I have found that thinking about network theory sheds an entirely new light on the problems that face corporations — both fledging and established — as well as governments around the world. The principle problem that faces governments around the world is that of lurid inefficiency, bureaucracy, and inability to act in the face of changing, and ever-accelerating problems that happen in the real world. My last post on this subject is just the tip of the proverbial iceberg when it comes to these types of problems.

When asking the question of what is causing government incompetence, you will invariably get one of two answers from the right and left, respectively:

  1. The government is not constrained or incentivized by the profit (/loss) motive that necessitates firms in the private sector operate efficiently. Governments very rarely face losses, and because humans have such a hard time envisioning fat-tailed events, it’s hard to even grasp (at least in the developed world).
  2. The government has been co-opted by special interests which put the profit motive before the “will of the people”, and thus steer policy away from the “social good”. What we need is enlightened figures to (magically?) weed out corruption and bring the focus of democratic government back to its true spirit — the people.

Sound familiar? When you hear these things, you should roll your eyes, for while there is a hint of truth in both statements, neither is absolutely true.

On the right, the profit motive often leads to incredible bureaucracies that very often lead to corporate demise — just like governments. Just look in the newspapers and you will see two (now-more-famous) letters littering the headlines — did you ever think they would be seriously looking down the barrel of bankruptcy? How about when Microsoft was going to take over the world…did that ever happen? Same was said about IBM, and they were out-competed by a college kid with $1,000 startup capital. Privatizations can also go bad. For instance, the privatization of directory service (“411″) in Britain, which led to higher prices and worse service because search costs were simply too high.

On the left, hoping for change through more enlightened souls…philosopher kings, as it were…is an exercise in futility. And thus the left is constantly being discouraged by just about everything that goes on in government — and especially by “Mr. Hope and Change” Obama (from what I hear). Maybe it’s representativeness bias (as I have quite a few leftist-liberal friends, and read quite a few leftist-liberal blogs). Oddly, having led so many long fights for “progressive change”, one would think they would understand the type of network effects they are up against! However, the overarching point is that sometimes government isn’t the answer simply because these type of network effects arise naturally, are aren’t willed by the “special interests”. Sometimes when things need to adapt to changing conditions quickly, government (regulation) just isn’t going to be the best solution. Postal service, for instance…and to some extent the operation of public transit.

In any case, this post was intended to raise awareness among the more pragmatic in the two broad camps — the next time you’re dissatisfied about something that goes on in government (or indeed, even at your workplace), take a minute to look at the network. Oftentimes you’ll find that something that seems stupidly trivial to you (i.e. if you were an omnipotent dictator able to make every rational decision immediately, or Homo economicus) — like switching from black to blue pens — quickly becomes a near-insurmountable obstacle, even in areas where it would offer a Pareto improvement. It’s not anything to do with bad people, or even lack of competition…it’s the network.