Things Club” and the “Party Planning Committee” on The Office, but these have no effect on compensation or division of labor. They’re diversions, and they don’t generate meaningful DSS.

There are three common things that will create a non-zero DSS. The first is for management to recognize someone formally with a job title or promotion, which creates positive DSS if management takes the accolade more seriously than the external market would. The second, which generates negative DSS, is for a person to be embarrassed or develop a negative reputation among colleagues. (If that person gets a negative reputation with management, she usually just gets fired.) The third source of DSS, probably most painfully common to my readers, is for a person to improve without it being recognized. This person’s DSS goes negative not because of organizational adversity, but because the organization refuses to allow someone to advance at the rate at which she actually improves, leaving her in a role and on work that’s below her frontier of ability.

Most corporate denizens aren’t noticed in any special way by management or their colleagues at large, nor do they improve fast enough to generate the third category of DSS. The result is that it’s most common for a person’s DSS to be close to zero.

Organizations have a love/hate relationship with DSS. On one hand, it’s a means of self-definition for the organization, and a way to motivate people. Those with positive DSS are going to behave like owners, because they’ll experience a drop in working conditions, compensation, and quality of work if they lose their jobs. Those with negative DSS serve a pariah or “omega” function: a way for an organization to state what it dislikes. DSS gives organizations a banner and a way to proclaim their values by promoting those who exemplify them. On the other hand, DSS is unstable. People with negative DSS will leave, of course. Regarding positive DSS, Sociopaths and Losers, when they find themselves with it, will usually try to parlay that into persistent, outside-of-firm social status and improve their long-term career prospects. If you’re strategic and have positive DSS, this is what you want to do with it: convert it into something that’s not contingent upon one organizational role. This improvement of their external alternatives reduces that positive DSS.

With the concept of differential social status well-understood, we can approach the Loser/Clueless interface. Losers have DSS right around zero, like most people. They could get other, equivalent jobs. What keeps them loyal and in-place isn’t the economic superiority of what they have, but the fact that they prioritize comfort and stability over the potential for gain. Additionally, when Losers get positive DSS they will, because they are strategic, convert it into genuine improvement of their overall career standing. One of the most incredible moments in The Office is when Pam, a receptionist converted into an unsuccessful saleswoman, uses the organizational “fog of war” following a management takeover to invent a new job for herself– a salaried Office Manager role. Pam is a MacLeod Loser, but a smart and very strategic one who uses her positive DSS (being married to “rising star” Jim, and having been with the company for much longer than the new management) to get improvements that actually matter: a better job title and more pay. The result of this is that Losers don’t tend to build up a bankroll of DSS. They convert it into forms that are more persistent and useful. If they can rise to a higher level in the organization, they do so and become Losers there (which is better than being a Loser at a lower level.) Clueless, on the other hand, will build DSS because they never cash it in.

It’s the Clueless who climb ladders, pay dues, and take on additional responsibilities in order to develop positive DSS, which they perceive as a two-sided loyalty. Venkat Rao argued The Office to be the first American workplace drama to peer into the world of the Clueless. I disagree. Willy Loman, in The Death of a Salesman, is the archetypal literary Clueless. Loman is a true believer in the importance of being well-liked. He builds up a bunch of relationships that, in the end, don’t matter and won’t save him. The loyalty is not reciprocated. He fails to convert his transient DSS into something more stable and, as he ages, it goes away.

So, how shall we separate the Loser and Clueless tiers? Losers, in general, do not exert themselves to build up positive DSS. When they get it, they attempt to convert it into something less contingent and more permanent. Sociopaths pursue DSS but only as a mechanism to rise to the top of the organization, which means they cash it in likewise. Clueless, apart from Losers, are those who sit on a fat bankroll of untapped and local social capital. They keep their DSS as it is, being true believers and wanting to show personal investment in the company. So what differentiates Losers from Clueless is a persistent pattern of nonzero DSS.

The Clueless/Sociopath interface: the effort thermocline

More interesting than the Loser/Clueless interface is the one that separates the Clueless and Sociopath tiers: the effort thermocline. Low in the organization, jobs get harder and more demanding as one rises the ranks. Salaried office workers work harder than hourly employees. Middle managers often work harder than the people they supervise, having more to lose. In the Loser and Clueless tiers, each promotion means higher standards, longer hours, and less job security.

There’s a level at which the jobs stop getting harder with each step up, and start getting easier at a rapid rate. Middle managers, in most organizations, are glorified grunts with front-man responsibility for meeting deadlines and deliverables, but no authority to define them or set priorities. However, there’s a level in each organization where the perks of the job include autonomous control over the division of labor and an extremely lenient performance evaluation process. It’s the “good old boy” club of upper management. It’s the level at which the top brass say, “Welcome, you can breathe now.” This group can be clubby and petty like any gossip-ridden small town, and this can make life within it very stressful, but judgment based on effort and sacrifice end.

The separation between these two worlds is the effort thermocline. That thermocline is the highest that a typical organization will allow someone to rise by working hard. It’s the top of the Clueless tier, the bottom of the Sociopath capstone, and if it’s serving its purpose well, it’s a one-way mirror: opaque from below, transparent from above. Executive Sociopaths, from the other side of the thermocline, appear (from below) to be working hard. Because they control not only the division of labor but the physical space, they can manufacture the image of high effort and investment while they enjoy the comfort of a private office and take the “fun work” for themselves. Losers, to some extent, know what’s up, but they’re so far from that theatre that they don’t really care about it on a day-to-day basis. The veil is for the Clueless, who must be tricked into seeing superior Cluelessness when they look up.

The purpose of the effort thermocline is to create an image of effort-based meritocracy at the bottom. This ruse makes people work hard, and it also creates social stability because people aren’t too eager to rise. Most Losers genuinely don’t want their boss’s jobs, because they realize they’ll be expected to put forth 50-200 percent more effort in exchange for about a 20-percent pay raise. Most Clueless see their bosses as superior– more talented, more experienced– and consider themselves ineligible (at least, at the time) for the roles above them. The only people who expect to rise rapidly (skipping the demanding middle ranks if possible) are the Sociopaths. As soon as they have something to trade, they look for a market.

Above the effort thermocline, being seen as hard-working isn’t especially important. In fact, it can be detrimental. If you have to work 12 hours per day, you’re probably inefficient. Sociopaths see the sacrificial lambs in the Clueless tier as chumps. Sociopaths actually “get” organizational politics. They understand that their progress within the organization will be based not on how much of themselves they put into an impersonal, organizational meritocracy (that doesn’t exist) but on how well they trade assets with important individuals. Effort is just one asset; credibility, relationships and information are often more important, and often easier to attain.

This enables us, as well, to look at some differences between the true Psychopath and the Technocrat (“good Sociopath”). The most successful Clueless have an unconditional work ethic, while Psychopaths and Technocrats are all about working smart. They define that a bit differently, however. Psychopaths like to manipulate people; Technocrats aim for improvements and genuine efficiency. They’re both hackers, but they enjoy different kinds of hacks.

Organizations that are going to generate MacLeod classes (and I will argue, later, that they need not necessarily do so) rely heavily on the effort thermocline. It’s the spine of the organization. Just above it are the lowest-tier Sociopaths who get direct information from the base of the company. As the executive suite’s filter, they have an enormous influence over what information is presented, when, and how. Top-tier Clueless could have this power if they wanted it, but their earnestness prevents them from seeing or exploiting the editorial control they could exert. To them, furnishing information is a duty, not something to be selectively performed. Thus, the information flow into the upper ranks of the company will generally come from the Sociopaths just above that thermocline, who perform the first filter.

Top-tier Clueless provide an obvious benefit as well, which is that they set the pace for the world below them. The most dedicated, productive Clueless are held up (at least superficially) as role models for the organization. Additionally, they take final responsibility for operational issues. Low-level Losers can blame circumstances for failures, nonproductivity, and mistakes. If the Loser’s computer breaks, he can sit tight and wait for IT to fix it. The perk of being a Loser is that the organization is tacitly responsible for maintaining your work conditions. Sociopaths cleverly define their jobs so as to have no hard responsibilities or deliverables. It ends up being the Clueless who are held responsible for keeping the lights on, resolving communication difficulties, and doing the ugliest work.

Technology, VC-istan, and meritocracy…

In my last post, I discussed the pseudo-meritocracy of VC-istan. What makes VC-istan successful is that it generates a context in which highly intelligent people can be rendered Clueless. When the ruse is new, peoples’ psychological immune systems haven’t formed yet and the smartest people, who would converge to MacLeod Loserism or Sociopathy in a normal corporation, can buy into it. Free markets are, on their own terms, meritocratic. The heavily manipulated market (by VCs and acquirers) looks like such. What makes VC-istan so brilliant is that the effort thermocline is extra-organizational. It’s not an organizational promotion that launches a person beyond the veil. It requires getting an entirely different job description.

For hard technological work, the MacLeod hierarchy is clearly dysfunctional. Losers are good at delivering grunt work reliably, but it tends to require a large number of them to do a major project. In technology, the result of this is intolerable communication overhead. Clueless tend to solve the wrong problems, unless micromanaged. Sociopaths, if they turn “black hat”, are outright dangerous. Whatever it is that causes the MacLeod hierarchy to emerge, the technological world would do well to eliminate that.

VC-istan’s pretense is that it has eliminated or obsoleted the MacLeod hierarchy, which is clearly dysfunctional. That’s actually not the case. The hierarchy has re-emerged. The solution is disposable companies. Sociopaths, as anywhere, find ways to trade social assets at a profit and become the major players. Many are not investors or “tech press”; in fact, I would guess that most of the Sociopaths are executives who’ve cultivated relationships with investors and can get themselves plugged into de-risked companies with absurdly high compensation. Clueless are the ones who suffer all the pain and risk. Losers are unemployable. Over time, this Loserlessness (despite the fact there’s a lot of losing going on) bifurcates the Clueless caste into Clueless-Losers and Clueless-Sociopaths. These mid-grade classes exist as Clueless rapidly become clueful, but are generally transient states. Clueless-Sociopaths are the ones who will readily screw their colleagues over but still believe that “delivering” is more important than acquiring credibility and trading social assets. Clueless-Losers are the ones who keep faith in the lofty “vision” (read: marketing) of their companies but have learned to tolerate subordination and are gradually realizing that their future and their firm’s (or VC-istan’s) will diverge.

With all this, the MacLeod hierarchy seems to fly in the face of the high-minded concept of meritocracy. In fact, MacLeod organizations are meritocratic not only on their own terms, but on multiple sets of terms. Losers, in general, don’t care either way whether their organizations are meritocratic. They can see the lie, but it doesn’t upset or anger them, because they don’t care to play in the higher leagues where the lie is in force. However, the differential social status of the Clueless, in addition to the opacity of the effort thermocline, create the appearance of a meritocracy from a Clueless position. That keeps these “useful idiots” happy and striving. For their part, Sociopaths also perceive a meritocracy, if only because they define merit as “what you can get”. To a Sociopath, the idea that there would be any definition of merit other than raw power, status, or money is laughable.

This leads me to a brief exploration of what I call localism and globalism. I borrowed it from machine learning and mathematical modeling. A global model is one that imposes underlying structure and uses that for prediction, while a local one uses nearby data and discounts distant observations. For example, if one were to predict average annual temperatures of geographic locations, the tendency for polar locations to be colder than equatorial ones is a very strong global feature. If you were to predict temperatures based on only one variable, latitude is what you’d use, and it would serve well for the majority of places, but not all. On the other hand, local data has value insofar as it can capture variations (altitude, ocean currents) that are specific to small regions. Rome is very warm for its latitude because of the Mediterranean Sea and the Gulf Stream; Lhasa, quite cold because of its altitude and continental location. Ultimately, the solution to most complex problems is going to require a mix of local and global approaches.

The age-old debate between planned and market economies is related to this. Socialism is an approach that sets social-justice standards (“no one should be without appropriate health care”) and expects to apply them globally. Central planning imposes globally-oriented solutions on a diverse world. (This is one of the reasons why Marx believed communism needed to be worldwide.) Capitalism allows individuals to exploit local information for personal profit, with the desire, because such exploitation will require trade, that some of the surplus will be dissipated into society in the process. Neither of these two approaches, standing alone, is adequate. Societies, it turns out, need both. Laissez-faire capitalism tends to diverge into undesirable states when power disparities reach a certain critical level of self-perpetuation. Without some wealth transfer back into the poor, absolute libertarian capitalism devolves into oligarchy and, as it perpetuates itself across generations, aristocracy. On the other hand, outright command economies cannot make use of the wealth of distant, local information out there and stagnate, in addition to becoming extremely corrupt. In either case, the elite becomes a locality that is both incapable of solving global problems or serving other localities, and disinterested in doing so.

Corporate organizations are an interesting beast, in this light, and it’s useful to assess how the MacLeod Clueless and Sociopaths approach them. Ultimately, the corporation’s purpose is to provide some of the security of socialism while serving a capitalist purpose on the external market. Policies are set to impose fairness constraints that are held to be global up to the extent of the organization. The corporation takes on the hard, dirty work of competing on a tooth-and-claw market, but internally, it’s supposed to provide its employees with the comfort of a well-run, stable command economy in which the demands on them and their compensation will be regular and reasonable. This is the risk transfer that Losers tolerate, which is why they can’t be considered actual “losers”. Their low compensation (from an expected-value perspective) is due to the premium they pay for this comfort and abstraction. What corporations create is a story of internal globality. Most importantly, employees get a guaranteed minimum income based on the value of their skills.

The World is big and unwieldy and heterogeneous and scary. It’s a chaotic mess. Corporations intend to create order within the mess, and leave interaction with the scary Without to an exalted caste (in truth, comprised mostly of rent-seeking Sociopaths) called “executives”. They’ll handle that stuff. Employees can live in comfort and stability.

An analogy for this might be a cruise ship, which provides the comforts of a hotel in an environment where most people lack the skills necessary to survive. Losers are happy to remain above-decks. They enjoy the abstraction. Clueless, on the other hand, want to graduate from passengers to drivers. They’re willing to deal with bilge pumps and engine rooms. They want to “learn the ropes”, as if such objective principles existed. Although they are the actual (unwitting) muscle of the company, Clueless have a childlike eagerness to become “adults”, failing to recognize what Sociopaths already know: there are no adults. In the corporate world, there is no “God”. You get what you can get.

It’s the Clueless who believe in objective corporate policies, enforce written rules because they are rules, and sustain the fiction of a globalist meritocracy where talent within the organization will always be allocated toward its best use. Sociopaths, on the other hand, tend to be aggressive localist players who already comprehend that the best way to “get ahead” is the old-fashioned, localist, way: trading favors, peddling influence, and leveraging information. Clueless believe in a paternalistic, globalist system that will take care of everyone, and intend to gradually grow into a “leadership” role. Sociopaths focus on the local problem: moving themselves forward by exploiting features and people that are close to them.

Neither localism nor globalism is innately superior but, strategically, the localist approach is bound to be more successful within the modern corporate organization. Sociopaths can be either localist or globalist in orientation but, in the workplace, they take the more effective localist approach. Sociopaths win because, ultimately, the “global-within-local” concept is, in most corporate organizations, fictional. The people running these companies have no real stake in the globalist fairness constraints put forward as the organization’s values. The real dominating behavior is localism.

For one example of the ruse, let’s consider the legal obligation of corporate executives to represent the immediate financial interests of shareholders, even if the action taken is socially irresponsible. That “obligation” doesn’t exist. It’s a fiction, designed to give what these Sociopathic executives want (aggressive, self-promoting localism) a globalist spin: it’s just the law. The Clueless buy into it, and believe that “the company” is doing all these bad things because it has no choice. What is actually happening here is that executives have figured out that there’s profit to be made in taking a localist approach, and they want in. Executives are supposed to be the fair stewards of a fairness-and-process-oriented (i.e. globalist) organization dedicated toward capitalist purposes, but they become localists within them. Managers and the more adept employees have caught on to localism as well and taken up a strategy of careerist job-hopping instead of loyalist dues-paying. Good for them, too. They get it. The result of this, on the large scale, is the breakdown of the Clueless-o-polis of the paternal organization.

Transcending the MacLeod hierarchy

The MacLeod hierarchy emerges because of a tension between globalism and localism, and the tendency for globalism to be implemented half-heartedly. People who are rich– here, I’m not talking about financial wealth so much as risk tolerance and the ability to withstand intermittent, short-term failures– want the localist right to exploit information (opportunities for profit) as soon as they discover it. Among the rich, there are those who intend to take the high road (Technocrats) and make the world genuinely better, and the degenerates (Psychopaths) who will exploit anything, even if it’s a negative- or zero-sum cost externalization. Those who are poor and don’t have the resources, capital, credibility or connections to survive a failure prefer the safety net provided by a globalist institution, whether it be a large private company or a government. The Losers are the poor who understand the trade (and defect if the organization shows malevolence or extreme incompetence) and take part, because they prefer or need stability. The evil of such organizations is not that the risk transfer exists and that the poor are rewarded “unfairly” by losing in expected-value terms– that is basic finance (here applied, additionally, to non-financial assets like social stability and credibility). It’s that the Psychopaths at the top of many organizations will do anything possible to drive the exchange rate (not set by a fair market) on this risk transfer as far out of whack as they can get it. The end-state is an organization where the low-level Losers get almost nothing in the way of risk reduction, but give up a lot in terms of compensation and advancement potential (that might enrich them and bring them out of involuntarily Loserism).

My contention is that the MacLeod hierarchy doesn’t emerge only out of peoples’ psychological traits and emotional tastes for various forms of risk. If that were the case, it would be inevitable, and organizations would invariably tend toward pathology. I don’t think it’s so. I think that the MacLeod issues come from rich and poor, which are not limited to financial wealth. So where do rich and poor come from? Ultimately, on the organizational setting, they come from credibility, which I’ve discussed previously. In most companies, the credibility of a non-managerial employee is almost zero. Credibility is intentionally made scarce within the organization. What happens when you lack credibility? Your ideas aren’t taken seriously, you don’t get to define appropriate use of your own working time, and if it goes to zero, you’re typically fired. In the MacLeod world, Losers acquire just enough credibility to feather a nest and, once done, stop gambling. Clueless lay down enormous amounts of effort to get credibility, mindless of the diminishing returns, and get some moderate amount. Sociopaths find the credibility black market (there always is one) and find the most efficient ways to cheat the system, and they get the most credibility of all.

At this point, we can discuss the four work cultures and their tendencies. The planned cultures are guild and rank cultures, and those have globalist intent. Professions, in fact, are globalist beyond the extent of one company, and usually exist to create a guild culture outside of it. The better of the two planned cultures is the guild culture, which replaces power relationships with mentors and proteges. The “boss” is a teacher. The pathological planned culture is the rank culture where blind subordination becomes requisite. The market cultures are the self-executive and tough cultures. Both hold the employee responsible for delivering value to the firm, and allow for localist autonomy of sub-organizations, but the difference is that the self-executive culture gives employees more time to bring their ideas to fruition and more opportunities for good-faith failure. Tough cultures have tight deadlines and no control over scope-of-work for low-level employees. The self-executive culture is the healthier of the two market cultures, and the tough culture is the pathological one.

What unifies the two healthy cultures, and the two pathological ones? It comes down to employee credibility. The credibility floor in the tough and rank cultures is zero. Employees are not held to be implicitly credible. An employee who can’t demonstrate hard value-add on a minute-by-minute basis fails in a tough culture. One who is disliked by his manager fails in rank culture. Both of these cultures, in functionality, are defined by the fear-driven, cutthroat, unethical, and often harmful activities in which normal people will engage when there’s a threat of their credibility levels dropping to an unacceptable level.

The healthy cultures, on the other hand, set a credibility floor, although they do it in markedly different ways. The guild culture has a rigid seniority system, but assumes the junior employee to be a student and therefore of value– especially future value– to the organization. The self-executive culture is a more localist, market-driven culture, but with the assumption that each employee has some quantum of irrevocable credibility– a real vote that can’t be taken away by a priapic manager.

Companies that establish a credibility floor will still exhibit shifts of influence and, if nothing else, inequalities in soft power. There will be cliques and the best one can do is to render them fairly harmless. There will also be attempts to game the system and amass credibility through a variety of means. Credibility trades, although they “shouldn’t” exist, will. That’s human nature. The difference is that, when a credibility floor exists, one doesn’t have the panic trading (which Psychopaths love, because it’s easiest to exploit) that generates organizational pathology at such a rate that it’s uncontrollable. The trade of credibility still exists, but it’s mostly harmless and does not reach a level that creates unmanageable organizational pathology. When there’s a credibility floor, the rate of corrosion is slow enough that attentive management can reverse the damage. When the credibility floor is zero and panic trading defines the organization, institutional corrosion is so rapid and ubiquitous that it can’t be halted. 

I must make one note, here: companies that intend to function without corrosion and pathology must establish a credibility floor. That’s not to say that they must employ unproductive or harmful individuals indefinitely. If someone punches another employee, he’s still “credible” in the abstract, but he’s every bit as fired, because what he did was wrong and dangerous. The purpose of a credibility floor isn’t to say that no one ever gets fired (that’s a horrible idea) but to prevent people from, in RPG terms, being “killed by the dice”– that is, fired because of credibility fluctuations, and not because they deserve it.

It’s the absence of a credibility floor that generates a permanent Loser caste (whose exchange rate in their requisite risk transfer becomes increasingly unfavorable) and a fear-driven, tunnel-visioned Clueless “useful idiot” class, leaving both groups prone to exploitative Sociopaths. So the question becomes, then: how does an organization create a credibility floor? How can one globally legislate an amorphous, hard-to-define, and often very local social asset? That’s an incredibly hard problem to solve, and where I intend to go next.

This is probably the second-to-last item in my series on MacLeod’s organizational hierarchy and the Gervais Principle. (See: Part 1, Part 2, Part 3, Part 4, Part 5.) I’m leaving the country for a little over a week, and intended my “tie it all together and solve it” post for today, but that will have to wait until later in the month. I’ve decided to take a detour into certain unanswered moral questions associated with the MacLeod hierarchy. What does it mean, morally, to be a MacLeod Sociopath? Is it necessarily harmful? (Answer: no.) What about Losers and Clueless? Are there not psychopathic Clueless out there? (Answer: there are.)

The Alignment model

As it were, the most useful classification I can come up with, in order to assess the MacLeod organization’s moral bearings, is the two-dimensional alignment system of many role-playing games, such as Dungeons and Dragons. These present a moral spectrum (good vs. evil) and a civil spectrum (law vs. chaos). These are independent of each other: one can be lawful and evil, or chaotic and good, for example. I’ll use that system to analyze the moral correlates of the MacLeod hierarchy.

The Moral Spectrum: good vs. evil

How do we define good and evil? It’s not an exact science, of course, but I think that most peoples’ definitions of “good” come from the so-called Golden Rule: do unto others as you would have them do unto you. As a general ethical guideline, this is a good one, and it’s the spine of almost all major religions. However, it’s simplistic and flawed, as I’ll address later on. Evil is miltant disobedience of that ethical principle, in favor of a “power does as it can” world where the winners gloat and the losers suffer. Most people, of course, are in between. They buy into the values of good, but sometimes indulge in evil behaviors as well. About 80 percent of people’s actual behaviors are in the “neutral” midsection of the spectrum, with 10% on each side being good and evil.

There’s a problem with the Golden Rule, which is that it fails to account for asymmetry, and that it can be warped to justify actions most people would consider evil. Perversions of the Golden Rule could be used to justify rape (asymmetry in sexual desire) and the rule has been (ab)used to justify religious persecution, it being better for people to suffer in this life than in the hereafter.

Trade, on the other hand, is all about asymmetry: comparative advantages, differences in value. It’s an action that seems, on some level, to oppose the Golden Rule, in that the two parties have exactly opposite financial outcomes. What makes trade “good” (not a violation of the Golden Rule) is the unequal value of the traded items for each party. As long as both gain, according to a difficult-to-define pseudo-quantity called “utility”, the trade is good.

At scale, there are very few actions that are good for everyone, resulting in debates over justice and politics, and attempts to resolve massively multilateral disputes through aggregation (voting, markets) that will drive general improvement, although it is impossible to make everyone happy. Ultimately, the Golden Rule falls in favor of the Silver Rule: do less harm to others than you do good. This represents the evolution from an inflexible but absolute good to a more flexible, pragmatic sense of “good”. Societies must favor the Silver Rule over the Golden one, in practice. Murderers must be jailed, and roads must be built.

The Silver Rule, however, is also flawed for computational reasons. How are good and harm measured? Gathering and processing information is an activity that itself imposes a cost (to others, but especially to oneself) which means that at some point, decision makers have to stop hearing all sides and just decide. This leads naturally to the Bronze Rule, which is: do your best, with the information and resources you can reasonably get, to do more good than harm to those you can credibly affect. This tends toward a more local sort of altruism that (inadvertently or intentionally) favors the well-connected. We’ve left the realm of the good and are now in the neutral-aligned territory.

The issue with the Bronze Rule and its tolerance of localism is that it enables selective goodness, because people can modulate how much weight they put into others’ concerns and how much effort they put into discovering what they need, and this leads people to favor those who are close (genetically, culturally, religiously, and geographically) to them.

The natural tendency of most humans is not to be egotistical or to be altruistic, but to be local. People want to confer benefit on those with whom they have personal affinity or similarity. Egoism and altruism are extreme points on a spectrum based on how people define their moral neighborhood. The extreme egoist defines it to contain only him, and the extreme altruist inclues all humans (or, perhaps, all living beings). Yet almost all of us are localist when it comes down to our day-to-day interactions with other people. It’s how we work.

Cognitively, most people know that inflexible or militant localism (which can tend toward racism, elitism, or jingoism) is wrong, but are not unusually energetic in pursuing the right. They give it a try, but it’s not crucial to them. They’re selective in how much effort they’ll put forth in the pursuit of good, depending on the affinity they have for the beneficiaries. That’s how the neutral alignment works. Good and neutral are localistic in practice; the difference seems to be in aspiration and energy. Good people will make serious sacrifices for others’ benefit; neutral will generally not.

If the Golden Rule is the archaic and idealized good, the Silver Rule is the practical good that accounts for asymmetry and massively multilateral decision-making. The Bronze Rule is the constrained, more austere spin that accounts for informational surface areas and human exhaustion, and generates the neutral alignment.

Finally, we have one more metallic ethical rule, the Iron Rule: take whatever you can get. This is the militant or even psychopathic egoism most commonly associated with “evil”. Actually, Iron-Rule psychopathy isn’t actually the extremity of evil. Beyond it are sadistic reaches that I don’t care to explore: people who actively seek harm to others, rather than merely tolerating it in the pursuit of their own needs. For this purpose, the sadists (as a class apart from psychopaths) aren’t important.

The Bronze Rule, I would contend, describes the state of nature. We are not naturally evil, egoistic, or psychopathic. Nor are we naturally good, universalist, or empathetic toward all. We made decisions (most, with an earnest desire to make the right ones) under extreme scarcity of information and with heavy influence (some of which is intractable) from the biological evolution that made us, and that makes us naturally localist. What generates the moral spectrum is where people try to go. The good aim for the Golden and Silver rules in their interaction with other people. The neutral tend toward Bronze Rule localism. The evil celebrate Iron Rule egoism or, worse yet, tend toward sadism.

The Civil Spectrum: law vs. chaos

The second dimension of the alignment system is the civil spectrum, which pertains to one’s approach toward authority and social stability. As with the moral spectrum, about 80 percent of people would be classified as neutral, with 10% on each side being lawful or chaotic.

Good and evil describe the direction that people, personally, try to take from our Bronze Rule state of nature. Of course, there’s another dimension, which is a person’s willingness to cooperate with authority. While good people will ultimately oppose an evil society, the reverse also being true, an overwhelming majority of complex societies are neutral, regressing to the mean as they get large. Thus, most peoples’ attitudes toward authority will often be more of a function of their personal biases toward law or chaos than of the character of the society, predominantly because large societies are not that different from one another in any morally meaningful way.

For personal ethics, the Silver Rule is to do more good than harm to others, with the tacit intent to take in as much information as one can absorb. Lawful people believe in analogous Silver Rule with regard to society, which is that authority will best aggregate the available information and do the right thing. (However, a lawful evil’s person’s definition of “the right thing” may be harmful to those judged not to matter. Lawful evil people place faith in society’s ability to decide who matters.) Lawful people do not believe necessarily that societies or organizations are infallible, but only that they perform far better than individual judgment.

Civilly neutral people believe that societies implement the localist Bronze Rule. Organizations and those who hold authority may try to do their best, but are limited by their informational surface area and limited time and energy. Ultimately, those who are close to those in power enjoy an advantage, also known as corruption. It’s not that organizations tend toward self-serving pathology or even intentional elitism, but that a certain degree of localism is inevitable and mostly tolerable. Civilly neutral people believe that societies tend to be no better or worse than individuals.

Chaotic people believe that those in power, in most societies, will follow the Iron Rule. They distrust authority, believing that power will almost invariably be used toward bad ends, and that those who are in control will take whatever they can get. Neutral people admit that civil authority can tend toward localist corruption, but chaotic people believe that organizations tend toward defectiveness. Chaotic good people believe that authority will, over time, lead to evil. Chaotic evil people view those in civil power as contemptibly incompetent.

Social acceptability

Lawful good represents what people are “supposed to” be, ideally, while the central “true neutral” alignment is what they actually are. Actually, I would argue that neutral may be the wrong term, since people seem to be, by default, weakly good and weakly lawful. Anyway, what all of this means is that people who are lawful or neutral on the civil spectrum, and good or neutral on the moral spectrum, fall into a category that people are familiar and comfortable with. This 81 percent of the population will generally have no difficulty following social norms.

What remains is an L-shaped region (19%) that contains the chaotic or evil. Chaotic people face above-normal rates of social rejection. Evil people are punished and despised– if they are caught. Chaotic evil are the pinnacle of dysfunction, and only succeed amid severe environmental disorder. One example (from Final Fantasy VI) is Kefka. His chaotic evil (as opposed to Emperor Gestahl’s lawful evil) renders him an incompetent nincompoop in the (ordered) World of Balance, but he becomes a demigod in the (disordered) World of Ruin.

In general, the utter social dysfunction of chaotic evil (1%) divides the “L of social unacceptability” into two separate islands, each of which can be socially functional under some circumstances. One contains those who are evil but lawful or civilly neutral (not chaotic). These people can succeed socially as long as they can move faster than the consequences of their actions catch up with them. The other contains those who are chaotic but good or morally neutral (not evil). They can succeed socially as long as they are in environments that recognize the benefits of disruption and that value creativity over uniformity.

I describe the chaotic crowd as “those who wear hats”, using the hacker terminology where good guys wear “white hats”, the neutral wear “gray hats”, and the bad guys wear “black hats”. Wearing a hat (of any color) indoors is, at least traditionally, socially unacceptable. The lawful and neutral take them off. An environment that tolerates hat-wearing is one in which the chaotic can thrive.

This explains my desire to split the MacLeod Sociopath category into two. People use “sociopath” to describe those who live in this “L of social unacceptability”, the chaotic good radicals being “good sociopaths” (after they are recognized as good, the reality being that most people cannot parse chaotic morality in its own time). In my view, this deserves further exploration.

Psychopaths are, as I’ve defined the moral spectrum, evil. That doesn’t mean they participate in evil’s most brutal manifestations, but they devalue others’ needs, gains, and losses outright. Technocrats are chaotic by nature. Rather than gaining power through typical social means (dues paying, credibility, deal-making) they attempt to create radical and new forms of power. The goal is to take superior craftsmanship, art, science, and knowledge (techne) and turn that into influence, wealth, or power (kratos). That is innately disruptive to those who are vested in the old forms of power.

This does not exclude the possibility of “black hat” Technocrats forming an organizational presence, but my experience is that chaotic evil people very rarely move into positions of power or importance. They are just too socially dysfunctional. Complex societies will form subcultures that give chaotic good and chaotic neutral people second chances… but chaotic evil people only seem to acquire power in damaged environments.

The MacLeod pyramid

With this understanding of alignment, it’s possible to approach the MacLeod pyramid in the context of the moral and civil spectra. Perhaps not surprisingly, the civil spectrum is more correlated to it than the moral one.

MacLeod Losers, at the base of the pyramid, tend to be civilly neutral. Whether they are morally good, evil, or neutral doesn’t matter much to the health of the organization, because they have very little power. Since they view the organization as a Bronze Rule localist organization (not a Silver Rule, omnibenevolent meritocracy) they have a take-it-or-leave-it attitude and will show loyalty so far as they’re accorded social status, stability, and comfort. The Clueless, predictably, tend toward lawful alignments, but can be anywhere on the moral spectrum. Organizations actively try to make it this way. They don’t especially care about good versus evil in grunts or middle managers, but they want rules to be blindly enforced when necessary and blindly broken when authority requests it. 

If corporations could consciously choose leaders, they’d generally want people who are morally and civilly neutral, because that’s what most organizations are. Neither an overbearing lawful, chaotic, good or evil bias is beneficial to the organization’s objectives, and all can be harmful. Additionally, 64 percent of the population falls into that “true neutral” category. So it seems like the desirable set is a large one. However, rapid organizational ascendancy is abnormal. It breaks the rules of the on-paper pseudo-meritocracy, and it favors the stand-outs, who tend to fall into one (or two) of four categories:

• those who exert above-normal energy for the benefit of others, the organization, and the world (good).
• those who exhibit an unusual ability to conform and subordinate (law).
• those who will do anything, even harm others, in order to acquire power (evil).
• those who pursue disruptive and possibly anti-authoritarian avenues toward creativity (chaos).

In general, stand-out good people don’t get promoted. They get more responsibility, but not power. Stand-out lawful do, but at a plodding pace through “front door” avenues, and rarely past the effort thermocline. This leaves the evil and the chaotic, who tend toward variability because organizations just don’t know what to do with them. They exhibit an “up-or-out” distribution of organizational success. They’re either promoted or fired. (Sometimes it’s both.) They are the only ones who can pass through the effort thermocline.

A fully self-conscious organization desires neither evil nor chaos, so people judged to exemplify either are usually expelled from it (fired). the only forms of these that survive are those that manage to “trick” the organization enough to go undetected. Of course, this only reinforces the bias toward the promotion of evil or chaos, since deception is usually motivated by one or the other.

The surprising (sociopathic?) result is that the most successful people will come from the “L of social unacceptability”. Organizations, to the extent that they are conscious, try to exclude them. The result is an arms race between such people (as they fight to get as much out of organizations to survive or coexist) and the organizations, as they strive to improve their detection of law, chaos, good and evil. The winners become leaders; the losers get fired.

Eligibility pools

People who are lawful or civilly neutral (90 percent) are eligible for Loser-level roles in organization. Those who are lawful (10 percent) are eligible for Clueless middle-management positions. These numbers correspond roughly with a typical organization’s needs at each level. At the upper-tier, executive level, there’s a surplus. The “L of social unacceptability” (19 percent) is much larger than the organization’s needs for executives, so it can be selective. It can favor chaotic good, chaos, evil, lawful evil, or even chaotic evil. It gets to pick. In theory. In practice, almost no organizations exhibit anything like conscious, rational “thought”, so the selection is likely to be subconscious and by default.

Evil, I would say, is almost never desirable. Even if we were to judge evil to be necessary (with which I don’t agree) the darker shades of the moral neutrality can usually be coerced into it, especially if they have a civil bias. Lawful neutrality will support evil laws, and chaotic neutrality will oppose good rulers. Although many corporations devolve into macroscopic evil behavior and internal strife, and plenty of them are used for evil purposes, I still contend that even the most evil owner or executive would prefer not to have evil lieutenants. (Lawful neutrality is more desirable in a subordinate.)

The forward-thinking leaders that companies (if they are to remain adaptable in a chaotic world) should want, then, are the chaotic good and chaotic neutral– the Technocrats– with a hand-over to civilly neutral people as the organization grows. What remains an open question is which of these two alignments is to be preferred. That one, I would have a hard time to answer. I am (for obvious reasons) in favor of chaotic good, but I tend to think that chaotic neutrality may be more adaptive. In the rare case where a chaotic individual obtains power, the chaotic good person will limit her own power and create a system of checks and balances, creating a tougher job for the next generation of power holder in that institution. Chaotic evil people will abuse power so flagrantly that others will rush in to halt them. So chaotic good and evil both lead toward the reduction of power. It may be that chaotic neutral people (who just don’t know what to do with power) are the best ones for an organization to have hold it, because they are more likely to transmit it untouched to the next generation.

Conclusions

It seems that the worst pathologies of the MacLeod hierarchy come from the tendency to favor psychopathy at the top layer– the one called MacLeod Sociopaths. It is psychopaths who continue the dishonesty that deludes the middle layers (MacLeod Clueless) and the poverty that depletes the workers (MacLeod Losers). However, organizations create such bureaucratic walls that only stand-outs, rule-breakers, and tricksters can get through them. That favors evil or chaos (with those who exemplify both often being too pathological to succeed). It seems that organizations are doomed to have one or the other become prominent within its leadership. Therefore, the best antidote toward psychopathy (evil) might just be an increased tolerance of chaos.

Over the past couple weeks, I’ve delved into organizational health and the processes that compromise it. (See: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6.) Typically, organizations tend toward a MacLeod hierarchy with three tiers: the Sociopaths, the Clueless, and the Losers, in that order from top to bottom. Sociopaths, who take an up-or-out strategy and either end up at the top or fired, are strategic and dedicated but not subordinate. They’ll never sacrifice their individual career goals for the benefit of the organization, although they may work to improve the company if there is gain for them. These aren’t always bad people. Of the three personalities, I have most in common with the Sociopaths, but I’m not a bad (much less psychopathic) person. Clueless, on the other hand, are dedicated and subordinate but not strategic. They’ll work hard, and take orders, but they don’t have a good intuition for what is worth working on. They’ll eagerly follow or lead pointless, “death march”, projects. They tend to be shunted into middle management where their dedication and eagerness are an asset but their lack of strategy does minimal damage. Losers are subordinate and strategic but not dedicated. They know what’s worth working on and what not, and will follow orders– they’re subordinate because it makes their lives easier– but rarely put forth more effort than is required of them. (As already said, they’re not actually “losers”. More on that, later.) They’re discomfort-minimizers, while the equally strategic Sociopaths are yield-maximizers.

The MacLeod process exists because most organizations make it inconsistent for a strategic person to also be subordinate and dedicated, meaning that the confluence of these three traits won’t occur. Strategic people tend to be rational and selective with their efforts. Some will aim to minimize change and discomfort, willing to sacrifice compensation and career progress in exchange for an easy job where they won’t get fired. That favors subordinacy: make the boss happy, get away with more and reduce risk. If such a person can leave work at 3:00 and collect the same salary, he will. (Why not? If the firm remains happy with his work ethic, is it unethical?) These are the Losers. It’s important to note that they’re not losers in the sense of being disliked, undesirable, or defective. They only “lose” in the first-order economic sense, since their position is one in which they receive less (usually, a steady pittance) from the organization than they put forth. They trade expectancy (long-term average compensation) for the risk-reduction offered by a large, stable company in which they can retain good standing by appeasing a small number of important people. There’s another crowd who are also strategic, but who have more of an appetite for risk and want to capture some of the surplus value generated by the Losers’ trade (of expected value for risk reduction). They make the equally rational decision to put forth a lot of effort, and to take on a lot of risk, in exchange for rapid career growth. They tend to be dedicated, hard workers, but they’re not subordinate. This doesn’t mean that they’re ideologically or obnoxiously insubordinate, but they’ll never buy into the fiction that people must put company goals above their own career needs. Ultimately, such a person will gladly work a 50 or 70-hour week for the right price, but will never sacrifice her own career goals for the company or “the team”. Such people can’t stay in one place for very long. It’s not that they make themselves disliked, but there is a certain “offness” about them. They’re ambitious. They have “an agenda” (as if that were a bad thing). They’re only loyal to companies that treat them well and give their career needs a special value that can’t be given to all. They’re mercenary. It’s up-or-out for them. Companies promote as many of these as they have room for, but must discard the rest. This is actually an impersonal and necessary process– when you have more ambitious people than there is room at the top, you must make a way out for some, even if they are good people that you personal like. However, companies often have a psychological need to create a mythology for hard decisions, and this leads into the “not a team player” epithet that exists to justify this process (that, in my opinion, companies are not required to justify, because it’s not immoral to fire people; it’s just the way human organizations work). These strategic, ambitious people are the Sociopaths. Finally, the non-strategic who are dedicated and subordinate must, almost by definition, be Clueless. Those are the “true believers” who give to the company without expecting much in return.

The MacLeod organization is very stable according to its own internal metric. The Clueless provide a barrier between Losers and Sociopaths on the rank spectrum, while Losers (who give little, and get little) provide one between (value-capturing) Sociopaths and Clueless (who give a lot, and get little) on the hedonic spectrum. The effort thermocline and differential social status hold everything together. It’s an envy-reducing structure. Clueless are oblivious to the effort thermocline and don’t want the jobs immediately above them. Losers don’t want to become Clueless middle-managers– with only token power and slight improvements to compensation, but substantial increases in responsibility and discomfort. Thus, very few people want the jobs immediately above them, and those who clearly do want to ascend (Sociopaths) are fast-tracked either up or out. The MacLeod organization is, on its own terms, fairly peaceful. On the external market, however, such organizations are not always able to compete. MacLeod hierarchies keep peace within the firm, but often make the organization slow to adapt to the world outside.

The problem with the MacLeod organization is that it’s driven by three tiers for which each has a critical defect. Insubordinacy (of the Sociopaths) is not always bad, but it is a defect from an organization’s point of view, and with no one to audit the Sociopath tier here is no way to exert control over the moral character of the leadership. If “good Sociopaths” (Technocrats) are in charge, it will be a good organization. If bad people get into power, they will drive out the good. The problem isn’t that such ambitious people are uniformly or even often bad, but that organizations can almost never self-regulate in such a way as to audit or change the moral character of their leadership– and once an organization goes bad, it will rarely revert, because bad people have an innate competitive advantage; true psychopaths are more agile in social competition than the irreverent-but-decent “good Sociopaths”. In short, MacLeod Sociopaths are not necessarily bad people, but they’re impossible for an organization to control. The Clueless, lacking strategy, are unable to function without good people above and below them. They produce most of the tactical effort, but require management from above and below in order to retain focus on useful stuff. This dependence on others is their shortcoming. Finally, there are the Losers, who do most of the work and will directly affect the company’s ability to execute as well as its reputation for quality of service but who are, rationally, only dedicated enough to remain in good social standing. It’s not true that they “do the minimum not to get fired” (that’s a common misunderstanding of Loser-ism) so much as they manage their performance to the Socially Acceptable Middling Effort (SAME). They want neither the reputation for being a slacker, nor that for working too hard. They aim for the middle. While less important than the strategic competency of the leadership, the SAME level is a major cultural factor in a company’s macroscopic performance.

The organizational issue with the SAME is that it drifts over time. A high SAME will keep the working people of the company, who are often very competent despite their lack of ambition, highly productive. On the other hand, when the SAME falls to zero, the company ends up with a lot of deadwood; Losers stop working, because there’s no reason to do so. In this light, we can understand Marissa Mayer’s recent decision to crack down on work-from-home employees. This effort is about raising the SAME, which is hard to manage in a distributed setting. The problem isn’t that WFH employees are likely to be lazy. That’s often not the case. In fact, the best WFH-ers are far more productive than any in-office employee. The issue is that the good WFH-ers have no effect on the SAME– they get a lot done, but the rest of the office doesn’t see them working hard– and the bad WFH-ers have fallen to zero. An in-office policy will, at least at first, reduce bulk productivity (by hurting the good WFH-ers more than it brings up the bad ones, most of the latter being incorrigible people who will need to be fired) but the expected second-order effect is to raise the SAME. Mayer’s changes may kick Yahoo into the ugly state of a tough culture, but that’s likely to be less dysfunctional than the stodgy rank culture into which MacLeod corporations devolve. In rank culture, getting along well with management is more important than effort itself, which pushes the SAME down as obedient non-performers get a pass and weak managers become entrenched.

If each of the 3 MacLeod tiers is defective in one of these three desired organizational traits, we must ask the question. Can people be strategic, subordinate, and dedicated? It only happens in the context of a mentor/protege relationship. In truth, people who are truly strategic are never fully subordinate or insubordinate. While I originally approached the MacLeod hierarchy and this three-trait decomposition, I assumed the existence of all three traits to be impossible. In reality, those who are strategic are subordinate or insubordinate based on context. Strategic and dedicated people will subordinate, in the short term, if the leadership (management, advisors, investors) shows a long-term interest in their careers. True loyalty is not incompatible with the insubordinate tendency of the highly capable mind. There’s a pay-it-forward mentality and a personal affinity that enables such people to live in harmony with the organization. This is observed in the rarest of the four work cultures: the guild culture, which creates balance in the relative importance of dedication, subordination, and strategy. The other cultures tend focus on one of the 3 traits at the expense of the others: rank culture, on subordinacy; tough culture, on dedication and sacrifice; self-executive culture, on being strategic. Guild cultures encourage balance. Why, then, are guild cultures rare (and dying)? The answer is two-fold. First, they’re hard to maintain, because the leadership must continually refresh its skill base in order to mentor new people, which means that the teachers must “moonlight” as students and study new methods as well as the external market. Second, guild cultures cannot grow fast. If they take on too many new people at subordinate ranks, it becomes clear that the not all of their careers will succeed (there isn’t enough room higher on the ladder) and the whole thing falls to pieces. While guild culture may be “good”, it is not fit (as an evolutionary term) insofar as it does not allow fast growth of its organizations.

A guild culture that collapsed recently is that of large-firm law (“biglaw”). Originally, it was difficult to get an associate position at a “white-shoe” law firm, but one who had one stood a very high chance of making partner. Not making partner (after seven to ten years) was the exception reserved for bottom-5% performers. In the 1980s, this changed, due to the increased workload generated by the private equity boom. The firms began taking on large numbers of associates without allowing the partnership ranks to grow in tandem, the result being that making partner is now the rarity. Now, it’s about 5 percent who get partnership, rather than 5 percent being denied it. The guild culture died horribly, being replaced by a catastrophic tough culture where 70-hour work weeks and “4:30 work drops” (late-day assignments with next-morning deadlines) are the norm. New York attorneys frequently describe the state of their (ex-)profession as “banking without the upside”.

So what defines a healthy working culture? We now have the vocabulary to address this. I’m going to elaborate six statements about a healthy workplace culture, and then arrive at a 7th (The Mike Test) which is the most important of all. I derive these six assertions from the three workplace traits– strategy, subordination, and dedication– in addition to the need for moderation in each.

1. (Dedication, or DED) People can be relied upon to do their jobs well, and to treat their work as important. Ideally, this trust and reliability should exist at all levels of the organization. The company functions best if everyone is willing to do the hard jobs. 
2. (Moderation in dedication, or M-DED) People do not engage in unnecessary sacrifice for social or subordinate reasons. Pain does not become a measure of a person’s work or value.
3. (Subordinacy, or SUB) People take a “pay-it-forward” attitude toward their colleagues and the company. Junior employees take direction from mentors; seniors invest in their reports for the long term. People invest in their relationships with the company, because it is worthwhile to do so. 
   
4. (Moderation in subordinacy, or M-SUB) Doing the right thing is more important, to employees and the company, than following orders. This requires a culture that enables people to speak up without fear of retribution.
5. (Strategy, or STR) Individual employees take ownership of their own work and have the autonomy to place their efforts where they perceive the most value. There’s no need to ask permission or “apply for transfer” to work on something that appears important. This is where open allocation shines.
6. (Moderation in strategy, or M-STR) Allowance is made for exploratory work that might pay off only in the long-term. Work need not deliver short-term dividends to be acceptable. People are allowed, at all ranks, to invest at least some of their time into R&D that is abstractly beneficial to the organization, even if it doesn’t produce an immediate benefit.

If I were to grade each of the four cultures (0 to 8, 8 best) for its typical level of success on each of these traits, here’s how I would assign them (based on their observed performance, not on their purported values).

Trait Rank Tough Guild Self-exec.
DED     2    6     5      8
M-DED   3    0     5      6
SUB     4    1     8      4
M-SUB   0    2     5      7
STR     1    4     4      8
M-STR   2    0     5      3
Avg.   2.0  2.2   5.3    6.0


Rank cultures are across-the-board weak. They excel in superficial subordinacy, but the lack of true loyalty earns them only a ’4′ grade for that trait (SUB). The only good thing about them is their internal stability, which is why they are the eventual state of a hierarchical (MacLeod) organization. Still, they tend increasingly toward macroscopic underperformance due to their corrosive mediocrity. When the only thing that will prevent laziness is aggressive management, effective managers leave (wanting better reports) and the company ends up getting stuck with lazy managers who tolerate crappy employees. Tough cultures are slightly better– people actually give a shit, if only for selfish reasons such as aggressive performance reviews– but still fail in most critical areas, and behavior tends toward moral degradation. In tough cultures, people are as subordinate as they need to be to survive, but deeply disloyal. Two examples of tough-culture degradation are Enron and Google after the introduction of “calibration scores”, but the tracks of the organizations are different. Enron maintained its tough culture by executive fiat and experienced top-to-bottom ethical corrosion. Google’s tough culture (introduced by a play-for-play copy of Enron’s performance review system) reverted quickly to a rank culture, because many managers had no desire to enforce it and began agreeing to “peg” calibration scores in return for loyalty. (Google is an unusual example, having a healthy self-executive culture above the Real Googler Line– enabling it to maintain strong macroscopic performance– and a necrotic tough-turned-rank culture below the RGL.) The latter path is more common. Tough cultures usually return to rank cultures; those who have the power to protect people from the harsh review system become the new holders of rank.

Let’s examine the healthy cultures, in the light of the grades above. Note that self-executive cultures get top marks for dedication and moderation in dedication. When people are trusted to direct their own efforts, and rewarded for good work, they tend to put their effort levels at the right level. They also excel at moderation in subordinacy and (of course) strategy. What self-executive cultures tend to be bad at is rewarding long-term investment, including mentoring new hires. Guild cultures, although not especially fit due to their intolerance of fast growth, are well-rounded and healthy. When they work well, they excel in terms of a “pay-it-forward” attitude that replaces subordinacy (or insubordinacy) with genuine altruism. They’re also, perhaps surprisingly, the most prone to long-term investment (moderation in strategy). The central planning inherent in guild culture can be a weakness, but it can also allow the firm to “future-proof” itself consciously– if its leadership wants to do this.

Both cultures struggle when it comes to growth, but in different ways. Guild cultures can grow vertically– bringing in people of lower or higher skill levels– because they have the machinery for assimilating them into mentor/student relationships, but tend to fail at horizontal growth, because guild cultures require a carefully managed balance of work quality, skill level, and rewards. If that gets out of whack due to rapid growth, some form of scarcity (e.g.,of good reports, of high-quality work, or of room at the top) will turn the firm into a zero-sum slugfest that destroys the mutual trust of the guild culture. (It becomes a tough or rank culture.) On the other hand, self-executive cultures can grow horizontally– taking on more people at the same skill level– but tend to be incapable of assimilating people of superior or inferior skill levels to those who are already there, because self-executive cultures rarely provide the incentives for managed growth (as opposed to going out and putting forth work that brings immediate results). An example is Valve, an ideologically self-executive culture that simply does not hire junior-level people– it has enough self-awareness to know that it can’t maintain its self-executive culture in the face of the skill inequality that vertical growth creates.

In truth, self-executive cultures tend to downplay differences in skill– everyone has basic autonomy, there are no real “bosses”– and can’t hire below the prevailing skill level and maintain their culture. They could hire above the prevailing skill level and survive– that would be desirable– but have a hard time getting such people to work for them without offering some authority to them. People who are used to be entitled leaders (executives) do not usually want to work on equal terms with people they consider of inferior skill. Thus, self-executive cultures can only hire near the prevailing level and, since they only succeed if the prevailing skill level is fairly high, the scarcity of such talent means they cannot grow fast even if they would want to.

Tough and rank cultures, on the other hand, grow much faster. Why is this so? Tough cultures do not focus on growth so much as churn. They hire a lot of people, fire a lot of people, and are responsive to market conditions but generally agnostic on the direction of headcount numbers. Tough culture, being the absence of a work culture, has no growth management. A tough culture can hire a person of low market value, accepting the very high chance (in some cases, over 50% per year) that it will have to fire him. What causes directional growth (i.e. more hires than fires) in tough cultures is the long-term tendency toward inefficiency (necessitating greater headcount) and the emergence of pockets of rank culture as the tough culture decays. Tough cultures tend to grow in spite of themselves, because the cultural corrosion reduces individual performance despite the culture’s intent of doing the opposite. Rank cultures, for their part, actively encourage headcount growth. Hiring binges mean that there are more subordinates to go around, which makes managerial decision-makers happy.

In other words, neither of the desirable cultures (self-executive, guild) excels at horizontal growth and vertical growth. This makes them less fit, at least in terms of the ability to subsume people, than the pathological rank or tough cultures of typical organizations. There might be as many of these desirable cultures (self-executive and guild) as there are pathological cultures, but the latter house more people. It may be that most businesses have good cultures, but most employees work in dysfunctional businesses, if only because the dysfunctional work cultures are most able to grow quickly.

This conclusion is depressing: most people will work in dysfunctional cultures. Can we change that? If we want to do so, we need to answer some questions? What is the best workplace culture? Should one aim for the guild culture, or the self-executive one? I think the answer is obvious: one needs a hybrid, with ideas from both. I would say that one should aim for a culture that is mostly self-executive, and especially so for senior hires, but that creates an internal market for mentoring new employees, and for long-term investments, in which those efforts are equally valued. In doing so, it would manage to capture some of the assets of the older guild cultures, thus enabling some degree of vertical growth.

On the topic of growth: in addition to the six cultural evaluations above, I’ll add a 7th that is, above all, most important. The other six pertain to the present-time cultural health, but this 7th determines whether an organization will improve or decay over time. It’s The Mike Test. It has one criterion. The Mike Test is…

…would you, if no one would know or give you credit for doing so, want to hire someone better than you? Would it be rational to do so?

Assume that there’s no hiring bonus, and she’s not your best friend. You won’t get credit, in any form, for a great hire, and she won’t feel preternaturally loyal to you if she rises fast. The only benefit you get from hiring this great person is that you improve the company. The risk you take on is that your relative status in that company will decline. In a large company, the risk is low– you’re unlikely to compete directly with her– but so is the reward, making the balance zero. (It’s not worth it to hire her even in the large firm, not because there’s a risk of competition, but because you could spend time on other things.) I would argue that most companies fail The Mike Test. In the vast majority of companies, it is not rational to hire a person of superior ability.

This hits on the (slightly altered) Jack Welchism that “A players hire A+ players; B players hire C players”. In my use, however, “A” and “B” orientation pertain to context and security rather than innate competence. A players are secure enough that their interests (at least, in hiring) align with the company’s. They want to work with great people, and it has nothing to do with coarse personal benefits (hiring bonuses, “finder’s” credit). They make their companies better. B players, who are insecure because they are unremarkable, want to be safe and manage themselves to the middle. Hiring incompetents minimizes their risk of drifting out of the middle (and into the bottom). Good cultures discourage this kind of B-ness. They make sure that competent people are secure, and they rid themselves swiftly and fairly (preferably with severance; it reduces drama) of incompetents. Sadly, that’s rare. Most companies fail the Mike Test, and MacLeod hierarchies form because of organizations’ tendencies to hire people inferior to the (semi-insecure) real decision makers and, when superior people are brought in, to try to make them inferior using their control over the division of labor. Those tiers emerge because people in an insecure context have the incentive to hire only inferior copies of themselves.

Let’s discuss each of the four cultures in the context of the Mike Test.

Tough cultures fail the Mike Test in the worst way. In a tough culture, no one is secure– that’s the whole point of tough culture– so everyone is a contextual B-player (i.e. incentivized to hire mediocrities and make oneself look better). No rational person living in a tough culture would hire someone of superior skill– that person becomes an immediate threat. Rank cultures don’t fare much better. In a rank culture, one tends to have one of two kinds of managers. The first is the checked-out (i.e., also lazy and mediocre, as befits rank culture) boss who just doesn’t care. There isn’t a major loss inherent in hiring strong people, but it’s not a worthy use of time. The second is the hard-ass, careerist boss who creates a pocket of tough culture under him. (The company might still have a rank culture, but this boss holds high expectations.) That type of boss only cares about hiring insofar as it builds his team, and the tough-culture rules (don’t hire someone better than you, lest you be thrown under the bus) apply. Bosses in rank cultures might want to hire people of superior skill, but only if they could lock in permanent rank superiority. Rank cultures especially stigmatize reporting inversion (i.e. having a younger, less senior, or less educated boss) to the point that it can be career-ending to be at the butt of one. The benefits of having a strong subordinate are offset, in a rank culture, by the risk of reporting inversion. Therefore, both of the dysfunctional cultures (rank and tough) fail the Mike Test, explaining why they hire worse people with each generation of growth.

Guild cultures pass The Mike Test. If you hire someone better than you are, he might end up in a higher place, but that’s okay. You get a mentor, not a threat. A well-managed guild culture can assimilate someone at a higher skill level without eroding the well-being of the rest of the organization. This is the symbiotic nature of the guild culture. Self-executive cultures also pass, because their “bossless” nature means that the prospective hire’s superiority of skill is not a major concern. It’s a good thing to hire a better person, because you’ll have a strong colleague.

To summarize this briefly for each culture:

• Tough cultures fail the Mike Test catastrophically. You endanger yourself directly if you hire someone better than you are.
• Rank cultures fail the Mike Test by apathy. People only hire strong people if they can guarantee that person’s subordinate status. Rank cultures tend toward inferior hiring– strong people are less likely to be subordinate– but not as fast as tough cultures.
• Self-executive cultures pass the Mike Test, as most people would prefer stronger colleagues, but the equality inherent to a self-executive company is a hard sell to one who might expect (because of a higher skill level) a leadership role.
• Guild cultures pass the Mike Test, if they can convince the superior to take the role of a mentor rather than a manager.

Perhaps surprisingly, most VC-funded startups fail the Mike Test. They pass it for founders and real owners, who will have a more successful company, but they fail for engineers. Founders and investors control the dilution process and, even if they lose relative share, they’ll only make deals that are beneficial to them (50 percent of something is better than 100 percent of nothing.) If you own 20 percent of the company, you’re ecstatic if you just hired someone better than you are. What about engineers, however? What are their incentives?

Let’s consider a typical software engineer at a 50-person technology startup with 25 software engineers. His compensation is $25,000 per year lower than the market level, offset by equity equal to 0.05 percent of the company, vesting over 4 years. (In practice, he’d more likely have options at a low strike price, but I’m going to simplify here.) Salary raises are rare in startups, and equity improvements (without a promotion) are almost unheard-of. When things are going badly, that’s not a time to ask for anything; when they’re going well, the appreciation of equity is the raise. In addition to the $100,000 lost over four years at a low salary, let’s value the lost salary growth at $50,000 over 4 years, plus another $50,000 to account for future income lost to being at a low salary level when he exits. So he’s paying $200,000 for 0.05% of the company, implying a valuation of $400 million. This is, most likely, much higher a valuation than the one at which investors would buy into it. However, I can make a strong case that the engineer’s valuation should be lower than that given by investors, especially in a VC-feeding frenzy. When risk, liquidation preferences, cliffs and the lack of control are included, an engineer doesn’t do well to accept this typical startup offer ($25,000 salary drop, no raises; 0.05% equity) unless he can realistically value the company at approximately $1 billion. With the shoddy IPO climate, not many startups deserve that kind of valuation. (In fact, the companies that do are no longer really startups.) So, the equity offered by a startup is not, for most mere engineers, a good reason to be there.

So why do software engineers work for these VC-funded startups? There are many Clueless in the mix who massively overvalue their equity consideration, but most engineers believe their initial grants to be “teasers”. They know that their starting allocations are low, but expect that they’ll get something closer to a “fair” share when they grab those “inevitable” executive positions at which real equity allotments (0.25 to 0.5 percent for Directors, 0.5 to 1.0 percent for VPs, 2.0 for C-level, 3.0 for CTO/COO and 5.0 for CEO) are common. That is what keeps engineers in VC-istan motivated; the implicit (and often broken) promise of a higher-ranking role (with investor contact, and real equity) as the company grows. The real concern, when engineers participate in hiring decisions, isn’t about equity dilution associated with strong hires. They just don’t have enough equity for that issue to really matter. Their fear is that, if they hire people stronger than them, they’ll lose out on the executive positions implicitly promised to them as early hires at their startups. If they hire engineers better than they are, they’re doomed to languish in a company that has begun hiring above them. One note about typical startup sociology: once your startup hires someone from outside directly above you, it’s over. It will continue doing so, and your career has stalled out. You’re not a real player in the firm.

There’s an inherent conflict of interest in this style of VC-funded startup. The real owners (investors, founders, top management) get a social-climbing mentality and seek to hire stronger technical talent (even if they don’t need it!) for the sake of “scaling”. Engineers, on the other hand, would do well to subvert this. They don’t actually want to hire bad people (terrible software engineers reduce the productivity of the team) so much as they want to hire just-slightly-inferior people who aren’t so bad as to poison the team, but won’t challenge their chances of getting an executive position. This is more of a case of B players hiring B- players than one of them hiring C players. 

However, two to five generations of “just slightly inferior” will turn to bad, and the rapid churn of VC-funded startups means that it doesn’t take that long. VC-istan startups degrade severely and predictably once hiring decisions are made by people with small equity slices, whose concern is not the health of the company (ownership) but the protection of their own inside track to executive positions. Such startups fail the Mike Test, and it doesn’t take long for it to show.

What is VC-istan’s place in the 4-culture taxonomy?

What is the culture of a typical VC-istan startup? Within VC-istan, there are efforts (e.g. Y Combinator) to generate a pay-it-forward guild culture. This is actually quite interesting– entrepreneurship is supposed to be market-oriented, but the most healthy subsector of VC-istan is guild culture– the healthy variety of a command culture. On the other hand, the healthy market culture (self-executive) is shockingly rare. This suggests that VC-istan has become somewhat of a command (not market) culture, and it seems that it would be more of a rank culture than anything else. I tend to believe that this is probably true. VCs talk to each other. They decide as a group who is hot and who is not, and this extortionate power makes them the true holders of rank. VC-istan, a postmodern corporation that manages to transcend mere companies– in VC-istan, companies are disposable– is so amorphous and complex that it cannot be tagged as “only” belonging to one culture, but rank culture is increasingly the dominant force. Unfortunately, I don’t see a solution for this. One possibility would be for the government to interfere with communication among VCs in order to kill off the collusion, herd mentality, and “accept this term sheet or I’ll pick up a phone and no one will fund you” extortions, but a government step-in would probably cause more problems than it would solve.

VC-istan itself may be a rank culture, but an imperfectly formed one. VC-istan exists because a web of socially connected people– reputable investors, and those with welfare-check (err, I mean “acq-hire”) writing ability at large companies– have created a controlled-market zone. Outside of that is regular ol’ business formation: an actual market. By the way, what are free markets? They are like self-executive cultures at best, but tough in their own way. Corporate tough cultures are mean-spirited and driven by intentional human malice (stack ranking, “calibration scores”, transfer blocks). Free markets are tough only because they are indifferent, but self-executive for those who’ve managed to develop a pattern of success. So the “greater world of business” formation is one that contains the market’s mix of self-executive and tough features at its periphery, and becomes more rank-culture-like as one grows closer to the VC-istan power players.

Startups are a reaction against the dysfunctional rank cultures, and would prefer to set themselves up as self-executive enterprises.However, as the company grows, power shifts to the rank culture of the world without (investors, acquirers). Full-on rank culture is usually in force shortly after liquidity, but the phase most typically associated with VC-darling “startups” is a transitional spell of (unplanned) tough culture. 

Startups tend to remain “flat” for a long time, but this is usually not out of executive altruism. Self-executive cultures are naturally flat, but so are tough cultures. Tough cultures want everyone in competition with everyone else and use a (pathological) flat model to maximize internal competition. The self-executive model of the VC-istan startup dies as soon as the company stops handing out real equity slices (often immediately after the Series A). At this point, the “colony” mentality (live or die as a group) ends and the true goal of the new hires is to get into the executive positions that make real equity slices possible. The internal competition that emerges causes alliances to form and break, influence to be peddled, and informal management (people who manage to win credibility through illicit trades and manufacture the appearance of high performance) will emerge. The tough culture’s informal management is actually substantially worse than the rank culture’s rigid system, because the former encourages more influential people (managers in practice, if not in title) to compete with their (again, informal) inferiors. Rank cultures, at least, are rendered stable by the absence of competition between managers and subordinates– leading, over time, to the Gervais hierarchy. Tough cultures are just amoral, vicious messes.

When a startup first gets funding, the cultural neighborhood of the founders switches from the tough one of an indifferent market to a more self-executive one. They now have some autonomy, measured numerically in “runway” (how long they can survive with current capital). Unfortunately, this self-executive culture cannot survive the rapid growth typically expected by investors (especially VCs). Self-executive cultures can only hire near the prevailing skill level. VCs, on the other hand, want the company to indulge in social climbing (hiring above that level, which involves enticing people with executive positions that reduce the autonomy of those within) and rapid growth (which mandates hiring below the prevailing skill level to tackle the grunt work generated by sloppy, fast growth). Guild culture is clearly not an option, because tight deadlines leave no time for mentoring. Nor is rank culture, because it tends rapidly toward the underperformance of the MegaCorps that startups exist to destroy. Thus, VC-funded startups tend to degrade into a tough culture by default. This should explain the churn-and-burn behavior for which they are so infamous.

So, what culture is VC-istan? It depends. If you’re lucky enough to win the attention and mentorship of the (extremely rare) well-connected person who’s not an asshole, it’s a guild culture. If you’re a founder who just got funding, or a very early hire guaranteed a strong position, it’s self-executive. For founders and executives fighting mostly external battles (with acquirers, investors, and others with a million times more in the way of connections) it’s a rank culture, but one that does not (at that point) seep into the organization. For typical engineers facing internal battles (for scarce future executive positions that come with real equity) it’s a tough culture of long hours, harsh deadlines, vicious politics, and fast firing.

In other words, startups go through four cultural phases. Before funding, they live in the prevailing, indifferent tough culture of the market. Once they get their initial funding and have some autonomy, they turn self-executive (second phase). The romance of the “startup ideal” is derived from this phase of organizational life. As they grow (often sloppily) and take on more people than they can really provide startup perks (real equity, autonomy, leadership) for, they turn into tough cultures (third phase). Most VC darlings have tough cultures. By the time the company is getting that much attention, the self-executive era has ended. Finally, once the startup reaches liquidity and is a full-fledged corporation, it tends toward typical rank culture (fourth phase).

Mike Testing VC-istan to predict its future

Let’s see if we can apply the Mike Test to VC-istan, noting that Silicon Valley emerged as a reaction to the stodgy rank cultures associated (at the time) with East Coast corporations. The Mike Test tells us that self-executive and guild cultures can improve as they grow, although these low-entropy work cultures are hard to grow fast. Rank cultures, on the other hand, tend to stagnate, and tough cultures actively devolve, as headcount grows. What is the future, then, of VC-istan?

Most VC-istan companies are in active cultural devolution, being tough cultures where people are prone to hire inferior versions of themselves. In software engineering, this process is slowed somewhat by the (genuine) desire not to hire outright incompetents. Software is structurally cooperative enough that the pain (bugs, bad designs, low code quality) associated with hiring an incompetent does not offset the gain in relative position. As I said, this software-specific trait means that B players don’t try to hire C players, but B- players, which slows the Mike-Test decay normally associated with tough cultures. All of this is, in fact, not a major problem for VC-istan. Companies are disposable! The thing should be sold before it falls that far. VC-istan can tolerate the corrosion of the tough corporate cultures it generates, since these companies are just going to be sold to rank-culture corporate behemoths. VC-istan is not designed to build free-standing companies. They exist to be bought or to die.

The tough cultures of VC darlings will bring incompetents into those companies, but not a rate that is fast enough to matter to the corporations themselves. They’re build-to-flips that have no reason to care about slow cultural corrosion. There might be a “littering effect”, if these tough cultures are (a) bringing undesirable people from outside of VC-istan, and (b) leaving them in the VC-istan ecosystem after the company fails or is bought. If both (a) and (b) are true, then we can hold these cultures responsible for lowering the overall quality of people in it. I don’t know if that’s the case. That subject needs further study. Since the most egregious incompetents in VC-istan are not low-level engineers but the supernumerary, non-technical, executives, I tend to doubt that any engineering-specific littering effect is a problem, either in the short or long term. The executive-specific one is well-documented; VC-istan does have a way of turning shitty, failed bankers into even shittier non-technical startup “executives”.

In other words, I don’t know if the tough culture that typifies the standard VC darling is going to fill VC-istan with incompetents. The company itself will take on undesirable people, but those companies aren’t built to last very long. That tough cultures are so common is a symptom of something pathological, but that’s a topic for another essay. Instead, to project the future of VC-istan, we need to look not at the culture of the typical VC-funded company, but at the culture of VC-istan itself: the postmodern corporation in which the VCs are executives, so-called “CEOs” are glorified project managers, and engineers are clueless chumps who don’t realize they work for a big company. What we see is a very typical rank culture, with VCs and well-connected “serial entrepreneurs” (read: people whose connections entitle them to continued funding no matter what happens) in the Sociopath tier and a swollen Clueless tier. It’s a very effective, internally stable MacLeod rank culture.

As I discussed earlier, the stability of the MacLeod organization comes from the lack of envy between Losers and Clueless; and between Clueless and Sociopaths. Differential social status (DSS) and the effort thermocline (the level at which jobs become easier, rather than harder, as one ascends) ensure this stability. Losers prefer things of genuine value over the non-transferrable DSS coveted by the Clueless. Clueless are oblivious to the effort thermocline and consider the Sociopaths above them to be harder working and more capable than they are. Losers who want to become Sociopaths are fast-tracked up or out of the organization. How does this work out in VC-istan? The effort thermocline is blindingly obvious: it’s the distinction between startup employees and powerful investors. Above the thermocline are the reputable VC partners, whose social connections entitle them to an easy life; below it are founders and the people they hire. The founders are the upper-tier Clueless who (just as in a MacLeod organization) don’t want the jobs above them, on the assumption that the Sociopaths “just shake hands and push paper around; we do the real work”. Differential social status, in VC-istan, is access to funding and publicity– something that a generation of idealistic idiots has spent decades of hard work to get, while their peers “sold out” and made actual money that could be used to buy actual houses and vacations.

For all this, I used to think that VC-istan didn’t have MacLeod Losers (with the losses borne by the swollen Clueless tier) but I realized that I wasn’t looking hard enough. Clueless are true believers, while Losers are rationally disengaged people who work hard, but minimize discomfort. (Again, they aren’t actually losers per se. Unlike the Clueless, they know the trade they make.) In VC-istan, MacLeod Losers tend to be consultants and freelancers. They cherry-pick the work that’s interesting to them, can lead quite a nice lifestyle if they’re good, and never work for equity. Since these people can often command $250 per hour or more, it’s hard to call them Losers! What they are is checked out of the Clueless game of VC-istan. They will never get rich– it’s hard to get more than 800 hours of work per year, with a decent rate, as a freelancer– but they will never lose a vacation or a relationship to a get-big-or-die company either. They sell tools and water to the idiots who dig for gold in the 120-degree heat. The MacLeod Losers of VC-istan are the mercenary consultants who manage to get by, contribute some work, but never hitch their fortunes or make undue sacrifices for a specific company.

If VC-istan is a MacLeod organization, then what is its future? MacLeod rank cultures decline, but they do it slowly. That is also what will happen to VC-istan. I couldn’t possibly say whether it will happen over the next 2 years or the next 20, but VC-istan is already in a MacLeod state and, while its decline is likely to be gradual, it’s also inexorable. I’ve started calling many of these companies “ad-banking”; VC-istan is what investment banking was in 1995. That is far from “death”. It does not even mean that it will become impossible to get good people; investment banks are able to get good people even now, but they pay dearly. It only means that good people will become more expensive over time. Only when compensation ceases to grow exponentially (in banking, circa 2009) will the best people start to trickle out and look for something new. VC-istan engineer compensation has quite a few years of 10-20% annual growth before reaching the unsustainable level, so I don’t see its “death” setting in until about 2025. Until then, there’ll be a lot of money to be made by mercenary engineers, so long as they know the market well enough to play it.

What will make VC-istan’s unwinding process interesting is its generation of alternatives. As investment banking grew stodgy, boring, and difficult, banks raised compensation (for genuine talent) into the stratosphere. No one would spend 15 years in New York investment banking for less than $400,000 per year at the end of it. This transfer of wealth generated early retirees and a few hedge funds, but not rival investment banks. People did not take their $6-million nest eggs and launch rivals to Goldman Sachs. VC-istan’s story will be different. As talented engineers wake up to the scam, wages may rise to the same levels that bankers commanded, generating a transfer of wealth toward a set of people not typically associated with richness: hard-working computer programmers. Those among them who have a mind for business will want to participate in investment, and to build something different from VC-istan. Something better. I don’t think anyone knows– yet– what will be built.

So what should be built? At 7.7 kilowords, I can’t hack that now. That’ll be covered in a future essay.

Well, this is yet another “second-to-last post” in the Gervais/MacLeod series (See: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7) as I’ve realized that I need to cover one more topic: human nature, especially in the context of the corporate organization (e.g. Theories X and Y). What is it? Is it inherently good, or evil? Is it natural for people to be altruistic, or selfish? I addressed the morality and civility spectra and it should be obvious that I am neither committed to the idea of an inherently bad or good human nature. Mostly, I think people are localistic. We are altruistic to people we consider near to us in genetic, tribal, cultural, or emotional terms. We’re generally indifferent to those we regard at the periphery, favoring the needs of our tribe. Good and evil don’t escape from this localism; they just handle it differently. Good attempts to transcend this localism and (perhaps cautiously) grow the neighborhood of concern: expanding it to all citizens of a polity, then all humans, then all living beings. Evil, not always being egoistic, turns this localism into militancy. Both involve an outside-the-system comprehension of localism that is somewhat rare, leaving most people in an alignment considered neutral. Morally neutral people are best described as weakly good. Assuming they have a strong sense of what good and evil are, they’d prefer to be good, but this preference is not strong and they do not have a burning desire to seek good at personal or localistic risk.

The civility spectrum, between law and chaos, reflects peoples’ biases toward organizations and those who lead them. While lawful good people will oppose an evil society and chaotic good will support a good one, the truth about most societies and organizations is that they are themselves morally neutral, so a person’s civility (bias in favor or against establishment) will influence her tendency to oppose or support power more than the sign-comparison of her and its moral alignments. Lawful people think organizations tend to be better than the people who comprise them; chaotic people think they tend to be worse than the people who make them up. For my part, I’m chaotic, but just slightly. I think that individual people average a C+ on the moral scale (A being good, F being evil) and organizations tend to average a C-. Chaotic bias makes it natural to see corporations as “evil”; in reality, most of them are indifferent profit maximizers.

Interesting enough, software engineering is intrinsically chaotic. Because software requires exact precision, while human communication is inherently ambiguous, large software teams do not perform well. The per-person productivity of a large development team is substantially lower than that of an individual engineer. A team of 10 might be 2-2.5 times as productive as a single engineer. This leads us, as technologists, toward the (chaotic, possibly faulty) assumption that organizations are inherently less than the sum of their parts, because that is clearly true of software engineering teams.

Management theorists have questioned human nature, generating two opposite sets of assumptions about the typical employee of a corporation.

Theory X (presumed egoism): employees are intrinsically lazy, selfish, and amoral. If they are not watched, they will steal. If they are not prodded, they will slack. They are not to be trusted. The manager’s job is to intimidate people into getting their work done and not doing things that hurt the company.

Theory Y (presumed altruism): employees are intrinsically motivated and inclined to help the organization. If they are given appropriate work, they’ll do well. The manager’s job is to nurture talent and then get out of people’s way, so they can get work done.

Theory X is socially unacceptable, but a better representative than Y of how business executives actually think. Theory Y is how executives and organizations present their mentality, because it’s more socially acceptable. So which is right? Neither entirely. Theory X is ugly, but it has some virtues. First, it can be, perversely, more egalitarian than Theory Y. Theory X distrusts everyone, including the most talented and best positioned. Executives are no better than worker bees; everyone must be monitored and a bit scared. Theory Y, which is focused on talent and development, requires (non-egalitarian) decisions about whom to develop. Second, Theory X is more tolerant of scaling, because large-scale societies run (by necessity) on X-ish assumptions. To keep a Theory-Y organization intact, you cannot hire before you trust. Only in the technological era (where small groups can deliver massive returns) has it been possible for growth-oriented organizations to hire so selectively as to make Theory-Y organizational policies tenable.

My ideology (e.g. open allocation) might be seen as “extreme Theory Y”, but that’s not because I believe Theory Y is inerrant. It’s not. Reality is somewhere between X and Y. I believe that organizations ought to take the Y-ward direction largely (on this spectrum) for the same reason that archers aim slightly above their targets. With the actual leadership of most organizations tending toward egoism and X-ness, an organization that doesn’t set inflexible, constitutional Theory-Y pillars (for some concerns) is going to suffer a severe X-ward bias. X-ism is tolerable for concave industrial work, but in the convex world, organizations need to be somewhat Theory Y. How X (or Y) should an organization be? There’s actually a very simple and absolutely correct answer here: trust employees with their own time and energy, distrust those who want to control others’. It really is that simple– a rarity in human affairs– and to continue with anything else is moronic. Employees who volunteer to use their own energies toward something they believe will benefit the organization should be trusted to do so; those who exhibit a desire for dominance over others should be deeply distrusted.

There’s one thing I haven’t addressed, which is which Theory is actually more in force. Theory X was the industrial norm from antiquity to about 1925, when Henry Ford discovered that being a jerk (which almost all industrialists at the time were) was bad for business. High wages for employees meant a strong consumer base. Eight-hour work days were just as productive as longer ones, with fewer accidents. While there were some severe bumps in the road (Great Depression, World War II) the following 50 years saw the emergence of a large middle class, and a changing workforce. Theory Y, at least in aspiration, set in, along with the growth of positive psychology and even the 1950s-70s countercultures, which were more of a reaction against perceived hypocrisy (in organizations claiming to be Theory Y) .

With Theory-Y organizations– especially in research and development– we cracked the German Enigma, sent people to the moon, advanced science more in one half-century than had ever been thought possible, invented the Internet, and grew the global economy at an astounding 5.7 percent per year. Theory Y was the dominant organizational culture from 1925 to about 1975. Then something happened in the counterculture. The 1950s counterculture was mild, liberal, and cautious about the potential for organizational overreach, but tame by modern standards. The 1960s took these seeds of dissent to their logical (civil rights, Great Society) and illogical (Tim Leary, Weathermen) conclusions. The 1970s counterculture was transitional, meek, and reactive to the failed aspirations of the 1960s. In the 1980s, the counterculture was: Let’s Be Dickheads Again. Thus emerged the golden age of private equity, rampant cocaine use (exacerbating its already-present tendency toward context-free arrogance and vacuous superiority) among the upper class, and pro-corporate “greed is good” mentalities. The yuppie generation disgusted their (cautiously liberal, as befit the 1940s-60s) parents with how illiberal and materialistic they were.

Theory Y failed in the 1980s. If your employees are coming into work looking to steal your secrets and launch their private equity careers, you actually can’t trust them. This decade of betrayal, greed, and organizational dissolution proved Theory Y inadequate. Bad people exist at all levels. Some people will try to steal from their employers, employees, and colleagues.

If the Gilded Age nightmare of Pinkertons and company towns was the height of Theory X, and the mid-20th century United States was that of Theory Y, what came after? The chaos of the 1980s settled down, and I think what emerged in its wake can be called Theory Z. By 1995, corporations had been looted at bottom and top (mostly, at the top) and had ceased to inspire. Technology startups were taking on corporate behemoths of much greater size. People at the bottoms of corporations (MacLeod Losers) were beginning to recognize that presumed upward mobility could no longer be believed in. The arrogant egoism of the coked-up 1980s ubermenschen had faded somewhat, but the bilateral altruism existing between the paternalistic corporation and employee was forever gone as well. People returned to localism in personal alignment: trying to do right by the people they care about, and the people near them.

Theory Z (prevailing localism): a few employees will be unusually egoistic or altruistic, but most are going to be localist. Interpersonal loyalty will bind them together, and growing affinity within the group will encourage “pro-social” behavior. People who feel excluded by the group will defect; those who feel included will cooperate. The manager’s job is to build a great team– to use an intuition for human localism to direct that tendency toward pro-organizational behaviors– and to marginalize or separate from (i.e. fire) those whom it excludes.

Theory Z is the most accurate of the 3 “human nature” calculi put forward thus far, insofar as it covers most of an organization. One might also note that these 3 theories correspond neatly to the MacLeod hierarchy. The executive suite (MacLeod Sociopaths) tends to be dominated by Theory-X mentality. These people know that they shouldn’t be trusted, so they aren’t inclined to trust anyone else. Clueless middle-managers tend to overestimate human nature and have a Y-ish bias. MacLeod Losers want to be socially acceptable and get along well with the group. The Loser world, driven by interpersonal and team affinity, is a Theory-Z one. They want to get along, and will manage their effort level to the exact point that keeps in the best social standing– the Socially Acceptable Middling Effort (SAME).

Theory Z may be the most accurate model of the MacLeod Loser class that does most of the work in an organization. This said, Theory Z also has some severe defects, having generated a cargo cult of teamism. Organizations waste time and money on pointless “team-building” paraphernalia: “mandatory fun” retreats that no one enjoys, in-office perks that adolescentize the workforce but detract from actually getting stuff done. A person is judged not on her individual merits, but based on (a) the social status, outside of her control, of the team on which she has landed and (b) as a tiebreaker, her performance on that team. The top people in the organization (rather disgustingly) call themselves “the leadership team”. Teamism also creates closed allocation, of which I’m not a fan. People who attempt to serve the organization directly by moving to more appropriate teams (which their native teams and managers view negatively as attempts to swing to higher-status teams) are viewed as “not team players” and, instead of being allowed transfer, are discarded. Teamism is especially defective in software, where large teams are almost never productive. Theory Z conformity actually solves the industrial problem: what’s the best way to manage concave work? Concave work is that in which the difference between mediocrity and excellence is minimal in comparison to that between mediocrity and noncompliance (zero) and variance reduction (at which management excels) is desirable. It doesn’t solve the technological problem that emerges when we confront convex work, in which the difference between excellence and mediocrity is critical and that between mediocrity and nonperformance is negligible.

The industrial paradigm is heavily oriented toward concave work. To see that, consider educational testing. Students are given very easy problems (most of the difficulty being in artificial resource limits– timed, closed-book exams) so that an average performer will get 85 percent right. The pass/fail line is then set at 70%– in other words, no more than twice the defect rate of the average. If we wanted to re-orient exams toward a convex world, we’d give students very hard problems so that average performers only get 20% (the pass rate might be 10-15%) and call excellence 40%. I’m not actually saying that’s a good idea– I’m out of my depth on these sorts of educational issues– but this is just one way in which in the presumed concavity of industrial work is visible in the pedagogical training people get before entering it.

Why did Theories X, Y, and Z exist? What will replace them? To answer this, it’s useful to look at humanity in several stages– agrarian, industrial, and technological– based on the prevailing rate of economic growth. In the agrarian era, from 10000 BC to about 1750, economic growth was slow (0.01 to 1.0 percent per year) and generally imperceptible in a human lifetime, especially in comparison to the local rises and falls of empires. Most people who wanted to get rich had to steal or kill. Mercantilism was the predominant economic theory, slavery was he most common form of organizational labor, and Malthus was right– not in his modeling of food production growth as linear, it being a slow-growing exponential function; but in his assumption that human population growth exceeded agrarian economic growth. (England didn’t have a Malthusian catastrophe, the Industrial Revolution intervening, but an overwhelming number of societies have had them. Some have argued that England, in the 19th century, outsourced its Malthusian problem to Ireland.) Economics in the agrarian era could be approximated as zero-sum; with population growing as fast the economy did, the average human’s standard of living didn’t improve much. Machiavelli probably wrote The Prince as satire, but it was apropos of the political climate of the time, and any time before or up to about 250 years after that.

The industrial world came into being gradually, with the advent of science and, later, rational government. It started in the late 17th century, and by the 18th, progress was (while slow) visible. Malthus, despite his pessimistic projections, acknowledged that growth existed: it just wasn’t happening very fast in 1798– about 0.9% per year. This rate being too slow to sustain human population growth, economics truly earned its name of “the dismal science”. Personally, I define the industrial threshold (very arbitrarily) as the point (early 19th-century) at which global economic growth reached 1.0% per year. Since I define the technological threshold at 10% per year, we haven’t gotten there yet. (More on this here.) But the most interesting companies (technology firms oriented toward convex work) have that capability.

The architects of the industrial world were quick to realize that coercive labor wouldn’t suit their needs: the jobs were too complex and variable to leave to people who’d been deprived of all autonomy (slaves). This had to be replaced with a semi-coercive model in which employees had some freedom: they’d need to have a boss to survive, but they could choose which one. Industrialists studied sailors (pirates, privateers, explorers and merchants– all different in how ships were run) to learn about group sociology apart from the agrarian state. They studied militaries, large organizations which had left important duties to non-coercive labor (and less important ones to semi-coercive conscripted labor) for centuries. They looked at prisons to see how free people handled the temporary loss of liberty that would be similar to a merchant’s conscription into a middle-management office role. (Slaves were rarely put into prisons, but beaten or killed.) As most complex organizations of the time were semi-coercive, vicious, and prone to violence (that was often a part of the business) this naturally led into a Theory-X mindset: bring ‘em in, and don’t beat ‘em so hard they can’t work, but don’t trust ‘em either.

The zero-sum world of agrarian humanity suffered a major blow in the mid-19th century when the industrialized nations began abolishing slavery, but human behavior is slow to change. Progressive mentalities began to form within nation states, but the old ways of interaction still existed between them, and also between advanced nations and the colonized people. That blew up spectacularly in the World Wars. By 1945, it was evident that being a jerk was not going to work anymore. Racism, for one example, lost all intellectual respectability after what Hitler did. Militant localism (jingoism) had to be replaced by a climate of prevailing respect and positive-sum thinking. The U.S. rebuilt the economies of nations it had defeated at war, instead of inflicting further economic penalty as occurred after World War I. The corporate analogue of these changes came out of positive psychology and political progressivism: Theory Y.

Unfortunately, while Theory Y built good organizations, it left them unable to defend themselves against bad people, as the 1980s showed us. Academia and basic research, in the U.S., still haven’t recovered from the barbarian attacks. Rather, it’s ongoing. Global economic growth dropped– from 5.7% per year to about 3.5– due to society’s disinvestment in progress and science. (It has recovered somewhat, to 4.8%, largely because of the declining relevance of the gutted U.S.) The chaos of the 1980s left working Americans bereft of faith in institutions and in the people they worked with. This led to the more cautious and accurate Theory Z, which correctly models human localism but prescribes a managerial style based on conformity and mediocrity– solving the concave/industrial problems, but failing at the convex/technological ones.

So, what is human nature? Are people inherently altruistic, egoistic, or localistic? We’ve seen a tendency toward localism– somewhere between altruism and egoism– as a default. Does this mean that “human nature is localistic”? Can we say that human nature is morally neutral (rather than good or evil, as some philosophers have suggested)? For my part, I don’t. I’m not convinced that it’s anything, because I don’t hold strong beliefs in human nature. I’m not sure that there’s a there there. We can understand biophysics mathematically, observe sociality, and experience spirituality, but a complete understanding of ourselves eludes us. “Human nature” is a “God of the gaps”.

Personally, my philosophical and religious beliefs are most in line with Zen Buddhism. It would be un-Zen to say that I am or am not a Buddhist, so I won’t, but I believe that the Zen approach to reality is among the most accurate. Most phenomena are empty. People tend weakly toward moral good, but circumstances can easily steer normal people toward lawful evil (Milgram Experiment) or even the chaotic kind (Stanford Prison Experiment). Theory X presumes a hostile human nature, as a slaveowner might. Theory Y presumes an altruistic one, leaving organizations unable to defend themselves against bad actors. Theory Z correctly concludes the human default to be localism  but settles prematurely for mediocrity and cargo-cult teamism. None of these are well-equipped to tackle the needs of the technological era, in which the fast rate of growth and change necessitate unlocking creative energies, while a certain caution is needed regarding those who might wish to subvert the organization, or gain inappropriate dominance over it.

Theory Z gets what Y did not– that there are “toxic” bad actors out there that the organization must reject– but takes a stupidly teamist approach. People aren’t fired from Theory-Z organizations because they’re harmful, bad people, but because they’re “not a team player”. The effort is almost never exerted to assess alternative possibilities to individual defect, such as (a) a defective or poorly-configured team, (b) bad management, or (c) no-fault lack-of-fit. All of these are more common than the extremely damaging but rare toxic individual.

In the convex world, creative output isn’t going to come from “teams”, at least not in the managerial sense where the teammates have little control over membership and organization, and in which “team” is conflated with “career goals of the manager”. (Note: a manager who says “not a team player” is actually saying, “not a me player”.)  Theory-Z management tries to control human localism, corralling people together and saying, “Be a team, now!” That doesn’t work very well. Rather, the creative energies that can produce technological-era progress come from individuals who sometimes choose to form teams, and sometimes to work alone.

Why is Theory Z just as foolish as X and Y? X and Y inaccurately claim “human nature” to have a strong directional bias toward self-serving egoism or pro-organizational altruism. It does not. Theory Z maintains a belief in “human nature” and assumes it to be inflexibly localist, because that’s an observed default. I maintain that “human nature” is pretty damn empty. People are mutable. Don’t settle for bland localism; you’ll get pointless institutions that way. People can be very good; try to make it happen. They can also be very evil; try not to have that happen. They will sometimes form teams; that is fine. They will sometimes work alone; that is also fine. Judge people on their actions and not assumptions about some “nature” that is illegible at best and nonexistent at worst.

How does one convert this into an actionable management style? Lord Acton said it very well:

Judge talent at its best and character at its worst.

Theory X fails because it allows no room for excellence (talent at its best). Theory Y fails to account for bad actors (character at its worst). Theory Z throws its hands up in the air and mediocritizes: let’s all just get along and be a team. How do we assess talent or character? The truth is that we can’t; we can only look at peoples’ actions. In practice, this usually gives us enough data. If people show even the potential for excellence, that should be explored and encouraged. On the other hand, it should be very rare (if ever?) that a person is presumed to have good character and given more power over others than is absolutely necessary. So I actually nailed it, already, above. Here is an upgrade of Theory Y that is more robust against problematic people:

Theory A: trust employees with their own time and energy; distrust those who want to control others’.

That is where I’ll stop for today.

Originally, I had intended the 9th part to be the one in which I solve this damn thing for good. Unfortunately, as that “9th post” crossed into 12 kiloword territory, I realized that I needed to break it up a bit. Even for me, that’s long. So I had to tear some stuff out and split this “final post” yet again. So here’s the 9th chapter in this ongoing lurid saga. (See: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8). I am really trying to wrap this fucker up so I can get my life back, but I’m not going to solve it just yet… there are a few more core concepts I must address. Today’s topic, however, is convexity.

What is convexity?

Convexity pertains to the question: which is more important, the difference between excellent work and mediocre work, or that between mediocre work and noncompliance (zero)? For concave work, the latter is more important: just getting the job done is what matters, and qualitative concerns are minimal. For convex work, the difference between excellence and mediocrity is substantial and that between mediocrity and failure is small.

The theoretical basis for this is the logistic function, or “S-curve”, which is convex at its left side (looking exponential at y << 0.5) and concave on the right, as it approaches a horizontal asymptote (saturation point). Model input as a numerical variable i pertaining to resources, skill, talent, or effort. Then model task output as having a maximal yield Y, and the function Y * p(i) where p is a logistic function with range (0, 1) representing the proportion of maximum possible yield that is captured. Now, the inflection point (switch-over from convexity to concavity) is exactly where p(i) = 0.5. Taken in full, this logistic function is neither concave or convex. Yet, for most economic problems, the relevant band of the input range is narrow and is mostly on one side of the inflection point or the other. We can classify tasks as convex or concave based on what we know about the performance of the average.

To get concrete about it, consider exams in most schools. A failing student might be able to answer 60% of the questions right; an average one gets 80%, and the good ones get 90%. That’s a concave world. The questions are easy, and one needs to get almost all of them right to distinguish oneself. On the other hand, a math researcher would be thrilled to solve 50% of the (much harder) problems she confronts. With concave work, the success or completion rates tend to be high because the tasks are easy. With convex work, they’re low because the tasks are hard. What makes convex work worth doing is that, often, the potential yield is much higher. If the task is concave, it’s been commoditized, and it’ll be hard to make a profit by doing it. Even 100% completion will yield only marginal profits. If the work is convex, the most successful players can generate outsized returns. It may not be clear even what the upper limit (the definition of “100%”) is.

Convexity and management

Consider the following payoff structures for two tasks, A and B. A is concave; B is convex, and 0 to 4 represent degrees of success.

| Performance | A Payoff | B Payoff | Q dist | R dist |
-------------------------------------------------------
| 4 (Superb)  |      125 |      500 |  20.0% |   0.0% |
| 3 (Good)    |      120 |      250 |  20.0% |  20.0% |
| 2 (Fair)    |      100 |      100 |  20.0% |  60.0% |
| 1 (Poor)    |       60 |       25 |  20.0% |  20.0% |
| 0 (Awful)   |        0 |        0 |  20.0% |   0.0% |
-------------------------------------------------------


Further, let’s assume there are two management strategies, Q and R. Under Q, the workforce will be uniformly distributed among the five tiers of performance: 20% in each. Under R, 20% each of the workforce will fall into Good and Poor, 60% into the Fair tier, and none into the Superb or Awful tiers. R is variance-reducing managerial strategy. It brings people in toward the middle. The goal, here is to maximize bulk productivity, and we assume we have enough workers that we can use the expected payoff as a proxy for that.

For Job A, which is concave, management strategy Q produces an output-per-worker of 81, while R yields 96. The variance-reducing strategy, R, is the right one, yielding 15 points more. For example, bringing up the worst slackers (from 0 to 60) delivers more benefit than pulling down the top players (from 125 to 120).

For Job B, which is convex, strategy Q gives us an average yield of 165, while R delivers only 105– 60 points less. The variance-reducing strategy fails. We see more of a drop in pulling down the best people (from 500 to 250) than we gain in hauling the laggards (o to 25).

In short, when the work is concave, variance is your enemy and reducing it increases expected yield. When the work is convex, variance is your friend; more risk means more yield. 

The above may seem disconnected from the problems of the MacLeod organization, but it’s not. MacLeod organizations are based on variance-reduction management strategies, which have worked overwhelmingly well over the past 200 years of concave, industrial-era labor. MacLeod Losers naturally desire familiarity, uniformity, and stability. They want variance to be reduced and will give up autonomy to have that. MacLeod Clueless (middle managers) take on the job of reducing variance in conditions for the Losers below them, and reducing volatility in performance for the Sociopaths above. Their job is to homogenize and control, and they do it well. It doesn’t require vision or strategy. MacLeod Sociopaths start out as the “heroic” risk-takers (entrepreneurs) but that caste often evolves (as especially as transplant executives come in) into a cushy rent-seeking class as the organization matures (necessitating the obfuscation enabled by the Clueless and the Effort Thermocline). The Sociopath category itself becomes risk-averse, out of each established individual’s desire to protect organizational position. The result is an organization that is very good at reducing variance and stifling individuality, but incapable of innovation. How do we come back from that?

In the concave world, the failures of the MacLeod organization were tolerable. Businesses didn’t need to generate new ideas. They needed to turn existing, semi-fresh ones into repeatable processes, and motivate large groups of people to carry out difficult but mostly simple functions. Variance-reduction was desired and encouraged. Only in the past few decades, with the industrial era fading and the technological one coming on, has there been a need for business to have in-house creative capacity.

Old-style organizations: the optimization model

The convex/concave discussion above assumes one dimension of input (pertaining to how good an individual is at a job) and one of output (observed productivity). In truth, a more accurate model of an organization’s performance would have a interconnected network of such “S-curve” functions for the relationships between various variables, many of which are hidden. There’d be a few input variables (“business variables”) and the things the company cares about (profit, reputation, organizational health) would be outputs, but most of the cause-and-effect relationships are hidden. Wages affect morale, which affects performance, which affects productivity, which affects the firm’s profits, which is its performance function. With all of the dimensions that could be considered, this function might be very convoluted, and while it is held to exist “platonically” it is not known in its entirety. The actual function relating controllable business variables to performance is illegible (due to hidden variables) and certainly not perfectly concave or convex.

So how does the firm find an optimal solution for a problem it faces?

This gets into an area of math called optimization, and I’m not going to be able to do it justice, so I’ll just address it in a hand-wavy way. First, imagine a two-dimensional space (if only because it’s hard to visualize more) where each point has an associated value, creating a 3-dimensional graph surface. We want to find the “highest point”. If that surface is globally concave, like an inverted bowl, that’s very easy, because there can only be one maximum. We can start from any point and “hill climb”: assess the local gradient, step in the most favorable dimension. We’ll end up at the highest point. However, the more convoluted our surface is, the harder the optimization problem. If we pick a bad starting point on a convoluted surface, we might end up somewhere sub-optimal. Thinking of it in topographical terms, a “hill climb” from most places won’t lead to the top of Mount Everest, but to the neighborhood’s highest hill. In other words, the “starting point” matters if the surface is convoluted.

Real optimization problems usually involve more than two dimensions. It is obviously not the case that organizations perform optimizations over all possible values of all possible business variables (of which there are an infinite number). Additionally, the performance function changes over time. As a metaphor, however, for the profit-maximizing industrial corporation, it’s surprisingly useful. One part of what it must do is pick a good “starting point” for the state of the business, a question of “What should this company be?” That requires non-local insight. Another part is the iterative process of refinement and hill-climbing once that initial point is selected.

This leads to the three-tier organization. People who are needed for commodity labor but not trusted, at all, to affect business variables are mere workers. Managers perform the iterative hill-climb and find the highest point in the neighborhood. In startup terms, they “iterate”. Executives, whose job is to choose starting points, also have the right to make non-local “jumps” in business state if needed. In startup terminology, they “pivot”.

The MacLeod organization gets along well with this computational model of the organization. MacLeod Losers are mediocre in dedication, but that’s fine. That aspect of them is treated as a hidden variable that can be modulated via compensation (carrots) or managerial attention (sticks). In the optimization model, they’re just infrastructure– human resources in the true sense of the word. The fault of MacLeod Clueless is that they aren’t strategic, but they don’t need to be. Since their job is just to climb a hill, they don’t need to worry about non-local “vision” concerns such as whether they’re climbing the right hill. That’s for someone else to worry about. They just assess the local gradient and move in the steepest upward direction. Finally, there are the MacLeod Sociopaths, whose goal is to be strategic and have non-local insight. Being successful at that usually requires a high quality of information, and people don’t get that stuff by following the rules. The source could be illegal (industrial espionage) or chaotic (experimental approaches to social interaction) or merely insubordinate (a programmer learning new technologies on “company time”) but it’s almost always transgressive. The MacLeod Sociopath’s ability to get information confers more benefit, in an executive position, than the negatives associated with that category.

Why the optimization model breaks down

In the model above, there is some finite and well-specified set of business variables. The real world is much more unruly. In truth, there are an infinite number of dimensions. Two things make this more tractable. The first is sparsity. Most dimensions don’t matter. For example, model “product concern” as a vector representing the products that a company might make (1.0 meaning “it’s the only thing we care about”, 0 meaning “not interested at all”). Assume there are 387 trillion possible conceivable products that a firm could create. That’s 387 trillion business variables; 386.99999…+ trillion of those entries are always going to be zero (excepting a major pivot) and can be thrown out of the analysis. Second is aggregation. For personnel, one could have a variable for each of the world’s 7.1 billion people (again, most being zero for ‘not working here’) but most companies just care about a few things, like how many people they employ and how much they cost. Headcount and budget are the important business variables. Whether John A. Smith, 35, of Flint, Michigan is employed at the company (i.e. one of those 7.1 billion personal variables) isn’t that relevant for most values of John A. Smith, so executives need not concern themselves with it.

Even still, modern companies have thousands to millions of business variables that matter to them. That’s more information than a single person can process. Then there is the matter of what variables might matter (unknown unknowns). If the optimization problem were simple, the company would only need one executive to call out starting points, but these information issues mandate a larger team. The computation that the organization exists to perform must be distributed. It can’t fit on one “node” (i.e. one person’s head). That also mandates that this massively high-dimensional optimization problem be broken down as well. (I’m ignoring the reality, which is that most people in business don’t “compute” at all, and that many decisions are made on hunches rather than data.)

As far as many dimensions are separable (that is, they aren’t expected to interact, so the best values for each can be found in separation) the problem can be decomposed by splitting it into subproblems and solving each in isolation. Executives take the most important business variables where it is most likely that non-local jumps will be needed, such as whether to lay off 15% of the workforce. The less important ones (like whether to fire John A. Smith) are tackled by managers. Workers don’t participate in the problem-solving; they’re just machines.

This evolves from an optimization model where business variables and performance functions are presumed to exist platonically, to a distributed agent-based model operated by local problem-solving agents. This is a more accurate model of what actually happens in the corporation, made further amusing by the fact that the agents often have diverging personal objective functions. Centralized computation is no longer the most important force in the company; it’s communication between the nodes (people).

Here’s where MacLeod comes in to the agent-based model. MacLeod Losers consume information and turn it into work. That’s all they’re expected to do, and ideally the only thing that should be coming back is one word: done. MacLeod Clueless furnish information up and down the food chain, non-editorially because they aren’t strategic enough to turn it into power. They tell the Losers what to do, and the Sociopaths what was done, and they aren’t much of a filter. The only information they take in, in general, is what information others want from them. The MacLeod Sociopaths are strategic givers and takers of information, and (having their own agendas) they are selective in what they transmit. Organizations actually need such people in order to protect the top decision-makers from “information overload”. It’s largely the bottom-tier Sociopaths who participate in dimensionality reduction and aggregation, so they’re absolutely vital; however, they make sure to use whatever editorial sway they have toward their own benefit.

Optimization and convexity

The actual performance function of a company, in terms of its business variables, is quite convoluted. It’s generally concave in a neighborhood (enabling managers to find the “local hill”) but its global structure is not, necessitating the non-local jumping afforded to executives. The underlying structure, as I said earlier, is driven by an inordinate number of hidden variables. It might be best thought of as a neural network of S-curve functions (“perceptrons”) wherein there are elements of concavity and convexity, often interacting in strange ways. It’s not possible for anyone to ascertain what a specific organization’s underlying network looks like exactly. The overall relationship between business variables (inputs) and performance (output) is not going to be purely concave or convex. The best one can hope for is a well-chosen initial point in which the neighborhood is concave.

For typical organizations and most people in them, concavity has a lot of nice properties. For one thing, it tends toward fairness. Allocation of resources to varying parties, if the input/output relationships are concave, is likely to favor an “interior” solution– everyone gets some– because marginal returns diminish as the resource is allocated to richer people. If the input/output relationship is convex, resource allocation can favor an “edge” solution where one party gets everything and the rest get none, which tends to exacerbate the “power law” distributions associated with social inequalities: a few (who seem the most capable of turning those resources into value) get much, most get little or nothing. Another benefit of concavity is that performance relative to a standard can be measured. At concave work, the maximum sustainable output is typically well-studied and known, and acceptable error rates can be defined. With convex work, no one knows what’s possible. Once a maximum is established and can be reliably attained, the task is likely to become concave (as people develop the skills to perform it successfully more than 50% of the time). Research is inherently convex: most things explored don’t pan out, but those that do deliver major benefit. When those explorations lead to repeatable processes that can be carried out by people of average motivation and talent, that’s concave, commodity work.

MacLeod organizations exist as a risk trade between those who want to be protected from the vagaries of the market, so creating islands of concavity and easiness is kind of what they do. The Big World Out There is a place with many pockets of convexity, plenty of bad local maxima, and a difficult and mostly unexplored landscape. The MacLeod organization provides its lower-level workers with access to an already-explored and safe concave hill neighborhood. Executives read maps and find start points. Managers just follow the steepest gradient up to the top, and workers just have to follow and carry the manager’s stuff.

Technology and change

There’s a problem with concave work. It tends to be commoditized, making it hard to get substantial profits on it. If “100% performance” can truly be defined and specified, then it can also be achieved mechanically. Not only are the margins low, but machines are just better at it than humans: they’re cheaper, don’t need breaks, and don’t make as many mistakes. Robots are taking over the concave work, leaving us with convexity.

We cannot compete with robots on concave work. We’ll need to let them have it.

Software engineering is notoriously convex. First of all, excellent software engineers are 5 to 100 times more productive than average ones, a phenomenon known as the “10X engineer”. As is typical of convex projects, most software projects fail– probably over 80 percent deliver negative net value– but the payoffs of the successes are massive. This is even more the case in the VC-funded startup ecosystem, where companies that seem to show potential for runaway success are sped along, the laggards being shot and killed. In a convex world, that’s how you allocate resources and attention: focus on the winners, starve the losers.

Convexity actually makes for a very frustrating ecosystem. While convex work is a lot more “fun” because of the upside potential and the challenge, it’s not a great way to make a living. Most software engineers get to age 30 with no successful projects (most of this being not their fault) under their belt, no credibility on account of that series of ill-fated projects, and mediocre financial results (even if they had successes). Managing convex work, and compensating it fairly, are not things that we have a society have figured out how to do. For the past 200 years– the industrial era, as opposed to the technological one that is coming on– we haven’t needed to do it. Almost all human labor was concave. What little convex work existed was generally oriented toward standardizing processes so as to make 99.9% of the organization’s labor pool concave. We are now moving toward an economy where enormous amounts of work are done by machines, practically for free, leaving only convex, creatively taxing work.

The fate of the MacLeod organization

MacLeod organizations, over the past 200 years, could perform well. They weren’t great at innovation; they didn’t need it. They got the job done. One of the virtues of the corporation was its ability to function as a machine made out of people. It would render services and products not only at more scale, but much more reliably, than individual people could do. The industrial corporation co-evolved with the failings of each tier of the MacLeod organization, hence converging on the “optimization model” above that uses the traits of each to its benefit. Of course, I do not mean to suggest that these “computations” are performed in reality, but the metaphor works quite well. 

The modern technological economy has created problems for that style of organization, however. Microeconomic models tend to focus on a small number of business variables– price points, quantity produced, wages. Current-day challenges require thousands, often ill-defined. What product is one going to build? What kind of people should be hired? What kind of culture should the company strive toward, and how will it enforce those ideals? Those things matter a lot more in the technological economy. Hidden variables that could once be ignored are now crucial, and industrial-era management is falling flat. Combine this with the convexity of input/output relationships regarding individual talent, effort, and motivation, and we have a dramatically different world.

The islands of concavity that MacLeod organizations can create for their Losers and Clueless are getting smaller by the year. The ability to protect the risk-averse from the Big World Out There is diminishing. MacLeod Sociopaths were never especially scrupulous about keeping that implicit promise, but now they can’t.

Even individuals now have to make non-local (formerly executive-level) decisions. For a concrete example, consider education. The generalist education implicitly assumes that most people will have a concave relationship between their amount of knowledge in an area and utility they get from it. It’s vitally important, as most educational institutions see it, for one to first get a mediocre amount of knowledge about a lot of subjects. (I agree, for non-economic reasons. How can a person know what is interesting without having a wide survey of knowledge? A mediocre knowledge gives you enough to determine if you want to know more; with no knowledge, you have no clue.) However, there’s no such thing as a Generalist job description. The market doesn’t reward a breadth of mediocre knowledge. People need to specialize. In 1950, having a college degree bought a person credibility as someone capable of learning quickly, thus entry into the managerial, professional, or academic ranks. (Specialization could begin on the job.) By 1985, one needed a marketable major: preferably, math, CS, or a physical science. In 2013, what classes a person took (compilers? machine learning?) is highly relevant. The convex valuation of a knowledge base makes deep knowledge in one area more valuable than a broader, shallower knowledge. Choosing and changing specialties is also a non-local process. A well-rounded generalist can move about the interior by gradually shifting attention. The changing specialist must jump from one “pointy” position to another– and hope it’s a good place to be.

In technology especially, we’re seeing an explosion of dimensionality. General competence doesn’t cut it anymore. Firms aren’t willing to hire “overall good” people who might take 6 months to learn their technology stacks, and the most credible job candidates don’t want to pin their careers on companies that don’t strongly correspond with their (sometimes idiosyncratic) preferences. When there’s a bilateral matching problem (e.g. dating) it usually has something to do with dimensionality. Both sides of the market are “purple squirrel hunting”.

This proliferation of dimensionality isn’t sustainable, of course. One thing I’ve come to believe is that it has an onerous effect on real estate prices. That might seem bizarre, but the “star cities” are the only places that tolerate purple squirrel hunting. If you’re a startup that wants a Python/Scala/C++ expert with production experience in 4 NoSQL products and two PhDs, you can find her in the Bay Area. For some price, she’s out there. That’s not because the people in the Bay Area are better; it’s that, with more of them, you get a continuous (it’s available at some price) rather than discrete (you might wait intolerably long and not find it) market for talent– and also for jobs, from a candidate’s perspective– even if you’re trying to fill some ridiculous purple squirrel specification. That’s what makes “tech hubs” (e.g. Bay Area, New York, Boston) so attractive– to candidates and companies both– and a major part of what keeps them so expensive. The continuous markets make high-risk business and job-hopping careers– that aren’t viable in smaller cities unless one wants to move or tolerate remote work– possible. Since real estate in these areas is reaching the point of being unaffordable for technology workers, I think it’s a fair call to say that this dimensionality explosion in technology won’t continue forever. However, convexity and high dimensionality in general are here to stay, and about to become the norm for the greater economy. The convexity introduced by an economic arrangement where an increasing bulk of commodity labor is dumped directly on machines has incredible upsides, and is very attractive. Now, in the late-industrial era, global economic growth is about 4-5 percent per year. In the thick of the technological era– a few decades from now– it could be over 10% per year.

If MacLeod rank cultures are going to become obsolete, what will replace them? That I do not know for sure, but I have some thoughts. The “optimization model” paints a world where the relevant business variables are known. Executives call out initial values (based on non-local knowledge) for a gradient ascent performed by managers. As the business world becomes high-dimensional– too many dimensions for any one person to handle them all– it begins to break down the problem and distribute the “computation” (again, solely in metaphor). High-ranking executives handle important dimensions (sub-problems) where tricky non-local jumps might be in order. Managers handle less-important ones where continuous modulation will do. Getting the communication topology right is tricky. Often the conceptual hierarchy that is created will look suspiciously like the organizational hierarchy (Conway’s Law?) This leads to an interesting question: is this hierarchy of people– which will limit the firm’s capacity to form proper conceptual hierarchies and solve its own problems– even necessary? Or is it better to have all eyes open on non-local, “visionary” questions? Is that a good idea? Organizations claim to want their employees to “act like owners”. Is that really true? With the immense complexity of the technological economy, and the increasing inability of centralized management to tackle convexity (one cannot force creative excellence or innovation by managerial fiat) it might have to be true.

Enter the self-executive. Self-executive people don’t think of themselves as subordinate employees, but as free agents. They don’t want to be told what to do. They want to excel. A manager who will guide one (mentorship) gets loyalty. However, typical exploitative managers get ignored, sabotaged, or humiliated. Self-executive employees are the ones who can handle convexity, and enjoy the risk and challenge of hard problems. They strongly toward chaos on the civil alignment spectrum. These are the people one will need in order to navigate a convex technological economy, and the self-executive culture is the one that will unleash their capabilities.

That said, the guild culture has a lot to add as well and should not be ignored. There’s a lot of lost work in exploration that can be eliminated by advice from a wise mentor (although if things change, as they do more rapidly these days, that “don’t go there” advice might sometimes be best discarded). The valuation of knowledge and skill are so strongly convex that there’s immense value generation in teaching. Not only should that not be ignored, but it’s going to become a critical component of the working culture. Companies that want loyalty are going to have to start teaching people again. Self-executives don’t work hard unless they believe they’re learning more on the work given to them than they would on their own– and these people tend to be fiercely autodidactic.

This brings us to the old quip. A VP tells his CEO that the company should invest more in its people, and he says, “What if we spend all that money training them and they leave?” The VP’s response: “what happens if we don’t and they stay?” That ends up looking like MacLeod rank culture over time. There’s a lot to be learned from guild culture, and when I finally Solve This Fucking Thing (Part 11? 12? 5764+23i?) I won’t be able to afford to overlook it.

I’ve posted a lot about organizations and their corrosion (See: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9). but there’s something that I realize I have not covered, and it’s one of the most important topics to address before attempting to solve the general organizational problem. What are we up against? What is it that makes organizations turn toward moral failure (tough culture) or extortive self-diminishment (rank culture)? What are the personal motivations of people who cause organizations to deteriorate? What are the natural forces that drive them? Why do they exist? What do they want?

I’ve discussed evil abstractly, but not what it looks like, or how it works. I mentioned that truly toxic people (Psychopaths) are superior at social competition without getting into what “social competition” is and why it tends to easily to evil, when other kinds of competition do not so commonly go that way. What is it about social competition that makes a certain alignment (lawful evil) so good at it? What is it that organizations do to fill their top ranks with the horrid people who give the MacLeod Sociopaths such a bad name?

Rank theory of depression

No one knows for sure, but I’ve suspected for a long time that the rank theory of depression is, at least, partially correct as an explanation of why the disorder exists. According to that hypothesis, the depression machinery (psychological “source code”) exists as a way of helping people adapt to low social status. Reduced libido and appetite, physical lethargy, and disinterest in social activity would conceivably be useful in helping a person survive low status in our evolutionary environment, in which status conflicts were a frequent cause of death among males. Of course, it would only confer an evolutionary benefit if it existed to handle transient social disadvantage. (In the long term, evolutionary fitness sees no difference between death and non-reproduction, so an organism would do better to fight permanent low status and risk death, than to accept it.) The moodiness associated with adolescence may tie into this: young men, not yet at their strongest, are presumably the most prone to the transient low status that mild depression helps a person survive.

The above being said, clinical depression– which is, to complicate things, probably a collection of diseases with similar symptoms rather than one illness–  is almost certainly a pathology of that system. Old code that is maladaptive in modern society is being called by inappropriate triggers (possibly biological malfunctions). The person might be reacting as if to low social status for no discernable social reason.

Rank theory, to me, seems to explain, for example, why exercise helps so much for mild depression. The brain takes bodily activity as a signal of a person’s social status. An active body means that one has been invited on the hunt and that tells the brain that its low-status response is inappropriate. A sedentary lifestyle means that one has fallen to low rank and is one of the less necessary and subordinate people, making semi-hibernation adaptive.

One piece of evidence weighing against rank theory is that it would predict depression to be more common in men– for whom, there was more variation in social status (for reproductive reasons) and a higher rate of positional violence– while it seems to be at least as common, if not moreso, in women. The reason I do not believe that justifies a challenge to rank theory is that I think there’s an extremely large amount of “code sharing” in the human brain between genders. If it took millions of years for that code to emerge through natural processes, one might expect nature to reuse as much as possible of the hard-to-make stuff that made humans intelligent. I don’t see any reason to believe there’s any gender-specific code. Certain pieces are called more often in men than women, and vice versa, but it seems to be all available to both. The rank-theoretic function of, at least, mild depression may have had the original purpose of keeping men alive during spells of transient low social status but, once it evolved, there was no reason it could not be triggered (especially by pathology) in women as well. We’ll get to a much more exciting case of code-sharing (from female evolutionary incentive to mostly male application) later on.

Good and evil

What are good and evil, in truth? Every religion or philosophy has a different stance on it, but one issue that it seems to get tied up with is the fact that there were two evolutionary pressures that were on our ancestors: r- and K-selection. The first, r-selection, favors rapid reproductive proliferation. This is seen in many of the lower animals, where a brood of hundreds of spawn is common, but only a few live. Parental investment is nonexistent or low. K-selection, however, favors quality: a smaller number of offspring, with each of them given high parental investment, with the hope of making them more successful.

Early in their evolution, human societies developed a tension between K-selective– monogamous, family-building, future-oriented, superego– lifestyles and r-selective– polygamous, harem-building, present-oriented, id-driven– behaviors. Among the more powerful men, there were the r-strategic “alpha” males who’d have harems and hundreds of offspring, with almost no paternal investment in any of them: lots of kids, most would fare poorly. Then there were the K-strategic “beta” males with small numbers of wives (one or two) and fewer children but who put high levels of investment in them. Finally, there were the omegas who had no wives, little or no access to sex, and a strong reproductive drive to positional violence to better their opportunities. Modern civilization began as the K-strategists took over and started laying rules to reduce positional violence: men didn’t covet others’ wives, murder was no longer acceptable, polygamy was discouraged. Monogamy encouraged paternal investment, and it also introduced stability due to the reduced rate of male positional violence, with fewer men being left sexless. It also was the first move toward gender equality. While not all women in monogamous marriages were well-treated (history tells us that a horrifying number weren’t) they were undeniably better off than in harems, where they were treated like livestock. A man who is going to have all of his children by one wife is going to have strong incentives to treat her well.

If it seems sexist that I am focusing on male status variance and polygyny only, that’s because there is, in nature, more cause for status variation in men, due to the reproductive bottleneck of the woman’s womb. Men can sire five hundred kids but women cannot. They have more reproductive upside. They also have more downside, since low-status men are judged to have nothing to offer (except unneeded sperm) and ignored or discarded by society. A woman has a womb, putting a higher floor on her reproductive value. So it was typically men who went to extremes in social status– and had evolutionary incentives for antisocial behavior.

Societies quickly learned the value of monogamy, even if no human group perfectly observed it. It reduced positional violence and, by requiring men to treat women better, led to healthier offspring. It made a world in which the most successful men took an interest in social justice and progress (to create a better world for their few children; “few”, here, meaning less than 20) rather than acquiring more wives. Much of our evolution was an arms race between the r-strategists and K-strategists within us. Religions defined the r-strategist as “evil”– irresponsible, dangerous, malicious– and the K-strategist became “good”.

Over time, we’ve developed a more mature understanding of this. Sexual activity is not the best way to assess moral decency. It was the dishonesty and violence associated with those powerful and promiscuous men that made them so toxic– not the sexual pattern only. There are good people who are sexually prolific, and evil people who are restrained or even abstinent. So it’s not especially useful, from a modern view, to overemphasize this dimension of morality over other, more important ones, like honesty, compassion, and altruism. Nonetheless, we’re aware of the fact that, for evolutionary reasons, there are two conflicting personalities that live within us. Most people have a mix of r- and K-strategic tendencies, due to the fact that both strategies played a role in our evolutionary history.

There is an adaptation that seems to shut down the K-strategic personality outright, although that person may conform to social norms (law) and observe traditionally K-strategic behaviors (monogamy, sexual restraint). Like a cancer cell, the person becomes more fit at the expense of the larger organism. We call this type of person a psychopath.

The less-severe sociopath is used to include, as well, chaotic people with conscience (good, neutral) but not the socially-induced superego. It’s also preferred in popular use because psychopath sounds like psychotic, while those categories of illness are quite dissimilar. The problem with the concept of the “sociopath” (one who is chaotic or evil) is that it lumps together types of people who could not be more different. When we finally solve “The Organizational Problem” (as if it were that easy) we’ll see that the battle between chaotic good and lawful evil (two opposite sets of people labelled “sociopaths”) is one of the most exciting conflicts.

Two kinds of psychopathy

Most people associate the word psychopath with a serial killer or common criminal living in social depravity, but those are the lower classes of psychopaths. The upper-class psychopaths are the white-collar criminals who rob companies for nine-figure sums and often get away with it. These are the people who ruin companies. To understand the latter category, we need to understand social competition and its evolutionary frame. It was born, I believe, in the harem.

A male psychopath (extreme r-strategist) in the prehistoric world had his work cut out for him– kill men, rape women, enslave children. One might expect that would should be (because of their reduced reproductive variance) K-strategists, but with code sharing, it’s quite likely that there will be females with the same impulse. How does she do it? How can a woman play the extreme r-selective game of the male psychopath? It’s biologically impossible for her to have 50 kids. In a typical pre-monogamous context, she has to do it in two generations. She needs to have a high-status, psychopathic, alpha-male son. How does she do that? It helps, but it’s not enough, for such a spawn to have an alpha father. As an r-strategist, he’s going to have a lot of progeny and most will be failures. She needs more than a high-status father, because that alpha’s throwing seed all over the place. How does she maximize her chances of her children being the ones who inherit that paternal status? She has to establish herself as the queen of the harem and the legitimate wife, so her children are heirs and the other womens’ are bastards. Within the harem is the birth of social competition.

This is a different sort of contest: a degrading and subordinate kind where the victor is chosen by an external agent. The high-status man needs to believe he is making the choice as to the favorite in his harem. From his perspective (and that of proto-Clueless women in the harem) it’s a beauty contest. He picks a favorite based on some measure of attractiveness that is presumably correlated with reproductive health. Of course, the more effective social competitors (proto-Sociopaths) know that it’s an easy contest to corrupt.

The would-be harem queen must engineer a situation in which she’s the most attractive. The psychopathic man kills rivals, but she can’t. As a means of tearing down a rival with more natural beauty (however it is defined) physical violence is out. The man views his harem as personal property and won’t accept it if one of the women in it starts harming or killing the others. He might punish her and, even if not, it won’t have the desired competitive effect. The hurt rival will then appear injured, not ugly or unhealthy. Recall what I said about depression and code-sharing: that process of adaptation to (temporary) low social status exists in both men and women. A would-be harem queen could win if she were to find a way to trigger this depression process inappropriately in her rivals. After she does so, these others (of superior natural beauty) will appear sick and weak (and therefore reproductively unfit) to the alpha male. So the aspiring harem queen would harass her rivals– especially more attractive ones– in order to inflict an invisible injury that the alpha-male judge would not see: induced depression. She’d continue until only her supporters remained. The alpha would then perceive her as the most beautiful, and choose her.

Thus emerged a second variety of psychopathy focused on social competition rather than violence. The old-style, violent sorts (chaotic evil) of psychopaths became the lower classes. They could be useful to an evil organization attempting to establish itself, but were too impulsive to be trusted to rule it. The socially competitive and dishonest ones (lawful evil) emerged. Of course, the code for socially competitive nastiness crossed genders quickly, if not immediately. Women do not have a monopoly on this sort of pernicious social competition. Men can do it, too. In the modern context, it seems to arise independent of gender. It’s just what psychopaths (male and female) do to climb social hierarchies.

The workplace

It should be obvious where I intend to go: the workplace.

The metaphor is strong. The harem queen competition is a degrading and subordinate “beauty contest” where “beauty” is assessed by an external agent– a dominant and brutal male who perceives the harem as his property. The corporate contest is a degrading and subordinate one where “performance” is assessed by external superiors called “management”. A would-be harem queen is only effective if she can trigger invisible mental injuries (depression, anxiety, motivational collapse) in her rivals that look like low reproductive fitness; otherwise, she’s found-out for being antisocial and destructive and will be punished or expelled. Analogously, a corporate social competitor is only effective if he or she can trigger invisible mental harm in rivals that looks like low performance; otherwise, he or she is found-out for being toxic and “political” and will often be terminated.

What makes corporations different is the recursive nature of the harem. At the ground level, the harem queen is the managerial favorite (“golden child” or ladyboy) and the “alpha male” is management, but that manager is often vying to be a harem queen within another harem. It’s harems all the way up to the executive suite. Who’s the “alpha male”? A pile of money. Kapital. An imaginary psychopath called “The Corporation”. This is not so far-fetched. Humans have been inventing imaginary psychopaths and using them to control other people for thousands of years.

The private-sector social climbers who claw their way to the tops of typical corporations are not “alpha males” as the Ayn Rand fantasy they have would suggest. Corporate strivers are emasculated harem queens. At least to the men among them, who are often insufferable in their machismo, it should be pointed out at every opportunity. (Minor nit: entrepreneurs aren’t “alpha” males or females in the pre-monogamous sense either. They’re beta. Why? Alphas are r-selective, present-oriented and consumptive; betas are the positive-sum, future-oriented productive people who built civilization.)

Companies often give a spiel about “accommodating depression”, but the truth is that for the bulk of companies– rank and especially tough cultures– this is impossible. Depression is a landmark feature of the “corporate ladder” competition that they use (because of a lack of vision) to evaluate their people. It’s a war of attrition, and depression is one of the most powerful agents of that. It cannot be accommodated; it would break the game. The context-specific, socially- or occupationally-induced mental illnesses– usually mild, but with paralyzing motivational consequences– that punctuate the corporate career, popularly known as “nervous breakdowns”, must exist in the corporate game. What’s the alternative? Letting everyone have a real career?

Technocrats want to change the game. They want to unleash creativity and improve processes so everyone wins. They don’t want their colleagues to become depressed and fail out to make space. True Psychopaths (social competitors) do want that. They’re made for a negative-sum war of attrition. Just as the would-be harem queen makes her more attractive rivals appear unhealthy via a campaign of harassment, corporate psychopaths turn more talented rivals into non-performers or social misfits through a campaign of discouragement, dishonesty, and sabotage.

MacLeod Losers just don’t want to have mental breakdowns– that’s understandable– so they avoid risk and discomfort. Their intentional restraint of dedication prevents them from reaching a level of emotional investment in the organization where its volatility could effect their mental health. They stay out of the worst social competition and generally avoid getting hit with anything that would ruin a career. The Clueless cope by finding or creating a “reality distortion field” that protects them from induced depression and, additionally, encourages them to want things that don’t actually matter (and thus, for which there is not much competition). Psychopaths have a natural skill at social competition; it’s natural to them. Lack of conscience and adeptness at social competition have a million-year-old genetic correlation. It’s the Technocrats, who want to end the zero-sum social competitions of yesteryear, who are most exposed.

Cultural dysfunction

Corporate macroscopic evil (Xe/Blackwater, U.S. health insurance) is notorious but rare. Very few corporations exist for evil purposes; most are macroscopically neutral on the moral scale and, while insistent on their own law, macroscopically neutral on the civil scale as well. My exposition has been all about the internal moral and civil character of organizations, that tends to emerge despite the “true neutral” macro-alignment of an organization as it relates to society. Rank cultures (MacLeod-style bureaucratic dysfunction) are lawful evil. Tough cultures (sink-or-swim, Enron-style cultures) are chaotic evil. Guild cultures (progressively conservative, with symbiotic hierarchy) are lawful good. Self-executive cultures (Valve-style open allocation) are chaotic good.

Previously, I was hand-waving with terms like “negative sum” or “egoism”, but now we have a firm understanding of what drives most internal corporate evil: social competition designed to interfere with performance. Inducing depression, anxiety, or loss of motivation in more talented rivals is one of the most powerful tools in the social warrior’s arsenal. Now we know why MacLeod organizations are so goddamn depressing: for the same reason that compost heaps are hot. The stuff is generated everywhere.

Lawful evil wants to dominate while chaotic evil likes to destroy. So the purpose of induced depression is different in a rank versus tough culture. In both cases, the means of warfare is to load someone with unnecessary, counterproductive stress until that person breaks, then rationalize that person after-the-fact as being “not a team player” (rank culture) or “a piker” (tough culture). The difference is that, in rank culture, the person need only submit and the induced-depression campaign stops. In tough culture, the attacker won’t stop until the target’s performance has dropped so low as to drive the person out of the company.

This micro-character may emerge in spite of the organizational macro-alignment. For example, while tough culture is an emergence of chaotic evil, most tough-culture executives see themselves as neutral. Like pre-monogamous alpha males, they think they’re objective and infallible judges of the beauty contest, capable of assessing and rewarding “performance”, but the beauty/performance they are able to see is the outcome of a attritive social war that has already happened; the harem queens (“top performers”) have already been determined– the people who were most ruthless in that prior social war, not those with the most actual merit.

From a macroscopic perspective, tough cultures actually perform badly. People do a lot of busy work, but the error rate becomes intolerable and the vision is lost as power shifts to the (non-strategic) people with the strongest reality distortion fields, and to the antisocial players at the top, who loot and rob the organization. The chaotic good who might stand up to a rising tide of evil in the organization are long gone by that point. It turns out that an epidemic of unnecessary depression and anxiety is not good for business; who would have guessed?

Rank cultures, into which tough cultures evolve when let to their own devices, tend to be less radical and quick in their toxicity. What happens after a while as vicious but rationally repressive systems stabilize is that the punishment (induced depression) is replaced with the threat thereof. Instead of actually creating a hostile situation that will interfere with performance and induce illness, only the capability to do so is needed. The gun is waved but never fired. Tough cultures actively induce anxiety, which becomes depression. Rank cultures are just uninspiring, from inside and without. Over time, the rank-culture organization becomes so inefficient that it’s not even good at being evil.

That internal currency that companies create called credibility plays a role. You need credibility to get anything done that involves other people and, in the contemporary Theory-Z (teamist) environment, a lone actor can’t accomplish much of anything. Because low credibility makes it impossible to get anything useful done, it’s demoralizing and humiliating. Credibility reductions are a great way to engage in the social warfare that comprises the vast majority of any company’s internal evil. If there is no credibility floor, evil is at an advantage.

Guild cultures account for future potential in assessing credibility and thus create a floor for a diligent student. One can escape from social warfare, hit the books and get better at one’s craft. It’s safe in the library. Self-executive cultures have a more fluid, market mechanic for operations but recognize markets as short-term noisy and only eventually consistent, so they assess a basic minimum credibility to individuals, even if ruthlessly killing off failed ideas. Tough cultures do not have a credibility floor. One can fall all the way to zero due to unpredictable fluctuations. A worthy player can be killed by the dice. Psychopaths love tough cultures. They figure out how the damn thing works and load the dice. Rank cultures emerge out of tough cultures because, when there is no credibility floor, most people (MacLeod Losers especially) prefer the comfort of a dictatorial, extortionate manager who can unilaterally ruin them, but won’t do so if certain easy-to-fulfill conditions are met, over a capricious market that has no rules and might kill them off “at random”. Who is it that profits most from that change? Lawful (and neutral) evil psychopaths, whose network of extortions and alliances will hamstring the chaotic evil tough culture and form the next generation’s rank culture.

Now, we’re more equipped to assess concept of good, evil, law, and chaos as we attempt to attack the MacLeod Problem. We have a much stronger sense of what evil, in this context, is. We have a better sense of what we’re up against. Now we can focus on the ultimate chaotic-good Technocrat’s problem: taking these parasitic, social-climbing harem queen bitches (that term used gender-neutrally, most of our adversaries being men) down for good.

I discussed recently the process of social competition that enables the lawful evil to succeed in large corporations. That’s one of their two main weapons. The other one (existential fear) requires a more through exposition of the career trajectories most common for each alignment. I’m going to focus on each of the nine possible alignments.

Values

Between extremes of altruism and egoism is what most people are: localist, with concern for others being highest regarding those who are close to them and being low (to zero) at the periphery. Good people are oriented toward expensive altruism. If they’re honest, they’ll acknowledge that they are localist, too, for practical and biological reasons. However, they try to extend basic concern for others’ welfare to the universal scope: all humans, possibly all living beings. They aren’t perfectly universalist, but they try. Morally neutral people tend to favor pragmatic localism. How far can one reach, really? They tend to step away from the Golden Rule: can one really know another’s tastes? Should one really care, when there is work to be done? Therefore, moral neutrality steps away from idealistic or normative concerns and toward functional ones: does it work? Evil is militant localism such as racism, jingoism, or classism. While sadism and egoism– a locality of one– can be (and often are) components of evil, they’re not required. It wasn’t egoism but militant racism and statism (that is, belligerent localism) that motivated the totalitarian Axis powers in World War II.

While good values good, the same is not true of evil. Evil despises good, which it views as weakness, but does not hold other evil in any regard; it values strength only. Good values compassion and kindess and judges institutions based on how much good they deliver to others. Moral neutrality values competence and efficiency and assesses organizations based on how well they meet their purposes, as long as those are not evil. Evil values power, the aggrandizement of its chosen locality, and the overwhelming subordination or defeat of everything else.

Civil bias (law vs. chaos) tends to come down to two questions: an individual’s preferred means, and how he or she tends to view organizations. Lawful people tend to favor tradition and, so far as they accept change, they prefer to interpret old rulings for new circumstances. Civilly neutral favor evolutionary progress: small steps when possible, large steps when needed. Chaotic people favor revolutionary change. Lawful good people view institutions as more just and honorable than the people who comprise them, while chaotic good view them as corrupt and self-serving, even if the individual people are good. Lawful neutral people see institutions as reliable and competent machines that are more than the sum of their parts. Chaotic neutral people see them as stifling and ineffective wastes of talent. Finally, lawful evil view organizations as strong and as a means to extend one’s power. Chaotic evil see organizations as weak and disempowering.

Careers of each

1. Lawful Good

All of us is the best us.

Lawful good, in the corporate context, tends to be the “team-builder” alignment. Such people never want to fire anyone (except law-breakers). Those who are lawful good expect organizations to live up to their lofty principles, and are continually surprised and disgusted when they fail. Despite stereotype, such people are not always dogmatic rule-followers. A lawful civil bias means that one tends to favor institutions as a default; not that one continues to favor those that prove ineffective or malicious.

In fact, it’s often a lawful good person who engages in one of the most feared forms of adversity to an organization: whistle-blowing. When such a person perceives that an organization is being evil in a way that is contrary to outside law, she exposes the fact. Moral bearing is stronger than civil bias, since even the most civilly biased (lawful or chaotic) person knows there are exceptional institutions that deserve special treatment.

Lawful good people tend to be honest to a fault. They prefer public discussion over private subversion. No one should be excluded. They’re often a very predictable alignment, and this weakens them in corporate competition. They want to do the right thing, but will often take direction from power and tradition on what that is.

In rank cultures, lawful good tend toward team-serving localism. They won’t try to upset an unethical manager, but will try to do well by the people around them. They are eager to please and to perform, so they tend toward middle management (MacLeod Clueless) in such organizations. In (chaotic evil) tough cultures, they look for ways to protect people, but often leave themselves exposed and are shot down by competitors. They get flushed out. Lawful good thrive in guild cultures– the epitome of lawful good– with clear expectations and definitions of progress. In self-executive cultures, they can do well as mentors and team builders, but they tend to wish for more guidance.

Lawful Good
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | V. High |
Manager      | High    | V. High |
Executive    | Low     | Medium  |
----------------------------------


2. Lawful Neutral

Who are we to question those who came before us?

To the organization, the lawful neutral person is an ideal middle manager. The lawful good might turn disloyal in the face of evil, while lawful evil turn treacherous on a whiff of weakness. Lawful neutral tend to be the “useful idiots” who have no strong moral compass, but a preference for order. They can be altruistic, but usually in the form of providing stability and comfort to those below and diligence to those above them. They like to participate in the upkeep of the organization.

Where lawful neutrality becomes potentially limited is in the face of multiple definitions of “law”. Most organizations want people to be lawful with regard to their own laws, and neutral with regard to those that the outside world expects the organization to obey– fluent enough to disobey them when it’s advantageous. With their strong lawful bias, lawful neutral people rarely have the fluidity to be desirable as executives, because those jobs require a willingness to depart from tradition and expectations. So they tend also to end up in middle management (MacLeod Clueless) where they can be relied upon by those above them for good or bad.

In rank cultures, lawful neutral people tend toward conformity but above-average performance. In tough cultures, they are often flustered and disgusted by the breach of rules by the most successful, but may not do anything about it. They tend to perform well in guild cultures, and to struggle in self-executive cultures. Lawful good and lawful evil find themselves without direction in self-executive culture but can make their own: lawful good will try to assist and mentor others, while lawful evil will attempt to set themselves up, informally at first, as power-holders. Lawful neutral people are left with no idea of what to do.

Lawful Neutral
Rank/Fitness | To Rise | To Keep |

----------------------------------
Subordinate  |         | V. High |
Manager      | V. High | V. High |
Executive    | V. Low  | Medium  |
----------------------------------


3. Lawful Evil

A place for all: the bottom for the weak, the grave for those who oppose me. 

Lawful evil is an alignment, within a corporation, that is surprisingly fit. Such people are institutionally ambitious, because they equate organizational position with strength and seek it. The other lawful alignments can find self-esteem in lower levels of an organization, and in filling a role well. Lawful evil typically has a genuine desire for the organization to be macroscopically successful, and will avoid hurting it, but views the company’s interior as ripe for plunder. Damaging it is bad; its people are fair game. Lawful evil will tolerate a subordinate position if it suits certain strategic goals, but ultimately seeks localistic dominance of some sort: either the organization’s conquest of the outside world, or personal domination of the organization. Like lawful good and neutral, lawful evil can be a team-building alignment, but only out of the need to win supporters.

Of the alignments, lawful evil comes closest to our associations with psychopathy. Neutral evil can be worse because it is more unpredictable and fluid. However, it tends to be less ambitious, leaving the lawful variety the strongest force of organizational corrosion.

We are now prepared to discuss the second organizational weapon of lawful evil, the first (covered in Part 10) being social competition, at which psychopaths excel. The second is existential fear. I’m not talking about real existential risks, so much as the social currency of existential risk. “We won’t be able to [X] unless [Y].” There are a lot of code words that come into play here. Deliver, used intransitively, is a great one. ”We won’t be able to deliver if…”. Lawful evil does not enjoy conflict; it wants its ideas to seem inevitable. Lawful evil discovers quickly what an organization perceives as its existential risks, and uses those to expand the network of feared possibilities in order to get what it wants by making the alternative seem terrifying. If lawful evil wants to set up a tough culture (that it can exploit for rank) for example, it will use a zombie invasion of “low performers” to justify a “5% must die” annual witch-hunt. Existential fearmongering is an especial problem for startups, where there are real existential risks that the company faces.

It is in the face of perceived existential risks that companies abandon their culture, ethics, and decency. We won’t be a real concern unless we hire executives. To hire executives, we must sell off employee autonomy. The problem is that businesses, especially when starting out, do have real existential issues. There are deadlines that must be met and deliverables that must be provided. The problem is that lawful evil is great at manipulating existential fear.

Lawful evil tends to excel in rank cultures, which are the epitome of that alignment. In tough cultures, lawful evil engages with and builds a network of bribes and extortions enabling it to subvert the performance assessment process, while making sure not to do anything where there’s any risk of getting caught– it deceives organizations but, being lawful, still respects them (or, at least, the power they have). Lawful evil finds guild cultures convenient but will make sure not to fulfill any guild-culture promises unless it’s individually beneficial. In self-executive cultures, lawful evil will attempt to set up social competition and create a tough culture that it can then manipulate for rank.

Lawful Evil
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | Medium  |
Manager      | High    | High    |
Executive    | High    | V. High |
----------------------------------

4. Neutral Good

We ought to do the right thing.

Neutral good, being free of civil bias, will work with or against powerful institutions. Its civil fluidity tends to keep it from falling into institutional traps or bad trades, as there isn’t a strong loyalism to it, but also permits it to work with established players that chaotic good would find distasteful. Neutral good will tolerate an institution in accord with its conscience, but will rarely put forth above-normal effort for its upkeep except when under a belief that it’s a good organization.

Mostly, neutral good is tolerant of subordination as long as it isn’t asked to do something it considers evil. Lawful people want to rise within organizations to get the validation of an important position. Chaotic people want to change them (into something they find acceptable) or destroy them. Neutral people don’t care, any more than they expect the organization to care. They will take responsibility if it is given to them, but not seek it.

Neutral good people tend to accept rank cultures as the default and are not surprised or shocked to find out that that’s what most companies are. As long as they aren’t asked to do something evil, or in a macroscopically evil company, they’re usually okay, but they will turn disloyal if confronted with evil. They dislike tough cultures strongly. Those who leave companies conscientiously when they turn to tough culture tend to be the neutral good. Neutral good tend to see value in both the guild and self-executive culture and perceive no major difference between them, and behave the same way– altruistically and progressively, without pushing for major change– in both.

Neutral Good
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | High    |
Manager      | Low     | High    |
Executive    | Low     | Medium  |
----------------------------------


5. True Neutral

Let’s get back to work.

Original D&D rules specified “true neutral” as having an almost ideological faith in the need for “natural balance” between good, evil, law, and chaos. That not what I mean here. Most people don’t have an “ideological neutrality”. They’re just neutral. They have good values, but don’t always meet them. (Moral neutrality is better modelled as “weak goodness”.) They don’t have a strong civil bias either way. This is what most people are.

The truly neutral are the most fluid, because they can succeed in any kind of organization. They can do good or evil, follow laws or break them. In the lawful-evil environment of the rank culture, they will accept lawful evil and the most successful will adopt it. They can equally well adapt to the chaotic evil tough culture or the chaotic good self-executive culture. They don’t expect there to be rules, but if they exist, they’ll assess the rules, the benefits of following them, the penalties for breaking them, and decide accordingly.

True neutral are most at-ease with the Loser trade of the MacLeod hierarchy. They’re willing to subordinate, if afforded easy jobs with steady compensation. It doesn’t take much else to please them. Lawful people want an important role, good people want to improve the organization in spite of itself and often at the expense of powerful people, chaotic people want change, and evil people want to use it for malicious purposes. Neutral people, in general, just want a paycheck and a few friends. They like to be in an “in-crowd” but they don’t expect to be rich or to make major decisions.

True neutral people, being highly adaptable to large institutions, tend not to rise not in spite of their adaptability, but because of it. They can find comfort at the bottom, being easiest for organizations to accommodate. That being the case, why would they bother to rise?

The true neutral tend to find niches in rank cultures that keep them in comfort. They tend to leave tough cultures not for an ideological reason, but because such cultures are uncomfortable, pointless, mean-spirited and inefficient. Regarding guild and self-executive cultures, they tend not to form strong opinions. They don’t perceive workplace culture when it works well and doesn’t affect them.

True Neutral
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | V. High |
Manager      | Medium  | High    |
Executive    | Low     | Medium  |
----------------------------------


6. Neutral Evil

Heads, I win. Tails, you lose.

Neutral evil people are the most dangerous, without the adherence to law that restrains them, nor the chaotic impulsivity that brings them to failure before they can do great harm. A lawful evil person would rather enslave than kill, while a chaotic evil person would rather kill than enslave. Neutral evil enjoys both equally.

Lawful evil, in an organization, still wishes for the macroscopic success of the organization. Neutral evil is indifferent. I believe that I am correct in my assessment that not all evil is egoism, and that militant localism suffices, but neutral evil tends most strongly to severe selfishness and greed. It doesn’t favor or oppose localities (races, corporations, nations) so much as it just doesn’t care. What it is not– at least, not as much as lawful evil– is organizationally ambitious. It will climb if the opportunity is presented. Without that, though, it will happily indulge in mere sadism, which can be enjoyed even in a position of middling authority.

Neutral evil is rarely happy at the bottom of an organization, but can tolerate a subordinate role with access to a coveted in-crowd. Angela, in The Office, exemplifies this tendency. She’s happy to use economically meaningless forms of power, such as dominance of the “Party Planning Committee”, to exclude and cause pain to others.

Neutral evil enjoys rank cultures because they provide opportunity to dominate others, and tough cultures because they bring ruin and pain to people. Neutral evil tends to silently disdain self-executive and guild cultures, will not attempt to subvert them, but will manipulate them if it can.

Neutral Evil
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | Medium  |
Manager      | Medium  | High    |
Executive    | Medium  | High    |
----------------------------------


7. Chaotic Good

Evil presses in. Do what you will, but I will fight. 

Chaotic good views disruption and transgression, if toward a beneficial goal, as virtuous. Both lawful and chaotic alignments exist out of a fear of entropy, but with different slants. Law fears natural entropy (corrosion) and puts faith in institutional and traditional safeguards. Chaos fears human entropy (corruption) and puts faith in continual revolution. From the chaotic perspective, anything human that is not subjected to regular revolutionary improvements will turn necrotic and dangerous. Doing the right thing is requisite, but improvisation is acceptable and expected.

Both lawful and chaotic good tend, philosophically, toward universal altruism, but lawful good tends to think in loss-reductive terms. From the lawful-good perspective, there’s a utopia or even a heaven that is achievable, and one can iteratively reduce error, or discrepancy between reality and that state, to zero. Chaotic good treat change and the creative process as having inherent hedonic value and therefore conclude that no perfect stable state can exist; we should strive, instead, for perpetual growth and improvement. While lawful good wants to minimize error in a quest for zero (concavity) the goal of chaotic good is to maximize some hedonic function that can go toward infinity (convexity).

While chaotic good is attractive in a literary sense, it’s often socially maladaptive. People like the idea of it– a will toward good that is so strong as to override the stagnation and corruption of authority, but not always the people who exemplify it. Relevant is the common quote about loving reforms and hating reformers. Most people find chaotic good individuals to be self-righteous, dangerous, and impulsive in the rejection of authority.

In general, as well, most people struggle with chaotic morality, which vexes them even more than evil, which is easier for most people to comprehend, if not accept. For an example, consider the term cynic. True cynicism is the epitome of chaotic good. It favors economic and social simplicity out of a distrust for establishment, while striving for general and contagious happiness and virtue. Modern usage of the term has discarded the ancient, philosophical ideals and focused on one trait: distrust for human law and of organizational motives. People even misuse the word cynicism, sometimes, to describe lawful evil, describing such people as “cynical manipulators”. If people use a word to mean its opposite, they really don’t understand the concept! Societies and organizations have a hard time dealing with rejection, and tend to conflate those who abandon its conscience (apostatic, chaotic) with those who have no conscience (psychopathic, evil).

Technocratic (chaotic good, chaotic neutral) leaders have a strong affinity for the chaotic good and will attempt to promote them quickly, before they get turned off or washed out by the organization’s inefficiencies. Other than that, they rarely rise through the hypercompetitive main channels (which favor the lawful) and find it difficult to keep jobs. They are averse to subordination, and are even more hostile toward typical middle management positions (where they have a limited power that they must use for ethically questionable purposes).

Chaotic good find rank cultures to be inefficient and corrupt, but as those don’t have the mean-spirited character of tough cultures, they’ll attempt to reform it (and, usually, be fired for it) rather than fighting it head-on. Tough cultures they either fight or leave on account of conscience, unless they can find a meritocratic niche that is more like a self-executive culture. Self-executive cultures are the chaotic good’s favorite, those encouraging change and transgression. Chaotic good tend to distrust guild cultures (being cynical, in the true sense of the word) but will contribute positively when in a genuine guild culture.

Chaotic Good
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | Low     |
Manager      | Low     | V. Low  |
Executive    | Medium  | High    |
----------------------------------


8. Chaotic Neutral

Change before you have to. 

Chaotic neutral is the “problem solver” alignment. This alignment has a reputation for being fickle, but they actually have an important organizational role. They like to solve problems and try new things because it’s fun. Chaotic good wants to advance humanity by solving difficult problems. From a chaotic neutral perspective, that creative stimulation has merit standing alone. It’s a game. Chaotic neutral want to change organizations in spite of themselves. They want to make things work.

Chaotic neutrality can be ruthless, but it’s not malicious. If people lose their jobs, that’s undesirable but acceptable. This alignment tends toward libertarianism. Institutions are distrusted and naturally impermanent. Upkeep of them, when they become inefficient, is just dishonest. Inherent in chaotic neutrality is a steadfast belief in creative destruction and a libertarian ethos. Change should be embraced; people will adapt.

Technocrats and the better kinds of MacLeod Sociopaths tend to be a mix of chaotic good and neutrality. Chaotic neutrality is somewhat less admired in the abstract, because it can be interpreted as selfish: bias toward change because one finds it personally enjoyable. For example, it’s the chaotic neutrality of most computer programmers that drives the burn-everything-old, bet-the-company-on-us rewrites that software engineers regularly engage in, largely because they’re more fun than working with mediocre legacy code. That said, chaotic neutrality is slightly more organizationally adaptive than chaotic good, in so far as moral good or evil are each sources of discrepancy with typical (morally neutral) institutions while neutrality confers the most fluency.

Chaotic neutrality finds rank cultures to be inefficient and distasteful. It views tough culture as superior to rank cultures, and necessary to purge the rank culture’s accumulated rot. It generally dislikes guild culture, which it views as meek and enabling, and would prefer the creative expression and liberty afforded by a self-executive culture.

Chaotic Neutral
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | Low     |
Manager      | Medium  | Low     |
Executive    | High    | Medium  |
----------------------------------


9. Chaotic Evil

I will burn everything! If you die, I will laugh. If I die, I will laugh. 

Chaotic evil is the evil of the madman. It tends to be maladaptive in organizations. Those who are chaotic draw attention to their moral character, while the lawful and neutral can hide it. Chaotic good are still often rejected when found out as good, but they are admired at least abstractly, and that can give them a chance. Chaotic evil shows itself as treacherous. Only in a damaged environment can chaotic evil have any advantage. Otherwise, the neutral evil, who can use chaos when they need it, are best equipped.

Chaotic evil has a literary attractiveness because it’s self-limiting and cathartic. It rises to power for a short while, burns brightly, turns to madness, and implodes. Its taste for destruction is so strong that it tends inevitably toward self-contradiction and collapse. In the corporate context, we might rarely see it. Or would we?

There are degrees of chaos is chaotic evil, and not all are like Kefka or The Joker. Ryan, in The Office, is (slightly) chaotic evil and, being an agent of technical change and improvement, delivers some needed future-awareness to the backward Scranton branch. Chaotic evil is the least organizationally adaptive of the nine alignments, but the more moderate varieties of it (as opposed to the caricature, which is insane chaotic evil) can find success. Chaotic evil people can rarely keep their impulses in check for long enough to rise to the top, but their mean-spirited ideas often linger on. The malignant, viciously political, performance review systems for which Enron, Microsoft and Google are well-known emerged from chaotic evil minds– and were retained because the lawful and neutral evil leadership decided that, hey, that kind of chaos works. 

Chaotic evil tends to fight and attempt to purge rank cultures, not because they are inefficient, but to torch the weak. Naturally, chaotic evil has the most affinity for the tough culture (that culture itself being chaotic evil) and it will actually fight, on a matter of principle, against the lawful-evil proto-managerial extortionists trying to turn it into a rank culture. Chaotic evil tends toward exploitation of guild culture, but with minimal success because such cultures are actually resilient against that type of evil. In a self-executive culture, the chaotic evil person will play for personal gain and, often, abuse the self-executive culture’s openness with information and find a way to steal from the company.

Chaotic Evil
Rank/Fitness | To Rise | To Keep |
----------------------------------
Subordinate  |         | V. Low  |
Manager      | Medium  | Low     |
Executive    | Medium  | Low     |
----------------------------------


Conclusion

We now have a sense of how alignment plays out in organizational cultures. There are a few interesting notes we can make:

• the character of moral neutrality is generally a more adaptive variety of good. Organizations don’t especially want good or evil, both distracting people from the organizational goal, which is usually neutral. The moral flexibility of the neutral person is generally preferred. Good can be a slight advantage of the chaotic, as chaotic behavior makes one’s moral bearing public information, but chaotic good is still often maladaptive. 
• lawful people are the most likely to become and stay middling managers. This should not be surprising to anyone.
• lawful evil and chaotic neutral people are most likely to become executives. Following are the chaotic good, who are hampered by their moral compasses, and neutral evil, whose sadistic tastes do not require an important organizational role that a lawful evil person has more cause to desire.
• lawful evil are the most likely to be career executives. When they get the position, they are the ones most able to keep it. Why? Because the perversion of law toward personal benefit is quite natural for them.
• in addition to social violence, lawful evil are prone to manipulate a company’s existential fears. This might be the main advantage of the lawful evil (as neutral evil use both social and physical violence if they can get away with it). Lawful evil can best tap into the fear of organizational dissolution because it shares that fear.
• the Technocratic impulse comes from the chaotic good and chaotic neutral. Chaotic good express altruism through creativity and revolution. Chaotic neutral join in because solving problems and inventing new things is fun.
• chaotic evil, despite its colorful literary presence, is not a major organizational concern. We just have a lot more to worry about from the lawful and neutral kinds.
• neither the self-executive nor guild culture is immune against evil. The evil cultures (rank and tough) can turn neutral and even good people toward evil activity, but the reverse is not true. A naive guild or self-executive culture will find itself exploited by evil, especially of the lawful kind.

The last of these points should be the most jarring. Why can’t the good cultures defend themselves against evil? Organizations are quite adept at handling law and chaos, hand-picking lawful people for management roles and a few chaotic ones for executive positions, while rejecting most of the chaotic. What is it about workplace cultures that leaves them hapless in the face of good (which they cannot pursue) and evil (against which they cannot defend)? How do we patch the best workplace cultures– the guild and self-executive ones– to make them evil-resistant?

As I get further into the organizational problem– with the hope of, one day, working a way out of it– it becomes increasingly clear that there is no simple solution. There are a variety of principles that sometimes contradict. Consider bridge bidding, with various guidelines on how to send signals to one’s partner and find a winning contract, but with ambiguity and even contradiction. There are a variety of strategic concerns that must be balanced, and what makes it interesting is the fact that the right thing to do is not at all obvious. If bridge were deterministic and solved, there’d be no such thing as a good bridge player. It’s the difficulty and chaos of the game that makes it fun. Then, the more complex game of business formation will even be harder to “solve”. I expect that, when I finally am ready to “solve it”, I’ll arrive at twenty principles that should, by then, seem obvious– not one “closed-form” model. Certainly, I think the previous 11 essays have given us some insight into organizational corruption, without falling back on any prevailing pessimism (that organizations always tend toward failure). We have a good sense of why the MacLeod tiers emerge. We still need the core ideas that will help us build something different.

There are a few concepts that deserve further exploration: growth, risk, and chaos.

Growth, and how it influences behavior

Macroscopic economic growth is a fairly modern phenomenon. Before 1700, global economic growth was never faster than 0.3% per year, and generally slower. Most people who were rich had made others poor to get there. A zero-sum approach to human problems made sense. Conservative, religious institutions had a lot of power, and for understandable reasons. If large-scale material growth is not to be expected, then people need to organize themselves in a way that does the best with what is available. Religion gave people access to social plans that had been tested by time. Some of its dictates were nonsense; some were incredibly valuable. On the whole, it probably did more good than harm from a single-time perspective (its retardation of progress requiring another discussion).

A late 18th-century Anglican clergyman named Thomas Malthus is notorious for having been “wrong” in his thesis about population sustainability– he predicted a mid-19th century calamity in England. In truth, he wasn’t that wrong with most assumptions. By 1798, economic growth had accelerated to just under 1 percent per year. He asserted that exponential population gains would outpace economic growth, which he modelled as linear. On that, he was incorrect. On the conclusion– that the economy was not growing fast enough to support human population growth, and that the latter would be checked by famine, disease, or war– he was still right. Malthusian catastrophes are all over the place in history. One was to see it is that the Industrial Revolution intervened. A darker view is that the 19th-century English catastrophe was outsourced to Ireland.

Religious institutions, being conservative while expansive both in time and space, were storehouses of “big picture” knowledge about a society’s history and evolution. Typical people saw rises and falls: frenzied victories, hideous defeats, tribal and racial hatreds, and the formation and dissolution of societies and cultures. There’d be spells of peace and war, and control would pass from one set of hands to another, but global progress was rare until the 18th or 19th century. Religion– and, later, the narrative-driven nation-state– emerged to create order in an almost zero-sum world where it was inconceivable that any economy could grow at a rate comparable to the human desire to populate. It didn’t solve the problem, but it provided explanations and planning. Over time, religion’s central role was eclipsed when competent outsiders and specialists began attacking human problems. One of those specialties was economics, truly a “dismal science” in a time of sub-1 percent growth, explanatory of famine and war.

Clearly, we live in a different time. Economic growth is faster than population increases, so the average person’s standard of living is improving. We hit a phase change at some point between 1725 and 1925, the exact date of it still being debated, at which point economic growth stopped being subsumed by population increases, enabling genuine long-term improvement. The zero-sum outlook no longer makes sense. Progress and growth are now expected. So what causes economic growth? Where does it come from?

“Improvement of processes” is a common first answer. The Industrial Revolution enabled us to get better at stuff. It’s the culmination of thousands of years of progress. Writing gave us stable history. Mathematics gave us precision and mechanisms for solving problems. Empiricism and science gave us the ability to measure things. Technology made us more powerful, more productive. Each invention or innovation we kicked out pushed us forward, and the economic value of our knowledge base has been a faster-than-linear function of its size, while that knowledge base itself grows exponentially. We’ve had an ongoing story of faster-than-exponential growth going back to the advent of sexual reproduction 1.2 billion years ago due to a self-accelerating improvement of processes, but it’s still a bit vague what that means. We should find “improvement of processes” to be intensely suspect. Why aren’t processes already in the improved state?

Almost always, improvements come from outsiders, so the macroscopic change is a “creative destruction” driven by replacement. Most of China’s lasting intellectual accomplishments came from the “outside elite” of its scholarly civil-service structure, and not the upper-crust mandarins. Greek philosophical advancements are not owed to reputable clerics of that time, but to heathens, many of whom disavowed the traditional gods and were persecuted for doing so. In medieval Europe, a despised class of merchants grew richer and, eventually, more powerful than the hereditary aristocracy. Large companies are often defeated by innovative small ones run by people the conglomerate would never hire. Social substructures seem to have a “natural growth rate” that, to the extent that it evolves, decreases over time as the substructure reaches saturation or even decline. What drives the faster-than-exponential growth seen thus far is the generation of new ones with faster growth rates. Where do those come from? There is, metaphorically, a place where genuine creation occurs. Chaos. Nothing begets something because there is no nothing. The closest this world (possibly the universe, possibly any universe) has to nothing is pure chaos, which is still fundamentally creative. I’ll get back to that concept.

In 2013, most genuine growth– of the economy, of human knowledge, of technology– comes not from established entities but from new ones trying to force their way into existence as they emerge out of chaos. Large, established organizations have given up on progress, by cutting R&D funding and focusing on next-quarter profits. Progress has also given up on them. The smartest and most ambitious people, who wish to harness chaos for new creation (or, to see it more cynically, enrichment beyond the pittance judged fair by some massive organization) generally lack interest in the corporate behemoths with entrenched processes and slow growth. Don Draper, in departing from a sclerotic corporation (in which his advertising agency had become a subsidiary) to form a new one, said it best:

Who the hell is in charge, a bunch of accountants trying to make a dollar into a dollar ten? I want to work. I want to build something of my own.

Draper (a MacLeod Sociopath, without question) doesn’t want the restrained, conservative growth of a bulky corporate enterprise. He wants something more rapid, personal, and fun. So he left an existing substructure to form a new one.

That was 1963, when the first hints of a technological era just appearing. In 1863, industrial growth actually was the most exciting game in town, and people would have been thrilled at the prospect of turning “a dollar into a dollar ten”. For millennia, humanity had been in a zero-sum arrangement where being powerful meant dominating and controlling other people. From the Egyptian pyramids to the Colosseum to the aristocracy of the Southern United States was a trail of monuments that required slavery. Industry provided a way out: the possibility to turn $1.00 into $1.10 without hurting anyone. Compared to the zero-sum squabbling, that was immensely progressive. With industry catching on, nations all over the world abolished slavery in the mid-19th century. Getting rich no longer required making others poor, or unfree, or dead. The downside of this was turning work into something often too stable and boring to excite the Don Drapers of the world.

Why is it so common to call someone like Don Draper a sociopath? The state of society delivers a prevailing growth rate. For agrarian societies, it was near zero. For industrial ones, it was slow (1 to 5 percent per year). As we move into the technological era, it might become higher. Whatever that rate is, evidence strongly suggests that there will always be people who want to grow their fortune at a faster clip. One way to do this is to steal. That’s what war (ending lives to rob the dead) and slavery (stealing freedom and autonomy) were about. The other, much harder, way is through new invention and the creation of value that didn’t exist previously. It might like these are being put forward as vice and virtue, eternally separate. It’s not so. It’s a lot more complicated. Is mining for gold, diluting its financial value in the same way as counterfeiting does, a zero-sum theft of financial value that delivers nothing to the world? Or is it, since the yellow metal has some hedonic value in so far as people like to look at it, a productive activity? This is hard to answer. Additionally, how does an enlightened or altruistic industrialist (circa 1750) ensure deliverance of value when powerful forces will divert any produce to zero- or negative-sum pursuits, such as warfare? How does the engineer make sure his efforts are used to build more plowshares rather than swords? I don’t think he can. In any case, that’s not important from a macro perspective. New invention and raw theft both come from a class of rule-breakers who aren’t content to have their fortunes grow at the prevailing rate.

The problem of chaos

Often, “chaos” is used to describe squalor or malfunction, but its original meaning is closer to abyss, or the formless void from which the universe emerged. It’s not “nothingness”, because things (such as the universe) come from it. One might think of it as a pregnant silence, or a blank canvas. It’s creative emptiness.

Experientially, we know that the best way to create a chaos is to clear something away. Many meditation practices can be viewed this way. The principled and mindful attention, with a calming intent, to thought processes leads us away from the toxic, repetitive, and mostly negative thoughts that occur in conditioned life. We create a chaos into which new forms of thoughts and experience– which wouldn’t have otherwise existed– can come into being. Sensory deprivation, sleep, and dreaming are also forms of chaos, in so far as they induce experiences that seem not to be produced by the objective world.

Chaos, as a source of something, we welcome so long as we trust our ability to filter the positive from the negative. Chaos, as a state of nothing, we view negatively. We strive to differentiate ourselves from the scarcity, formlessness, and indifference of primordial chaos. It is an open question how far chaos is to be desired. It’s chaos that creates the need to build, and that gives us the tools to do it. Law, order, and structure with intent toward permanence are built by some to protect people against the pain of chaos. However, an alternative approach (more common in Eastern religions) is to embrace chaos and impermanence– to recognize that it is better to adapt to chaos than to cling to the flimsy things that we invent to protect ourselves from it.

It is reductive and useless to call chaos “good” or “bad”. It’s neither. Nor is it random. In fact, some aspects of it (such as unexplored mathematics) are quite structured. It is, however, unexplored and mostly incomprehensible. People find it discomforting, the ultimate chaos (from a human viewpoint) being death. There are, however, degrees to which people accept or avoid it. Those who engage chaos directly will be more creative, but also more volatile. Stepping back from the metaphysics, we have (in chaos) a way to understand economic progress. In pre-industrial times, a person wanting to become rich without harm to others might search for gold. The earth itself was once a chaos. The Greeks acknowledged this by assessing ownership of all material wealth to the temperamental god of the underworld: Hades.

In 2013, gold is a effectively a commodity. It is expensive per ounce, but because a large amount of human service is required to produce that ounce (reflecting the metal’s rarity). Nothing special distinguishes that service. So, those who aspire to wealth (or growth) in 2013 are not likely to dig for gold. The technocrats don’t have a special proclivity for digging the earth in search of a yellow metal. They leave that to the specialists who have the equipment. Instead, they mine chaos.

Entrepreneurs and innovators scan various chaoses with the hope of putting something together that is of value to other people. Transfer occurs from one chaos (unrealized ideas) to a painful one that there is benefit in filling (unmet human desires). It might be called “magic”. It isn’t. However, it’s unpredictable and intermittent by nature. Once that chaotic transmission is completed, the work involved is no longer inherently exciting. It’s a commodity. (Making easier the jobs of those who have to do it, on the other hand, remains potentially fruitful.) Once the chaos is taken out of the equation, what remains is dull labor.

From chaos, we can understand the nature of convexity. There are some people who have the skill to go “into” chaos (or, at least, a subchaos related to a specialty) and find something useful. To the unskilled, chaos simply looks “random” and dark. To continue the metaphor of chaos as a space, the improbability of a find is (to an unskilled person) an exponential function of how deep into chaos it lives, because more “lucky” steps are required for an unskilled person to get there, and the multiplication of low probabilities has that effect. In other words, the farther a find or job is from the well-ordered and easily understood territory, the more that personal skill and knowledge matter, it’s likely an exponential relationship. Things being valuable in proportion to their rarity, we see where convexity comes from.

The risk thing

Industrial businesses begin as chaos-mining operations, but after carving out a space of order, seek to protect it. Standardization becomes the goal. We can’t exactly quantify (or even perfectly define) chaos, but we can quantify risk. Risk and chaos are fairly related. Risk pertains to how interactions with chaos might affect an entity’s economic health. It’s not concerned with the whole of chaos, but only about what threats might come out of it. Financial risk is even measurable, to some degree, enabling portfolio managers to discuss “how much risk” the company has. We’ve now seen a mature commoditization of that kind of risk, with markets able to price assets not only based on their expected (average-case) yield but to account of risk according to what the principal players find desirable.

All else the same, risk is considered undesirable. Most people would rather have $5 million than a 50% chance at $10 million. Let’s separate the value of an asset into its mean value and a zero-mean risk variable. The first possibility is that one has $5 million. The second is that one has $5 million plus a 50% chance of winning $5 million and a 50% chance of losing $5 million. Most people would value that zero-mean risk negatively. A person with the latter portfolio might be inclined to “sell” that risk for -$10,000– that is, to pay $10,000 for someone else to take that variation and have a solid $4.99 million instead. Much of finance is about figuring out fair prices at which to transfer risk.

I’ve previously discussed law and chaos in the context of alignment. Are these connected with the chaos described above? Absolutely. Risk and chaos aren’t the same thing; the latter is an injection from chaos known to have an effect on one’s well-being. Computationally, we process risk because chaos is beyond what we can quantify. Civil alignment correlates to a person’s attraction or repulsion to chaos. Lawful people tend, in general, to have faith in the infrastructure that humans have created to hold chaos at bay. They prefer by-the-book solutions to problems because they fear the chaos of improvisation. Chaotic people, on the other hand, see chaos as potentially beneficial. They want to mine it. Measured in terms of risk, lawful people are, in general, going to be more risk averse. Chaotic people tend to be risk seekers.

This is not necessarily true, however, in terms of financial risk, on account of its commoditzation. Financial risk can be separated into an expected value and a zero-mean random variable whose variability itself can be measured. This enables the commoditization (measurement, trade) of financial risk. That’s not to say that there aren’t black swan, out-of-context, risks out there (that rarely follow Gaussian distributions) but those are often placed in a different category. Because of this commoditization, financial risk has largely been divorced from a personal law/chaos bias. Lawful people with means will pursue investment strategies with high volatility in order to get high returns; those with less means or likely to need liquidity soon might favor less volatile strategies. However, it has little to do with a person’s often visceral reaction to chaos.

If financial risk is a commodity, it can be allocated. Traders have risk allotments based on past performance and seniority that represent how much risk they can take on behalf of the firm. Such rules are necessary to resolve the conflict of interest that exists. Traders, usually paid on commission, have an upside-biased risk profile: making $40 million is twice as good as making $20 million, but losing $20 million and losing $40 million are identical– both result in getting fired, but there’s no further consequence. Without risk limits, traders would have the incentive to take on risks that the firm (absorbing wins and losses) would not want.

Typical business organizations do not have as well-formed an understanding of risk as trading desks, because financial risk has been mostly commoditized, while the performance and chaotic risks that businesses deal with cannot be. However, that mentality is still in force. The organization earns a profit because it takes on risk: otherwise, in a competitive market, there should not be profits. There is, therefore, a certain amount of risk to be expected, and little more should be tolerated. As a trading desk would distribute risk allocations among its traders, a standard business organization attempts to create a risk allocation regime for its people. The firm must allow some small set of people to take chaotic risks, because the world is lawless and volatile and a firm that ignores chaos outright will struggle to thrive. Those people are called executives. Then there are people trusted with financial and performance risks (such as assessing people to be hired and fired). Those categories of risk are seen as “less dangerous” because financial risk is easy to measure, and performance risk over concave labor, while not directly tradable, falls within a tight bell curve. Those people are called managers. Workers, in this model, should not be trusted with any risk at all. As the organization sees it, they already bring too much risk by walking in the door to have any right to ask for more.

In the optimization model put forward for the corporation, I discussed the idea that a manager’s job is to hill climb to the top of a neighborhood (gradient ascent) and find a local maximum, while executives are trusted with non-local explorations that might lead to finding better hills. Non-locality implies that the executive is going into uncharted territory, or engaging directly with chaos. He’s not, however, typically allowed to go very far in, but he has some non-zero chaotic risk allocation.

The human side

One way to view the organization’s miserly risk allocation protocol is to say that it’s inhumane and demoralizing. Engagement with chaos is part of what makes us human, is it not? Most Americans participate in activities that are more industrious and difficult– such as picking their own fruit, open-source programming, and independent writing– than their pointless, subordinate office jobs. Even risk-taking is a hobbyist activity, if sometimes a destructive one, in the form of gambling (engagement with an otherwise uninteresting chaos). “Work”, for most people, is a boring and unhealthy psychological monoculture, leading to the question: why do people tolerate it in the first place?

Risk and chaos are the forces at play. Deep into chaos is somewhere that most people don’t want to be. It’s lonely, unsettling, and weird. Without financial constraints, most people would still fall into routines over time: people, places and work that make them happy. So there is an inherent willingness for those who are more chaos-averse to enter the ordered zone of a facile subordinate position. There are psychological reasons for people to take the MacLeod Loser deal. Many people would rather have the comfort of a stable group than attempt to lead it and risk rejection or group dissolution. Organizations exist to diminish chaotic risk for themselves, but in doing so, create a realm that is highly ordered and allow the chaos-averse to make a home there.

There are also the financial aspects, and that discussion becomes a bit less humane. People make the financial Loser deal because most of them have no choice. They need a stable monthly income. That trade, both from a micro- and macroeconomic perspective, tends to get worse over time. The low savings of lifetime wage-takers forces them to continue making this risk-reducing trade, limiting their leverage, and consigning them to take deals that are increasingly risky (end of corporate loyalty) but increasingly costly to them. It’s a feedback loop that keeps “the 99%” tied in to a certain pattern where they are forced to buy risk reduction, even if it brings them down to a subsistence wage.

There are some, however, who react with a certain insubordination. They get what business corporations are about and learn quickly how to play them. Initially, they will not be allocated chaotic risk by their firms. They just take it. These are the MacLeod Sociopaths.

Convexity and chaotic acceleration

Business corporations exist to create a process that reliably generates income. Their initial architects might glance around in chaos early on to find a source of profit, but once that is accomplished, they are almost all about law. What little engagement with chaos the firm needs is handled by a nerve center containing a small set of people called “executives”. Everything else lives in, or is forced to live in, the concave, far-from-chaos world of “another day, another dollar”.

The industrial world began when scientific advances altered the labor model. I’ve discussed concavity and convexity, but what’s the labor model that has been with humanity for most of its existence, before the industrial era? A binary one, in which there are compliance and noncompliance. That’s the world of slave labor. A noncompliant person was beaten, a compliant one was not. This judgment of compliance might not have had any connection with reality, of course, and hardworking people frequently got the “noncompliant” treatment. It was about emotion and perceived loyalty. The industrial world, in which productivity was derived from systems of conditions rather than exertion alone, encouraged people to look into concerns like morale and quality of training as “hidden” force multipliers that mattered at scale, far more than individual perceptions of loyalty. It no longer matted how many compliant people one had, but how they were arranged. The concave model replaced the binary loyalty-based model of slave labor, and it became clear that coercive labor was no longer tenable. Semi-coercive wage labor, with the worker financially dependent but free enough to change bosses, won out.

Since the 1940s, the binary model of labor has returned, but in a different and benign form: computing. Given a job, properly specified, a computer will do it without complaint. Such machines are extremely good at following deterministic laws. In almost all cases, a computer program will get the right answer to a well-formed problem either 100% of the time, or 0% (a bug). Exceptions (non-deterministic “Heisenbugs”) exist and are extremely painful to deal with, but they tend to be rare in critical components, at least by human standards. Almost no human could multiply two 100-by-100 matrices without mistakes. If the labor is intrinsically binary in value, we can specify requirements and usually program to them. If it is concave, we can often specify what perfect completion (or, at least, an arbitrarily close approximation) is and program for that. Work that lives in the lawful world that human society has already explored is all being done, or will soon be done, by machines.

What’s left for us to do? Convexity, which will require us to move away from semi-coercive labor to a fully free system based on intrinsic motivation. The industrial world saw risk as a commodity that could transferred, and allocated the right to take risks to a small number of people. That works for the typical financial (or performance) risk, since it can be separated into a constant expected value and zero-mean random variable, the latter of which can be traded (often “synthetically” through derivate contracts). In the convex world this separation of risk cannot be performed. It doesn’t make sense. Workers not allowed to take creative risks won’t create. It won’t be useful to employ them, then. The three-tiered corporation ceases to be functional.

What remains, once the machines have conquered the concave world, is the chaos of an unsolved problem. Can we handle it, as humans? Sure. We always have. But how will corporations survive it? They exist to produce law but, in the technological era, the rate at which a company will need to grow to be competitive is one that is innately chaotic. Some companies claim (most, without meaning it) that they want every employee to participate in the growth process. Not so far from now, that will be reality, but that requires a dramatically different view of the organization.

We are close. Close, that is, to having done sufficient exploration into the role and operations of economic organizations (such as the corporations or nation-states we love and hate) to start solving some of these organizational problems– to attempt to invent the future.

My role now, in analyzing the organization, is to watch for The Shark. Creative divergence is fun, but at some point, convergence becomes necessary. One needs to make a coherent whole– to solve the problems one has set forth. This can be brutally difficult to do. It’s why the sixth and seventh books of the Harry Potter series are so long and complex, and why some doubt that any person (even a clearly strong storyteller like George R. R. Martin) can handle the monstrous convergence task existing after the first 5 books of A Song of Ice and Fire. To his credit, I think Martin has the right idea– to put the continuing world exploration into a companion book, and finish the damn story in the next two books. Divergence is the fun, playful, erotic part: branching. Convergence is the difficult, thanatoptic pruning task. Writers refer to it as “killing your darlings”. Steve Jobs said it succinctly, for consumer technology: real artists ship. If you diverge for too long without tying everything back into a coherent whole, you Jump The Shark. That’s not something that happens when people are “out of ideas”, as if there were a finite pool of them. When a narrative reaches The Shark, changing writers and hiring an untapped, relief writer won’t help. Shark-jumping occurs when further new stuff (e.g. new characters, motifs, and ideas) can be added, but there’s no good place to put them without loss of clarity. After the shark is jumped, more neat stuff can be added, but the whole (degrading in quality) no longer provides its own reason to care about that stuff.

This isn’t just “meta” wankery. I wouldn’t pollute this series (already tens of thousands of words) with my own problems as a writer. Creative divergence and convergence are at the core of the topics I intend to discuss today. This is the fun topic. It’s why work can, if conditions are right, not suck. I discussed, in Part 9, the role of the organization of a computation problem for an optimization problem, while the “fitness landscape” grows increasingly complicated. In Part 12, I tackled chaos and risk. Financial risk has been commoditized and can generally be measured, sold and bought. Performance risks, at concave labor, tend to be normalized by the Central Limit Theorem when there is a large team of people. Companies want to be able to do this with all kinds of risk, but creative and chaotic risks are harder to manage. The concept involved is separability.

If I had an asset (a security) that, in one hour, would either be worth $10 million or zero based on a coin flip, I’d be inclined to sell it for a middling value. As I alluded in Part 12, this is identical to having $5 million (expected value, my financial wealth) and a zero-mean random variable: 50% chance of +5 million, 50% chance of -5 million. I’d do best to keep the former but have the latter risk off my books.

I might find a wealthy, risk-neutral person and sell him the security. Since it’s not worth it for him to buy it at its expected value, I’d probably sell around $4.99 million, the other $10,000 being a risk premium I pay to him to have that coin-flip out of my portfolio. That’s a case of separable risk. In that scenario, I have financial wealth of $5 million and pay $10,000 to cancel out a risk source threatening a sudden (and possibly catastrophic) swing in income. Here, my making the trade has no effect on the outcome of the coin flip. Risks can be moved around (and, from a cynical perspective, hidden) when they are separable.

Let’s change the game. I’m building a company, or writing a novel, or engaging in some creative effort that involves a lot of work. Let’s keep the same payoff structure, 50/50 chance, $10 million but include individual performance. If I’m diligent, it might be higher than 50%. If I’m lackadaisical, it will be less. If I’m noncompliant (don’t do it at all) then it’s zero. It would no longer be wise for someone to buy at the “expected value” of $5 million.  If I get all the risk off my books, I have no incentive to perform. I might be able to sell that “chance at $10 million” for $100,000 if I’m lucky, in which case, I’m an employee.

There’s a partial solution, which would be to sell some of my risk. I might reach an agreement with a counterparty where I take a $2 million advance and offer him 50% of my upside. He loses $2 million (paid to me, either way) if I fail, and nets $3 million if I succeed. From my perspective, I’m paying a risk premium of $500,000– hefty, but the fact that I’m selling my own performance risk (read: hedging against myself) doesn’t entitle me to the best terms. From his perspective, he’s making a winning deal so long as he believes that, even with my reduced incentive, there’s better than a 40% chance that I succeed. This seems like a win-win.

Here’s the problem: let’s say I make two deals of that sort, getting $4 million with no risk, then I don’t perform. That’s fraudulent and undesirable. I could potentially go further and make twenty such deals. I collect $40 million but am negatively exposed to my own performance (with $10 million coming in, and $100 million owed to counterparties). Not only would that leave me without incentive to perform, but I’d be unable to afford success. So I don’t perform and rob my counterparties blind (and, one hopes, end up in jail). Sold in these large, incentive-affecting blocks, my performance risk isn’t commoditizable.

Clearly, financial markets have regulations in place to prevent those types of abuses: for an obvious starter, executives can’t short-sell their own companies. With commoditized risk, the corrupt cases are few enough that laws can be written to preclude abuses. “Insider trading” can be defined and banned because the set of people who have privileged information is sparse and that set of people isn’t hard to define. Creative and chaotic risks don’t work that way; information asymmetries and incentive effects are much more brutal and fairness is impossible to define. A sane, just regime of risk commoditization is hard to put in place for chaotic risk. It’s an unsolved problem.

Why is risk commoditization so important? It keeps society and the economy fresh. Left to their own devices, economies will converge to a “power law” arrangement where a few have the bulk of the wealth and most have none. It’s not about talent, nor is it about intentional malice or greed. It’s just the result of a mixture of random drift and the feedback cycle of wealth that exists when its many forms (social status, financial capital, access to jobs) are transferrable. It becomes pathological because elites tend toward entrenchment. Then, the executive nerve center (of an organization, or a society) is characterized by complacent mediocrity. Talent desires to break through, but is increasingly far from the resources (capital) needed to put it to use. Risk commoditization is the only mechanism that will connect talent and resources, which are often far away from each other due to the tendency of both to have lopsided (non-democratic) distributions. With commoditized risk, talent (traits that confer favorable odds regarding chaotic and performance risks) and capital (put at risk for mutual benefit) can find each other.

This has always been a hard thing to get right. How is good-faith business failure separated from negligence, incompetence, or outright fraud? It’s not as easy problem to solve at scale. Additionally, talent often has no collateral. Bank loans require personal liability and some capital investment, as such deals probably require, but that limits access in a major way. One needs money to play, and can’t go into high-risk sectors. Venture capital doesn’t require personal financial liability, but views its (otherwise benighted, and somewhat illegal because of the collusion) small-town reputation economy as the machinery that keeps entrepreneurs honest. All of these mechanisms have scaling limitations. They’re only available to a small set of talented people who are in access to some resources; the financial transfer just gets them more. They can connect resources with talent but in a limited, much-to-few, way. A small number gold-stamped “worthy individuals” get the credibility and right to some risk. The rest of the talent is seen as unneeded and, therefore, not developed. Such people are consigned to implement the ideas of others with more social access and credibility. This could be tolerated in a time when most of the work that society needed to be done, and done by humans because there was no alternative, was rote, mechanical, and uninspiring. That was the case for thousands of years, and isn’t anymore. Let’s focus on the history of work– and, later, its purported opposite, play.

Some people fetishize the hunter-gatherer existence, whether they’re talking about prehistoric humans, nomads who coexisted with (or parasitized) agrarian societies, or even contemporary cultures of that kind. One good thing about such lifestyles is that the toxic separation of work and play doesn’t seem exist. People do, and the things they do to subsist don’t seem painful. They enjoy hunting, gathering fruit, teaching others how to do these things, and learning about the natural world. People in such societies seem to spend about 50 hours per week on productive or resource-gathering activity, but without the clock-punching, mind-numbing monoculture of activity, or the required unhealthy arrangements (10-hour block, ass-in-chair, constant visibility). I don’t mean to imply that the more primal lifestyle is superior. It ended for many reasons. It terms of the ability to support a large population, it’s not nearly as fit as agriculture. There’s no way the Earth could support even a tenth of its current population as hunter-gatherers. A stable hunter-gatherer world would entail control of population growth, which requires the dominance of some humans over others. Since it’s mostly subordination (and not productive activity, which humans seem to enjoy) that makes Work such a life-ruining, millennia-long, species-wide clusterfuck, I don’t see primality as any solution. The evidence is strong that Work sucks not because agriculture or technology are unnatural, but because of who we are. The dreamed-of primal utopia is quite flimsy against the same greed that ruins work.

If primal humanity can be described in moral terms, it’s sociopathic– certainly in the MacLeod sense, and often in the truer sense. Lives were nasty, brutish, and short. Positional violence among men, in order to increase social status, was common, with a per-year death rate of men in violence being comparable to those experienced by modern gang members, prisoners, and soldiers. Female sexuality was under male control, with the strongest men having exclusive sexual rights to tens of women– their consent being irrelevant– and the shut-out men angry and tempted toward positional murder. This was the state of affairs in which psychopathy conferred an individual advantage. Most modern people wouldn’t consider it desirable. Yet, there was a way in which the primal and nomadic people were, for lack of a better phrase, more alive than the sedentary, often servile, and often less healthy agricultural people. I’m going to crib the some observations from Paul Graham, in “You Weren’t Meant To Have a Boss“:

I was in Africa last year and saw a lot of animals in the wild that I’d only seen in zoos before. It was remarkable how different they seemed. Particularly lions. Lions in the wild seem about ten times more alive. They’re like different animals. I suspect that working for oneself feels better to humans in much the same way that living in the wild must feel better to a wide-ranging predator like a lion. Life in a zoo is easier, but it isn’t the life they were designed for.

[...]

Having seen that happen so many times is one of the things that convinces me that working for oneself, or at least for a small group, is the natural way for programmers to live. Founders arriving at Y Combinator often have the downtrodden air of refugees. Three months later they’re transformed: they have so much more confidence that they seem as if they’ve grown several inches taller. Strange as this sounds, they seem both more worried and happier at the same time. Which is exactly how I’d describe the way lions seem in the wild.

“More worried and happier” is a great observation. The YC founders left their corporate factory farms for the MacLeod-Sociopathic world of business formation, and found that it’s more fun out there. It’s also much harder, much higher in risk, and much more chaotic than the monoculture of bare-minimum subordinate busywork. Is it better than corporate junk work? That depends.

First, longevity is a problem. Almost no one can commit a 480-month block of time (with no departure longer than 2-3 weeks) to that kind of intense work, or even one-fifth of that amount without a break. Second, it would be unwise for most of us 99-percenter poors to bet our incomes on that kind of work, when we need fairly regular paychecks. Even people who have enough savings to last a few months need to worry about their resumes. Paul Graham’s thesis is that neither of these concerns is in force anymore. With the returns available from technology startups (rapid generators of value) being what they are, longevity isn’t an issue (cash-out, travel the world, come back fresh) and neither is the day-job economically competitive. That’s the theory.

There’s much truth in Paul Graham’s ideological commitment to the technology startup as the organization of the future. The uncertainty pertains to the timeframe and also the logistics– it would be good for society for the world’s smartest 10 million (or more) people to have implicit autonomy over their own time, but who will pay for that? It will pay for itself over time, but who takes the initial risk? An investment model (with returns enriching the backers) is obviously requisite, but how is that going to be set up at scale? VC-istan takes a much-to-few model: a lot of resources go to a small number of in-crowd-approved, people deemed actually to have the right to be founders. The advantage it gets out of a much-to-few topology is that it generates a reputation economy discouraging defection. Founders are kept in check by the investors’ ability to lock them out of ever again receiving investment (which is also used for extortion).

VC-istan, in 2013, has met congestion, as seen in the sobering market performance of the genuine concerns (e.g. Facebook) and the proliferation of batty, nonsensical operations (e.g. “Groupon for pets”). VC-istan is now a big company, bereft of real vision, as high-profile investors have congealed into one executive suite. It will be obsoleted by a fleet of smaller, long-term-oriented lifestyle businesses not focused on get-huge-or-die gambits in deep-red oceans. How this will be funded– i.e. what process will discover and enable the relevant talent, and connect it with appropriate risk and capital allocations– is a completely open question. Perhaps that is the problem of the early 21st century. It’s clear that work and money require redefinition, as machines take over the grunt work to which semi-coercive labor was originally directed.

Returning to the primal world in which the evil of institutionalized, subordinate Work had not been invented, we see that it was still sociopathic. Positional violence and warfare among men were common, for one thing. The primal state had its appeals– living under the sun, not caring whether it’s a Tuesday or a Saturday– but people had strong reasons to move away from it as they discovered agriculture (a process that, in truth, occurred gradually over thousands of years) and, later on, writing, law, and the division of labor. There was one inherent problem with this new world. Something horrible became possible: slavery.

When the idea of slavery emerged, it was probably seen as merciful and humane. A fully primal tribe, if victorious in war, would be inclined to kill off the defeated group– at least the men, and probably the women, who were also quite capable of being deadly– to avoid retribution. Primal societies couldn’t use captives as slaves, because they engaged in work activities (such as hunting) that were dangerous, as a defector could murder his masters out in the wild. Agricultural societies, however, could delegate work that was undesirable and free of risk to the superior to a class of permanent subordinates. Primal and agricultural societies both began partaking in one of the most profitable, yet morally rancid, businesses ever devised: the capture and sale of humans.

This created a stratification of work. Most slave-owning societies had multiple tiers of slave. Above them were a class of servants given the work that could only be trusted to free people, followed by financially independent yeomen, and finally the slave-owning leisure class. With productive activities being intertwined with social class– some being desirable, others being dishonorable– and therefore often divorced from intrinsic motivation, it was necessary to separate work from leisure.

As the agricultural era evolved into the industrial one, slavery fell in favor of semi-coercive wage labor. Conditions like morale mattered enough in the industrial context that such economies could not make use of enslaved people. Companies needed to provide financial risk reduction and uniformity in working conditions, setting up the MacLeod Loser trade (facilitated by the Clueless) with people who had a very limited ability to refuse. The industrial era’s sunset will see the semi-coercive model go into obsolescence, pulling society toward fully non-coercive self-executive labor. That, however, is still in the future for most.

Even for high-status people, work became a psychological monoculture (making it unhealthy and, worse yet, boring) in the agrarian and industrial eras. Slave sellers had to run auctions, keep books, and haggle. Monarchs had to hear petitions and pay attention to castle intrigue. Low-status people were subsumed in painful and rote physical labor, while high-status people found their lives devoured by a 24/7 job of social maintenance and posturing. At all levels of society, there emerged a common and unifying thought: I kinda hate this shit. So what did people do when they got away from it? Something that is often called play.

I can’t do justice to play in a few thousand words. As a game designer in addition to the other stuff I do, I know better. It’s emergent activity that is not generally oriented toward production, although there are often echoes of productive activity within it. For most of our history, the ultimate form of upper-class play was hunting– work, in a primal context; play, in one where the activity was irrelevant to the lord’s soul-destroying job of maintaining social position. Play is work-like, but helps people escape into something real that provides a genuine sense of accomplishment.

Indeed, for a lot of people, their play is more like work– open-source software, altruistic travel, amateur art– than the subordinate junk activity that they’re paid to do. Play seems frivolous and indulgent, but it actually leads somewhere. It goes into (as I defined the concept in the last essay) chaos. I mentioned in the previous essay that chaos can be viewed as a creative emptiness. In the vacuum, something new emerges. Play is the chaos that exists when extrinsic direction is removed form activity, often enabling creation that would never occur in a subordinate or mercenary context. Sometimes, that creation is much greater value than anything produced in typical “work”.

Heading into chaos is not profitable, most of the time, but when something novel and useful is discovered, the rewards are immense because so few people can navigate any specific neighborhood of chaos. In this metaphor of chaos as “like” a physical space, we can get a physical sense of the divergent and convergent aspects of the creative process. Divergent creativity (branching) is heading deep into chaos. The issue is that most paths “into chaos” don’t lead anywhere. One needs, at some point, to pop back out and explore a new path. Convergent creativity (pruning) is an anchoring process that extends order and refines the understanding of what kinds of chaos are potentially desirable. Convergence kills off the explored but useless branches, and it reminds us why “chaos” is viewed as a desolate void by most. With divergence only, one will explore limitlessly without return. But if convergence is over-emphasized, one will not go far enough into chaos to find anything that is of value.

Large organizations eventually get to a point where they view their role as keeping chaos out. Law and order are the business of business. Salaries must be paid, deliverables must be met, and work must be defined to leave as little room for variation as is possible. This might induce a psychological monoculture that is unhealthy, bizarre, and probably causative of early cognitive decline, but that’s what the money’s for. This variance reduction serves these firms well in a concave world. Reining in slackers and incompetents compensates for the management’s (counterproductive) interference with the stars, who might only be 1.25 times more productive than the average. To be competitive and functional, organizations in concave labor must drive out variance as much as they can. That means they push away chaos, and drive out play.

Divergent creativity might be called free play. That’s Calvinball. The rules don’t exist yet. Things should be explored. At some point, however, limitless divergence fails to satisfy certain needs. Players want feedback on performance and, often, direction and rules. This necessitates structure that kills off some of the less beneficial or important fruits of chaos. Convergent creativity is discipline. It directs play and makes it more beneficial and focused. The “darling killing” convergence of the novelist produces a coherent story instead of an orderless array of ideas, characters, and settings. Convergence is less “fun” than the divergent part of creativity– it’s demanding and feels more like work– but it’s equally important.

Organizations typically allocated the iota of divergently creative work that they needed done to the caste of people called executives. A very limited role in the convergence process (related to trimming away pesky human chaos, but involving no real control or creative input) went to managers. Workers got no room for risk, no play, no creative control. That model worked for more than 200 years, and it took something radical (widespread, commoditized, and extremely cheap computing) to kill it.

In the concave world, risks are separable and can be commoditized. The top executives can bicker over who gets how much risk to play with, and manage accordingly. The convex world’s risks are non-separable. Move the rewards to one party, the idea generation to another, implementation to a third, and responsibility to a fourth, and you’ll get deceit and dysfunction. If anything worthwhile is being done, there’s just too much chaotic risk that can’t be moved around. People need the right to risk, and they need to be trusted with their own time, or what they produce will be of so low value as to render the enterprise unable to compete. Convexity mandates that people become more self-executive, and that their companies let them do so. The semi-coercive wage labor of the industrial world is dying out. What’s replacing it is fully non-coercive work: disciplined play.

If disciplined play and self-executive, well-treated labor shall carry us forward, then what is the role of the organization? Given how exceedingly difficult it seems to be for a corporate organization to avoid falling into dysfunction, are they desirable in the first place? Why not have some utopian “market state” of self-executive free agents, with no need for these stodgy and often corrupt corporate employers? The answer is that it won’t work. So long as people need an income to survive– and a high one, thanks to corrupt influences on the housing market, a transportation regime that stopped improving in the 1960s, the 9/11 every 24 days that we call our healthcare system, and the expensiveness and exclusivity of the educational institutions that can still place children decently in this imploded economy– they live in a tough-culture reality. The 99%, out of panic, make disadvantageous Loser/Clueless trades that hurt not only them but, in a convex world, society by depriving the world of talent’s proper applications.

The obvious solution to that is a guaranteed basic income. One major advantage of the technological era is that autonomy with one’s own time is often enough “capital” to build something great, computing costs being minimal. But we’re about as likely to see a basic income in the U.S. as we are to change the weather with complaint. Europe’s recent economic crises also show us that, while such states have desirable features, the bigger problem remains unsolved. Europeans have a far better healthcare system and humane vacation allotments (20 days, generous by U.S. standards, is an EU minimum) but their work life isn’t exactly a self-executive paradise. The ideal of a welfare state, to me, is not that it enables people not to work, but it that liberates them to work.

Europe’s systems, with harsher personal bankruptcy laws and more resistance to business formation, haven’t achieved self-executivity much better than we have. With sweeping social reforms (such as basic income) off the table– not impossible, and certainly not unreasonable ideas, but far out of my power– we need to focus on what technocratic individuals can actually do. We can harness individual, mostly localistic, energies. We have one source in those who are starting companies and genuinely want to build great organizations: companies actually worth caring about. That may be a “selfish” motive, and it’s certainly a pragmatically localistic one, but it’s what will save us: people who (for a mix of selfish and altruistic reasons) want to build excellent businesses.

Most of VC-istan, in my mind, doesn’t qualify. These build-to-flip gambits are mostly marketing experiments designed to exploit existing technological trends. Since most of them aren’t building real technology (which requires investment) and measure their own health by “virality”, the get-big-or-die mentality is appropriate for them. We can preach the virtues of open allocation, but cultural health just isn’t important to executives of a company who plan to sell it in 3 years. We need to talk to the people building lifestyle businesses expecting to last 20 years or more. Even if the material ambitions of such firms seem lower– a steady few million per year, instead of corporate Big Swinging Dickery– it’s from a fleet of some 50,000 (plus or minus) small technology companies that we’ll probably get the first successful approach to convexity. In technology, there aren’t as many of those. No one is funding lifestyle businesses yet. One of the biggest financial questions of the 21st century is how to get money into that market. Now that securities markets have been shown to be vulnerable to manipulation, with the housing market continually exposed to execrable corruption, is there really a good reason not to find a way for a much larger pool of capital (not only venture) to connect with talent? While an individual business is certainly too risky for less sophisticated, middle-class investors (hence, the regulations pertaining to accredited investors) there should be a broad-based, relatively de-risked way for them to put money into independent talent.

Financial risk is, of course, one of the foremost problems with the concept of a “self-executive utopia”. There’s another important issue to address, however. While self-executive disciplined play can handle convexity, where does that discipline come from? When and where do people learn the skills necessary to perform convex work at a level even close to what people will pay for? A fully self-executive world still leaves unanswered the question of progress. Who pays people to learn how to become great at things?

Concave labor seems dull; convexity seems sexy and exciting. There is, however, one virtue in concavity. It favors equality. If the best people are only 1.5 times as productive as the mediocre, there’s benefit in bringing the laggards up to speed and giving the competent less attention. The contemporary Theory-Z cult of teamism makes a lot of sense. Convexity, however, seems to reward doubling down on successes and discarding failures. In the short term, that’s correct. That’s exactly what one should do, if optimizing for immediate payoff. Having the best and oldest people mentor the new and young inflicts an opportunity cost– a loss. Guild cultures (lawful good) tolerated that, expecting to be repaid in loyalty from developed talent, but self-executive cultures (chaotic good) struggle with it.

Becoming great at something requires a balance of law and chaos. For example, there’s no educational program in existence that can train someone to be at the forefront of technology. It requires a lot of independent learning (self-execution; disciplined play). Such a person needs enough fluency with law (and humility) to stand on the shoulders of giants, but enough chaotic capability to get out there into chaos where no one will tell a person to go.

There are a number of interesting subproblems that come out of this understanding of convexity. How do we get the desired productivity out of disciplined play? How do we get the right kind of play? Where does the discipline come from? Finally, from a manager’s standpoint, how do we handle convexity’s risks, given the innate non-separability that hasn’t been seen at such scale before? After 13 very long essays, it looks like we finally have the tools to solve some of these problems and, one hopes, the insights necessary to make it possible for business organizations not to suck.

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.

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 time, which 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.

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.

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.

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.

Yahoo recently bought Summly, a startup run by a 17-year-old, for $30 million. Since the product was shut down, it was a “talent acquisition” (or, “acq-hire”) intended to hire the team, making the list price a pure hiring bonus. This move has, predictably, generated a lot of buzz.

Let’s look at the economics of the damn thing. The information that’s coming out seems to indicate that three engineers will join Yahoo, with an 18-month commitment. Prorated over that time, that’s $6.7 million per engineer per year. Of course, Yahoo hopes that these engineers will stick around for longer than that– perhaps five years, making that price only $2 million per engineer-year. Such numbers are not atypical in the world of acq-hires. Companies routinely pay $5 million per head (40 years of salary, at market rates) just to get a team of validated talent. There are two ways to look at this. The first is to conclude that in-house engineers are getting screwed: if a relationship with an engineer (expected duration: about four years) is worth $5-10 million, doesn’t that mean they’re severely underpaying in-house talent? I think software engineers are underpaid, but on average, we’re not worth $2+ million. Some of us are, most aren’t.  The second possibility is that the engineers being hired are just far superior to Yahoo’s in-house talent. I doubt that as well. I’m sure that Yahoo has amazing software engineers making much less than $6 million per year.

What does it say that Yahoo is buying high-school-age engineers at a panic price?

Of course, some people are taking it as a sign that Yahoo doesn’t have internal talent, or can’t get it. That’s offensive, and almost certainly not the case. I’m sure that Yahoo has plenty of capable people. What acq-hires say is not that a company is so bereft of talent that it can only get it from outside, but that a company can’t recognize talent at the bottom. It’s there, but the middle-management filter is so defective that the executives have no clue what they have. This is similar in character to a hoarder. By “hoarder”, I’m not talking about people who keep receipts or silly mementos, but the pathological kind whose living quarters become filthy, dangerous, and borderline uninhabitable, and who require psychiatric help for normal living. A true hoarder will have to buy a new coat every winter because the old one, without fail, gets lost in a personal junkyard of useless stuff. Anyway, such a person’s likely to be needlessly spending $500 on winter clothing every season, because his house is such a pigsty. What he needs is already there, but inaccessible. This is the problem that rank cultures have when it comes to talent. They become so unable to spot talent at the bottom that, even though they have talent “lying around somewhere”, they can’t (or won’t) find what they have. So they have to panic-buy it in this ridiculous bubble climate. What’s this about? It’s about trust.

Yahoo is not getting hoodwinked– at least, not in this. As the executives see it, they’re buying a trusted team. Capable software engineers are worth these “absurd” amounts seen in acq-hires if they are trusted by the organization. Give a good engineer full autonomy over her work, and give her important work, and she’ll deliver millions in value. That probably applies to these guys, but it also applies to Yahoo’s stronger engineers. On the hand, if you don’t trust her, use her for fourth-quadrant work, and fail to develop that talent; then she’s worth, if you’re lucky, 2 to 5 percent of her peak potential. This is only tolerable in software because 2-5% of a competent engineer’s peak potential still exceeds the market salary.

Trust sparsity

Large rank-culture companies seem to be talent hoarders, with no exaggeration in the use of the word hoarder. They bring smart people in, because the talent is “worth having around”, especially at a wage level that is insignificant to a corporation. They let it go to waste. They build up a formless array of people at the bottom (with more rigid, but pathological and constantly changing, managerial structures to organize and stack-rank them them) and, not knowing where the talent is, tend toward prevailing trust of everyone down there. Clearly some of those nincompoops at the bottom have talent and some don’t, but it’s rarely worth it to sort through the mess in the basement. This becomes a self-fulfilling prophecy. Good engineers don’t want to work in companies that don’t trust them, so they leave; good managers don’t want crappy reports, so they quit. The end result is an all-levels flight of talent from the firm. What results is a loss of trust in all levels of the firm. Executives start assuming that their reports are all morons (the “bozo bit” defaults to the “on” position) and that the only candidates for decision-making roles are “special people” hired from outside. Workers stop believing that their managers give a damn about their career development. It’s a omnilateral breakdown of trust that is very hard to reverse.

When people stop trusting each other, they become dishonest. No, I’m not saying that a company like Yahoo is full of liars– I doubt that to be the case. However, there are degrees of honesty, and the important ones (e.g. willingness to share bad news and explore difficult realities, as opposed to merely furnishing truthful answers to simple questions) require trusting the other party with the truth. That’s the endgame of trust sparsity. It creates a world in which some degree of dishonesty is not only beneficial, but necessary for one who wishes to survive.

I mentioned, in Part 1, the social currency of credibility that is supposed to come from work performance, but that Sociopaths find other ways to get. They realize that, even if the organization wants to think that social status mirrors contribution and capability exactly, it can be tricked and “merit” can be bought on a black market. Trust sparsity exists in an organization when people tend to distrust the competence and decency of the other players. Employees doubt they’re fairly compensated or well-directed, managers distrust their reports to get their jobs done and tend to micromanage, and people are afraid to work with other teams, because the default assumption about another person in the company is that he’s an unreliable idiot. The “bozo bit” starts out in the on position (meaning people are, by default, regarded as idiots until proven otherwise).

Trust density is the opposite, in which people are generally assumed to be competent and decent. The “bozo bit” starts out in the off position, and only people who prove to be really bad are distrusted (and in a functioning organization, they’ll be let go). This matter of trust sparsity versus density seems to be a binary property of social groups. Once a company “flips the switch” to trust sparsity, it becomes impossible to get anything done without disproportionate credibility. This turns into a “permission paradox” state where the only way to get a project that would confer credibility is to have it already– unless you want to take the “fake it till you make it” strategy. That’s when MacLeod Sociopaths (who, again, are not always bad people; but invariably willing to break rules) start to take over. Bad artists borrow, good artists steal.

That’s why “why not?” cultures are superior to “why you?” cultures. MacLeod Sociopaths will just take credibility, no matter what the official culture is. If they can arrogate it silently, they do so. They’ll ask for forgiveness, not permission. The difference between good Sociopaths and bad ones is what they do with that purloined freedom. A “why you?” culture ends up relying on its Sociopaths, who are a difficult crowd to aduit.

When you have trust density, honest people are at an advantage in the environment of transparency and collaboration that it generates. Getting real work done is what people recognize. When you have trust sparsity, however, you end up with communication droughts, and it tends to be dishonest manipulators who acquire credibility and push themselves ahead.

Living in Truth, and the Lie

This is the most personal topic in the MacLeod series. The other organizations I suffer abstractly, as much as anyone else does. Those traits of organizations irritate me, and I find them perniciously inefficient, but they don’t mess up my life. This is an issue that has rocked my career (in good ways, an bad) from time to time. I care a lot about this one. I’m going to talk, for a bit, about living in truth.

When you live in truth, you decide to be consistently honest, and to assume good faith from other people (although you do not take them at literal word). You live and work as if it were a trust-dense environment, and you don’t try to hide the fact that you’re doing so. You’re honest with your manager, even if he’s not forthright with you. You inform counterparties of the risk inherent in deals you wish to make, even if it’s to your disadvantage. You don’t bullshit, and you don’t tolerate others’ nonsense either. In the classical sense of the word, it’s cynical: live virtuously and honestly, assume basic goodness in others, and oppose dishonesty. 

The modern concept (and the name) comes from Vaclav Havel, who championed “anti-political politics“. The idea is that, rather than directly opposing an overbearing political force, to live as if one were free. No violence or protest needed. Just do the right thing, anyway. This is a courageous and rare thing to do, for the obvious reason that political authority (especially under Soviet rule) can be terrifying. If one person lives in truth, he gets shot or thrown in jail (as Havel did, being imprisoned for several years). If a million people do it, society changes. The Lie’s only scalable weapon in the face of exposure is further dishonesty and, eventually, it becomes absurd and falls in on itself.

It’s actually much easier for us corporate denizens to live in truth, because we really have little to lose. What might happen? A job might end. That’s the loss of a relationship with someone who didn’t value us in the first place. We might get bad references (hire a lawyer; a well-written C&D will clear that up). Then there’s the “job hopping” stigma. Okay, that’s real, because there are a lot of imbeciles out there who are stuck in the 20th century who’ll throw out your resume for having “too many jobs”, but there are non-imbeciles out there as well. These are all serious consequences, but nothing compared to what real dissidents have faced: prison and death. So what the hell is our excuse? I’m not asking for self-immolation here, but moral courage would be nice. My experience in the corporate world has convinced me that it’s thin on the ground. People prefer the comfort of the Lie over a life in truth.

What does “truth” mean in a corporate context? It means doing the right thing, even if it hurts. It means placing value on personal health and progress, profitability of the business, and cultural integrity. It means taking responsibility for strategy at one’s appropriate scope, rather than using the following-orders defense for failure. It’s never easy, and it’s often punished. A synonym for living in truth is for an employee to be (a word I’ve used before) self-executive.

In a culture of truth, employees are self-executive and it’s assumed that they will be. Trust density dominates. I don’t intend to claim that what I’m discussing in a panacea that magically causes dishonesty to go away, but a self-executive world is one in which the honest can fight back. They have a chance. They’re informed, and it’s worthwhile for them to speak because people in power will actually listen to them. Nothing can change the fact that there are bad actors out there, and good people who work together badly. Even the best organizations will have to deal with that. But a self-executive world is one in which good people can still win.

I’ve talked about truth, and we can agree that it’s good. What does The Lie look like? Well, in typical corporations, the powerful aren’t explicitly dishonest. They’re careful not to say anything on record that is literally untrue. It’s more that they’re so opaque with information that emergent dishonesty is the norm. Valuable information is so guarded that people don’t even know if they’re doing their jobs properly, which makes it easier to mask a termination as “for performance”. Managers can claim that “there isn’t money in the budget” for a raise when that is only correct with the added context, “for you.” There’s a lot of dishonesty that opacity enables.

Corporations like The Lie because it creates an executive in-crowd. A nasty joke has been told, and the target doesn’t even notice. Sociopaths get the joke, and the Clueless butts have no idea what’s happening. MacLeod Losers would get it, but they’ve chosen not to be in the same room. The Lie is also an extremely powerful weapon. If you’re in on the Lie and have some control over its direction, you can use it to take people down. That’s why reputation economies tend to be hacked by the worst sorts of people. The Lie is very good at ruining reputations. That’s how the fucking thing fights back: it reduces the credibility of its opponents with (big surprise) deceptive half-truths, opacity, and outright lies.

In terms of corporate employment, reputation damage– in forms like immediate firings, bad references, and possibly frivolous lawsuits– is all that it has. That should establish it as very weak. Why? The Lie’s counterattack has constant total strength but a variable number of targets. It’s like a fireball spell that, if it hits one target, does enough damage to kill a demigod but, if it hits fifty, barely scratches them. If everyone fights The Lie and The Lie fights back against everyone, its weapon is so diluted as to be impotent. No one will buy into The Lie if it starts smearing more people– especially if they experience getting smeared, which is one way for a person to learn viscerally that The Lie is a lie.

Right now, people are terrified of bad references, short jobs, and public terminations. People don’t “bad mouth” unethical employers for fear of severe career repercussions. Now, I tend to agree that people who air “dirty laundry” (mistakes and embarrassments within normal bounds, that any complex entity will endure, as opposed to real ethical problems) are doing something that they shouldn’t, but some companies and executives are just deeply unethical and deserve to have their secrets blown. Right now, this sort of thing doesn’t happen until it’s far too late– investors were defrauded, employees robbed, and customers left hanging– because no one is willing to risk long-term blacklisting to do something that, while desirable to society, confers little personal yield. The Lie perpetuates itself by making truth scary for the individual who might expose it.

“Stone Soup” and convex dishonesty

Why does The Lie exist? I’m going to tackle a related question: is dishonesty always bad? With dishonesty, I’m not talking about “white lies” or inconsequential politeness or even the semi-formalistic lies (such as never disparaging an ex-employer or boss, instead saying “I was looking for new challenges”) required by decorum, but rather about willful deception of other people with the goal of altering their behavior. In other words, deception means serious sociopath stuff. So, I think it should be obvious that we’re going to fall somewhere between “always wrong” and “most often wrong”. I intend to convey that it’s the latter: it’s most often wrong, but not always. There are situations that require dishonesty.

There’s a parable, probably going back to medieval times, about a village in a deep state of famine. Each villager has plenty of produce, but they hoard food, never sharing or trading it because they distrust each other. Everyone’s malnourished; they’re probably making bad decisions, and slowly dying.

A pair of outside strangers, also hungry, comes to the village and asks for food. Slammed doors. Nothing. So they camp out in the town square, put a rock in a cauldron with some water, and start boiling it. Curious villagers, from time to time throughout the afternoon, come by to ask what they’re doing. “We’re making Stone Soup, a delicious specialty where we’re from. Would you like some?” Villagers agree to partake, and the travelers suggest that Stone Soup is even better with just a few carrots. Parsley’s good too. Rice. Chicken. Soon enough, the whole village is on it, with each contributor thinking he or she is adding just a little extra to a completed product. Of course, the stone is actually inert: “Stone Soup” is just hot water! So the stone is taken out at the end, and the soup is served to the village. Everyone gets a much healthier meal than they’ve had in months. Victory. The End.

This is a case where’s pre-existing trust sparsity within the village. They don’t share food, because they don’t believe the others will be fair to them. Instead, each eats only the one food product he or she has, and they’re all malnourished. The travelers, needing to eat, do something dishonest. Asking for food doesn’t work, so they make up a nonexistent delicacy, offer to share, and ask people for ingredients one-by-one. The result is that everyone gets a bowl of real soup. They all benefit, but it’s still dishonest. This isn’t a polite white lie or a “protocol lie” where both parties understand the truth can’t be told. It’s intentional deception with the explicit goal of altering economic behavior: legally, we call that “fraud”. Yet it’s clearly a good thing they did. This is a model case of convex dishonesty.

What’s convex dishonesty? It exists when one party gets commitments from others through dishonest means, under a situation where a small number of commitments will lead to failure but a large investment will pay off multiply (convexity). The goal, of course, is to succeed and pay everyone back.

For a less defensible example, let’s say that I have a business strategy that will require investments of $1 million from five people. If all contribute, we’ll net $21 million. I take $1 million for the execution and pay $4 million back to each of the principals. If we don’t get all five commitments, however, everything is lost. It’s very risky to go in as the first, second, third or fourth investor, because you’re betting on the whims of all the others. The fifth investor experiences no risk. A devious way to maximize my chance of success would be to tell each of the 5 participants that the other four were already committed, implying that there’s no risk. If I pull it off, everyone wins. We all get a payday. However, if one of those players can’t invest, or doesn’t trust me, then we all lose.

Why is that convex? It pertains to the input-output relationship between resources and payoff. In the example above, the payoff function is zero from 0 to 4 commitments, and $21 million at 5. That’s the “hockey stick” graph that is the epitome of convexity. Typically, a convex profile means that a mediocre commitment will result in failure (hosing the investors) while a large one will deliver outsized success. Investors are effectively betting on whether they believe others will commit, and the fraud is in convincing them that the others have.

Stone Soup has a similar profile. The value of the soup is somewhat subjective, but convexity is clearly in play. If one villager puts food in the soup, he gets screwed. He’s giving away some of his food for a “soup” that he could make at home. He’d probably be very angry. If twenty villagers participate, however, they get a food that they couldn’t have made alone.

With convex dishonesty, you’re typically generating validations (often “social proof”) to create the impression that a project is almost in a desirable state, in order to motivate people to contribute so you can get to that point. You’re selling a “vision” to get commitment before you have any way of knowing whether you’ll gather enough to deliver. I’d imagine that most startup entrepreneurs understand this intuitively: one has employees, investors, customers and press, and all are looking for progress with the other groups to see general “traction”. It might be tempting (and it’s generally quite wrong) to exaggerate one’s success in other departments– for example, to hire people at a low salary with the promise that “Series A funding will be here in two months”, or to mislead investors with inflated customer numbers (don’t do that). It’s just very hard to orchestrate a situation where that heterogeneous collection of needs and resources grow together.

Convex dishonesty isn’t always good. It’s often bad. What’s wrong with it? Well, most scams look like convex dishonesty. For one game-theoretic example, consider the “drop-our-books” prank played in junior high schools across America. The butt of the joke is told that, at a certain time, the whole class is going to engage in some disruptive behavior (such as dropping one’s book on the floor, clapping, or yelling out). If disruption of class is considered “good” (e.g. positive utility in schadenfreude against the teacher) then it’s convex. If one student does it alone, he’s embarrassed and possibly punished, so he loses. If all the students do it, they laugh at the teacher’s expense but can’t all be singled out, so the group wins. Of course, the fraudulent aspect of this is that only one person (the butt of the joke) will actually engage in the behavior. The other students laugh at his expense.

In fact, phenomena that “look like” convex dishonesty can reach extremes of evil. Ostracism is a case of that. I’m not talking about mere individual social rejection, but when a community is persuaded to reject someone entirely. Influential people in that group create the usually-fraudulent perception that no one likes the target, which compels individuals to reject that person because “everyone else” dislikes him. It’s not convex in the typical sense (there’s no clear “payoff function” with a convex shape) but it has similarities insofar as it uses dishonesty to push the community from one Nash equilibrium to a worse (at least for the rejected person) one.

Trust sparsity and convex dishonesty

If we jump back to Stone Soup for a second, we find an impressive moral message. In this contrived (but not uncommon) circumstance, deliberate deception is heroic. Amid the trust sparsity of that village, a convex deception is the only thing that can get them to work together and produce a decent meal.

I contend that these travelers are archetypal MacLeod Sociopaths. Yes, they saved the villagers’ lives. They were certainly decent enough to share the Stone Soup that they created. (A modern executive would take an 80-percent cut of the soup as a “stone fee”, giving the villagers the scraps.) They also did it for selfish reasons: they didn’t want to starve either. One can argue them to be thieves: all they brought to the soup was a worthless stone, but they got to share in the final product. Their fundamental, catalytic function, however, was to make this trust-sparse group of people work together with the lubricant of convex dishonesty: the lie that this Stone Soup had pre-existing value, and just needed a little bit more from each. Whether these outsiders were good-hearted altruists or dishonest egoists (sociopaths?) is beside the point. They were necessary.

That is what trust sparsity is about. Within a trust-sparse corporate environment, to do anything requires a certain dishonesty (also known as “social proof arbitrage”). Trust sparsity means that everyone’s default will be to look at you with the “bozo bit” on, and ignore your input. The first thing you must do– the only thing that’s important– is flip that damn switch using whatever means possible. Until you’ve done that, nothing you achieve will matter. After you’ve flipped your “bozo bit” to the off position, you can get some real work done. But if your “bozo bit” is on, the only thing you’ll be able to do is fourth-quadrant work. Get out of that mess as soon as you can. Fourth-quadrant work will stink up your career if you’re on it for too long.

What exactly am I advocating?

My message might seem muddled at this point. I railed against The Lie, but I just said that people should flip their “bozo bit” to off using “whatever means possible”. It’s actually quite altruistic to do so, because you can’t get real work done till you’ve zeroed that “bit”. Does that means I’m advocating dishonesty? Possibly so.

When you live in truth and become self-executive in the honest way, you’re taking on a major risk. You’re flipping your own “bozo bit”, and letting it be known that you expect others to do so as well. You’re refusing to be deprived of credibility, and in a visible and above-board way. Often, this means you’re arrogating more autonomy than your manager has. It’s dangerous. It can get you fired. Most people prefer the safer and subversive convex dishonesty. They’re not trying to defraud anyone, though; they fully intend to pay the villagers back.

How do The Lie, and convex dishonesty, interact with the traditional MacLeod tiers? MacLeod Losers live with the Lie. It becomes an annoying landscape feature, rather than a moral calamity, to them. Clueless tend not to know that it is a Lie. They’re the “useful idiots”. Most of the MacLeod Sociopaths have, however, risen to a level (just past the Effort Thermocline) where they’re cognizant of The Lie. It’s a like a hedge maze whose structure is evident from above, but befuddling and illegible from the inside. Sociopaths, with a reaper’s-eye-view, learn how to use The Lie.

Where are the people who oppose The Lie and live in truth? I contend that those are the natural Technocrats, and it’s telling that the original MacLeod pyramid has no place for such. I guess that such people are assumed to be flushed out, and that’s not a bad assumption. That is the fundamental evil of organizational opacity, wherein truth-tellers can be isolated, punished, and ejected. The Lie can push them out, and make itself stronger. Its opponents are either pushed out in a humiliating way (“making an example”), isolated and ejected invisibly, or silenced into non-participation. At the same time, the bad MacLeod Sociopaths learn how to mix their own power with The Lie, an alloying process that makes both stronger.

The Lie loves trust sparsity, because it makes it easy to play divide-and-conquer games against the powerless. Moreover, the only way to get any work done in a trust-sparse environment is to use convex dishonesty. It’s to counterfeit credibility (go ahead, it’s usually a bullshit currency that deserves it) as far as you can, and to live in a “why not?” culture instead of “why you?” by changing your history as much as is needed. That’s a practical necessity for most people (even good people in the desirable subslice of the Sociopath type) if they want to get any work done.

I don’t like that. I don’t like that the need for dishonesty is there. Even good lies– even full-on, obvious-after-the-fact convex dishonesty– are damaging to relationships. My advice: be cautious. Be smart. If a personal relationship is valuable to you outside of the organizational context, don’t pollute it with a lie (even a convex one). But most human organizations won’t let you do X until you’re a “real X” with 5 years of experience in a 3-year-old technology. How do you become a real X? You should just become one, through any means possible. Your decision, today. Better to fake it now than to never make it. “You don’t need to hire an X. I am the resident X. Of course I have production and leadership experience!” Never claim a specific competency that you don’t have, or promise work that you can’t fulfill, but if you need to inflate experiences to tweak perceptions in the right direction, go right ahead. Your enemies are cheating in the exact same way, and they’re much worse people, so why not? If you can afford to live in truth, do it. If you can’t, then bolster your career with enough convex lies to get permission to tackle real work. But then, because you still are a decent person, it’s on you to deliver what you promised.

Ultimately, a lot of decisions aren’t made based on merit, but on gut decisions derived from social status and “feel”. That is why the Draco Malfoy type whose family “was Ivy before George III” sees his career advance just a little bit faster than everyone else’s. It’s not that there’s a conscious decision to promote him based on irrelevant social status. It’s just how people work when trust sparsity has set in and people are waving feeble lanterns at midnight. If you can push yourself forward with just little bit of convex social-proof arbitrage, then you should. Like I said, I don’t advocate this style of deception if you want a persistent personal relationship– that slight social superiority puts one just-above-zero in a trust-sparse environment, but it’s not worth it to gain that petty sort of elevation in genuine relationships– but it’s a fine way to move about at work.

Or, you can go the other way. You can disobey the Lie. Sometimes that’s the right thing to do, as well. You can get up at 4:00 in the morning when The Lie is asleep and get to work. You can live in truth. Both, as I see it, are morally valid options for the individual.

Organizational benefits of trust density

I consider it morally acceptable for a person to use convex lies to push his career forward. Why? Because most companies put people in roles that are three levels below their frontier of ability. The assignment of fourth quadrant work that is itself dishonest. How am I justified in saying that crappy work assignments are dishonest? The truth about the junk work is that it’s evaluative. It has very low importance in the function of the business, and not much is learned in doing it. Rather, it’s just there to see if the person is “good enough” for real work, a decision that often isn’t made until he’s “paid dues” and “proven himself” in a years-long wringer of boring, unimportant work where there are high expectations of dedication and obedience to managerial authority. In my opinion, this is a terrible statement about an organization. It means that it doesn’t trust its own hiring process.

Some people (MacLeod Sociopaths) bypass all that evaluative time-wasting nonsense and put themselves on real work. This can be done by public honesty (living in truth) but that tends to entail more risk of sudden income loss than most people can tolerate. So usually, they do it in dishonest ways. They fake credentials and experience, careful never to explicitly lie, but fudging on subjectives like “production experience” and “leadership role”. They find social proof arbitrages and credibility trades and hack the system as it exists. This is good for them, but it’s bad for the organization itself.

The Lie can be seen as a waste-pile of formerly convex dishonesties that were useful to the organization at one point but are now pathological. For example, let’s say that the organization was divided on the matter of who should be CEO: John or Kara. John got the job over his more competent co-founder, Kara, because he had “investor connections” that weren’t real and never came through. However, with John as the leader, they were able to work together as a group, and other funding came in later. A convex deception! Three years later, it’s discovered that John’s claim to the CEO job was utterly false. The company can either fire him or (often, the more expedient choice) assimilate his lies by changing the story.

I tend to think of organizational opacity as a core aspect of The Lie, rather than something that just enables it. For example, companies always claim that compensation is fair, but keep specifics extremely murky so that no one can really audit them. The reason they do this, of course, is so they can be unfair when it’s expedient. If they’re desperate for talent, they’ll go up by 20% without raising salaries across the board. In truth, the culture of opacity and hierarchy that companies create surrounding compensation, division of labor, performance evaluation, and pretty much anything else that matters, is all there to enable expedient lies. Those errors are supposed to cancel out over time, but MacLeod Sociopaths find ways to turn such errors into a true currency that they can trade and invest for profit. As they do so, The Lie invisibly gains strength. Virtually no one intends to build up The Lie, because almost everyone is acting out of self-interest only. It happens day by day. When compensation becomes unfair and information becomes asymmetric, The Lie gets stronger. When internal headcount limitations are put in place, and closed allocation sets in, The Lie gets much stronger.

Most convex dishonesties are “good lies” of the Stone Soup variety. People are embellishing credentials to counterfeit credibility and therefore be permitted to do real work that’s of benefit to them and the organization. Those convex lies generally don’t contribute to The Lie directly. In fact, these are people fighting against The Lie, by subverting its attempts to disempower them. Unfortunately, they’re often indirectly responsible for feeding The Lie. When a convex lie fails (i.e. the payoff is never realized, and the lied-to parties get burned) people become, justifiably, angry. They bought into a party with counterfeit credibility, and lost. This validates credibility’s necessity! (What happens when people with real credibility fail to deliver? Credibility is defined more conservatively, and the environment becomes more trust-sparse and dysfunctional.) The Lie becomes stronger. Those who are aware of The Lie being a lie are never fully comfortable with it, but they prefer the static falseness of The Lie over the chaos of unknown truth values. This gets to one of The Lie’s stabilizing social purposes. It does try to wipe out Truth, and with a vengeance. It fights that with the most ardor imaginable, because that’s an existential struggle. The Lie fights truth hardest of all, but The Lie also fights other lies, and that’s why people tolerate it.

One of the easiest ways to make enemies to counterfeit some social status currency (or credibility). That’ll piss off both sides, on the matter of how people feel about that currency. People who buy into it become enemies, in defense of what was just diluted by an attempt at counterfeit. People who oppose that currency despise the counterfeiter with equal fervor because the fakery validates it. So when people feign credibility for a convex deception and fail, they’re a common enemy for everyone. That’s good for The Lie. The Lie loves common enemies, and if those enemies are liars, it can make itself look truthful or, at the least, “credible” (there’s that concept again). That’s because people tend to assume false dichotomies on a variety of moral issues, creating “sides” that lead to wrong conclusions.

I’ve opined on moral alignment and noted that, while good always treats other forms of good with basic respect– there can be disagreement and debate, but not malicious harm– there is no such convenant among evil. Good respects good as inherently valuable. Evil does not respect other evil; it only values strength. This gives good a certain unifying strength: a more cohesive, visibly altruistic, message. While good people often argue endlessly about tactical concerns, they’re all “on the same side”. That leads to a misperception that there’s an “evil side”. There isn’t. Evil fights good and evil. It lacks that cohesiveness. What is it, then, that makes evil strong, with enough power to oppose good with almost equal force? Most people aren’t “aligned with” good or evil. They’re in the weak, indecisive middle. Evil is more willing to recruit them. Good wants to recruit people honestly, and treat them as equals. That doesn’t “scale” into the moral middle classes. Evil is much more comfortable with recruiting them as inferiors and with dishonesty. One time-honored recruiting tactic, for evil, is to choose some powerless (or nonexistent) subsector of evil and punish it brutally, thus appearing to weak souls to be an anti-evil force, thus good. The Lie works in a similar way. I don’t mean to imply that typical status-inflating convex lies are evil, but most people find them to be unethical. When The Lie smashes a caught liar on the rock, it persuades the weak-minded (often, disproportionately represented in the Clueless ranks that are an organization’s muscle) that it stands for what is (if clearly not truthful) ethical, at the least. Of course, that’s a lie on it’s own.

That is the fundamental problem with convex dishonesty. It’s sometimes expedient, and sometimes a person’s career needs it, but over time it strengthens The Lie (one of whose sources of power is a fear of status-inflators and subversives; being one justifies it). When you run a convex fraud, you’re borrowing credibility on fraudulent terms (stealing) even though you have the (morally good) intent of paying everyone back multiply and making your creditors more than whole. The problem is that if you succeed, you validate that credibility currency that you stole, strengthening The Lie. If you fail, you give the Lie and the useful idiots a common enemy in you, also strengthening The Lie. I won’t call convex dishonesty unacceptable as a means of corporate survival and self-advancement, because it’s often just necessary in a trust-sparse environment, but it is corrosive to organizations. One way or another, this class of dishonesty strengthens The Lie.

An organization that wants to be healthy can’t tolerate The Lie. It needs to kill it at root. If it’s going to avoid generating one, it needs to create a trust-dense environment where the “bozo bit” is always off. There’s no alternative, because when trust sparsity is in effect, the only people who can succeed (and acquire credibility in the pseudo-meritocracy) are those willing to partake in convex dishonesty. This generates an undesirable selection pattern in which organizational success favors convex dishonesty, which evolves into all-out dishonesty. Over enough time, this moves away from the good-faith, “team-building” convex deception and toward outright “cooking the books”.

Solving It

This is why trust is so damned important, but trust is hard to manage at scale. You might trust your friends, but do you trust their friends? At some point, the warm-fuzzy social currency of trust needs to give way to structure. You actually need to go into the painstaking process of formalizing social contracts. If you’re running a company, what does the Employee Bill of Rights look like? You don’t need one at 8 people; you certainly do need one at 300. You need to set minimum trust, by which I mean giving employees enough basic credibility that they don’t need to perpetrate convex lies to grow and take risks. You also need to set maximum trust, both to crack down on the proto-managerial thugs who’d abuse the power vacuums left by formal management’s fundamental decency to extort others into supporting their career goals, and to give meaning to the minimum trust offered. (If people are “boundlessly trusted”, that just means you’ve been lazy and will rule ad-hoc, because the concept makes no sense.) There’s work to do on where to set the posts, and while I think it’s obvious where I stand (trust people with their own time; distrust those who attempt to control others) I will flesh that out further in further installments.

In Part 17, I discussed financial trust and the use of extreme transparency to ensure investors, employees, and management that everyone’s being compensated fairly. In Part 18, I discussed industrial trust– do you trust your employees to get the work done, and to do it well?– and how it requires not micromanagement but a self-executive focus on driving toward Progressive Time. Now I’ve discussed the forces that conspire against trust. People either need or think they need convex dishonesty to get things accomplished. Organizations compensate by creating an internal social currency called “credibility”, which evolves its own pile of lies that become The Lie. The Lie generates trust sparsity as its beneficiaries fight for its upkeep, and the organizational self-loathing and dysfunction that come out of trust sparsity generate more convex dishonesty to overcome an increasingly strong Lie. The alternative is to Live in Truth– to name The Lie and stand in opposition to it. Individually, this is dangerous and impotent: you lose credibility, become “disgruntled guy”, then “fired guy“. Collectively, it’s powerful. If The Lie cannot discredit the group as a whole, it falls to pieces. Organizations, however, shouldn’t wait for whistleblowers to call them out. Reliance on individual heroism is not a good strategy, but shows the absence of such. If you want a healthy organizational culture, you have to fight The Lie proactively. Living in Truth must be a central pillar of the culture.

We’re almost finished. There’s a lot that I might add to this series in the future, and I’m seriously considering the book idea, but this series has taken a lot of time and work, and there are some technical projects I want to start in the spring. Here’s the roadmap I see for the next three posts:

• Part 20: This one. Flesh out what simple trust is, why it isn’t so simple, and how to defend it. 
• Part 21: Review the economics of the problem (convexity, technological-era needs) so we can define what “Solving It” looks like.
• Part 22: The final Solve It post, where I discuss what I think is the missing piece in all of this.

To recap where we’ve been, I’ve spent so much time on trust. Here’s what I’ve covered on the topic this far:

• Part 17: Financial trust. Do investors and employees feel that the compensation structure is fair to everyone? I advocated a structure that encourages transparency, that does not disallow but limits “HR expedient” overcompensation, and avoids a lot of the problems with traditional equity compensation (e.g. liquidation preferences, disalignment of incentives). 
• Part 18: Industrial trust. Are people trusted in their use of time? Since the productive value of time can scale either progressively or haphazardly with planning, the idea is to create a culture of intelligent (self-executive) time management and self-improvement. That delivers more yield (and is more scalable) than traditional micromanagement.
• Part 19: Why dishonesty is so common in organizations. As trust sparsity set, people need to make unrealistic or highly contingent promises in order to get anything accomplished, but this “convex” deception is simply taken to prove the need for further distrust of employees. Also, it creeps; what starts as “stone soup” (mutually beneficial convex deception) evolves into fraud.

These issues are critically important. The MacLeod degeneracy is an artifact of trust sparsity and dishonest risk transfers. If we want to avoid it, we have to learn how to build trust-dense organizations. That’s an incredibly hard thing to do.

There seem to be three ways humans have been able to get large projects done; call them “sources of power”. The first is coercion: someone with a weapon or military backing decides that work will be done and forces people to do it. That’s mostly illegal, and good riddance to it. The second is divination. You don’t have to believe in supernatural beings for it to work; random chance is just fine. Aaron Brown, in The Poker Face of Wall Street, makes a good case for gambling as having had a necessary function on the American frontier. It allowed poor but ambitious people to form pools of capital that could be used to finance large projects. It didn’t matter who the leader was, for most of these, but it needed someone. Capital inequality, for its obvious flaws and injustices, fulfills that. Self-favoring divination is a subcase called arrogation. The third is aggregation, which is how we make choose political leaders (voting) and valuate companies (markets) and it also is supposed to determine how companies run themselves, at least at the upper levels. Aggregation involves voluntary action (unlike coercions) and decisions that must be made with defensible reasons (unlike divination) and that requires trust, both in the processes and the people.

When there isn’t trust and aggregation fails, people tend to default to one of the other two sources of power. Ineffective managers fall back on coercion, while convex fraud can be viewed as an attempt to create a divination process that favors oneself (arrogation). No one would disagree that this stuff is socially and emotionally toxic. Is it, however, unprofitable? In the technological economy, wherein the relationship between input (morale, effort, skill, and talent) and output (economic value rendered) is convex, the answer’s a resounding “yes”. One of the traits of convexity is that small differences in conditions produce large variations in output, and distrusting employees doesn’t just shave a little off the top, as it would in a concave world. It hamstrings them, and everyone loses.

What is simple trust?

Trust is a multifaceted and complicated trait of a relationship. There are degrees of it. There’s a lower bar to trust someone with $10 than with $10,000,000. Likewise, there are people whom I’d trust to do the right thing on big issues, but wouldn’t leave small stuff (that they might ignore) to them. I’d rather do it myself. Additionally, there’s the matter of domain-specific competence. I’m not a doctor, so if you trust me to perform plastic surgery on you, then you’re making a mistake. This is pretty complex and specialized. I have good news: we don’t have to peer into that stuff. Simple trust is, well, much simpler. Is this person trusted to be decent and intelligent or, to use the business lingo, “credible”? Simple trust doesn’t require a foolhardy faith that someone will get everything right, but it assumes that he will try to do his best, communicate shortfalls, and accept feedback.

Simple trust is binary

What’s important about simple trust is that it’s binary. For the larger topic of trust, there are degrees and nuances. Simple trust either exists or it doesn’t. Here’s a barometer for simple trust: would you give this person an introduction? Would you trust him to give you a fair recommendation? There’s a quick, emotional “yes” or “no” that comes forth in, at most, a couple hundred milliseconds. “No, not that idiot!” “Yes, of course! Great guy!” That’s where simple trust lives. More complex nuances of audit structure, project/person fit, and contractual provisions– all of those being more ratiocinative and deliberate– come later.

In software, we refer to simple trust as the “bozo bit”. If the bozo bit is off, then a person is going to be held to have valuable input. That doesn’t mean that his ideas will never be rejected, but they will be heard and considered. He’ll have influence, if not power. When the bozo bit’s on, that person’s input is ignored and he’ll be viewed as a source of trouble and potential failure. In management culture, the exact same dynamic has been given the name “flipping the switch”. That’s when a report is prematurely judged to be incompetent and therefore ignored wholesale. When a manager flips the switch, the employee becomes A Problem, even if there’s no objective reason to view him that way.

Simple trust is symmetric

In general, simple trust is symmetric. People size each other up and generally figure out, on a subconscious level, where they stand on this matter. There are some cases of cluelessness that enable asymmetry, but they’re rare. That’s why a bad reference is so damaging to a person’s job search. It means that a candidate put simple trust in someone who thought she was an idiot. Either no one likes her and she’s back into a corner, or she’s a terrible judge of character. This is different from other emotional affinities or revulsions. For example, there are probably people I like who don’t like me, and vice versa. Admiration driven by social status is asymmetric, almost by definition. More nuanced varieties of trust (driven by information specific to the parties) can be asymmetric. Simple trust rarely is. It’s reciprocal.

When I was involved in recruiting, I noticed that even though most candidates had nothing to hide, people hated giving direct managers for references. Actually, I think this fear is often misplaced. Managers are trained in not-getting-sued so bad references from them are rare– they tend to fade to neutrality from both sides– and variance-reduction in the reference-checking process is generally desirable, since it only occurs when the decision to hire is nearly made (and will only be unmade by a surprisingly bad finding). Still, it’s understandable that people wouldn’t want ex-bosses in their continuing careers. Managerial authority tends to make simple trust impossible. That’s why the relationship is so awkward. The manager’s job is to look for causes of potential failure, especially in people. Fault-finding is her responsibility, as most companies define it. That, I would say, is the antithesis of simple trust. When there’s simple trust, you size people up for upside capability because you assume they’re not going to fail you in bad faith. When there isn’t, you start looking for breaking points: how far would this person need to be pushed before he became useless?

Why is simple trust symmetric? Because the lack of it is a negation of the person. Most people understand and respect that no one is going to enter a $20-million deal with them on their word alone, but when there’s a lack of simple trust, the relationship becomes adversarial. The absence of simple trust becomes fight or flight. Most of the corporate pyrotechnics we know and love come from the cases where “flight” is rendered impossible.

Simple trust is systemic

In the general and more complex sense, trust is not (nor should it be) transitive. Trusting someone does not mean trusting everyone she trusts. An ungodly number of parties have been ruined by invited people inviting people… who invite other people. Simple trust generally tries to be transitive. If Alice trusts Bob, and Bob trusts Eve, it’s unlikely that Alice will view Eve as a complete waste of her time. Alice’s bozo bit will probably be 90% of the way to “off” based on Bob’s recommendation alone. That’s why introductions are so important as a social currency; they are the process of simple trust transitivity.

If a relationship is (mostly) symmetric and transitive, then it will tend to coalesce into graph-theoretic cliques (clusters of nodes where each pair is directly connected) and those are often realized in human social cliques. Within the clique, there’s simple trust between all the members. They may not care for each other personally, nor agree very often, but they respect each other enough to work together. Outside of such cliques, simple trust is uncommon. This encourages the formation of an “us” and a “them”. How big can these trust-dense cliques get? No one knows, for sure. They can scale to hundreds of people, but that’s rare. Typically, simple trust among an unstructured set of people will congeal into a state where there are many small, trust-dense cliques amid an overwhelmingly sparse general graph. That’s what we see in high schools and prisons, and it seems to be a fairly natural human state in the absence of effective leadership.

Within a group, there will be a general character of trust sparsity or density, and it’s a binary systemic property. That is, a trust-sparse company will be sparse almost everywhere, while a trust-dense company will be uniformly dense, which is experienced in a sense that “everything just works”. Trust-dense environments may have an occasional “broken link”, but they’re often self-repairing and can adapt: those two people just won’t be made to work together if it can be avoided. Trust-sparse environments tend to generate small cliques that view each other with suspicion and, sometimes, outright adversity. Managers in trust-sparse companies tend to prize the “unicorn” who can become trusted in multiple cliques (because that’s so rare) who might be able to merge them into a larger coalition, but usually such a person is thrown out by one of the two.

This can often be understood as a sort of organizational self-efficacy. When a company is in a trust-dense mode, there’s an understanding that work done within those walls will, most often, be done by capable people who know what they’re doing. People, then, can specialize in what they do best and hand over work that is better done somewhere else. In trust sparsity, companies get a “none of our shit is any good” attitude that leads to duplicated effort, communication failures, and waste. That’s the point at which companies find themselves buying modestly talented software engineers at $5-million-per-head panic-priced “acqui-hires”; they have much cheaper talent in-house, but can’t find it because of the sense that the company is full of bozos and good people are so rare that it isn’t worth the effort to discover them.

Trust, teamwork, and teamism

Theories X and Y represent the extremes of the trust graphs. Theory X has everyone as an isolated point in a Hobbesian wilderness. Theory Y attempts to realize the complete graph: that is, the organization is a single, trust-dense, clique with everyone in it. That works extremely well, until a few “bad apples” take too much advantage. Theory X was the old, original-sin management style inspired by millennia of labor reliant on coercion rather than voluntary aggregation. Theory Y emerged around 1920 with Henry Ford’s model of paternalistic capitalism, and was destroyed in the “greed is good” 1980s when cocaine-fueled yuppies sold their employers’ secrets to get private equity jobs. Theory Y trusted employees too far, because it didn’t account for the return of pre-1945 economic inequality and the higher stakes of the post-Reagan world. What we have now, for the most part, is Theory Z teamist management that acknowledges, but attempts to control, the natural tendency of humans to form trust-dense cliques amid prevailing trust sparsity. It’s closer to Theory X than Y, but it acknowledges the usefulness of team cohesion.

In the Theory Z world, everything is a team. The rent-seekers call themselves “the management team” or (get your vomit bag out) “the leadership team” in official documentation. There’s even a “Termination Approval Committee” in many companies– a firing team. There are project teams and inter-team “special teams” and within-team subteams. Finally, if you paid attention in your HR-mandated management classes and know you can’t call someone a “retard” or “fag” in his or her performance review, you say “not a team player” instead. They both mean the exact same thing: I don’t like that person and will say the nastiest thing I can get away with. It’s just that “not a team player” has a more conservative and HR-appropriate sense of what one can get away with.

There are two problems with Theory Z. One is that teamism often tends toward mediocrity. I might seem “pro-convexity” with my technological-era cheerleading, but concavity has a major virtue, which is that it favors equality. Let’s say that you have six “points” of resources to give three employees and their productivity will be as follows:

Input | A Payoff | B Payoff |
------+----------+----------+
4 |      125 |      600 |
3 |      120 |      250 |
2 |      100 |      100 |
1 |       60 |       25 |
0 |        0 |        0 |
------+----------+----------+


For A, the concave task, the optimal allocation of the 6 points is equality: give 2 points to each, producing 300 points. That’s the “team player” world in which it’s better to get mediocre exertion from all team members. However, for B, the optimal arrangement is to give one employee (the “favorite”) 4 points, with the second (the “backup”) getting 2 points, and a third (the “loser”) getting none, which produces the maximum payoff of 700. It doesn’t even matter, in this examples, who’s more talented. Convexity just naturally favors inequality in investment. That’s why the second and often dishonest source of power (divination) worked for the convex process of business formation before there was modern finance (aggregation). It just needed to pick a winner.

Does all of this mean that teamwork is completely antiquated in the convex world, and we should just find ways to delegate convex work to highly-promising individuals, and starve (i.e., fire) the rest? Absolutely not. The assumption in the above model is of an additive relationship where the value produced by the business is the sum of individual productivities, and that’s not a good assumption. Work is only of value if it provides benefit to other people and that generally means that employees who only value their individual productivity become detrimental. The best programmers aren’t the ones who commit the most lines of code, as if it were some commodity product, but the multipliers who make the whole team better by writing good code, teaching people how to use assets created, and generally remove obstacles. Thus, teamwork is not antiquated. Far from it.

The input/output relationship for well-structured team endeavors is also convex, so let’s return to the “B Payoff” function for convenience, and assume we have 4 players who can each contribute 1 point of effort to a project. If they each build their own thing in isolation, each puts forth a yield of 25 points, for a total of 100. None of them accomplished much, working alone. On the other hand, if they work together and put a solid, focused 4-point effort, the yield is 600. This sort of team synergy is real and, when it happens, it’s powerful.

What’s wrong with Theory-Z, closed-allocation, teamism? It’s not well-structured. It’s not self-organizing. It almost never produces team convexity (synergy). Why? The fundamental flaw of closed allocation is the conflict of interest between project leadership and “people management”. The closed-allocation middle manager is held responsible for the success of a project, while also auditing the work and career progress of a heterogeneous set of people, whose best move might be to another project. When there are conflicts, which side wins? The project has buy-in from upper management, or there wouldn’t be someone assigned to run it. The people have no vote, given the manager’s ability to unilaterally zero their credibility.

In a closed-allocation environment, the only thing that people on a “team” share is that they report to the same manager. They’ve been dropped by fate in the same place. Nothing more. They didn’t choose each other, they probably didn’t choose the work, and they have very different career goals. Part of the corporate Lie is that they’ll subordinate their agendas to the organizational mission, with the defectors either being vacuumed up into upper management (MacLeod Sociopath) or flushed out of the company, but only a few (MacLeod Clueless) really buy into that. Most just fake it to get by. What does all of this mean? It means that they’re not really a team.

Genuine team synergies can usually only be discovered at the grass-roots level. Corralling a set of people together and saying “Be a team, now!” doesn’t often work. Moreover, what is the only thing this “team” has in common? Their manager, who is trying to build a team while ensuring that he remains its leader. That’s a real problem. The most valuable group members are people who will lead if needed, but don’t mandate that they fill the top position– people who care more about executing the right ideas than executing their ideas. When someone tries to form a social group but keep its existence contingent on his inflexible superiority, the others don’t like it. The only thing that can become common between them, in this case, is their dislike for him. 

One trait of Theory-Z teamism is that managers don’t have perfect unilateral credibility. Under Theory X, labor is material that can be flushed out if judged defective for any reason, so managers do have total credibility. Theory Y softens managerial power considerably by granting implicit credibility to all employees. Theory Z is closer to X than Y, but it has introduced “360-degree reviews”, meaning that while a single individual cannot overthrow a manager– HR will side with the boss, and she’ll get fired for even trying– but a whole team, if they work together and tell the exact same story, can. Knowing this, the last thing a typical corporate manager wants is for his reports to form a genuine team. Isolation and division are necessary to keep the manager’s job secure.

The need for trust density

Convexity requires attention to variables such as project/person fit and team synergy that simply did not matter in the industrial era of individually concave labor. Morale, team synergy, and motivation used to be “nice to haves” that often weren’t especially necessary. They were rarely judged to be worth their cost. With concave labor, productivity can’t be improved very much over the typically achieved state, so management’s goal becomes to get things done cheaper, not better.

Concave human labor is going extinct. Model a task’s payoff as M * p(q), where M represents the maximum potential yield, p is a logistic “performance function” between 0 and 1, and q is a measure of inputs (skill, effort, talent, motivation) that we’ll leave abstract but assume to be measurable. With concave work, p(q) is greater than 0.5 for typical values of q. This means that we know what M is and, for predictable economic reasons, it’s usually low. We can define “perfect work” and management’s job is to track and reduce error. If the average error rate is 5% (that is, p(q) = 0.95) then management might warn the people above 10% and fire the ones above 15%. Concavity usually means that we can define perfect work and specify it, and thus we can usually have machines do it with p(q) very close to 1 and costs extremely low. If the technology to do so doesn’t exist now, some machine learning researcher is out there working on it. Driving is just one example of concave labor that will almost certainly be automated in the next couple of decades. Much of medicine will be automated in the same way. There will, probably as long as there are humans, be people called “doctors” whose job it is to understand, monitor, and communicate the purposes of the machines– that work will be always be convex– but I doubt that we’ll have physical surgeons in 2250.

There is, however, a different class of labor where M is unknown, because almost no one has achieved a level near it, and “low” values of p (below 0.5, and possibly well below it) are acceptable. For example, getting a 1% share of a $10 billion dollar market is no small achievement. Generally, for hard jobs where p(q) is low for observed values of q, M is going to be unknown, but very high. Since the logistic function p is exponential at p(q) << 0.5, the result is an input/output curve that is, over all relevant values of q, an exponential growth function: highly convex. There is a “levelling off” point somewhere where the exponential behavior stops and saturation sets in, but that’s tomorrow’s problem if p(q) << 0.5. The essence of convex labor is that no one can specify what “perfect completion” is, because the maximum potential hasn’t been found yet.

Cost- and risk-reducing management strategies generally fail over convex labor, because of their effects on morale and communication, to say nothing of the attrition of talent as the most capable leave for other jobs. In the individually concave, industrial-era, world those aspects of work were treated as “marginal” factors that have small effects on q. For concave work, these “soft factors” were subordinate to the hard concerns of cost minimization. However, for convex labor, small margins in q matter. That is the nature of exponential functions: small margins in input produce large variances in output.

Trust sparsity is devastating when an organization is engaged in convex work, because people who do not feel trusted by management, and who do not believe their bosses will be fair to them, are never going to perform at the highest levels. That’s why trust-sparsity fails amid convexity in individual work. You don’t lose 5% (as you would, for concave work) when you treat employees like pure subordinates; you’re lucky if you get 5%. Moreover, it also falls down when it comes to synergistic team-building. With trust-sparsity, communication problems are commonplace and formation of appropriate teams to solve complex projects is not possible. That’s the moral of the “stone soup” parable discussed in Part 19: the trust-sparse and famished village is saved by outsiders who use a nonexistent delicacy to create the trust density that enables them to make a genuine meal. In a trust-sparse environment, the only way to get team convexity is to use deception.

The original formulation of the MacLeod process is that it’s a financial risk transfer between entrepreneurial, hard-working Sociopaths and risk-averse Losers, with the Clueless brought in to intercede and hold up a veil (Effort Thermocline) once the Sociopaths become complacent. I’m not sure that that’s quite right. If nothing else, an honest risk transfer (in which the party exposed to less risk enjoys less reward) is certainly not sociopathic. It’s how finance works. Rather, I think the infusion of bad Sociopaths (true psychopaths, as a psychologist would define it) comes later. Trust sparsity and clique formation mean that people need “protection” because isolated points (single-node cliques) are going to be flushed away. Personal trust is hard for a dysfunctional corporation to encourage, so they replace it with an impersonal, official organizational trust– credibility– in the form of job titles, project allocations, and special awards. Even though credibility’s supposed to be strictly a reward for performance, an internal market for that forms. The vulnerable start panic trading and become MacLeod Losers, and the ones who put themselves on the other side of those trades become an increasingly powerful (and credible) Sociopath tier. Useful idiots who still believe in credibility and Santa Claus become the Clueless. That is exactly how an organization is handed over from “good Sociopaths” (Technocrats) to the bad ones. It all starts when simple trust disappears and, as I said, it’s a systemic and binary property.

Your organization is probably failing

Simple trust does not mean “trust everyone, all the time, on everything”. Database servers should be backed up. It also doesn’t mean one should put oneself in a situation where a single “bad apple” can ruin the company. That’s where Theory Y went wrong. It was too liberal with trust to be practical, and the uptick in economic inequality that began in the 1980s exposed organizations to an onslaught of bad-faith actors. Trust density is extremely important, but it needs to be defended with enough sobriety that it still makes sense.

Simple trust also doesn’t mean that you trust people stupidly. People who prove themselves undeserving of trust must be fired, lest they threaten the prevailing trust density. This is why so-called Performance Improvement Plans are such a terrible idea. Once an employee has been deemed a bozo, separate. Carrying out a kangaroo court for two months while a “walking dead” employee poisons morale, just to save chump change on severance payments, is idiotic. You’re not rewarding failure when you write a severance check; you’re reaching an agreement that is mutually risk-reductive.

Rather, what simple trust means is that people who are hired are held to be competent and capable of doing good work, and generally permitted to work for the company directly. The issue with management in a trust-sparse environment is that it quickly realizes that it has the power to reduce a person’s credibility to zero. Given the inherent conflict between project and people management, this typically results in middle-management extortions that leave the company unable to evaluate projects properly and, therefore, without a strategic rudder, they generate lots of fourth-quadrant work. Technically speaking, it’s rare for a manager to be able to explicitly fire someone (too much legal risk) but a mean-spirited performance review system and competitive internal market for transfers have, in essence, the same effect.

Until about 20 years ago, it was very rare that performance reviews were part of an employee’s transfer packet. If they were, managers would give a glowing review on paper and a realistic review, verbally. Taking care of the employee’s long-term career interests showed a commitment to mutual loyalty. What changed? Enron. No, I’m not talking about the 2001 revelation of accounting fraud that made it one of the most spectacular corporate failures in history. Rather, I mean to focus on its stirling reputation in the 1990s as one of the most innovative companies in existence. Enron made tough culture an art form, and was lauded for doing so, because this was a time when even many liberal Americans thought that “lazy people” were getting too many breaks. Some of the innovations that came out of the Enron-style performance review systems were:

• Performance reviews are numerical and forced to comply with a pre-defined distribution. It’s a zero-sum game. For one person to get a good review, another must get a bad one. Performance reviews also contain written feedback and direction, but the only thing that actually counts is “the number”. It determines compensation, promotion opportunities, and internal mobility. Because review points are a scarce resource, in-fighting and horse-trading among managers is an invisible but potent force directing one’s career. 
• A full review history is part of the employee’s transfer packet. This is the distilled essence of toxic trust sparsity. It means that employees are no longer trusted to represent their contribution to the company when they seek internal mobility. Their personal credibility is reduced to zero; all that matters is the “objective permanent record” they carry with them.
• “Passive firing”. Instead of an employee being fired by a direct manager (legal risk) his reputation is demolished in the review system, and he may not even be aware of it. This is how passive firing works: when the position on his project is cut, he’s technically permitted to interview for transfer, but immobile because of the smear. I don’t think that passive-firing systems reduce true legal risk, because damaging an employee’s reputation over months is much more damning than simply terminating him. I think the purpose is for the series of rejections (which are never explicitly connected to the bad reviews) to break the employee’s will and discourage the lawsuit from happening in the first place.
• Invisible career tracking. In tough culture, it’s not enough to do well by one’s boss. One also has to have a powerful manager. What that means is that there are well-known “good” and “bad” teams to be on, and everyone important knows which are which, but an outsider considering a job can’t tell based on the work alone. No matter how hard an employee works on one of the “bad” teams, it won’t matter because he’ll never be able to move to a “good” one. He’ll be competing against people who are moving from one good team to another and whose managers had more power.
• Welch Effect. The Welch Effect refers to the idea that the people most likely to lose their jobs are junior members of macroscopically underperforming teams (who had the least to do with said underperformance). In tough culture, that’s true, although I’d replace “underperforming teams” with “team with politically unsuccessful managers”. Often, managers who have fewer review points to give out will tend to sacrifice a team member or two in order to make decent scores available to motivate the more senior members, who become increasingly frustrated with their lack of advancement. (This loyalist effect is a major part of what turns tough cultures back into rank cultures.) The high turnover on the “bad” team, however, exacerbates its negative reputation and performance problems.

We know what happened to Enron, and there’s little doubt in my mind that the internal horse-trading surrounding credibility and performance review scores is intimately connected with its externally visible ethical problems. Tough-culture review systems generate a “truth” about personnel that is, in fact, subject to so much power-playing and dishonesty as to make a mockery of the concept. This kills off any respect for truth as an idea, and leads to a corrosion of ethics. It doesn’t always result in defrauded investors, but it’s always corrosive. Microsoft’s similar system is credited for more than a decade of mediocrity. Google has the same system, but with a brilliant twist: the “calibration scores” are secret! Google is the only company that I’ve encountered where a manager can spontaneously give positive verbal feedback and secretly black-list a report. Google has a silent problem of managers doing exactly that to keep people captive on undesirable projects.

So, look around your company. Are performance reviews part of the transfer packet? If so, you live amid trust sparsity. The company has decided that most of its employees are bozos, and it has decided to label them as such, as a favor to management. It doesn’t trust you to represent your contribution and abilities.

Solving It

Sparsity of simple trust is devastating. Because the “bozo bit” becomes a global artifact, companies can be observed to “flip the switch” as a collective. Lose it, and you’ll almost certainly lose your corporate culture. At that point, it doesn’t matter if you’re a bank or a tech company or an advertising firm. You no longer have a good place to work. Innovation and genuine teamwork will end, except in hidden corners of the company, and all you have to look forward to is a twilight of zero-sum squabbling over credibility, a behavior that will linger on until the damn thing finally dies. So trust density needs to be a pillar of the organization if you want it, ten years later, to be something worth caring about.

What usually goes wrong? In startups, it seems to be rapid growth, but I don’t think there’s an intrinsic growth limit– some magic number like “25% per year”. I think what kills the bulk of these companies is that they hire before they trust, without failing to comprehend the permanent loss that this inflicts upon them. That is true sociopathy, because it means that people are brought into the venture with the express purpose of putting them in a miserable, subordinate position. It’s also bad for almost everyone, because it creates insecurity in the rest of the labor force: being there no longer makes a person credible, so there’s a race for elevation as the company prepares for its split into two classes: the real members, and the bozos.

To hire before it trusts is not a short-term expediency. It’s the one thing that a company really can’t afford.

This is a penultimate “breather” post, insofar as it doesn’t present much new material, but summarizes much of what’s in the previous 20 essays. It’s now time to tie everything together and Solve It. This series has reached enough bulk that such an endeavor requires two posts: one to tie it all together (Part 21) and one to discuss solutions (Part 22). Let me try to put the highlights from everything I’ve covered into a coherent whole. That may prove hard to do; I might not succeed. But I will try.

This will be long and repeat a lot of previous material. There are two reasons for that. First, I intend this essay to be a summarization of some highlights from where we’ve been. Second, I want it to stand alone as a “survey course” of the previous 20 essays, so that people can understand the highlights (and, thus, understand what I propose in the conclusion) even if they haven’t read all the prior material.

If I were to restart this series of posts (for which I did not intend it, originally, to reach 22 essays and 92+ kilowords) I would rename it Why Does Work Suck? In fact, if I turn this stuff into a book, that’s probably what I’ll name it. I never allowed myself to answer, “because it’s work, duh.” We’re biologically programmed to enjoy working. In fact, most of the things people do in their free time (growing produce, unpaid writing, open-source programming) involve more actual work than their paid jobs. Work is a human need.

How Does Work Suck?

There are a few problems with Work that make it almost unbearable, driving it into such a negative state that people only do it for the lack of other options.

• Work Sucks because it is inefficient. This is what makes investors and bosses angry. Getting returns on capital either requires managing it, which is time-consuming, or hiring a manager, which means one has to put a lot of trust in this person. Work is also inefficient for average employees (MacLeod Losers) which is why wages age so low.
• Work Sucks because bad people end up in charge. Whether most of them are legitimately morally bad is open to debate, but they’re certainly a ruthless and improperly balanced set of people (MacLeod Sociopath) who can be trusted to enforce corporate statism. Over time, this produces a leadership caste that is great at maintaining power internally but incapable of driving the company to external success.
• Work Sucks because of a lack of trust. That’s true on all sides. People are spending 8+ hours per day on high-stakes social gambling while surrounded by people they distrust, and who distrust them back.
• Work Sucks because so much of what’s to be done in unrewarding and pointless. People are glad to do work that’s interesting to them or advances their knowledge, or work that’s essential to the business because of career benefits, but there’s a lot of Fourth Quadrant work for which neither applies. This nonsensical junk work is generated by strategically blind (MacLeod Clueless) middle managers and executed by rationally disengaged peons (MacLeod Losers) who find it easier to subordinate than to question the obviously bad planning and direction.

All of these, in truth, are the same problem. The lack of trust creates the inefficiencies that require moral flexibility (convex deception) for a person to overcome. In a trust-sparse environment, the people who gain people are the least deserving of trust: the most successful liars. It’s also the lack of trust that generates the unrewarding work. Employees are subjected, in most companies, to a years-long dues-paying period which is mostly evaluative– to see how each handles unpleasant make-work and pick out the “team players”. The “job” exists to give the employer an out-of-the-money call option on legitimately important work, should it need some done. It’s a devastatingly bad system, so why does it hold up? Because, for two hundred years, it actually worked quite well. Explaining that requires delving into mathematics, so here we go.

Love the Logistic

The most important concept here is the S-shaped logistic function, which looks like this (courtesy of Wolfram Alpha):

The general form of such a function L(x; A, B, C) is:

where A represents the upper asymptote (“maximum potential”), B represents the rapidity of the change, and C is a horizontal offset (“difficulty”) representing the x-coordinate of the inflection point. The graph above is for L(x; 1, 1, 0).

Logistic functions are how economists generally model input-output relationships, such as the relationship between wages and productivity. They’re surprisingly useful because they can capture a wide variety of mathematical phenomena, such as:

• Linear relationships; as B -> 0, the relationship becomes locally linear around the inflection point, (C, A/2).
  
• Discrete 0/1 relationships: as B -> infinity, the function approaches a “step function” whose value is A for x > C and 0 for x < C.
• Exponential (accelerating) growth: If B > 0, L(x; A, B, C) is very close to being exponential at the far left (x << C). (Convexity.)
• Saturation: If B > 0, L(x; A, B, C) is approaching A with exponential decay at the far right (x >> C). (Concavity.)

Let’s keep inputs abstract but assume that we’re interested in some combination of skill, talent, effort, morale and knowledge called x with mean 0 and “typical values” between -1.0 and 1.0, meaning that we’re not especially interested in x = 10 because we don’t know how to get there. If C is large (e.g. C = 6) then we have an exponential function for all the values we care about: convexity over the entire window. Likewise, leftward C values (e.g. C = -6) give us concavity over the whole window.

Industrial work, over the past 200 years, has tended toward commoditization, meaning that (a) a yes/no quality standard exists, increasing B, and (b) it’s relatively easy for most properly set-up producers to meet it most of the time (with occasional error). The result is a curve that looks like this one, L(x; 10, 4.5, -0.7), which I’ll call a(x):

Variation, here, is mainly in incompetence. Another way to look at it is in terms of error rate. The excellent workers make almost no errors, the average ones achieve 95.8% of what is possible (or a 4.2% error rate) with the mediocre (x = -0.5) making almost 5 times as many mistakes (28.9% error rate), and the abysmal unemployable with an error rate well over 50%. This is what employment has looked like for the past two hundred years. Why? Because an industrial process is better modeled as a complex network of these functions, with outputs from one being inputs to another. The relationship of individual wage into morale, morale into performance, performance into productivity, and individual productivity into firm productivity, and firm productivity into profitability, can all be modeled as S-shaped curves. With this convoluted network of “hidden nodes” that exists in a context of a sophisticated industrial operation, it’s generally held to be better to have a consistently high-performing (B high, C negative) node than higher-performing but variable node.

One way to understand the B in the above equation is that it represents how reliably the same result is achieved, noting the convergence to a step function as B goes to infinity. In this light, we can understand mechanization. Middle grades of work rarely exist with machines. In the ideal, they either execute perfectly, or fail perfectly (and visibly, so one can repair them). Further refinements to this process are seen in the changeover from purely mechanical systems to electronic ones. It’s not always this way, even with software. There are nondeterministic computer behaviors that can produce intermittent bugs, but they’re rare and far from the ideal.

As I’ve discussed, if we can define perfect performance (i.e. we know what A, the error-free yield, looks like) then we can program a machine to achieve it. Concave work is being handed over to machines, with the convex tasks remaining available. With convexity, it’s rare that one knows what A and B are. On explored values, the graph just looks like this one, for L(x; 200, 2.0, 1.5), which I’ll call b(x):

It shows no signs of leveling off and, for all intents and purposes, it’s exponential. This is usually observed for creative work where a few major players (the “stars”) get outsized rewards in comparison to the average people.

Convexity Isn’t Fair

Let’s say that you have two employees, one of whom (Alice) is slightly above average (x = 0.1) and the other of whom (Bob) is just average (x = 0.0). You have the resources to provide 1.0 full point of training, and you can split it anyway you choose (e.g. 0.35 points for Alice, and 0.65 points for Bob). Now, let’s say that you’re managing concave work modeled by the function L(x; 100, 2.0, -0.3), which is concave.

Let the x-axis represent the amount of training (0.0 to 1.0) given to Alice, with the remainder given to Bob. Here’s a graph of their individual productivity levels, with Alice in blue, Bob in purple, and their sum productivity in the green curve

If we zoom in to look at the sum curve, we see a maximum at x = 0.45, an interior solution where both get some training.

At x = 0.0 (full investment in Bob) Alice is producing 69.0 points and Bob’s producing 93.1, for a total of 162.1.

At x = 0.5 (even split of training) Alice in producing 85.8 points and Bob’s producing 83.2, for a total of 169.0.

At x = 1.0 (full investment in Alice) Alice is producing 94.3 points and Bob’s producing 64.6, for a total of 158.9.

The maximal point is x = 0.45, which means that Alice gets slightly less training because Bob is further behind and needs it more. Both end up producing 84.55 points, for a total of 169.1. After the training is disbursed, they’re at the same level of competence (0.55). This is a “share the wealth“ interior optimum that justifies sharing the training.

Let’s change to a convex world, with the function L(x; 320, 2.0, 1.1). Then, for the same problem, we get this graph (blue representing Alice’s productivity, purple representing Bob’s, and the green curve representing the sum):

Zooming in on the graph sum productivity, we find that the “fair” solution (x = 0.45) is the worst!

At x = 0.0 (full investment in Bob) Alice is producing 38.1 points and Bob’s producing 144.1, for a total of 182.2.

At x = 0.5 (even split of training) Alice in producing 86.1 points and Bob’s producing 74.1, for a total of 160.2.

At x = 1.0 (full investment in Alice) Alice is producing 160.0 points and Bob’s producing 31.9, for a total of 191.9.

The maxima are at the edges. The best strategy is to give Alice all of the training, but giving all to Bob is better than splitting it evenly, which is about the worst of the options. This is a “starve the poor” optimum. It favors picking a winner and putting all the investment into one party. This is how celebrity economies work. Slight differences in ability lead to massive differences in investment and, ultimately, create a permanent class of winners. Here, choosing a winner is often more important than getting “the right one” with the most potential.

Convexity pertains to decisions that don’t admit interior maxima, or for which such solutions don’t exist or make sense. For example, choosing a business model for a new company is convex, because putting resources into multiple models would result in mediocre performance in all of them, thus failure. The rarity of “co-CEOs” seems to indicate that choosing a leader is also a convex matter.

Convexity is hard to manage

In optimization, convex problems tend to be the easier ones, so the nomenclature here might be strange. In fact, this variety of convexity is the exact opposite of convexity in labor. Optimization problems are usually framed in terms of minimization of some undesirable quantity like cost, financial risk, statistical error, or defect rate. Zero is the (usually unattainable) perfect state. In business, that would correspond to the assumption that an industrial apparatus has an idealized business model and process, with the management’s goal to drive execution error to zero.

What makes convex minimization methods easier is that, even in a high-dimensional landscape, one can converge to the optimal point (global minimum) by starting from anywhere and iteratively stepping in the direction recommended by local features (usually, first and second derivative). It’s like finding the bottom point in a bowl. Non-convex optimizations are a lot harder because (a) there can be multiple local optima, which means that starting points matter, and (b) the local optima might be at the edges, which has its own undesirable properties (including, with people, unfairness). The amount of work required to find the best solutions is exponential in the number of dimensions. That’s why, for example, computers can’t algorithmically find the best business model for a “startup generator”. Even if it were a well-formed problem, the dimensionality would be high and the search problem intractable (probably).

Convex labor is analogous to non-convex optimization problems while management of concave labor is analogous to convex optimization. Sorry if this is confusing. There’s an important semantic difference to highlight here, though. With concave labor, there is some definition of perfect completion so that error (departure from that) can be defined and minimized with a known lower bound: 0. With convex labor, no one knows what the maximum value is, because the territory is unexplored and the “leveling off” of the logistic curve hasn’t been found yet. It’s natural, then, to frame that as a maximization problem without a known bound. With convex labor, you don’t know what the “zero-or-max” point is because no one knows how well one can perform.

Concave labor is the easy, nice case from a managerial perspective. While management doesn’t literally implement gradient descent, it tends to be able to self-correct when individual labor is concave (i.e. the optimization problem is convex). If Alice starts to pull ahead while Bob struggles, management will offer more training to Bob.

However, in the convex world, initial conditions matter. Consider the Alice-Bob problem above with the convex productivity curve, and the fact that splitting the training equitably is the worst possible solution. Management would ideally recognize Alice’s slight superiority and give her all the training, thus finding the optimal “edge case”. But what if Bob managed (convex dishonesty) to convince management that he was slightly superior to Alice and at, say, x = 0.2? Then Bob would get all the training, and Alice would get none, and management would converge on a sub-optimal local maximum. That is the essence of corporate backstabbing, is it not? Management’s increasing awareness of convexity in intellectual work means that it will tend to double down its investment in winners and toss away (fire) the losers. Thus, subordinates put considerable effort into creating the appearance of high potential for the sake of driving management to a local maximum that, if not necessarily ideal for the company, benefits them. That’s what “multiple local optima” means, in practical terms.

The traditional three-tiered corporation has a firm distinction between executives and managers (the third tier being “workers”, who are treated as a landscape feature) and its pertains to this. Because business problems are never entirely concave and orderly, the local “hill climbing” is left to managers, while the convex problems (which, like choosing initial conditions, require non-local insight) such as selecting leaders and business models are left to executives.

Yet with everything concave being performed, or soon to be performed, by machines, we’re seeing convexity pop up everywhere. The question of which programming languages to learn is a convex decision that non-managerial software engineers have to make in their careers. Picking a specialty is likewise; convexity is why it’s of value to specialize. The most talented people today are becoming self-executive, which means that they take responsibility for non-local matters that would otherwise be left to executives, including the direction of their own career. This, however, leads to conflicts with authority.

Older managers often complain about Millennial self-executivity and call it an attitude of entitlement. Actually, it’s the opposite. It’s disentitlement. When you’re entitled, you assume social contracts with other people and become angry when (from your perception) they don’t hold up their end. Millennials leave jobs, and furtively use slow periods to invest in their careers (e.g. in MOOCs) rather than asking for more work. That’s not an act of aggression or disillusion; it’s because they don’t believe the social contract ever existed. It’s not that they’re going to whine about a boss who doesn’t invest in their career– that would be entitlement– because that would do no good. They just leave. They weren’t owed anything, and they don’t owe anything. That’s disentitlement.

Convexity is bad for your job security

Here’s some scary news. When it comes to convex labor, most people shouldn’t be employed. First, let me show a concave input-output graph for worker productivity, assuming even distribution in worker ability from -1.0 to 1.0. Our model also assumes this ability statistic to be inflexible; there’s no training effect.

The blue line, at 82.44, represents the mean worker in the population. Why’s this important? It represents the expected productivity of a new hire off the street. If you’re at the median (x = 0.0) or even a bit below it, you are “above average”. It’s better to retain you than to bring someone in off the street. Let’s say that John is 40th percentile (x = -0.2) hire, which means that his productivity is 90. A random person hired off the street will be better than John, 60% of the time. However, the upside is limited (10 points at most) and the downside (possibly 70 points) is immense so, on average, it’s a terrible trade. It’s better to keep John (a known mediocre worker) on board than to replace him.

With a convex example, we find the opposite to be true:

Here, we have an arrangement in which most people are below the mean, so we’d expect high turnover. Management, one expects, would be inclined to hire people on a “try out” basis with the intention of throwing most of them back on the street. An average or even good (x = 0.5) hire should be thrown out in order to “roll the dice” with a new hire who might be the next star. Is that how managers actually behave? No, because there are frictional and morale reasons not to fire 80% of your people, and because this model’s assumption that people are inflexibly set at a competence level is not entirely true for most jobs, and those where it is true (e.g. fashion modeling) make it easy for management to evaluate someone before a hire is made. In-house experience matters. That is, however, how venture capital, publishing and record labels work. Once you turn out a couple failures, with those being the norm, it might still be that you’re a high performer who’s been unlucky, but you’re judged inferior to a random new entrant (with more upside potential) and flushed out of the system.

In the real world, it’s not so severe. We don’t see 80% of people being fired, and the reason is that, for most jobs, learning matters. The above applies to work at which there’s no learning process, but each worker is inflexibly put at a certain perfectly measurable productivity level. That’s not how the world really works. In-born talent is one relevant input, but there are others like skill, in-house experience, and education that have defensive properties and keep a person’s job security. People can often get themselves above the mean with hard work.

Secondly, the model above assumes workers are paid equally, which is not the case for most convex work. In the convex model above, the star (x = 1.0) might command several times the salary of the average performer (x = 0.0) and he should. That compensation inequality actually creates job security for the rest of them. If the best people didn’t charge more for their work, then employers would be inclined to fire middling performers in the search of a bargain.

This may be one of the reasons why there is such high turnover in the software industry. You can’t a get seasoned options trader for under $250,000 per year, but you can get excellent programmers (who are worth 5-10 times that amount, if given the right kind of work) for less than half of that. This is often individually justified (by the engineer) with an attitude of, “well, I don’t need to be paid millions; I care more about interesting work”. As an individual behavior, that’s fine, but it might be why so many software employers are so quick to toss engineers aside for dubious reasons. Once the manager concludes that the individual doesn’t have “star” potential, it’s worth it to throw out even a good engineer and try again for a shot at a bargain, considering the number of great engineers at mediocre salary levels.

One thing I’ve noticed in software (which is highly convex) is that there’s a cavalier attitude toward firing, and it’s almost certainly related to that “star economy” effect. What’s different is that software convexity has a lot inputs other that personal ability– project/person fit, tool familiarity, team cohesion, and a lot factors that are so hard to detect that they feel like pure luck– in the mix, so the “toss aside all but the best” strategy is severely defective, at least for a larger organization that should be enabling people to find better fitting projects, which makes a lot of sense amid convexity. That’s one of the reasons why I am so dogmatic about open allocation, at least in big companies.

Convexity is risky

Job insecurity amid convexity is an obvious problem, but not damning. If there’s a fixed demand for widgets, a competitor who can produce 10 times more of them is terrifying, because it will crash prices and put everyone else out of business (and, then, become a monopolist and raise them). Call that “red ocean convexity”, where the winners put the losers out of business because a “10X” performer takes 9X from someone else. However, if demand is limitless, then the presence of superior players isn’t always a bad thing. A movie star making $3 million isn’t ruined by one making $40 million. The arts are an example of “blue ocean convexity”, insofar as successful artists don’t make the others poorer, but increase the aggregate demand of art. It’s not “winner-take-all” insofar as one doesn’t have to be the top player to add something people value.

Computational problem solving (not “programming”) is a field where there’s very high demand, so the fact that top performers will produce an order of magnitude more value (the “10X effect”) doesn’t put the rest out of business. That’s a very good thing, because most of those top performers were among “the rest” when they started their career. Not only is there little direct competition, but as software engineers, we tend to admire those “10X” people and take every opportunity we can get to learn from them. If there were more of them, it wouldn’t make us poorer. It would make the world richer.

Is demand for anything limitless, though? For industrial products, no. Demand for televisions, for example, is limited by peoples’ need for them and space to put them. For making peoples’ lives better, yes. For improving processes, sure. Generation of true wealth (as Paul Graham defines it: “stuff people want”) is something for which there’s infinite demand, at least as far as we can see. So what’s the limiting factor? Why can’t everyone work on blue-ocean convex work that makes peoples’ lives better? It comes down to risk. So, let’s look at that. The model I’m going to use is as follows:

• We only care about the immediate neighborhood of a specific (“typical”) competence level. We’ll call it x = 0.
• Tasks have a difficulty t between -1.0 and 2.0, which represents the C in the logistic form. B is going to be a constant 4.5; just ignore that. 
• The harder a task is, the higher the potential payoff. Thus, I’ll set A = 100 * (1 + e^(5*t)). This means that work gets more valuable slightly faster (11% faster) than it gets harder (“risk premium”). The constant term in A is based on the understanding that even very easy (difficulty of -1.0) work has value insofar as it’s time-consuming and therefore people must be paid to do it.
• We measure risk for a given difficulty t by taking the first derivative of L(x; …), with respect to x, at x = 0. Why? L’(x; …) tells us how sensitive the output (payoff) is to marginal changes in input. We’re modeling unknown input variables and plain luck factors as a random, zero-mean “noise” variable d and assuming that for known competence x the true performance will be L(x + d; …). So this first derivative tells us, at x = 0, how sensitive we are to that unknown noise factor.
  

What we want to do is assess the yield (expected value) and risk (first derivative of yield) for difficulty levels from -1 to 2 when known x = 0. Here’s a graph of expected yield:

It’s hard to notice on that graph, but there’s actually a slight “dip” or “uncanny valley” as one goes from the extreme of easiness (t = -1.0) to slightly harder (-1.0 < t < 0.0) work:

Does it actually work that way in the real world? I have no idea. What causes this in the model is that, as we go from the ridiculously easy (t = 1.0) to the merely moderately easy (t = 0.5) the rate of potential failure grows faster than the maximum potential A does, as a function of t. That’s an artifact of how I modeled this and I don’t know for sure that a real-world market would have this trait. Actually, I doubt it would. It’s a small dip so I’m not going to worry about it. What we do see is that our yield is approximately constant as a function of difficulty for t from -1.0 to 0.0, where the work is concave for that level of skill; and then it grows exponentially as a function of t from 0.0 to 2.0, where the work is convex. That is what we tend to see on markets. The maximal market value of work (1 + e^(5 * t) in this model) grows slightly faster than difficulty in completing it (1 + e^(4.5*t), here).

However, what we’re interested in is risk, so let me show that as well by graphing the first derivative of L with respect to x (not t!) for each t.

What this shows us, pretty clearly, is monotonic risk increase as the tasks become more difficult. That’s probably not too surprising, but it’s nice to see what it looks like on paper. Notice that the easy work has almost no risk involved. Let’s plot these together. I’ve taken the liberty of normalizing the risk formula (in purple) to plot them together, which is reasonable because our units are abstract:

Let’s look at one other statistic, which will be the ratio between yield and risk. In finance, this is called the Sharpe Ratio. Because the units are abstract (i.e. there’s no real meaning to “1 unit” of competence or difficulty) there is no intrinsic meaning to its scale, and therefore I’ve again taken the liberty of normalizing this as well. That ratio, as a function of task difficulty, looks like this…

…which looks exactly like affine exponential decay. In fact, that’s what it is. The Sharpe Ratio is exponentially favorable for easy work (t < 0.0) and approaches a constant value (1.0 here, because of the normalization) for large t.

What’s the meaning of all this? Well, traditionally, the industrial problem was to maximize yield on capital within a finite “risk budget”. If that’s the case– you’re constrained by some finite amount of risk– then you want to select work according to the Sharpe Ratio. Concave tasks might have less yield, but they’re so low in risk that you can do more of them. For each quantum of risk in your budget, you want to get the most yield (expected value) out of it that you can. This favors the extreme concave labor. This is why industrial labor, for the past 200 years, has been almost all concave. Boring. Reliable. In many ways, the world still is concave and that’s a desirable thing. Good enough is good enough. However, it just so happens that when we, as humans, master a concave task when tend to look for the convex challenge of making it run itself. In pre-technological times, this was done by giving instructions to other people, and making machines as easy as possible for humans to use. In the technological era, it’s done with computers and code. Even the grunt work of coding is given to programs (we call them compilers) so we can focus on the interesting stuff. We’re programming all of that concave work out of human hands. Yes, concave work is still the backbone of the industrial world and always will be. It’s just not going to require humans doing it.

What if, instead, the risk budget weren’t an issue? Let’s say that we have a team of 5 programmers given a year to do whatever they want, and the worst they can do is waste their time, and you’re okay with that maximal-risk outcome (5 annual salaries for a learning experience). They might build something amazing that sells for $100 million, or they might work for a year and have the project still fail on the market. Maybe they do great work, but no one wants it; that’s a risk of creation. In this case, we’re not constrained by risk allocation but by talent. We’ve already accepted the worst possible outcome as acceptable. We want them to be doing convex work, which has the highest yield. Those top-notch people are the limiting resource, not risk allocation.

Convexity requires teamwork

Above, I established that if individual productivity is a convex function of investment in that person, and group performance is a sum of individual productivity, then the optimal solution is to ply one person with resources and starve (and likely fire) the rest. Is that how things actually work? No, not usually. There’s a glaring false assumption, which is the additive model where group performance is a simple sum of individual performances. Real team efforts shouldn’t work that way.

When a team is properly configured, most of their efforts don’t merely add to some pile of assets, but they multiply each others’ productivity. Each works to make the others more successful. I wrote about this advancement of technical maturity (from multiplier to adder) as it pertains to software but I think it’s more general. Warning: incompetent attempts at multiplier efforts are every bit as toxic as incompetent management and will have a divider effect.

Team convexity is a bit unique in the sense that both sides of the logistic “S-curve” are observed. You have synergy (convexity) as the team scales up to a certain size, but congestion (concavity) beyond a certain point. It’s very hard to get team size and configuration right, and typical “Theory Z” management (which attempts to coerce a heterogeneous set of people who didn’t choose each other, and probably didn’t choose the project, into being a team) generally fails at this. It can’t be managed competently from a top-down perspective, despite what many executives say (they are wrong). It has to be grass-roots self-organization. Top-down, closed-allocation management can work well in the Alice/Bob models above where productivity is the sum of individual performances (i.e. team synergies aren’t important) but it fails catastrophically on projects that require interactive, multiplicative effects in order to be successful.

Convexity has different rules

The technological economy is going to be very different, because of the way business problems are formulated. In the industrial economy, capital was held in some fixed amount by a business, whose goal was to gain as much yield (profit or interest) from it while keeping risk within certain bounds deemed acceptable. That made concavity desirable. It still is; stable income with low variation is always a good thing. It’s just that such work no longer requires humans. Concave work has been so commoditized that it’s hard to get a passive profit from it.

Ultimately, I think a basic income is the only way society will be able to handle widespread convexity of individual labor. What does it say about the future? People will either be very highly compensated, or effectively unemployed. There will be an increasing need for unpaid learning while people push themselves from the low, flat region of a convex curve to the high, steep part. Right now, we have a society where people with the means to indulge in that can put themselves on a strong career track, but the majority who have a lifelong need for monthly income end up getting shafted: they become a permanent class of unskilled labor and, by keeping wages low, they actually hold back technological advancement.

Industrial management was risk-reductive. A manager took ownership of some process and his job was to look for ways it could fail, then tried to reduce the sources of error in that process. The rare convex task (choosing a business strategy) was for a higher order of being, an executive. Technological management has to embrace risk, because all the concave work’s being taken by machines. In the future, it will only be economical for a human to do something when perfect completion is unknown or undefinable, and that’s the convex work.

A couple more graphs deserve attention, because both pertain to managerial goals. There are two ways that a manager can create a profit. One is to improve output. The other is to reduce costs. Which is favorable? It depends. Below is a graph that shows productivity ($/hour) as a function of wages for some task where performance is assumed to be convex in wages. The relationship is assumed here to be inflexible and go both ways: better people will expect more in wages, low wages will cause peoples’ out-of-work distractions to degrade their performance. Plotted in purple is the y = x or “break-even” line.

As one can see, it doesn’t even make sense to hire people for this kind of work at less than $68/hour: they’ll produce less than they cost. That “dip” is an inherent problem for convex work. Who’s going to pay people in the $50/hour range so they can become good and eventually move to the $100/hour range (where they’re producing $200/hour work)? This naturally tends toward a “winners and losers” scenario. The people who can quickly get themselves to the $70/hour productivity level (through the unpaid acquisition of skill) are employable, and will continue to grow; the rest will not be able to justify wages that sustain them. The short version: it’s hard to get into convex work.

Here’s a similar graph for concave work:

… and here’s a graph of the difference between productivity and wage, or per-hour profit, on each worker:

So the optimal profit is achieved at $24.45 per hour, where the worker provides $56.33 worth of work in that time. It doesn’t seem fair, but improvements to wages beyond that, while they improve productivity, do not improve it by enough to justify the additional cost. That’s not to say that companies will necessarily set wages to that level. (They might raise them higher to attract more workers, increasing total profit.) Also, here is a case where labor unions can be powerful (they aren’t especially helpful with convex work): in the above, the company would still earn a respectable profit on each worker with wages as high as $55 per hour, and wouldn’t be put out of business (despite managements’ claim that “you’ll break us” at, say, $40) until almost $80.

The tendency of corporate management toward cost-cutting, “always say no”, and Theory-X practices is an artifact of the above result of concavity. So while I can argue that “convexity is unfair” insofar as it encourages inequality of investment and resources, enabling small differences in initial conditions to produce a winner-take-all outcome; concavity produces its own variety of unfairness, since it often encourages wages to go to a very low level, where employers take a massive surplus.

The most important problem…?

Above is a lot about convexity, but I feel like the changeover to convexity in individual labor is the most important economic issue of the 21st century. So if we want to understand why the contemporary, MacLeod-hierarchical, organization won’t survive it, we need a deep understanding of what convexity is and how it works. I think we have that, now.

What does this have to do with Work Sucking? Well, there are a few things we get out of it. First, for the concave work that most of the labor force is still doing…

• Concave (“commodity”) labor leads to grossly unfair wages. This creates a natural adversity between workers and management on the issue of wage levels. 
• Management has a natural desire to reduce risk and cut costs, on an assumption of concavity. It’s what they’ve been doing for over 200 years. When you manage concave work, that’s the most profitable thing to do.
• Management will often take a convex endeavor (e.g. computer programming) and try to treat it as concave. That’s what we, in software, call the “commodity developer” culture that clueless software managers try to shove down hapless engineers’ throats.
• Stable, concave work is disappearing. Machines are taking it over. This isn’t a bad thing (on the contrary, it’s quite good) but it is eroding the semi-skilled labor base that gave the developed world a large middle class.

Now, for the convex:

• Convex work favors low employment and volatile compensation. It’s not true that there “isn’t a lot of convex work” to go around. In fact, there’s a limitless amount of demand for it. However, one has to be unusually good for a company to justify paying for it at a level one could live on, because of the risk. Without a basic income in place, convexity will generate an economy where income volatility is at a level beyond what people are able to accept. As a firm believer in the need for market economies, this must be addressed.
• Convex payoffs produce multiple optima on personnel matters (e.g. training, leadership). This sounds harmless until one realizes that “multiple optima” is a euphemism for “office politics”. It means there isn’t a clear meritocracy, as performance is highly context-sensitive.
• Convex work often creates a tension between individual competition and teamwork. Managers attempting to grade individuals in isolation will create a competitive focus on individual productivity, because convexity rewards acceleration of small individual differences. This managerial style works for simple additive convexity, but fails in an organization that needs people to have multiplicative or synergistic effects (team convexity) and that’s most of them.

Red and blue ocean convexity

One of the surprising traits of convexity, tied-in with the matter of teamwork, is that it’s hard to predict whether it will be structurally cooperative or competitive. This leads me to believe that there are fundamental differences between “red ocean” and “blue ocean” varieties of convexity. For those unfamiliar with the terms, red ocean refers to well-established territory in which competition is fierce. There’s a known high quantity of resources (“blood in the water”) available but there’s a frenzy of people (some with considerable competitive advantages) working to get at it. It’s fierce and if you aren’t strong, the better predators will crowd you out. Blue ocean refers to unexplored territory where the yields are unknown but the competition’s less fierce (for now).

I don’t know this industry well, but I would think that modeling is an example of red-ocean convexity. Small differences in input (physical attractiveness, and skill at self-marketing) result in massive discrepancies of output, but there’s a small and limited amount of demand for the work. If there’s a new “10X model” on the scene, all the other models are worse off, because the supermodel takes up all of the work. For example, I know that some ridiculous percentage of the world’s hand-modeling is performed by one woman (who cannot live a normal life, due to her need to protect her hands).

What about professional sports, the distilled essence of competition? Blue ocean. Yep. That might seem surprising, given that these people often seem to want to kill each other, but the economic goal of a sports team is not to win games, but to play great games that people will pay money to watch. A “10X” player might revitalize the reputation of the sport, as Tiger Woods did for golf, and expand the audience. Top players actually make a lot of money for the opponents they defeat; the stars get a larger share of the pool, meaning their opponents get a smaller percentage, but they also expand that pool so much that everyone gets richer.

How about the VC-funded startup ecosystem? That’s less clear. Business formation is blue ocean convexity, insofar as there are plenty of untapped opportunities to add immense value, and they exist all over the world. However, fund-raising (at least, in the current investor climate) and press-whoring are red ocean convexity: a few already-established (and complacent) players get the lion’s share of the attention and resources, giving them an enormous head start. Indeed, this is the point of venture capital in the consumer-web space: use the “rocket fuel” (capital infusion) to take a first-entrant advantage before anyone else has a shot.

Red and blue ocean convexity are dramatically different in how they encourage people to think. With red-ocean convexity, it’s truly a ruthless, winner-take-all, space because the superior, 10X, player will force the others out of business. You must either beat him or join him. I recommend “join”. With blue-ocean convexity (which is the force that drives economic growth) outsized success doesn’t come at the expense of other people. In fact, the relationship may be symbiotic and cooperative. For example, great programmers build tools that are used all over the world and make everyone better at their jobs. So while there is a lot of inequality in payoffs– Linus Torvalds makes millions per year, I use his tools– because that’s how convexity works, it’s not necessarily a bad thing because everyone can win.

Convexity and progress

Convexity’s most important property is progressive time. Real-world convexity curves are often steeper than the ones graphed above and, if there isn’t a role for learning, then the vast majority of people will be unable to achieve at a level supporting an income, and thus unemployed. For example, while practice is key in (highly convex) professional sports, there aren’t many people who have the natural talent to earn a living at it. Convexity shuts out those without natural talent. Luckily for us and the world, most convex work isn’t so heavily influenced by natural limitations, but by skills, specialization and education. There’s still an elite at the rightward side of the payoff distribution curve that takes the bulk of the reward, but it’s possible for a diligent and motivated person to enter that elite by gaining the requisite skills. In other words, most of the inputs into that convex payoff function are within the individual actor’s control. This is another case of “good inequality”. In blue-ocean convexity, we want the top players to reap very large rewards, because it motivates more people to do the work that gets them there. 

Consider software engineering, which is perhaps the platonic ideal of blue-ocean convexity. What retards us the most as an industry is the lack of highly-skilled people. As an industry, we contend with managerial environments tailored to mediocrity, and suffer from code-quality problems that can reduce a technical asset’s real value to 80, 20, or even minus-300 cents on the dollar compared to its book value. Good software engineers are rare, and that hurts everyone. In fact, perhaps the easiest way to add $1 trillion in value to the economy would be to increase software engineer autonomy. Because most software engineers never get the environment of autonomy that would enable them to get any good, the whole economy suffers. What’s the antidote? A lot of training and effort– the so-called “10000 hours” of deliberate practice– that’s generally unpaid in this era of short-term, disposable jobs.

Convexity’s fundamental problem is that it requires highly-skilled labor, but no employer is willing to pay for people to develop the relevant skills, out of a fear that employees who drive up their market value will leave. In the short term, it’s an effective business strategy to hire mediocre “commodity developers” and staff them on gigantic teams for uninspiring projects, and give them work that requires minimal intellectual ability aside from following orders. In the long term, those developers never improve and produce garbage software that no one knows how to maintain, producing creeping morale decay and, sometimes, “time bombs” that cause huge business losses at unknown times in the future.

That’s why convexity is such a major threat to the full-employment society to which even liberal Americans still cling. Firms almost never invest in their people– empirically, we see that– in favor of the short-term “solution”, which is to ignore convexity and try to beat the labor context into concavity, that is terrible in the long term. Thus, even in convex work, the bulk of people linger at the low-yield leftward end of the curve. Their employers don’t invest in them, and often they lack the time and resources to invest in themselves. What we have, instead of blue-ocean convexity, is an economy where the privileged (who can afford unpaid time for learning) become superior because they have the capital to invest in themselves, and the rest are ignored and fall into low-yield commodity work. This was socially stable when there was a lot of concave, commodity work for humans to do, but that’s increasingly not the case.

Someone is going to have to invest in the long term, and to pay for progress and training. Right now, privileged individuals do it for themselves and their progeny, but that’s not scalable and will not avert the social instability threatened by systemic, long-term unemployment.

Trust and convexity

As I’ve said, convexity isn’t only a property of the relationship between individual inputs (talent, motivation, effort, skill) and productivity, but also occurs in team endeavors. Teams can be synergistic, with peoples’ efforts interacting multiplicatively instead of additively. That’s a very good thing, when it happens.

So it’s no surprise that large accomplishments often require multiple people. We already knew that! That is less true in 2013 than it was 1985– now, a single person can build a website serving millions– but it’s still the case. Arguably, it’s more the case now; it’s only that many markets have become so efficient that interpersonal dependencies “just work” and give more leverage to single actors. (The web entrepreneur is using technologies and infrastructure built by millions of other people.) At any rate, it’s only a small space of important projects that will be accomplished well by a single party, acting alone. For most, there’s a need to bring multiple people together, but to retain focus and that requires interior political inequalities (leadership) to the group.

We’re hard-wired to understand this. As humans, we fundamentally get the need for team endeavors with strong leadership. That’s why we enjoy team sports so much.

Historically, there have been three “sources of power” that have enabled people to undertake and lead large projects (team convexity):

• coercion, which exists when negative consequences are used to motivate someone to do work that she wouldn’t otherwise do. This was the cornerstone of pre-industrial economies (slavery) but is also used, in a softer form, by ineffective managers: do this or lose your income/reputation. Anyway, coercion is how the Egyptian pyramids were built: coercive slave labor.
• divination, in which leaders are elected based on an abstract principle, which may be the whim of a god, legal precedent, or pure random luck. For example, it has been argued that gambling (a case of “pure random luck”) served a socially positive purpose on the American frontier. Although it moved funds “randomly”, it allowed pools of capital to form, financing infrastructural ventures. Something like divination is how the cathedrals were built: voluntary labor, motivated by religious belief, directed by architects who often were connected with the Church. Self-divination, which tends to occur in a pure power vacuum, is called arrogation.
  
• aggregation, where an attempt to compute, fairly, the group preference or the true market value of an asset is made. Political elections and financial markets are aggregations. Aggregation is how the Internet was built: self-directed labor driven by market forces.

When possible, fair aggregations are the most desirable, but it’s non-trivial to define what fair is. Should corporate management be driven by the one-dollar, one-vote system that exists today? Personally, I don’t think so. I think it sucks. I think employees deserve a vote simply because they have an obvious stake in the company. As much as the current, right-wing, state of the American electorate infuriates me, I really like the fact that citizens have the power to fire bad politicians. (They don’t use it enough; incumbent victory rates are so high that a bad politician has more job security than a good programmer.) Working people should have the same power over their management. By accepting a wage that is lower than the value of what they produce, they are paying their bosses. They have a right to dictate how they are managed, and to insist on the mentorship and training that convexity is making essential.

Because it’s so hard to determine a fair aggregation in the general case, there’s always some room for divination and arrogation, or even coercion in extreme cases. For example, our Constitution is a case of (secular, well-informed) divination on the matter of how to build a principled, stable and rational government, but it sets up an aggregation that we use elect political leaders. Additionally, if a political leader were voted out of office but did not hand over power, he’d be pushed out of it by force (coercion). Trust is what enables self-organizing (or, at least, stable) divination. People will grant power to leaders based on abstract principles if they trust those ideas, and they’ll allow representatives to act on their behalf if they trust those people.

Needless to say, convex payoffs to group efforts generate an important role for trust. That’s what the “stone soup” parable is about; because there’s no trust in the community, people hoard their own produce instead of sharing, and no one has had a decent meal for months. When outside travelers offer a nonexistent delicacy– the stone is a social catalyst with no nutritional value– and convince the other villagers to donate their spare produce, they enable them all to work together. So they get a nutritious bowl of soup and, one hopes, they can start to trust each other and build at least a barter or gift economy. They all benefit from the “stone soup”, but they were deceived.

Convex dishonesty isn’t always bad. It is the act of “borrowing” trust by lying to people, with the intent to pay them back out of the synergistic profits. Sometimes convex dishonesty is exactly what a person needs to do in order to get something accomplished. Nor is it always good. Failed convex frauds are damaging to morale, and therefore they often exacerbate the lack-of-trust problem. Moreover, there are many endeavors (e.g. pyramid schemes) that have the flavor of convex fraud but are, in reality, just fraud.

This, in fact, is why modern finance exists. It’s to replace the self-divinations that pre-financial societies required to get convex projects done with a fairer aggregation system that properly measures, and allows the transfer of, risks.

Credibility

For macroscopic considerations like the fair prices of oil or business equity, financial aggregations seem to work. What about the micro-level concern of what each worker should do on a daily basis? That usually exists in the context of a corporation (closed system) with specific authority structures and needs. Companies often attempt to create internal markets (tough culture) for resources and support, with each team’s footprint measured in internal “funny money” given the name of dollars. I’ve seen how those work, and they often become corrupt. The matter of how people direct the use of their time is based on an internal social currency (including job titles, visibility, etc.) that I’ve taken to calling credibility. It’s supposed to create a meritocracy, insofar as the only way one is supposed to be able to get credibility is through hard work and genuine achievement, but it often has some severely anti-meritocratic effects. 

So why does your job (probably) Suck? Your job will generally suck if you lack credibility, because it means that you don’t control your own time, have little choice over what you do and how you do it, and that your job security is poor. Your efforts will be allocated, controlled, and evaluated by an external party (a manager) whose superiority in credibility grants him the right of self-divination. He gets to throw your time into his convex project, but not vice versa. You don’t have a say in it. Remember: he’s got credibility, and you lack it. 

Credibility always generates a black market. There is no failing in this principle. Performance reviews are gamed, with various trades being made wherein managers offer review points in exchange for non-performance-related favors (such as vocal support for an unrelated project, positive “360-degree reviews”, and various considerations that are just inappropriate and won’t be discussed here) and loyalty. Temporary strongmen/thugs use transient credibility (usually, from managerial favoritism) to intimidate and extort other people into sharing credit for work accomplished, thus enabling the thug to appear like a high performer and get promoted to a real managerial role (permanent credibility). You win on a credibility market by buying and selling it for a profit, creating various perverted social arbitrages. No organization that has allowed credibility to become a major force has avoided this.

Now I can discuss the hierarchy as immortalized by this cartoon from Hugh MacLeod:

Losers are not undesirable, unpopular, or useless people. In fact, they’re often the opposite. What makes them “losers” is that, in an economic sense, they’re losing insofar as they contribute more to the organization than they get out of it. Why do they do this? They like the monthly income and social stability. Sociopaths (who are not bad people; they’re just gamblers) take the other side of that risk trade. They bear a disproportionate share of the organization’s risk and work the hardest, but they get the most reward. They have the most to lose. A Loser who gets fired will get another job at the same wage; a Sociopath CEO will have to apply for subordinate positions if the company fails. Clueless are a level that forms later on when this risk transfer becomes degenerate– the Sociopaths are no longer putting in more effort or taking more risk than anyone else, but have become an entitled, complacent rent-seeking class– and they need a middle-management layer of over-eager “useful idiots” to create the image (Effort Thermocline) that the top jobs are still demanding.

What’s missing in this analysis? Well, there’s nothing morally wrong, at all, with a financial risk transfer. If I had a resource that had a 50% chance of yielding $10 million, and 50% chance of being worthless, I’d probably sell it to a rich person (whose tolerance of risk is much greater) for $4.9 million to “lock in” that amount. A +5-million-dollar swing in personal wealth is huge to me and minuscule to him. It’d be a good trade for both of us. I’d be paying a (comparably small) $100,000 risk premium to have that volatility out of my financial life. I’m not a Loser in this deal, and he’s not a Sociopath. It’s by-the-book finance, how it’s supposed to work.

What generates the evil, then? Well, it’s the credibility market. I don’t hold the individual firm responsible for prevailing financial scarcity and, thus, the overwhelmingly large number of people willing to make low-expectancy plays. As long as that firms pays its people reasonably, it has clean hands. So the financial Loser trade is not a sign of malfeasance. The credibility market’s different, because the organization has control over it. It creates the damn thing. Thus, I think the character of the risk transfer has several phases, each deserving its own moral stance:

1. Financial risk transfer. Entrepreneurs put capital and their reputations at risk to amass the resources necessary to start a project whose returns are (macroscopically, at least) convex. This pool of resources is used to pay bills and wages, therefore allowing workers to get a reliable, recurring monthly wage that is somewhat less than the expected value of their contribution. Again, there’s nothing morally wrong here. Workers are getting a risk-free income (so long as the business continues to exist) while participating in the profits of industrial macro-convexity. 
2. De-risking, entrenchment, and convex fraud. As the business becomes more established, its people stop viewing it as a risk transfer between entrepreneurs and workers, and start seeing it (after the company’s success is obvious) as a pool of “free” resources to gain control over. Such resources are often economic (“this place has millions of dollars to fund my ideas”) but reputation (“imagine what I could do as a representative of X”) is also a factor. People begin making self-divination (convex fraud) gambits to establish themselves as top performers and vault into the increasingly complacent, rent-seeking, executive tier. This is a red-ocean feeding frenzy for the pile of surplus value that the organization’s success has created.
3. Credibility emerges, and becomes the internal currency. Successful convex fraudsters are almost always people who weren’t part of the original founding team. They didn’t get their equity when it was cheap, so now they’re in an unstable positions. They’re high-ranking managers, but haven’t yet entwined themselves with the business or won a significant share of the rewards/equity. Knowing that their success is a direct output of self-divination (that is, arrogation) they use their purloined social standing to create official credibility in the forms of titles (public statements of credibility), closed allocation (credibility as a project-maker and priority-setter), and performance reviews (periodic credibility recalibrations). This turns the unofficial credibility they’ve stolen into an official, secure kind.
4. Panic trading, and credibility risk transfer. Newly formed businesses, given their recent memory of existential risk, generally have a cavalier attitude toward firing and a tough culture, which I’ll explain below. This means that a person can be terminated not because of doing anything wrong or being incompetent, but just because of an unlucky break in credibility fluctuations (e.g. a sponsor who changes jobs, a performance-review “vitality curve”). In role-playing games, this is the “killed by the dice” question: should the GM (game coordinator who functions as a neutral party, creating and directing the game world) allow characters, played well, to die– really die, in the “create a new character” sense, not in the “miraculously resurrected by a level-18 healer” sense– because of bad rolls of the dice? In role-playing games, it’s a matter of taste. Some people hate games where they can lose a character by random chance; others like the tension that it creates. At work, though, “killed by the dice” is always bad. Tough-culture credibility markets allow good employees to be killed by the dice. In fact, when stack-ranking and “low performer” witch hunts set in, they encourage it. This creates a lot of panic trading and there’s a new risk transfer in town. It’s not the morally acceptable and socially-positive transfer of financial risk we saw in Stage 1. Rather, it’s the degenerate black-market credibility trading that enables the worst sorts of people (true psychopaths) to rise.
   
5. Collapse into feudalistic rank culture. No one wants a job where she can be fired “for performance” because of bad luck, so tough cultures don’t last very wrong; they turn into rank cultures. People (Losers) panic-trade their credibility, and would rather subordinate to get some credibility (“protection”) from a feudal lord (Sociopath) than risk having none and being flushed out. The people who control the review process become very powerful and, eventually, can manufacture enough of an image of high performance to become official managers. You’re no longer going to be killed by the dice in a rank culture, but you can be killed by a manager because he can unilaterally reduce your credibility to zero.
6. Macroscopic underperformance and decline. Full-on rank culture is terribly inefficient, because it generates so much fourth-quadrant work that serves the need of local extortionists (usually, middle managers and their favorites) but does not help the business. Eventually, this leads to underperformance of the business as a whole. Rank culture fosters so much incompetence that trust breaks down within the organization, and it’s often permanent. Firing bad apples is no longer possible, because the process of flushing them away would require firing a substantial fraction of the organization, and that would become so politicized and disruptive as to break the company outright. Such companies regularly lapse into brief episodes of “tough culture”, when new executives (usually, people who buy it as its market value tanks) decide that it’s time to flush out the low performers, but they usually do it in a heavy-handed, McKinsey-esque way that creates a new and equally toxic credibility market. But… like clockwork, those who control said black markets become the new holders of rank and, soon enough, the official bosses. These mid-level rank-holders start out as the mean-spirited witch-hunters (proto-Sociopaths) who implement the “low performer initiative” but they eventually rise and leave a residue of strategically-unaware, soft, complacent and generally harmless mid-ranking “useful idiots” (new Clueless). Clueless are the middle managers who get some power when the company lurches into a new rank culture, but don’t know how to use it and don’t know the main rule of the game of thrones: you win or you die.
7. Obsolescence and death. Self-explanatory. Some combination of rank-culture complacency and tough-culture moral decay turn the company into a shell of what it once was. The bad guys have taken out their millions and are driving up house prices in the area and their wives with too much plastic surgery are on zoning committees keeping those prices high; everyone else who worked at the firm is properly fucked. Sell off the pieces that still have value, close the shop.

That cycle, in the industrial era, used to play out over decades. If you joined a company in Stage 1 in 1945, you might start to see the Stage 4 midlife when you retired in 1975. Now, it happens much more quickly: it goes down over years, and sometimes months for fast-changing startups. It’s much more of an immediate threat to personal job security than it has ever been before. Cultural decay used to be a long-term existential risk to companies not taken seriously because calamity was decades away; now, it’s often ongoing and rapid thanks to the “build to flip” mentality.

To tell the truth about it, the MacLeod rank culture wasn’t such a bad fit for the industrial era. Industrial enterprises had a minimal amount of convex work (choosing the business model, setting strategies) that could be delegated to a small, elite, executive nerve-center. Clueless middle managers and rationally-disengaged (Loser) wage earners could implement ideas delivered from the top without too much introspection or insight, and that was fine because individual work was concave. Additionally, that small set of executives could be kept close to the owners of the company (if they weren’t the same set of people).

In the technological era, individual labor is convex and we can no longer afford Cluelessness, or Loserism. The most important work– and within a century or so, all work where there’s demand for humans to do it– requires self-executivity. The hierarchical corporation is a brachiosaur sunning itself on the Yucatan, but that bright point of light isn’t the sun.

Your job is a call option

If companies seem to tolerate, at least passively, the inefficiency of full-blown rank culture, doesn’t that mean that there isn’t a lot of real work for them to do? Well, yes, that’s true. I’ve already discussed the existence of low-yield, boring, Fourth Quadrant busywork that serves little purpose to the business. It’s not without any value, but it doesn’t do much for a person’s career. Why does it exist? First, let’s answer this: where does it come from?

Companies have a jealously-guarded core of real work: essential to the business, great for the careers of those who do it. The winners of the credibility market get the First Quadrant (1Q) of interesting and essential work. They put themselves on the “fun stuff” that is also the core of the business– it’s enjoyable, and it makes a lot of money for the firm and therefore leads to high bonuses. There isn’t a lot of work like this, and it’s coveted, so few people can be in this set. Those are akin to feudal lords, and correspond with MacLeod Sociopaths. Those who wish to join their set, but haven’t amassed enough credibility yet, take on the less enjoyable, but still important Second Quadrant (2Q) of work: unpleasant but essential. Those are the vassals attempting to become lords in the future. That’s often a Clueless strategy because it rarely works, but sometimes it does. Then there is a third monastic category of people who have enough credibility (got into the business early, usually) to sustain themselves but have no wish to rise in the organizational hierarchy. They work on fun, R&D projects that aren’t in the direct line of business (but might be, in the future). They do what’s interesting to them, because they have enough credibility to get away with that and not be fired. They work on the Third Quadrant (3Q): interesting but discretionary. How they fit into the MacLeod pyramid is unclear. I’d say they’re a fortunate sub-caste of Losers in the sense that they rationally disengage from the power politics of the essential work; but they’re Clueless if they’re wrong about their job security and get fired. Finally, who gets the Fourth Quadrant (4Q) of unpleasant and discretionary work? The peasants. The Losers without the job security of permanent credibility are the ones who do that stuff, because they have no other choice.

Where does the Fourth Quadrant work come from? Clueless middle-managers who take undesirable (2Q) or unimportant (3Q) projects, but manage to take all the career upside (turning 2Q into 4Q for their reports) and fun work (turning 3Q into 4Q) for themselves, leaving their reports utterly hosed. This might seem to violate their Cluelessness; it’s more Sociopathic, right? Well, MacLeod “Clueless” doesn’t mean that they don’t know how to fend for themselves. It means they’re non-strategic, or that they rarely know what’s good for the business or what will succeed in the long-term. They suck at “the big picture” but they’re perfectly capable of local operations. Additionally, some Clueless are decent people; others are very clearly not. It is perfectly possible to be MacLeod Clueless and also a sociopath.

Why do the Sociopaths in charge allow the blind Clueless to generate so much garbage make-work? The answer is that such work is evaluative. The point of the years-long “dues paying” period is to figure out who the “team players” are so that, when leadership opportunities or chances for legitimate, important work open up, the Sociopaths know which of the Clueless and Losers to pick. In other words, hiring a Loser subordinate and putting him on unimportant work is a call option on a key hire, later.

Workplace cultures

I mentioned rank and tough cultures above, so let me get into more detail of what those are. In general, an organization is going to evaluate its individuals based on three core traits:

• subordinacy: does this person put the goals of the organization (or, at least, his immediate team and supervisor) above her own?
  
• dedication: will she do unpleasant work, or large amounts of work, in order to succeed?
• strategy: does she know what is worth working on, and direct her efforts toward important things?

People who lack two or all three of these core traits are generally so dysfunctional that all but the most nonselective employers just flush them out. Those types– such as the strategic, not-dedicated, and insubordinate Passive-Aggressive and the dedicated, insubordinate, and not-strategic Loose Cannon– occasionally pop up for comic relief, but they’re so incompetent that they don’t last long in a company and are never in contention for important roles. I call them, as a group, the Lumpenlosers.

MacLeod Losers tend to be strategic and subordinate, but not dedicated. They know what’s worth working on, but they tend to follow orders because they’re optimizing for comfort, social approval, and job security. They don’t see any value in 90-hour weeks (which would compromise their social polish) or radical pursuit of improvement (which would upset authority). They just want to be liked and adjust well to the cozy, boring, middle-bottom. If you make a MacLeod Loser work Saturdays, though, she’ll quit. She knows that she can get a similar or better job elsewhere.

MacLeod Clueless are subordinate and dedicated but not strategic. They have no clue what’s worth working on. They blindly follow orders, but will also put in above-board effort because of an unconditional work ethic. They frequently end up cleaning up messes made by Sociopaths above and Losers below them. They tend to be where the corporate buck actually stops, because Sociopaths can count on them to be loyal fall guys.

MacLeod Sociopaths are dedicated and strategic but insubordinate. They figure out how the system works and what is worth putting effort into, and they optimize for personal yield. They’re risk-takers who don’t mind taking the chance of getting fired if there’s also a decent likelihood of a promotion. They tend to have “up-or-out” career trajectories, and job hopping isn’t uncommon.

Since there are good Sociopaths out there, I’ve taken to calling the socially positive ones the Technocrats, who tend to be insubordinate with respect to immediate organizational authority, but have higher moral principles rooted in convexity: process improvements, teamwork and cooperation, technical and infrastructural excellence. They’re the “positive-sum” radicals.  I’ll get back to them.

Is there a “unicorn” employee who combines all three desired traits– subordinacy, dedication, and strategy? Yes, but it’s strictly conditional upon a particular set of circumstances. In general, it’s not strategic to be subordinate and dedicated. If you’re strategic, you’ll usually either optimize for comfort and be subordinate, but not dedicated, because that’s uncomfortable. If you follow orders, it’s pretty easy to coast in most companies. That’s the Loser strategy. Or, you might optimize for personal yield and work a bit harder, becoming dedicated, but you won’t do it for a manager’s benefit: it’s either your own, or some kind of higher purpose. That’s the Sociopath strategy. The exception is a mentor/protege relationship. Strategic and dedicated people will subordinate if they think that the person in authority knows more than they do, and is looking out for their career interests. They’re subordinating to a mentor conditionally, based on the understanding that they will be in authority, or at least able to do more interesting and important work, in the future.

From this understanding, we can derive four common workplace cultures:

• rank cultures value subordinacy above all. You can coast if you’re in good graces with your manager, and the company ultimately becomes lazy. Rank cultures have the most pronounced MacLeod pyramid: lazy but affable Losers, blind but eager Clueless, and Sociopaths at the top looking for ways to gain from the whole mess. 
• tough cultures value dedication, and flush out the less dedicated using informal social pressure and formal performance reviews. It’s no longer acceptable to work a standard workweek; 60 hours is the new 40. Tough culture exists to purge the Loser tier, splitting it between the neo-Clueless sector and the still-Loser rejects, which it will fire if they don’t quit first. So the MacLeod pyramid of a tough culture is more fluid, but every bit as pathological.
• self-executive cultures value strategy. Employees are individually responsible for directing their own efforts into pursuits that are of the most value. This is the open allocation for which Valve and Github are known. Instead of employees having to compete for projects (tough culture) or managerial support (rank culture) it is the opposite. Projects compete for talent on an open market, and managers (if they exist) must operate in the interests of those being managed. There is no MacLeod hierarchy in a self-executive culture.
• guild culture values a balance of the three. Junior employees aren’t treated as terminal subordinates but as proteges who will eventually rise into leadership/mentoring positions. There isn’t a MacLeod pyramid here; to the extent that there may be undesirable structure, it has more to do with inaccurate seniority metrics (e.g. years of experience) than with bad-faith credibility trading. 

Rank and guild cultures are both command cultures, insofar as they rely on central planning and global (within the institution) rule-setting. Top management must keep continual awareness of how many people are at each level, and plan out the future accordingly. Tough and self-executive cultures are market cultures, because they require direct engagement with an organic, internal market.

The healthy, “Theory Y” cultures are the guild and self-executive cultures. These confer a basic credibility on all employees, which shuts off the panic trading that generates the MacLeod process. In a guild culture, each employee has credibility for being a student who will grow in the future. In self-executive culture, each employee has power inherent in the right to direct her efforts to the project she considers most worthy. Bosses and projects competing for workers is a Good Thing. 

The pathological, “Theory X” cultures are the rank and tough cultures. It goes without saying that most rank cultures try to present themselves as guild cultures– but management has so much power that it need not take any mentorship commitments seriously. Likewise, most tough cultures present themselves as self-executive ones. How do you tell if your company has a genuinely healthy (Theory Y) culture? Basic credibility. If it’s there, it’s the good kind. If it’s not, it’s the bad kind of culture.

Basic credibility

In a healthy company, employees won’t be “killed by the dice”. Sure, random fluctuations in credibility and performance might delay a promotion for a year or two, but the panicked credibility trading of the Theory-X culture isn’t there. People don’t fear their bosses in a Theory-Y culture; they’re self-motivated and fear not doing enough by their own standards– because they actually care. Basic credibility means that every employee is extended enough credibility to direct his own work and career.

That does not mean people are never fired. If someone punches a colleague in the face or steals from the company, you fire him, but it has nothing to do with credibility. You get rid of him because, well, he did something illegal and harmful. What it does mean is that people aren’t terminated for “performance reasons” that really mean either (a) they were just unlucky and couldn’t get enough support to save them in tough-culture “stack ranking”, or (b) their manager disliked them for some reason (no-fault lack-of-fit, or manager-fault lack-of-fit). It does mean that people are permitted to move around in the company, and that the firm might tolerate a real underperformer for a couple of years. Guess what? In a convex world, underperformance almost doesn’t matter.

With convexity, the difference between excellence and mediocrity matters much more than that between mediocrity and underperformance. In a concave world, yes, you must fire underperformers because the margin you get on good employees is so low that one slacker can cancel out 4 or 5 good people. In a convex world, the danger isn’t that you have a few underperformers. You will have, at the least, good-faith low-performers, just because the nature of convexity is to create risk and inequality of return and some peoples’ projects won’t pan out. Thjat’s fine. Instead, the danger is that you don’t have any excellent (“10x”) employees.

There’s a managerial myth that cracking down on “low performers” is useful because they demotivate the “10x-ers”. Yes and no. Incompetent management and having to work around bad code are devastating and will chase out your top performers. If 10xer’s have to work with incompetents and have no opportunity to improve them, they get frustrated and quit. There are toxic incompetents (dividers) who make others unproductive and damage morale, and then there are low-impact employees who just need more time (subtracters). Subtracters cost more in salary than they deliver, but they aren’t hurting anyone and they will usually improve. Fire dividers immediately. Give subtracters a few years (yes, I said years) to find a fit. Sometimes, you’ll hire someone good and still have that person end up as a subtracter at first. That common in the face of convexity– and remember that convexity is the defining problem of the 21st-century business world. The right thing to do is to let her keep looking for a fit until she finds one. Almost never will it take years if your company runs properly.

“Low performer initiatives” rarely smoke out the truly toxic dividers, as it turns out. Why? Because people who have defective personalities and hurt other peoples’ morale and productivity are used to having their jobs in jeopardy, and have learned to play politics. They will usually survive. It’ll be unlucky subtracters you end up firing. You might save chump change on the balance sheet, but you’re not going to fix the real organizational problems.

Theories X, Y, and Z

I grouped the negative workplace cultures (rank and tough) together and called them Theory X; the positive ones (self-executive and guild) I called Theory Y. This isn’t my terminology; it’s about 50 years old, coming from Douglas MacGregor. The 1960s was the height of Theory Y management, so that was the “good” managerial style. Let’s compare them and see what they say.

Recall what I said about the “sources of power”: coercion, divination, and aggregation. Coercion was, by far, the predominant force in aggregate labor before 1800. Slavery, prisons, and militaries (with, in that time, lots of conscription) were the inspirations for the original corporations, and the new class of industrialists was very cruel: criminal by modern standards. Theory X was the norm. Under Theory X, workers are just resources. They have no rights, no important desires, and should be well-treated only if there’s an immediate performance benefit. Today, we recognize that as brutal and psychotic, but for a humanity coming off over 100,000 years of male positional violence and coerced labor, the original-sin model of work shouldn’t seem far off. Theory X held that employees are intrinsically lazy and selfish and will only work hard if threatened.

Around 1920, industrialists began to realize that, even though labor in that time mostly was concave, it was good business to be decent to one’s workers. Henry Ford, a rabid anti-Semite, was hardly a decent human being, much less “a nice guy”, but even he was able to see this. He raised wages, creating a healthy consumer base for his products. He reduced the workday to ten hours, then eight. The long days just weren’t productive. Over the next forty years, employers learned that if workers were treated well, they’d repay the favor by behaving better and working harder. This lead to the Theory Y school of management, which held that people were intrinsically altruistic and earnest, and that management’s role was to nurture them. This gave birth to the paternalistic corporation and the bilateral social contracts that created the American middle class.

Theory Y failed. Why? It grew up in the 1940s to ’60s, when there was a prosperous middle class, but in a time of very low economic inequality. One thing that would amaze most Millennials is that, when our parents grew up, the idea that a person would work for money was socially unacceptable. You just couldn’t say that you wanted to get rich, in 1970, and not be despised for it. And it was very rare for a person to make 10 times more than the average citizen! However, the growth of economic inequality that began in the 1970s, and accelerated since then, raised the stakes. Then the Reagan Era hit.

Most of the buyout/private equity activity that happened in the 1980s had a source immortalized by the movie Wall Street: industrial espionage, mostly driven by younger people eager to sell out their employers’ secrets to get jobs from private equity firms. There was a decade of betrayal that brutalized the older, paternalistic corporations. Given, by a private equity tempter, the option of becoming CEO immediately through chicanery, instead of working toward it for 20 years, many took the former. Knives came out, backs were stabbed, and the most trusting corporations got screwed.

Since the dust settled, around 1995, the predominant managerial attitude has been Theory Z. Theory X isn’t socially acceptable, and Theory Y’s failure is still too recently remembered. What’s Theory Z? Theory X takes a pessimistic view of workers and distrusts everyone. Theory Y takes an optimistic view of human nature and becomes too trusting. Theory Z is the most realistic of the three: it assumes that people are indifferent to large organizations (even their employers) but loyal to those close to them (family, friends, immediate colleagues, distant co-workers; probably in that order). Human nature is neither egoistic or altruistic, but localistic. This was an improvement insofar as it holds a more realistic view of how people are. It’s still wrong, though.

What’s wrong with Theory Z? It’s teamist. Now, when you have genuine teamwork, that’s a great thing. You get synergy, multiplier effects, team convexity– whatever you want to call it, I think we all agree that it’s powerful. The problem with the Theory-Z company is that it tries to enforce team cohesion. Don’t hire older people; they might like different music! Buy a foosball table, because 9:30pm diversions are how creativity happens! This is more of a cargo cult than anything founded in reasonable business principles, and it’s generally ineffective. Teamism reduces diversity and makes it harder to bring in talent (which is critical, in a convex world). It also tends toward general mediocrity.

Each Theory had a root delusion in it. Theory X’s delusion was that morale didn’t matter; workers were just machines. Theory Y’s delusion is rooted in the tendency for “too good” people to think everyone else is as decent as they are; it fell when the 1980s made vapid elitism “sexy” again, and opportunities to make obscene wealth in betraying one’s employer emerged. Theory Z’s delusion is that a set of people who share nothing other than a common manager constitute a genuine (synergistic) team. See, in an open-allocation world, you’re likely to get team synergies because of the self-organization. People would naturally tend to form teams where they make each other more productive (multiplier effects). It happens at the grass-roots level, but can’t be forced in people who are deprived of autonomy. With closed-allocation, you don’t get that. People (with diverging interests) are brought together by force outside of their control and told to be a team. Closed-allocation Theory Z lives in denial of how rare those synergistic effects actually are.

I mentioned, previously an alternative to these 3 theories that I’ve called Theory A, which is a more sober and realistic slant on Theory Y: trust employees with their own time and energy; distrust those who want to control others. I’ll return to that in Part 22, the conclusion.

Morality, civility, and social acceptability

The MacLeod Sociopaths that run large organizations are a corrosive force, but what defines them isn’t true psychopathy, although some of them are that. There are also plenty of genuinely good people who fit the MacLeod Sociopath archetype. I am among them. What makes them dangerous is that the organization has no means to audit them. If it’s run by “good Sociopaths” (whom I’ve taken to calling Technocrats) then it will be a good organization. However, if it’s run by the bad kind, it will degenerate. So, with the so-called Sociopaths (while it is less necessary for the Losers and Clueless) it is important to understand the moral composition of that set.

I’ve put a lot of effort into defining good and evil, and that’s a big topic I don’t have much room for, so let me be brief on them. Good is motivated by concerns like compassion, social justice, honesty, and virtue. Evil is militant localism or selfishness. In an organizational context, or from a perspective of individual fitness, both are maladaptive when taken to the extreme. Extreme good is self-sacrifice and martyrdom that tends to take a person out of the gene pool, and certainly isn’t good for the bottom line; extreme evil is perverse sadism that actually gets in a person’s way, as opposed to the moderate psychopathy of corporate criminals.

Law and chaos are the extremes of a civil spectrum, which I cribbed from AD&D. Lawful people have faith in institutions and chaotic people tend to distrust them. Lawful good sees institutions as tending to be more just and fair than individual people; chaotic good finds them to be corrupt. Lawful neutrality sees institutions as being efficient and respectable; chaotic neutrality finds them inefficient and deserving of destruction. Lawful evil sees institutions as a magnifier of strength and admires their power; chaotic evil sees them as obstructions that get in the way of raw, human dominance. 

Morality and civil bias, in people, seem to be orthogonal. In the AD&D system, each spectrum has three levels, producing 9 alignments. I focused on the careers of each here. In reality, though, there’s a continuous spectrum. For now, I’m just going to assume a Gaussian distribution, mean 0 and standard deviation 1, with the two dimensions being uncorrelated.

MacLeod Losers tend to be civilly neutral, and Clueless tend to be lawful; but MacLeod Sociopaths come from all over the map. Why? To understand that, we need to focus on a concept that I call well-adjustment. To start, humans don’t actually value extremes in goodness or in law. Extreme good leads to martyrdom, and most people who are more than 3 standard deviations of good are taken to be neurotic narcissists, rather than being admired. Extremely lawful people tend to be rigid, conformist, and are therefore not much liked either. I contend that there’s a point of maximum well-adjustment that represents what our society says people are supposed to be. I’d put it somewhere in the ballpark of 1 standard deviation of good, and 1 of law, or the point (1, 1). If we use +x to represent law, -x to represent chaos, +y to represent good, and -y to represent evil, we get the well-adjustment formula:

Here, low f means that one is more well-adjusted. It’s better to be good than evil, and to be lawful than chaotic, but it’s best to be at (1, 1) exactly. But wait! Is there really a difference between (1, 1) and (0, 0)? Or between (5, 5) and (5, 6)? Not really, I don’t think. Well-adjustment tends to be a binary relationship, so I’m going to put f through a logistic transform where 0.0 means total ill-adjustment at 1.0 means well-adjustment. Middling values represent a “fringe” of people who will be well-adjusted in some circumstances but fail, socially speaking, in others. Based on my experience, I’d guess that this:

is a good estimate. If your squared distance from the point of maximal well-adjustment is less than 4, you’re good. If it’s more than 8, you’re probably ill-adjusted– too good, too evil, too lawful, or too chaotic. What gives us, in the 2-D moral/civil space, is a well-adjustment function looking exactly like this:

whose contours look like this:

Now, I don’t know whether the actual well-adjustment function that drives human social behavior has such a perfect circular shape. I doubt it does. It’s probably some kind of contiguous oval, though. The white part is a plateau of high (near 1.0) social adjustment. People in this space tend to get along with everyone. Or, if they have social problems, it has little to do with their moral or civil alignments, which are socially acceptable. The red outside is a deep sea (near 0.0) of social maladjustment. It turns out that if you’re 2 standard deviations of evil and of chaos, you have a hard time making friends.

In other words, we have a social adjustment function that’s almost binary, but there’s a really interesting circular fringe that produces well-adjustment values between 0.1 and 0.9. Why would that be important? Because that’s where the MacLeod Sociopaths comes from.

Well-adjusted people don’t rise in organizations. Why? Because organizations know exactly how to make it so that well-adjusted, normal people don’t mind being at the bottom, and will slightly prefer it if that’s where the organization thinks they belong. It’s like Brave New World, where the lower castes (e.g. Gammas) are convinced that they are happiest where they are. If you’re on that white plateau of well-adjustment, you’ll probably never be fired. You’ll always have friends wherever you go. You can get comfortable as a MacLeod Loser, or maybe Clueless. You don’t worry. You don’t feel a strong need to rise quickly in an orgnaization.

Of course, the extremely ill-adjusted people in the red don’t rise either. That should not surprise anyone. Unless they become very good at hiding their alignments, they are too dysfunctional to have a shot in social organizations like a modern corporation. To put it bluntly, no one likes them.

However, let’s say that a Technocrat has 1.25 standard deviations of law and chaos each, making her well-adjustment level 0.65. She’s clearly in that fringe category. What does this mean? It means that she’ll be socially acceptable in about 65% of all contexts. The MacLeod Loser career isn’t an option for her. She might get along with one set of managers and co-workers, but as they change, things may turn against her. Over time, something will break. This gives her a natural up-or-out impetus. If she doesn’t keep learning new things and advancing her career, she could be hosed. She’s liked by more people than dislike her, but she can’t rely on being well-liked as it were a given.

It’s people on the fringe who tend to rise to the top of, and run, organizations, because they can never get cozy on the bottom. We can graph “fringeness”, measured as the magnitude of the slope (derivative) of the well-adjustment function and you get contours like this:

It’s a ring-shaped fringe. Nothing too surprising. The perfection of the circular ring is, of course, an artifact of the model. I don’t know if it’s this neat in the real world, but the idea there is correct. Now, here’s where things get interesting. What does that picture tell us? Not that much aside from what we already know: the most ambitious (and, eventually, most successful) people in an organization will be those who are not so close to the “point of maximal well-adjustment” to get along in any context, but not so far from it as to be rejected out of hand.

But how does this give us the observed battle royale between chaotic good and lawful evil? Up there, it just looks like a circle. 

Okay, so we see the point (3, 3) in that circular band. How common is it for someone to be 3 standard deviations of lawful and 3 standard deviations of good? Not common at all. 3-sigma events are rare (about 1 in 740) so a person who was 3 deviations from the norm in both would be 1-in-548,000– a true rarity. Let’s multiply this “fringeness” function we’ve graphed by the (Gaussian) population density at each point.

That’s what the fringe, weighted by population density, looks like. There’s a lack of presence of people at positions like (3, 3) because there’s almost no one there. There’s a clear crescent “C” shape and it contains a disproportionate share of two kinds of people. It has a lot of lawful evil in the bottom right, and a lot of chaotic good in the top left, in addition to some neutral “swing players” who will tend to side (with unity in their group) with one or the other. How they swing tends to determine the moral character of an organization. If they side with the chaotic good, then they’ll create a company like Valve. If they side with lawful evil, you get the typical MacLeod process.

That’s the theoretical reason why organizations come down to an apocalyptic battle between chaotic good (Technocrats) and lawful evil (corrosive Sociopaths, in the MacLeod process). How does this usually play out? Well, we know what lawful evil does. It uses the credibility black market to gain power in the organization. How should chaotic good fight against this? It seems that convexity plays to our advantage, insofar as the MacLeod process can no longer be afforded. In the long term, the firm can only survive if people like us (chaotic good) win. How do we turn that into victory in the short term?

So what’s a Technocrat to do? And how can a company be built to prevent it from undergoing MacLeod corrosion? What’s missing in the self-executive and guild cultures that a 5th “new” type of culture might be able to fix? That’s where I intend to go next.

Take a break, breathe a little. I’ll be back in about a week to Solve It.