On January 28, 1986, the space shuttle Challenger exploded. All seven astronauts were killed. Eyewitness Frank Mottek described the scene:
Just then we both stood up and looked up at the shuttle making its way farther and farther into the sky. Suddenly, I was struck by a pattern I had never seen before. From our vantage point, it appeared that an extra flame was trailing from the shuttle. Then, in that split second, a silent fireball appeared in the sky. Then there was silence, the silence of alarm. . .
Investigations later revealed that two rubber O-rings, which were designed to separate the sections of the rocket booster, failed. Rather than remaining supple, they cracked because of cold temperatures. Pressurized fuel escaped through the crack, ignited, and exploded.
Challenger is America’s Titanic, our Hindenburg. It is a disaster forever burned into our national consciousness. And yet we seem to have forgotten its most powerful lesson: the whole is only as strong as its weakest part.
Perhaps this sounds trite. But sometimes the simplest observations are the most consequential. In this case, trillions of dollars—if not America’s economic future—depends on understanding how O-rings fail.
the vase factory, or O-Ring economics
In 1993, Michael Kremer, a Harvard-educated developmental economist, wrote a paper called “The O-Ring Theory of Economic Development.” The Challenger disaster for Kremer was not just a tragedy, it was also a parable that helped explain why workers in some countries and industries earn exponentially more than workers in other countries and industries, despite doing basically the same job. It all comes down to fragility and exponents.
Here’s how it works:
You own a factory that makes glass vases. It takes two workers to make one vase: one worker blows the molten glass, the other packs the vase for delivery. If either worker drops the vase it will shatter and become worthless. What a waste!
You have four workers. Two of them never drop the vase. Two of them drop it half the time. If you want to make as many vases as possible, how should you divide your workers?
Instinct tells us to pair the good and bad workers—that way both teams will have someone who knows what they’re doing, and both will be somewhat successful. This is a bad idea. If you did this then both teams would break 50 percent of the vases.
The better option is to pair the good workers together and let the bad workers make a mess. Why? Together the good workers would succeed 100 percent of the time. Meanwhile, the bad workers would succeed 25 percent of the time. On average, the teams would succeed in making vases 62.5 percent of the time. The second option is the clear winner.
This example highlights two important lessons. First, vase production is fragile—one small mistake at any point in the production-chain can destroy the whole vase. The chain is only as strong as its weakest link. Second, increasing the production chain’s complexity (for example, by adding third step) will increase the fragility in a non-linear way. How?
Imagine that you also need to paint the vases, adding a third step. Although your two good workers succeed 100 percent of the time, they are forced to work with butterfingers, who drops the vase half the time. In this case, the entire factory’s productivity decreases from 62.5 to 50 percent. Now pretend that you also need to varnish the vases, adding a fourth step. Your final employee is also a dropper, and decreases the factory’s output to 25 percent.
Now pretend that it takes 100 steps to make a vase: you have 97 employees who succeed 100 percent of the time, and just three bad employees (who succeed 50 percent of the time). In this case, the factory’s production efficacy would decrease to just 12.5 percent—despite the fact that you hired an army of competent workers!
When it comes to O-ring economics, one bad apple really does spoil the bunch.
turtles all the way down…
The above logic has profound implications for America’s trade policy—implications that America’s economic stewards completely ignore.
To begin with, moving production abroad adds complexity (extra steps to the production chain), which increases the likelihood that something will go wrong. And remember, this complexity harms production in a non-linear way—even a small failure in an otherwise flawless production chain can destroy the entire product. Technologically sophisticated output is especially vulnerable.
For example, Boeing’s 787 Dreamliner suffered numerous delays, cost-overruns, and safety problems because the international supply chain was too complex. Consider that Boeing employed some 50 different contractors, each of whom was responsible for designing and manufacturing a piece of the airplane. Complicating things further was the fact that these contractors often sub-contracted their production. And no doubt these sub-contractors further sub-contracted their work.
This is the economic equivalent of the Hindu’s infinite regression: it’s subcontractors all the way down.
God only knows how many different companies, located in how many different countries, worked on the 787. Rather than building an airplane, Boeing was building a puzzle with pieces of obscure provenance. Basically, Boeing had no idea if it was employing “vase-droppers” until it was too late.
The fact that things have not gone wrong for America on an apocalyptic level is largely due to the fact that American companies have hired legions of business consultants, logistics engineers, and risk-managers to “streamline” international supply chains. In fact, the growth of America’s managerial class is largely a response to offshoring and to the burden of increasing complexity.
Economists never account for the cost of this additional management when they discuss offshoring. Instead, the existence of a bloated managerial class is simply taken for granted.
This raises the question: are Chinese goods cheap, or do they appear cheap because we ignore the opportunity costs associated with employing millions of Americans in nonproductive jobs? How many billions of man-hours do we waste coordinating the labor of Chinese peasants? How many more are wasted coordinating the coordinators?
America is sacrificing its productive human capital on the altar of complexity: we trade the wisdom of makers for the trickery of takers.O
Oscar Wilde’s wisdom
Complexity is not just an economic problem, it’s an existential threat.
In his book The Collapse of Complex Societies, Joseph Tainter argues that civilizations collapse because they can no longer maintain their level of organizational, economic, and technological complexity. Increasing complexity is driven by an autocatalytic process—as societies grow they require more organization, which enables them to grow bigger still etc. Oscar Wilde sums up this idea neatly: “The bureaucracy is expanding to meet the needs of the expanding bureaucracy.”
Eventually, society becomes too complicated to survive with the available technology. Collapse becomes inevitable. Symptoms of an impending collapse often include the expansion of bureaucracies—bureaucrats being loosely defined as “organizers” rather than “producers”—increased taxes to pay for said bureaucracies, the proliferation of laws, increasing debt, currency debasement, widening economic inequality, and the consolidation of capital (land) ownership.
You don’t have to be Tiresias to see that America—if not Western Civilization itself—is nearing a complexity-driven collapse.
Our bureaucracy is bloated: over 22 million Americans work for the government (twice the number that work in manufacturing), and more than 60 percent of our people rely on the government for sustenance. The majority of Americans are de facto wards of the state. Ours is a nation of takers, not makers.
If America is going to survive and prosper, we must simplify the economy. Otherwise we will crash and burn for want of an O-ring.