Excerpts

'The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.' -- Friedrich von Hayek   'Cross the river by feeling for stones.' -- attributed to Deng Xiaoping   1 'You could easily spend your life making a toaster'   The electric toaster seems a humble thing. It was invented in 1893, roughly halfway between the appearance of the light bulb and that of the aeroplane. This century-old technology is now a household staple. Reliable, efficient toasters are available for less than an hour's wage.   Nevertheless, Thomas Thwaites, a postgraduate design student at the Royal College of Art in London, discovered just what an astonishing achievement the toaster is when he embarked on what he called the 'Toaster Project'. Quite simply, Thwaites wanted to build a toaster from scratch. He started by taking apart a cheap toaster, to discover that it had over four hundred components and sub-components. Even the most primitive model called for:   Copper, to make the pins of the electric plug, the cord, and internal wires. Iron to make the steel grilling apparatus, and the spring to pop up the toast. Nickel to make the heating element. Mica (a mineral a bit like slate) around which the heating element is wound, and of course plastic for the plug and cord insulation, and for the all important sleek looking casing.   The scale of the task soon became clear. To get iron ore, Thwaites had to travel to an old mine in Wales that now serves as a museum. He tried to smelt the iron using fifteenth-century technology, and failed dismally. He fared no better when he replaced bellows with hairdryers and a leaf-blower. His next attempt was even more of a cheat: he used a recently patented smelting method and two microwave ovens, one of which perished in the attempt, to produce a coin-sized lump of iron.   Plastic was no easier. Thwaites tried but failed to persuade BP to fly him out to an offshore rig to collect some crude oil. His attempts to make plastic from potato starch were foiled by mould and hungry snails. Finally, he settled for scavenging some plastic from a local dump, melting it down and moulding it into a toaster's casing. Other short cuts followed. Thwaites used electrolysis to obtain copper from the polluted water of an old mine in Anglesey, and simply melted down some commemorative coins to produce nickel, which he drew into wire using a specialised machine from the RCA's jewellery department.   Such compromises were inevitable. 'I realised that if you started absolutely from scratch, you could easily spend your life making a toaster,' he admitted. Despite his Herculean efforts to duplicate the technology, Thomas Thwaites's toaster looks more like a toaster-shaped birthday cake than a real toaster, its coating dripping and oozing like an icing job gone wrong. 'It warms bread when I plug it into a battery,' he told me, brightly. 'But I'm not sure what will happen if I plug it into the mains.' Eventually, he summoned up the courage to do so. Two seconds later, the toaster was toast.   2 Problem solving in a complicated world   The modern world is mind-bogglingly complicated. Far simpler objects than a toaster involve global supply chains and the coordinated efforts of many individuals, scattered across the world. Many do not even know the final destination of their efforts. As a lumberjack fells a giant of the Canadian forest, he doesn't know whether the tree he topples will make bed frames or pencils. At the vast Chuquicamata mine in Chile, a yellow truck the size of a house growls up an incline blasted into the landscape; the driver does not trouble himself to ask whether the copper ore he carries is destined for the wiring of a toaster or the casing of a bullet. The range of products, too, is astounding. There are a hundred thousand or so distinct items in an ordinary Wal-Mart. Eric Beinhocker, a complexity researcher at the McKinsey Global Institute, reckons that if you were to add up all the different sizes and shapes of shoes, shirts and socks, the different brands and flavours and sizes of jams and sauces, the millions of different books, DVDs and music downloads on offer, you would find that a major economy such as New York or London offers over ten billion distinct types of product. Many of these products were undreamt of when the toaster was first invented, and millions of new ones appear every month. The complexity of the society we have created for ourselves envelops us so completely that, instead of being dizzied, we take it for granted.   I used to view this sophistication as cause to celebrate. Now I am less sure. Certainly, this complex economy produces vast material wealth. Not everyone gets a share, but far more people today enjoy a high material standard of living than at any time in history; and, notwithstanding the occasional recession, the wealth continues to grow more quickly than it ever used to. The process that produces this wealth is near miraculous, and the job is far harder than we tend to acknowledge. Alternative systems, from feudalism to central planning, have attempted the same task and been consigned to the history books.   Yet the Toaster Project should give us pause for thought. Because it is a symbol of the sophistication of our world, the toaster is also a symbol of the obstacles that lie in wait for those who want to change it. From climate change to terrorism, fixing the banks to ending global poverty, there is no shortage of big policy problems out there. They are always up for debate, yet we never seem to move any closer to a solution. Humbler problems in business and everyday life also tend to conceal the same unexpected complexity as the Toaster Project.   This is partly a book about those problems. But more fundamentally, it's a book that aims to understand how any problem -- big or small -- really gets solved in a world where even a toaster is beyond one man's comprehension.   The toasting problem isn't difficult: don't burn the toast; don't electrocute the user; don't start a fire. The bread itself is hardly an active protagonist. It doesn't deliberately try to outwit you, as a team of investment bankers might; it doesn't try to murder you, terrorise your country, and discredit everything you stand for, as a terrorist cell or a group of insurgents in Iraq would. The toaster is merely an improved way to solve an old problem -- the Romans loved toast -- unlike the World Wide Web or the personal computer, which provide solutions to problems we never realised we had. The toasting problem is laughably simple compared to the problem of transforming a poor country such as Bangladesh into the kind of economy where toasters are manufactured with ease and every household can afford one, along with the bread to put into it. It is dwarfed by the problem of climate change -- the response to which will require much more than modifying a billion toasters.   Such problems are the stuff of this book: how to fight insurgents who, of course, fight back; how to nurture ideas that matter when so many of those ideas are hard even to imagine; how to restructure an economy to respond to climate change, or to make poor countries rich; how to prevent rogue investment bankers from destroying the banking system again. These are complex, fast-moving problems in a complex, fast-moving world. I will argue that they have far more in common with each other than we realise. Curiously, they also have something in common with the more humble problems we face in our own lives.   Whenever such problems are solved, it is little short of a miracle. This book is about how such miracles happen, why they matter so much, and whether we can make them happen more often.   3 The experts are humbled   We're proud of the change we've brought to Washington in these first hundred days, but we've got a lot of work left to do, as all of you know. So I'd like to talk a little bit about what my administration plans to achieve in the next hundred days. During the second hundred days, we will design, build and open a library dedicated to my first hundred days . . . I believe that my next hundred days will be so successful I will be able to complete them in 72 days. And on the 73rd day, I will rest.   This was President Obama addressing the White House Correspondents' Dinner, traditionally a venue for a joke or two, a few months after a tidal wave of hope and high expectations had swept him into power in November 2008. It seems a long time ago now, but Obama's joke cut close to the bone even then: people were expecting too much of one man.   We badly need to believe in the potency of leaders. Our instinctive response, when faced with a complicated challenge, is to look for a leader who will solve it. It wasn't just Obama: every president is elected after promising to change the way politics works; and almost every president then slumps in the polls as reality starts to bite. This isn't because we keep electing the wrong leaders. It is because we have an inflated sense of what leadership can achieve in the modern world.   Perhaps we have this instinct because we evolved to operate in small hunter--gatherer groups, solving small hunter--gatherer problems. The societies in which our modern brains developed weren't modern: they contained a few hundred separate products, rather than ten billion. The challenges such societies faced, however formidable, were simple enough to have been solved by an intelligent, wise, brave leader. They would have been vastly simpler than the challenges facing a newly elected US president.   Whatever the reason, the temptation to look to a leader to fix our problems runs deep. Of course, a leader doesn't have to solve every problem by himself. Good leaders surround themselves with expert advisers, seeking out the smartest specialists with the deepest insights into the problems of the day. But even deep expertise is not enough to solve today's complex problems. Perhaps the best illustration of this comes from an extraordinary two-decade investigation into the limits of expertise, begun in 1984 by a young psychologist called Philip Tetlock. He was the most junior member of a committee of the National Academy of Sciences charged with working out what the Soviet response might be to the Reagan administration's hawkish stance in the Cold War. Would Reagan call the bluff of a bully or was he about to provoke a deadly reaction? Tetlock canvassed every expert he could find. He was struck by the fact that, again and again, the most influential thinkers on the Cold War flatly contradicted one another. We are so used to talking heads disagreeing that perhaps this doesn't seem surprising. But when we realise that the leading experts cannot agree on the most basic level about the key problem of the age, we begin to understand that this kind of expertise is far less useful than we might hope.   Tetlock didn't leave it at that. He worried away at this question of expert judgement for twenty years. He rounded up nearly three hundred experts -- by which he meant people whose job it was to comment or advise on political and economic trends. They were a formidable bunch: political scientists, economists, lawyers and diplomats. There were spooks and think-tankers, journalists and academics. Over half of them had PhDs; almost all had postgraduate degrees. And Tetlock's method for evaluating the quality of their expert judgement was to pin the experts down: he asked them to make specific, quantifiable forecasts -- answering 27,450 of his questions between them -- and then waited to see whether their forecasts came true. They rarely did. The experts failed, and their failure to forecast the future is a symptom of their failure to understand fully the complexities of the present.   It wasn't that expertise was entirely useless. Tetlock compared his experts' responses to those of a control group of undergraduates, and the experts did better. But by any objective standard, they didn't do well. And the return on expertise was distinctly limited. Once experts have acquired a broad knowledge of the political world, deeper expertise in a specific field doesn't seem to help much. Predictions about Russia from experts on Russia were no more accurate than predictions about Russia from experts on Canada.   Most accounts of Tetlock's research savour the humbling of the professional pundits. And why not? One of Tetlock's more delicious discoveries was that the more famous experts -- those who spent a lot of time as talking heads on television -- were especially incompetent. Louis Menand, writing in the New Yorker , enjoyed the notion of bumbling seers, and concluded, 'the best lesson of Tetlock's book may be the one that he seems most reluctant to draw: Think for yourself'.   Yet there is a reason why Tetlock himself hesitates to draw that conclusion: his results clearly show that experts do outperform non-experts. These intelligent, educated and experienced professionals have insights to contribute -- it's just that those insights go only so far. The problem is not the experts; it is the world they inhabit -- the world we all inhabit -- which is simply too complicated for anyone to analyse with much success.   So, if expertise is of such limited help in the face of our complex, ever-changing human society, what can we do to solve the problems we face? Perhaps we should look for clues in the success story we've already encountered: the amazing material wealth of modern developed countries.   4 The long, tangled history of failure   In 1982, just a couple of years before Philip Tetlock began his painstaking examination of expertise, two management consultants, Tom Peters and Robert Waterman, concluded their own detailed study of excellence in business. In Search of Excellence was published to great acclaim and launched Peters's career as one of the world's most recognisable management gurus. The two authors, working with their colleagues at McKinsey, used a mixture of data and subjective judgement to settle on a list of forty-three 'excellent' companies, which they then studied intensively in a bid to unlock their secrets.   Just two years later, Business Week ran a cover story entitled 'Oops! Who's Excellent Now?' Out of the forty-three companies, fourteen, almost a third, were in serious financial trouble. Excellence -- if that was what Peters and Waterman really found when they studied the likes of Atari and Wang Laboratories -- appears to be a fleeting quality.   It seems strange that so many apparently excellent companies could find themselves in deep trouble so quickly. Perhaps there was something uniquely silly about Peters and Waterman's project. Or perhaps there was something uniquely turbulent about the early 1980s -- In Search of Excellence was published during a severe recession, after all.   But perhaps not. The 'who's excellent now?' experience is reinforced by a careful study from the economic historian Leslie Hannah, who in the late 1990s decided to trace the fortunes of every one of the largest companies in the world in 1912. These were corporate giants that had survived a merger shakedown over the preceding few years and typically employed at least ten thousand workers.   At the top of the list was US Steel, a gigantic corporation even by today's standards, employing 221,000 workers. This was a company with everything going for it: it was the market leader in the largest and most dynamic economy in the world; and it was in an industry that has been of tremendous importance ever since. Yet US Steel had disappeared from the world's top hundred companies by 1995; at the time of writing, it was not even in the top five hundred.   Next on the list was Jersey Standard, which these days continues to prosper under the name Exxon. General Electric and Shell were also in the top ten both in 1912 and in 1995. But none of the other top-ten titans was in the top ten by 1995. More remarkably, none of them was even in the top hundred. Names such as Pullman and Singer recall a bygone age. Others, such as J&P Coats, Anaconda and International Harvester, are barely recognisable. It is hard to imagine just how large and powerful these companies once were -- the closest parallels would be the likes of Microsoft and Wal-Mart today -- and how permanent their success must have seemed. And while it could be said that Pullman and Singer suffered from being market leaders in declining industries, their fate was not inevitable. Singer made sewing machines, but Toyota's origins as a manufacturer of looms were no more promising. Other former titans, such as Westinghouse Electric, Cudahy Packing and American Brands, were in the same dynamic industries as the rare success stories General Electric and Procter & Gamble. Yet they failed.   Just as Philip Tetlock's experts have proved less capable than we tend to think, in the face of a complex world, these great companies are more transient than we realise. Ten of Hannah's top hundred had vanished within a decade; over half disappeared over the next 83 years. The lesson seems to be that failure is fundamental to the way the market creates sophisticated and wealthy economies. But perhaps what Peters, Waterman and Hannah found merely reflects the fact that if you start at the top, the only way is down. What happens when we look at survival rates in young, dynamic industries?   The answer is that failure rates are even higher. Consider the early printing industry. The printing press was invented by Johannes Gutenberg, a man who changed the world utterly, and produced the celebrated Gutenberg Bible in 1455. But the Gutenberg Bible was a ruinous project that put him out of business. The centre of the printing industry quickly moved to Venice, where twelve companies were established by 1469. Nine of them were gone in just three years, as the industry fumbled for a profitable business model. (It eventually found one: printing pre-packaged relief from divine punishment in the form of religious indulgences.)   At the dawn of the automobile industry, two thousand firms were operating in the United States. Around 1 per cent of them survived. The dot-com bubble spawned and killed countless new businesses. Today, 10 per cent of American companies disappear every year. What is striking about the market system is not how few failures there are, but how ubiquitous failure is even in the most vibrant growth industries.   Why, then, are there so many failures in a system that seems to be so economically successful overall? It is partly the difficulty of the task. Philip Tetlock showed how hard it was for expert political and economic analysts to generate decent forecasts, and there is no reason to believe that it is any easier for marketers or product developers or strategists to predict the future. In 1912, Singer's managers probably did not forecast the rise of the offthe- peg clothing industry. To make things even more difficult, corporations must compete with each other. To survive and be profitable it is not enough to be good; you must be one of the best. Asking why so many companies go out of business is the same as asking why so few athletes reach Olympic finals. In a market economy, there is usually room for only a few winners in each sector. Not everyone can be one of them.   The difference between market-based economies and centrally planned disasters, such as Mao Zedong's Great Leap Forward, is not that markets avoid failure. It's that large-scale failures do not seem to have the same dire consequences for the market as they do for planned economies. (The most obvious exception to this claim is also the most interesting: the financial crisis that began in 2007. We'll find out why it was such a catastrophic anomaly in chapter six.) Failure in market economies, while endemic, seems to go hand in hand with rapid progress. The modern computer industry is a striking example: the most dynamic sector of the economy has also been the one in which failure is everywhere you look. The industry started with failure: when transistors replaced vacuum tubes as the basic elements of the computer, vacuum-tube manufacturers failed to make the switch. The likes of Hughes, Transitron and Philco took over, before stumbling in turn as integrated circuits replaced transistors, and the baton passed to Intel and Hitachi.   Meanwhile, Xerox, struggling to survive the expiry of its patents on photocopying, established the Palo Alto Research Center (or Parc), which developed the fax machine, the graphical interface that defines all modern computers, the laser printer, the Ethernet, and the first personal computer, the Alto. Yet Xerox did not become a powerhouse in personal computing. Many of the Alto's successors -- including the ZX Spectrum, the BBC Micro and Japan's MSX standard -- were dead-ends in the history of computing. It fell to IBM to produce the direct ancestor of today's personal computer -- only to then unwittingly hand over control of the most valuable part of the package, the operating system, to Microsoft. IBM eventually bowed out of the personal computer business in 2005, selling its interests to a Chinese company. Apple also lost out to Microsoft in the 1980s, despite perfecting the user-friendly computer (although it was later to bounce back selling music, iPods and phones). Microsoft itself was caught unawares by the internet, lost the search-engine war with Google, and may soon lose its dominant position in software altogether. Who knows? Only the most arrogant forecaster would be able to convince himself that he could predict the next twist or turn in this market. The most successful industry of the last forty years has been built on failure after failure after failure.   The humble toaster which so baffled Thomas Thwaites is itself a product of trial and error. The Eclipse of 1893 was not a success: its iron heating element was prone to rust and tended to melt and start fires. The company that marketed it no longer exists. The first successful toaster did not emerge until 1910. It boasted a superior nickel-chrome alloy for the heating element but was still flawed. Most notably, that heating element was exposed, making it a potential source of household fires, burns and electrocutions. It took several decades for the practical and familiar pop-up toaster design to emerge, by which time many manufacturers had quit the business or gone bankrupt. The market has solved the problem of generating material wealth, but its secret has little to do with the profit motive or the superior savvy of the boardroom over the cabinet office. Few company bosses would care to admit it, but the market fumbles its way to success, as successful ideas take off and less successful ones die out. When we see the survivors of this process -- such as Exxon, General Electric and Procter & Gamble -- we shouldn't merely see success. We should also see the long, tangled history of failure, of all of the companies and all of the ideas that didn't make it. From the Hardcover edition. Excerpted from Adapt: Why Success Always Starts with Failure by Tim Harford All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.