We need to stop our obsession with efficiency to address wealth disparity, says management expert
'What you have is many people with a little, and a few people with a whole lot,' said Roger Martin
Efficiency has been a key principle in capitalism since the Industrial Revolution. But our society's obsessive pursuit of efficiency has pushed the concentration of wealth and power out of balance, according to management expert Roger Martin.
"People do not realize that in 1980, if the economy grew by a dollar, it was most likely to end up in the pocket of the first-percentile person, somebody at the bottom of the income distribution. And the probability of where it would end up decreased as you got richer. Now, it is exactly the opposite," said Martin, who is also Professor of Strategic Management Emeritus at the University of Toronto.
"So something dramatic has happened in 40 years to turn that curve exactly in the opposite direction."
In his new book, When More Is Not Better: Overcoming America's Obsession with Economic Efficiency, Martin argues that businesses need to rethink how they measure efficiency, and focus on nurturing resilience.
Martin spoke to Spark host Nora Young about his new book and how our ideas of efficiency have gone awry. Here is part of their conversation.
Efficiency has been a goal in capitalism since it came about. Can you define what we mean by efficiency, at least in this context?
It is having more outputs of whatever you're looking for with lesser inputs. So efficiency would be producing a car with fewer labour hours, or getting a ton of coal out of the ground at the lowest possible cost. Those would be aspects of the kind of efficiency that the business world looks for.
So what's the problem with efficiency when we have too much of it?
What I've discovered is really happening with the economy is that the push for efficiency is manifested in increasing the pressure on companies, workers, economic systems.
So the idea is that if we open up trade even more, we'll get the kind of pressure that forces companies to be more efficient still. If we deregulate, we'll have more efficiency. If we make sure we don't have labour laws that cause workers to have too much power, we'll end up being more efficient. All of these forms of pressure inadvertently have had this impact of changing the distribution of outcomes. Part of an advanced economy is a large and prosperous middle class. Think of that as a big normal distribution. You've got a little tail of richer people, a little tail of poorer people and the middle class in the middle. That's the outcome we expect from the economy. And in fact, we expect that curve just moves toward higher income.
It turns out that if you take a system that's working like that and apply enough pressure on it, it turns into a different kind of curve … the Pareto curve, often thought of as the 80/20 law. What you have is many people with a little, and a few people with a whole lot. That's what has happened with this excessive pressure for efficiency.
You're arguing that resilience might be a better metric. Can we get into that a bit?
We need a balance of the two. So if we give up entirely worrying about efficiency, we'll get a stagnating economy. But we need to balance it with the idea of resilience. The systems that we're dealing with — the economy, a company, a community — need to be resilient over time, it needs to be resilient to shocks to the system, and if we just balance those two things, we would get fewer Pareto distributions.
Can you give me a couple of examples of resilience in action?
We can take COVID. What was our position going into COVID? We had hospitals that had been dramatically reducing any notion of excess staffing of nurses — nurses are the most expensive part of an operating cost for hospitals — and let's make sure our storerooms aren't full of PPE that we aren't using and is taking up working capital. They were more efficient.
But then when COVID comes along, you realize you're not resilient to that bump, and you're scrambling around for nurses [and] PPE. So while efficiency is good, you have to have a sense of how efficient do we want to be versus resilient.
How is upping the ante on efficiency linked to short-term thinking, as opposed to thinking long-term over what is efficient in a broader sense?
What we've done is taken a goal — more efficiency — and reduced it to proxies that we use to measure it. But we've been using proxies that are very short-term.
So efficient staffing means [a] low wage bill, which means "keep our wages down." Now that will give you, against that proxy, a feeling that you're more efficient because you've cut wages. Now, long term, if that results in more tired employees, more frequent turnover, etc., your service level will go down much more dramatically than the costs have reduced, and you will be behind.
So we do these things that seem to make sense in the short term, that turn out not to in the long term.
This interview has been condensed for length and clarity. To hear the full conversation with Roger Martin, click the 'listen' link at the top of the page.