Sean Park Portrait
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I say profound things

Peak Hierarchy

Regular readers will know that I have a healthy skepticism with respect to the supposed benefits of ever-increasing size in corporations and in particular with respect to financial services firms. Given the preponderant importance of human capital to creating and maintaining a competitive advantage in financial services, the exponential increase in complexity arising from imposing traditional hierarchical organizational paradigms on tens or hundreds of thousands of employees quickly outweighs the benefits of economies of scale in infrastructure and financial capital in today’s hybrid / universal banking and insurance giants.

Until now however, I have been without an elegant and robust metaphor for this thesis. But when I read Michel Bauwens’ essay (thanks to a pointer from Gordon Cook) comparing the current fundamental, secular changes in societal organization driven by the revolution in information and communications technologies, I knew I had found my meme:

…there is also the emergence of a new form of horizontality, no longer local and disconnected and unable to compete with hierarchical forms, but able to scale globally, through the global coordination of a multitude of small teams, outside of a logic of command and control. I think this is the significance of peer to peer (and peer production specifically), and that it points to the concept of Peak Hierarchy.

In my view, we have already reached the point in history, where ‘peer to peer plays’, i.e. interconnected horizontality, outcompetes hierarchical and diagonal plays. The two examples we have are of course Linux and Wikipedia.

In other words, we have reached a point in history, a true turning point, where a new form of social organization, starts to outcompete hierarchy. (But of course, just as early hierarchy was a hybrid with the system out of which it arose, so the new early forms of p2p are hybrid forms within the dominant system)

If this is true, and I of course believe it is, then we have indeed already reached Peak Hierarchy. It should be historically situated at the mid-point between the moment that Linux became the dominant technological force in the internet, and that the Wikipedia was outreading and outproducing the Brittanica. From that moment on, faced with these undeniable examples of success, the scramble for adaptation to distributed forms of organization, to integrating participation in the very heart of hierarchy, has started to make itself felt. There has been a magnetic reversal of the poles. The chaotic attractor has become the peer to peer mode. Hierarchy is still dominant, and will stay so for a determinate amount of time, but social forces are already looking elsewhere, mostly unconsciously, but nevertheless.

This is unprecedented, and is changing the whole course of human history. Of course, it will take time to play out, see how difficult it was to realize the truth of Peak Oil, how adamantly the forces of biospheric destruction fought and are fighting back. But we can also see that it is ultimately a losing battle for them.

Not only does this thesis capture the essence of the issues facing the prevailing global political and economic paradigm but it neatly frames the diminishing returns characteristic of the twilight of a golden age and the accompanying bewilderment of the existing elite who either fail or refuse to understand the tectonic changes inevitably undermining their comfortable sinecures. Shades of the fall of the Roman Empire? Listen to Michel’s take on this:

Not only is the concept of ‘Peak Hierarchy’ an important pillar in our investment thesis, but it also directly colours how we think about building and organizing our own firm over the coming years. We are convinced that this will give us an additional competitive advantage, especially as many of our potential competitors are likely to continue operating more traditionally for many years to come.

So I’m adding it as a category here at the Park Pardigm and expect to read more of my thoughts on its meaning and implications on business and finance going forward.

  1. At 6:03 pm on 14 Aug 08 Don Marti said:

    There’s the peak size that’s viable in a free market, and the much larger size that works best in a world where large organizations can either achieve “too big to fail” status (heads, shareholders win. tails, taxpayers lose) or manipulate public policy. ADM and Microsoft are too big for the free market, but just the right size to lobby for crowding out the competition.

  2. At 2:43 pm on 18 Aug 08 Sean said:

    Well yes in a purely Darwinian sense, you might say that ‘too big to fail’ is an adaptive optimization from an evolutionary point of view. But it is clearly sub-optimal in terms of shareholders and (most) employees…cockroaches have survived for eons but I’m not sure I’d rather be one… 😉

  3. At 5:33 pm on 18 Aug 08 Don Marti said:

    Why is it sub-optimal? Owning a piece of Fanny/Freddie means that you have a piece of the potential winnings from management’s outrageous bets, but you can’t lose?

  4. At 6:47 pm on 18 Aug 08 Sean said:

    Sometimes you might get away with it, but I think generally when these institutions “fail”, shareholders are wiped out, many employees lose their jobs – and even those that remain aren’t exactly having lots of fun or making lots of money (and may have had a big % of their savings/401k wiped out as per above)…the only constituency that really enjoys the benefits of the assymetrical punt, the wonderful free option is management who can take out reams of cash before the music stops… ‘agency’ problem indeed! :)

  5. […] used to be an advantage in almost any industry…now? Not so much. New rules, new […]

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