Strategic Ignorance and The Wealth of Nations

In her book, The Unknowers, How strategic ignorance rules the world (2019), Linsey McGoey analyses arguments that Adam Smith made in his seminal eighteenth century economic treatise The Wealth of Nations. Free-market economists use Smith’s work to justify their economic philosophies but McGoey explains that The Wealth of Nations was made up of five ‘books’ the last of which is not normally part of published versions.  Book 5 advises that governments need to take action to prevent markets being distorted by people who operate only for their own self-interest.

McGoey quotes Smith: ‘The interests of dealers, however, in any branch of trade or manufacture, is always in some respects different from, and even opposite to, that of the publick.’

According to McGoey, Smith defined 3 orders of people:

  • First order: wealthy, landed gentry who lived off land rents and were made stupid by their wealth because they did not need to think about how to make money.
  • Second order: wage labourers who were dulled by the pressure of their occupation and lacked education.
  • Third order:  the merchant class, the employers that lived by profit, had the ability to think more clearly about their own self-interest than the other two.

By this analysis, we have a ‘merchant class’ that are good problem solvers who turn this ability to their own ends and do not address the public good. That markets do not address public good issues is well accepted but McGoey’s view is that the when the merchant class put forward false arguments to justify their actions, their promotion of ignorance can be strategic.

For example, she summarises the marginal productivity theory of income distribution (that has had an important impact on economic thinking) as: ‘Under perfectly competitive markets, the remuneration that people receive from different economic activities tend to align naturally with the economic value that they have contributed to society.’ This theory is criticised on the basis that none of the assumptions are valid and it cannot be tested – that it is a fiction promoted by the merchant class to justify them taking a disproportionately large proportion of profits.

One action to counter strategic ignorance would be to make changes to the Companies Act that required directors to be more concerned with the welfare of employees and with environmental issues. Fat cats taking all the cream for themselves should at least be vieweed as unacceptable behaviour. A new ethos as to what is and what is not acceptable in business is needed.

Learning from success, learning from failure

A main idea that I promote on this website is that identifying and adopting guiding principles is a key issue in successful problem solving. We can learn about such principles by observing how successful projects are managed and from identifying the reasons for failures when they occur. In this post I analyse one of each of these from the infrastructure sector.

Success: the procurement of Terminal 5 at Heathrow Airport

In the 1990s BAA (then known as the British Airports Authority) had plans for a significant expansion to their infrastructure. In particular they intended to build a new Terminal 5 facility at Heathrow. A study of such projects worldwide showed that it was common for them to be heavily over budget and significantly late in completion.  How could such poor performance be avoided?

The conventional bidding process for contracts was such that contractors had to look to claims in order to make a profit. The relationship between the contractors and the client representatives was confrontational. BAA decided to do it differently.  They invited firms to form partnerships with them guaranteeing them continuing work. To keep contract costs down, rather than using competitive tenders, BAA staff worked on improvements in the contractors’ supply chains. BAA took ownership of all risks and paid contractors for work done at negotiated rates. This required open accounting and trust – more information here.

Terminal 5 opened on time within the budget and to specification.  What fundamental principles supported such achievement?

  1. BAA challenged conventional wisdom.  They refused to accept that the ‘way it is normally done’ was the way that it should be done
  2. They operated as a ‘competent client’. They appointed expert staff on their own payroll who were able to take a system view of the project and ensure that all partners were focussed on the client objectives.  But it was not, it could not be, one-way traffic; the client sought to ensure that their partners’ objectives were also met.
  3. They used collaboration rather than competition. All parties worked together to meet the project goals.

Failure: the Grenfell Tower disaster.

In June 2017, an internal fire at a low level in the 24 Storey Grenfell Tower residential building in London caused the cladding to ignite. This external fire spread rapidly sideways and upwards.   72 people died.  It was evident that the specification for the cladding was faulty.

The ensuing 2018 report by Dame Judith Hackitt on the regulatory system for high-rise and complex buildings identified a number of ‘deep flaws’ in the processes for design, construction and maintenance. In her Personal Statement in the report she wrote: “At the heart of this report are the principles for a new regulatory framework which will drive real culture change and the right behaviours.” In other words, using good principles, i.e. good ethos, is a key objective. In particular, an ethos for risk control – a central issue in complex problem solving – needs to be addressed.

What can be learned?

In professional practice, regulations, such as the building regulations, are used as main strategy in the control of risk. Designers sometimes reluctantly comply with the regulations and treat that as the only source of risk control. At a recent IESIS talk, Stephen Payne, the designer of the Queen Mary 2, said that when designing a passenger liner, he took the regulations as a starting point for safety assessment. This ties in with a statement in Dame Judith’s report that safety should be assessed on a case by case basis.

   Near the city of Edinburgh are three long span bridges across the River Forth. In the construction of the Forth Rail Bridge (completed 1890) there were over seventy fatalities; for the Forth Road Bridge (completed 1964) that number was seven.  While the factor of ten reduction was a significant improvement, seven deaths would now be considered to be totally unacceptable. In the construction of the third bridge, the Queensferry Bridge (completed in 2017), the single fatality was considered to be an aberration. The difference now is that on construction sites, at least on major sites, a safety culture is adopted. Everyone involved in the enterprise seeks to improve the safety conditions. All employees are invited to propose improvements for safety and managers are required to respond appropriately.  This is the case in other contexts.  Visit a nuclear power station and you will sense the aura of a safety culture.

    Dame Judith’s report shows that this type of thinking was needed in the procurement of multi-storey buildings in the UK.  A safety culture approach needs to be adopted not only for site safety but across the procurement and maintenance processes. Clients, designers, contractors and regulatory authorities need to work together towards such adoption. 

   Having a safety culture infers the use of the principles identified from the Terminal 5 situation: (1) Challenge conventional wisdom –  it is important that even the regulations are challenged; (2) Competent client –  the client must take an active part in the risk control process and (3) Collaboration of all parties is a key issue.

   Adoption of a safety culture has the very important advantage that the concept of whistleblowing is discarded. People who make suggestions for improving safety are thanked and possibly rewarded rather than being vilified. This applies to all aspects of risk control. If, as a manager, you do not welcome colleagues pointing out errors and suggesting improvements, you should not be a manager.

A task force for the Covid-20 pandemic response

No, that is not an error in the title.  I wish to reflect on how we should react when the next pandemic arrives. The Government would appoint an appropriately led task force of eclectically chosen experts to be responsible for drawing up the plan of action and for coordinating its implementation.  This is different from the present UK situation where government ministers formulate the plan based on information from advisers. The task force would be constituted as a separate entity responsile to the Government, with authority to make decisions and accountable for its actions . Sub-groups would be formed for data gathering and analysis, testing, provision of personal protective equipment, contact tracing, etc.

The plan would be based on experience of past pandemics but since every virus has different effects on people it would be assumed that some differences in the approach would be needed.

As the pandemic progressed, the efficacy of measures being taken in the UK and in other countries would be assessed. To illustrate how this might be done, I use data from the present context.  Tables 1 and 2 show cummulative deaths per million people, i.e. the death rate, for selectd countries on 22 May 2020 from this source.  These columns represent the two main objectives of keeping down the death rate and limititing risk to the economy.

Table 1 is for the top 10 countries (with a small number of small European companies excluded) ranked for death rate. In the ‘Risk to the economy’ column, ‘√’ indicates that restrictions have been such that they represent a serious threat to the economy.   ‘Low’ indicates that the restrictions are unlikely have such an effect.  This is a very rough metric used to develop an argument. Table 2 is for a selection of other countries that have lower death rates.

The task force would note that although the objective of avoiding the NHS being overwhelmed has been achieved, the UK is not performing well in relation to other countries. We are close to the top of the league for death rate and are in a lockdown that will seriously affect the economey. While the validity of this data needs to be challenged, it raises lots of questions.

Although Sweden has a high death rate, how has it managed to have a relatively low level of lockdown? Why are the top ten countries for death rate (Table 1) all European and North American? From Table 2, what is the reason for the relatively low death rates in Germany, Denmark and Norway as compared with other European countries? They use contact tracing. Can that explain the difference?  Why do the countries below Norway in Table2 have very low deaths per head?  Why have South Korea and Taiwan scored well on both objectives?  How did Singapore, that has a very high population density, keep the death rate down?

Turning to questions about actions to be taken, should the process of raising restrictions on activities be based on data?  That is, would it be better to restrict those activities that are known to be have higher risk of infection and allow more freedom in areas where the risk of infection is lower?  When a local spike in infection occurs should it be controlled by testing, tracing and isolation (TTI).

The Covid-20 Task Force would use the answers to questions of this type to inform refinements to the plan.  As well as a central role, it would also coordinate the efforts of people around the country. i.e. it would seek to mobilise the intellectual capital of the nation in limiting the effect of the virus.  This article by Andreas Kluth gives very interesting information about the situation in Taiwan.  It appears that that country achieved such mobilisation – an example of very good problem solving. 

The response to Covid-20 would be based on the principle that complex problem solving, like any other skill, should be addessed by people who are good at it. Risk is high when the consequences of unsatisfactory outcomes are severe and where innovation is needed i.e. where one cannot rely only on past experience. A pandemic is in this category. This calls for problem-solving skill of the highest order – see my two previous blog posts and this paper.

Is it still too late for the UK to apply a Covid-20 approach to the Covid-19 situation?

A prime minister gets smart about energy planning

Here is a transcript of an imagined meeting at the office of a Prime Minister and CC, a person with a reputation for successful project delivery.

PM I have a special mission for you.  We want you to carry out an investigation into how the Government should make decisions for energy policy.  Have a look at this report by Scottish Engineers – ref.  They propose that an overarching National Energy Authority should be created for the UK.  They do not lay it on the line, but implicit in what they write is that we have too many separate groups giving advice. The report does not go into detail as to how a National Authority should be constituted but it does put forward ideas about how it might operate.

Before I go into details, I want to make it clear that we want you to give unbiased recommendations.  We seek to ensure that what we get from our advisers is as close to the truth as can be achieved. That is certainly what we want from you.

We envisage actions as follows but we may have missed some issues:

    • Make a survey of all the bodies on whom we rely to help us to formulate energy policy. Look at the range of competence .
    • Investigate the history of the development of energy policy and governance in the UK. For example, the Scottish report states that the 1926 Electricity Act led to a very successful planning of the system. Eventually the Central Electricity Generating Board (CEGB) was formed that was not popular with some people. You should investigate the performance of CEGB.  The Scottish Report shows that under central planning the cost of electricity in real terms between 1925 and 1960 reduced by a factor of 3.5.  That calculation should be checked. I understand that the management papers of the CEGB are not available in the public domain.  They need to be reviewed (We will arrange for them to be made available to you).
    • Survey how other countries manage their energy policy.  Norway, Sweden and France should be interesting – and the EU.  I understand that the regulatory framework for electricity in North America is stricter than ours.
    • Assess the potential for a market approach as against a planned approach for achieving the aims of our energy policy.  We may need to think the unthinkable and, for example, admit that the privatisation of energy in 1990 is not compatible with the present situation because a crucial objective has been added – the need to reduce emissions.
    • Make a proposal as to how we should proceed with energy planning.

You should form a small core team to manage the work and hire consultants as needed to carry out the investigations.  We have not decided on a budget for the study that we want you to undertake. This is so important that you should not skimp on resources for it.

In the past we tended to call for evidence on energy isues from the public before doing our own analysis. That was the wrong order of events. This time your report and the supporting documents will be made available to the public and we will ask for comments on that – before we take action.

I emphasise that you are not to make recommendations about, for example, how much renewable energy we should aim for.  We want to be advised on how answers to such questions should be formulated. What organisational structure should be put in place? What should the competence of those involved? What should be the ethos under which it will operate?

Good luck!

The prime minister used good problem solving principles :

First, by recognising that it is essential to appoint a person who has the necessary attributes and has assign responsibility and authority to carry out the task – see my previous blog and this paper.
Second, by not wanting CC to jump to a conclusion. All aspects of the problem are expected to be investigated.
Third, by having an open mind.  Confirmation bias is not wanted. Truth is needed even if it hurts.
Fourth, by being prepared ‘think the unthinkable’ and admit to mistakes.

These are some of the principles that should be adopted when formulating government policy for energy – and indeed for any government policy.

A general takes advantage of his luck

In the late 1920s, early 1930s Ralph Bagnold was an engineering officer in the British Army stationed in Cairo. He and his colleagues explored the Libyan Desert in specially fitted Model T Ford cars. Although this was not a military operation – they travelled during their vacation time – it was serious exploration: they took risks and made discoveries. For navigation Bagnold developed a sun compass and invented a means of preventing the loss of cooling water for the engines. They did survey work and developed a method for driving up sand dunes. After retiring from the army in 1935, Bagnold’s studies on the physics of blown sand earned him membership of the Royal Society. He was touched by genius.

In June 1940 Archibald Wavell, the newly appointed Commander-in-Chief Middle East Land Forces, was in his office in Cairo looking at a map. Although the war in North Africa was being fought along a strip close to the Mediterranean coast, he asked himself whether it would be possible for the Italians to launch an attack from further south, via the empty desert. Should he take action to prevent that? Who could advise him? As he pondered these questions, he received a memo from Ralph Bagnold who had re-enilisted and was again stationed in Cairo. Within an hour Bagnold was being interviewed by Wavell.

The memo from Bagnold addressed the questions that Wavell had posed and it did not take the latter long to realise that he had found exactly the person he needed to advise him.  Bagnold proposed the formation of a special unit for reconnaissance and raiding across the Libyan Desert. He told Wavell that “We could get into the emptiness of inner Libya by a back door that only I knew of, through the heart of the sand barrier.” Wavell asked Bagnold “Can you be ready in six weeks?”  Bagnold replied “Yes provided….” Wavell interrupted him and said “Of course there’ll be opposition and delay.” He called his Chief of Staff “Bagnold needs a talisman. Get this typed for my signature right away: ‘To all heads of departments and branches. I wish any request made by Major Bagnold to be met at once without question’”. Then to Bagnold “Not a word of this must go out. There are sixty thousand enemy subjects here. Get a good cover story.  When you are ready, write out your own operational orders and show them to me personally”. Thus, the Long Range Desert Group (LRDG) was formed with Bagnold as its first leader.

When I read that story (in Bagnold’s excellent book Libyan Sands), I thought it showed very sound leadership by Wavell. His faith in Bagnold was not misplaced. The LRDG proved to be invaluable in the North African campaign.

I argue that a core strategy for solving complex problems is to be explicit about the principles to be adopted i.e. the ethos.  From the above story the following guiding principles can be identified:

    • As the leader responsible for addressing a multifaceted situation, e.g. fighting a war or a virus pandemic, create a set of sub-projects that address specific tasks.
    • Do not manage the sub-projects yourself.   Appoint leaders who have the necessary attributes, relevant experience and track records of success.
    • Give the leaders general instructions, let them form their own teams and let them get on with the work. Do not micro-manage.
    • Require regular reports and take action if the results are not satisfactory.

I pose this question: ‘To what extent are these principles being adopted by UK government ministers in their efforts to minimise the effects of the present pandemic?’ For example, there has been much disquiet about the provison of Personal Protective Equipment (PPE). Do the people who have been contracted to centralise this provision have extensive experience in procurement?

For more ideas on leadership and ethos see this paper and for ideas about the role of government ministers see page 5 of this paper.

Iain MacLeod  15.05.20