Managing Change Is Harder Than It Seems

By Michael Munger

Adapting to change is the key to survival. Social systems must be able to serve people in periods of stability, by creating predictable patterns of rules and expectations, and to serve people in times of disruption, by fostering innovation and entrepreneurship without breaking down.

In evolution, the tension between these two imperatives—the need to match features to specific settings, and the need to adapt quickly to unpredictable changes in circumstances—is the driving force that explains survival. The dinosaurs ruled much of the planet because they were adapted to the environments they lived; mammals took over because their smaller size, fur coats, and fast metabolism let them adapt to changing circumstances.

In human societies, disruptive changes are internally generated. Competition among societies, and innovation within societies, generates change that has to be managed by institutions. Since these institutions are often the products of the need to generate stability and predictability, managing fundamental change can be a problem.

The Ottoman Empire lasted for more than 600 years; it was stable and internally peaceful. On the other hand, this stability was purchased at the price of economic stagnation, and retarded progress in the sciences, of a dozen nations.  As my Duke colleague Timur Kuran argues, stability and coherence alone are not enough.  

On the other hand, the activities of Enron Corporation  showed that rapid adaptation, moving ahead of the ability of market institutions or property rights to adjust, can be catastrophic. The Industrial Revolution wiped out social and cultural institutions and traditions on a wide scale.

Some analysts (including me) are now arguing that we are on the threshold of similarly disruptive changes. The nature of work, our sources of income, and the way we own and use things may be profoundly different in just a few decades.

Saltation

One kind of disruption, which in my book Tomorrow 3.0 I called “saltation,” is mostly—though not entirely—good, because it means that the institutional and legal preconditions for development in poor nations will no longer be necessary. The word “saltation” is rarely used in conversation.  It means an abrupt movement or transition, or (in evolutionary terms) a sudden discontinuous jump in a line of descent.

Much of what we think we know about development, entrepreneurship, and the function of government and markets is based on certain assumptions about institutions and preconditions.  Software will allow even a nation with a corrupt government and police force, rudimentary banks and broken capital markets to produce useful services. Development economists have long told developing nations that they must follow a particular path of rule of law, independent judiciary, financial system, and so on. This essentially material, marginalist notion of “stages” of development is clear in Karl Marx, who said “The country that is more developed industrially only shows, to the less developed, the image of its own future.” (Capital, p. 13).  

But what if blockchain apps and cryptocurrency could simply operate on top of a corrupt system? Turn-key capitalism!  Functioning markets in a box! Or an “app,” at least. The reduction in prices, and the availability of an increasing variety of services and activities for free, or for a very low cost, is likely to provide a platform for leapfrogging the traditional stages of development and the usual institutions required for starting and running a business. This jumping will disrupt the banks, the courts, the political entities that try to regulate and control business activities, but it will also allow people in nations that lack financial intermediaries, a system of law, and state capacity to provide infrastructure to become competitive.  

Separation

The other kind of disruption, which is already commonly called “separation,” is mostly—though not entirely—bad, because it means that many people will be left behind, in most cases through no particular fault of their own, and will be relegated to second class status in wealthy nations.

I’m not convinced that separation is inevitable; much of the discussion of the “stagnation” of the total compensation of the middle class has ignored the dramatic decline in prices for many goods and services, especially on-line platforms such as Facebook, Twitter, and Wikipedia. Still, it’s true that software is replacing a lot of service jobs, and this may continue for years to come.

I have argued that the key feature of the new economy is the commodification of excess capacity. Like the commodification of labor in the 18th and 19th centuries, this may result at first in a “stretching” of the income distribution.  Those without knowledge of how to gain access to programming skills, and who don’t have durables, such as cars for Uber or houses for AirBnB, may find themselves in a difficult position economically.  

The three most important impacts of the new “sharing” economy are likely to be:   

(1) a dramatic reduction in the amount of physical stuff, in the form of consumer durables, being produced in factories by workers.

(2) an equally dramatic decline in the cost of having access to a variety of stuff, and a sharp reduction in costs of storage.

(3) an ambiguous, but unsettling, effect on real wages, with both the direction and variance of real wages very much in flux.

Over the last twenty years, two things have happened in U.S. manufacturing: The total number of jobs in manufacturing has fallen from about 18 million to just over 10 million. But the total value of manufacturing has increased steadily.  This increase in productivity is good; in fact, it’s great!

The problem is that it means that there are fewer people working in these kinds of jobs. In the past, the service sector has taken up the slack, but it’s not clear that will happen this time. The reason is that, as Marc Andreessen famously said back in 2011, “Software is eating the world.”

I don’t have a crystal ball, and I have shown in the past that I am terrible at making predictions. So I won’t make you laugh by drawing conclusions. But I will say this: if there is a way to encourage saltation,  because it levels the differences between developed and less developed nations, we should explore. And if there is a way to mitigate the harmful political effects of separation, we should explore those, too.

People fear change, because they don’t know what to expect. As a society, if we can ease the adaptation to changing circumstances, we may be able to do a much better job of accommodating a future that is coming whether we like it or not.

Sign up here to be notified of new articles from Michael Munger and AIER.

Michael Munger

Michael Munger is Professor of Economics at Duke University and Senior Fellow of the American Institute for Economic Research. His degrees are from Davidson College, Washington University in St. Louis, and Washington University. Munger is the author of Is Capitalism Sustainable? (AIER, 2019)