How to Organize a Rich and Successful Group: Lessons from Natural Experiments in History

Jared Diamond (UCLA)
1822nd Stated Meeting —National Humanities Center, North Carolina
March 31, 1999

In my book Guns, Germs, and Steel I asked why history has unfolded differently over the last 13,000 years in Eurasia, the Americas, sub-Saharan Africa, and Aboriginal Australia, with the result that within the last 500 years Europeans were the ones who conquered Native Americans, Aboriginal Australians, and sub-Saharan Africans, not vice versa.

I knew that I couldn't publish a book comparing the histories of different continents and considering Eurasia as a unit without saying something about the fascinating problem of the differences of history within Eurasia. Why, within Eurasia, was it Europeans who conquered the world and colonized other people, rather than people from China, India, or the Middle East? I devoted seven pages to that subject at the end of Guns, Germs, and Steel, and I think I arrived at the correct conclusion. Nevertheless, I've received a lot of interesting feedback about the implications of that comparative analysis of the histories of China, Europe, India, and the Middle East. In particular, in addition to the review of my book by Bill Gates, I've received correspondence from many economists and businesspeople who have pointed out possible parallels between the histories of entire human societies and the histories of smaller groups. This correspondence concerns the following big question: What is the best way to organize human groups, human organizations, and businesses so as to maximize productivity, creativity, innovation, and wealth? Should your human group have a centralized direction (in the extreme, under a dictator), or should there be diffuse or even anarchical organization? Should your collection of people be organized into a single group, or broken down into a small or large number of groups? Should you maintain open communication between your groups or erect walls between them? Should you erect protectionist tariff walls against the outside, or should you expose your business or government to free competition?

These questions arise at many different levels and for many types of groups. They apply to the organization of entire countries; remember the classic arguments about whether the best government is a benign dictatorship, or a federal system, or an anarchical free-for-all. The same questions also arise about the organization of different companies within the same industry. How can we account for the fact that Microsoft has been so successful recently and that IBM, which was formerly successful, fell behind but then drastically changed its organization over the last four years and improved its success? How can we explain the different successes of different industrial belts? When I was a boy, Route 128, the industrial belt around Boston, led the world in scientific creativity and imagination. But Route 128 has fallen behind; now Silicon Valley is the center of innovation. The relations of businesses to each other in the Valley and Route 128 are very different, possibly resulting in those different outcomes.

Of course, there are also the famous differences between the productivities of the economics of Japan, the United States, France, and Germany. Actually, though, there are differences between the productivities and wealths of different business sectors within the same country. For example, the German metalworking industry has a productivity rivaling that of its counterpart in the United States, so the Germans are certainly capable of organizing industries well—but the German beer-brewing industry is less than half as productive as ours. Or take Japan: we Americans are paranoid about the supposed efficiency of Japanese business-and indeed, Japan's steel industry is 45 percent more productive than ours. Why, then, is the Japanese food-producing industry less than a third as productive and efficient as ours? Similarly, the Korean steel industry is equal in efficiency to ours, but all other Korean industries lag behind their US counterparts. What is it about the different organizations of the German beer brewers and metalworkers, or of the Japanese food processors and car manufacturers, that accounts for these differences in productivity within each country?

Obviously, the answers to questions about differences in organizational success depend partly on the idiosyncracies of individuals. For example, the success of Microsoft has something to do with Bill Gates. Even with a superior corporate organization, Microsoft would not be successful with an ineffective leader. Nevertheless, one can still ask, all other things being equal, or else in the long run, or else on the average: What form of organization of human groups is best?

I propose to try to learn from human history which, over the last 13,000 years, comprises tens of thousands of different experiments. Each human society represents a different natural experiment in organizing human groups. Human societies have been organized in diverse ways, and the outcomes have varied widely. Some societies have been much more productive and innovative than others. What can we learn from these natural experiments of history that will help us all get rich? Let's look at two batches of natural experiments to gain some insights.

The first batch can help us understand the effects of isolation, group size, and communication with other groups on the productivity of human societies. If isolation has any effect on human societies, we're most likely to see it in the histories of two islands that lie near each other, about 200 miles off southeastern Australia: Tasmania and Flinders Island. They are separated today from Australia by the Bass Strait and from each other by the Banks Strait, whose floors lay above sea level at glacial times of low sea level, up to about 10,000 years ago. The straits were at that time dry land, and Tasmania and Flinders Island were part of the Australian mainland, just as Britain used to be part of the European mainland.

Then, 10,000 years ago, the glaciers melted, sea level rose, and the Aborigines of Tasmania and Flinders Island were cut off from mainland Australia and from each other by the Bass and Banks Straits, which are really rough waters. The watercraft of the Tasmanians and Flinders Islanders were washthrough rafts that got waterlogged and sank after about a dozen hours. As a result, the Tasmanians and Flinders Islanders could not reach the mainland Aborigines or even each other.

Thus, for 10,000 years, the Tasmanians represented a study of isolation unprecedented in human history. Here were 4,000 Aborigines on an island, totally cut off from any other people in the world until 1642, when Europeans "discovered" Tasmania. What happened during those 10,000 years to that isolated society? And what happened during that time to nearby Flinders island, which originally supported a tiny population of 200 cut-off Aborigines?

When Europeans found Tasmania in the seventeenth century, it held technologically the simplest, most primitive human society in the world. Native Tasmanians could not light a fire from scratch; they did not have bone tools, or multipiece stone tools, or axes with handles, or spear throwers, or boomerangs; they did not even know how to fish. Part of the explanation for the extreme simplicity of Tasmanian society at that time is that during the 10,000 years of isolation, the Aboriginal Australians, who numbered about 250,000, were inventing things that the isolated 4,000 Tasmanians were not inventing, such as boomerangs. Also, archaeological investigations have shown that during their long isolation, the Tasmanians actually lost some technologies that they had originally carried with them from the mainland-notably bone tools, which disappeared from the archaeological record about 3,000 years ago. That's incredible, because with bone tools you can have needles, and with needles you can have warm clothing. Tasmania is at the latitude of Vladivostok and Chicago; it's snowy in the winter; yet the Tasmanians went about either naked or with just a cape thrown over the shoulder. How do we account for the cultural losses and non-inventions of Tasmanian society?

Flinders Island was even more extreme: its tiny society of 200 people went extinct several millennia ago. Evidently, there is something about a small, totally isolated human society that causes either very slow innovation or loss of existing inventions. That result applies not just to Tasmania and Flinders but also to other isolated human societies. The Torres Strait islanders between Australia and New Guinea abandoned canoes. Most Polynesian societies lost bows and arrows and pottery. The Polar Eskimos lost the kayak; the Dorset Eskimos lost dogs and bow drills; the Japanese lost guns.

To understand these losses in extreme isolation, we can look to Japan, where the loss of firearms was witnessed and described in a literate society. Guns arrived in Japan around 1543 with two Portuguese adventurers who stepped ashore, pulled out two guns, and shot a duck. A Japanese nobleman was very impressed, bought the guns for $10,000, and had his swordmaker copy them. Within a decade, Japan had more guns per capita than any other country in the world, and by the year 1600 Japan had the best guns in the world. But over the course of the next century, Japan gradually abandoned guns.

What happened? The Samurai, the warrior class in Japan, had been used to fighting by making graceful speeches in front of their armies and then engaging in one-on-one combat. But as guns spread, the Samurai discovered that the peasants would shoot them while they were making those speeches. Realizing that guns were a danger because they were such an equalizer, the Samurai first restricted licensing to a hundred gun factories; then they licensed fewer factories; then they said that only three factories could repair guns; then they said that those three factories could make only a hundred guns a year, then ten guns a year, then three guns a year. By the 1840s, when Commodore Perry came to Japan, Japan no longer had any guns.

This loss of a very powerful technology was possible only in Japan because of its isolation; there were no other neighbors threatening Japan, When firearms arrived in Europe, there were European princes who similarly banned firearms, and there were European princes who banned printing, but you can guess what happened. When a prince in the middle of Europe banned firearms, within a short time either the prince next door who did not ban firearms walked in and conquered, or the prince who banned firearms quickly realized his mistake and reacquired them from next door. The banning of guns could work only in isolated Japan, where there were no neighbors as a threat and no neighbors from whom to reacquire the technology.

These stories of isolated societies illustrate two general principles about relations between human group size and innovation or creativity. First, in any society except a totally isolated one, most innovations are brought in from the outside, not conceived within. Second, any society undergoes local fads, that is, customs that do not make economic sense. Societies either adopt unprofitable practices or, for whatever reasons, abandon profitable ones. But usually those fads are reversed-for example, when societies without a certain fad outcompete the neighboring society with that fad, or when societies without the fad realize they're making a big mistake and reacquire it. In short, competition between human societies that are in contact with each other is what drives the invention of new technology and the continued availability of technology. Only in an isolated society, where there's no competition and no source of reintroduction, can a fad result in the permanent loss of valuable technology.

The other lesson I would like to draw from history concerns the optimal fragmentation principle. That is, if you've got a human group-whether that group is the staff of a museum, or a business, or the German beer industry, or Route 128 -is that group best organized as a single large unit, or divided into a number of small units, or fragmented into lots of small units?

I propose to get some empirical information about this question by comparing the histories of China and Europe. Why did China fall behind Europe technologically during the Renaissance? Some believe that the Confucian tradition made the Chinese ultra-conservative, whereas the Judeo-Christian tradition in Europe stimulated science and innovation. Well, just ask Galileo about the stimulating effects of the Judeo-Christian tradition on science. Also, consider the state of technology in medieval Confucian China. China led the world in innovation and technology in the early Renaissance, with such inventions as canal lock gates, cast iron, compasses, deep drilling, gunpowder, kites, paper, porcelain, printing, stern-post rudders, and wheelbarrows. So the real question is, why did Renaissance China lose its enormous technological lead to late-starter Europe?

We can get insight by examining why China lost its lead in oceangoing ships. By the year 1400, China had by far the most, best, and biggest oceangoing ships in the world. Between 1405 and 1432 the Chinese sent out seven oceangoing fleets-the so-called treasure fleets- comprising hundreds of ships with total crews of 20,000 men. Each of those ships dwarfed the tiny ships of Columbus. Those gigantic fleets sailed from China to Indonesia, India, Arabia, and the east coast of Africa. It looked as if the Chinese were on the verge of rounding the Cape of Good Hope, coming up the west side of Africa, and colonizing Europe.

But China's tremendous fleets came to an end through a typical episode of isolationism. In China there had been a navy faction and an anti-navy faction. In 1432 the anti-navy faction gained ascendancy when the new emperor decided that spending so much money on ships was wasteful. The consequent abandonment of the fleets in China was final because, when that emperor gave the order to dismantle the shipyards and stop sending out the ships, that decision applied to all of China. China was a virtual gigantic island, likeTasmania.

Contrast that with what happened with oceangoing fleets in Europe. Columbus, an Italian, wanted to sail a fleet across the Atlantic. He unsuccessfully sought support from his native Italy, and from France, Portugal, and Spain (six times), before he was finally given three small ships by the king and queen of Spain. Columbus then sailed off, "discovered" the New World, and brought the news back to Europe. Cort6s and Pizarro followed him and brought back huge quantities of wealth. Within a short time, as a result of Columbus having shown the way, eleven European countries jumped into the colonial game and got into fierce competition with each other. The essence of these events is that Europe was fragmented.

In China, which was unified, one emperor's decision abolished clocks throughout the empire. China was on the verge of building powerful waterpowered machinery centuries before the Industrial Revolution in Britain, but the emperor said "Stop, " and that was the end of it. Yes, in Europe there were princes who said no to electric lighting, or printing, or guns-but because Europe in the Renaissance was divided into roughly 2,000 principalities, there was never one person with the authority to abolish a whole technology throughout Europe. Inventors had lots of chances; there was always competition between different states; and when one state tried something that proved valuable, the other states saw the opportunity and adopted it. So the real question is, Why was China chronically unified, and why was Europe chronically disunified? Why is Europe disunified to this day?

The answer is geography. just picture a map of China and a map of Europe. China's coastline is smooth. Europe's coastline is indented, and each big peninsula became an independent country, independent ethnic group, and independent experiment in building a society-notably the Greek peninsula, Italy, the Iberian peninsula, Denmark, and Norway/ Sweden. Europe had two big islands, Britain and Ireland, that became important independent societies, while China had no island big enough to become an independent society until the modern emergence of Taiwan. Unlike China, Europe is transected by mountain ranges-the Alps, the Pyrenees, the Carpathians-that split It into different principalities. Europe's big rivers flow radially-the Rhine, the Rhone, the Danube, the Elbe-and don't unify Europe. In China the two big rivers flow parallel to each other, are separated by low-lying land, and were quickly connected by canals. For those geographic reasons, China was unified in 221 BC and has stayed unified most of the time since then, but Europe has never been unified. Augustus couldn't do it; neither could Charlemagne, Napoleon, or Hitler. To this day, the European Union is having difficulties bringing any unity to Europe.

So the lesson I draw is that competition between entities that had free communication between them spurred on Europe. In China one despot could and did halt innovation. China's technological innovations came mainly during the times when China's unity fell apart or when China was taken over temporarily by an outside invader. You've seen that effect even in modern times. Twenty years ago, a few idiots in control of the world's most populous nation were able to shut down the educational system for a billion people at the time of the Cultural Revolution; in contrast, it's impossible for a few idiots to shut down the educational system of all of Europe. This suggests that Europe's fragmentation was a great advantage, as far as technological and scientific innovation are concerned. Does this mean that a high degree of fragmentation is even better? Probably not. India was geographically even more fragmented than Europe but not as innovative technologically. This suggests that innovation proceeds most rapidly in a society with some optimal intermediate degree of fragmentation; a too-unified society is at a disadvantage, and so is a too-fragmented society.

Now let's apply this to some affluent modern industries and companies to determine what we should do if we want to get rich. We Americans fantasize that Japan and Germany have greater industrial productivity than the United States, but that's not true. On the average, America's industrial productivity is higher than that of either Japan or Germany. But that average figure conceals differences among the industries of each country, related to differences in organization-and those differences are very instructuve Let me give you two examples from case studies on the German beer industry and the Japanese food-processing industry, carried out by the McKinsey Corporation, an economics study group based in Washington, DC.

The Germans make wonderful beer, yet the productivity of the German beer industry is only 43 percent that of the US beer industry. Meanwhile, the German metalworking and steel industries are equal in productivity to ours. Why, then, isn't the same true when it comes to beer?

The German beer industry suffers from small-scale production. There are a thousand little beer companies in Germany, shielded from competition with each other because each German brewery virtually has a local monopoly, and shielded from competition with imports. The United States has 67 major beer breweries, producing 23 billion liters of beer per year. All of Germany's breweries produce only half as much. Thus, the average US brewery produces 31 times more beer than the average German brewery.

That fact results from local German tastes and German government policies. German beer drinkers are fiercely loyal to their local brand of beer, so there are no national brands of beer in Germany, analogous to Budweiser, Miller, and Coors in the United States. Instead, most German beer is consumed within 30 miles of the place where it is brewed. Therefore, the German beer industry cannot profit from economies of scale. In the beer industry, as in other industries, production costs decrease greatly with size. The bigger the refrigerator unit for making beer and the longer the bottle-filling line, the lower the cost of brewing beer. The tiny German beer companies are relatively inefficient. There's no competition; there are just a thousand local monopolies.

The local beer loyalties of Germans are reinforced by laws that make it hard for foreign beers to compete in the German market. The German government has so-called beer purity laws that specify exactly what can go into beer-which, not surprisingly, is what German breweries put into beer and not what American, French, and Swedish breweries like to put into beer. Because it's difficult for foreign breweries to compete in the German beer market, German beer is not exported much. The Lowenbrau in US stores is not brewed in Germany; it's brewed here, on license, with American productivity and efficiencies of scale.

The German soap industry and consumer electronics industry are also inefficient; their companies are not exposed to competition with each other, nor are they exposed to foreign competition, and so they do not acquire the best practices of international industry. But those disadvantages are not shared by the German metal and steel industries, in which big German companies compete with each other and compete internationally, and therefore are forced to acquire the best international practices.

The other example concerns the Japanese food-processing industry. We Americans are virtually paranoid about the efficiency of the Japanese, and it is formidable in some industries, but not 'in food processing. The efficiency of the Japanese food-processing industry is 32 percent that of ours. There are 67,000 food-processing companies in Japan. There are only 21,000 in the United States, which has twice Japan's population-so the average US food-processing company is six times bigger than its Japanese counterpart. Why does the Japanese food-processing industry, like the German beer industry, consist of small companies with local monopolies? Basically, for the same two reasons: local tastes and government policies.

The Japanese are fanatics for fresh food. A container of milk in a US supermarket bears one date: the expiration date. In Japan a milk container bears three dates: the date the milk was manufactured, the date it arrived at the supermarket, and the expiration date. Milk production in Japan always starts at one minute past midnight, so that the milk that goes to market in the morning is today's milk. If the milk were produced at 11:59 p.m., the date on the container would have to indicate that the milk was made yesterday, and no Japanese person would buy it. As a result, Japanese food-processing companies enjoy local monopolies. A milk producer in northern Japan cannot compete in southern Japan because transporting milk there would take several days. These local monopolies are reinforced by the Japanese government, which obstructs the import of foreign processed food by imposing a ten-day quarantine, among other restrictions. So the Japanese food-processing companies are not exposed to domestic or foreign competition, and they don't learn the best methods in the international trade for producing food. Partly as a result, food prices in Japan are very high: beef costs $200 a pound; chicken costs $25 a pound.

Some other Japanese industries are very different: the steel. metal, car, car parts, and electronics industries in Japan have higher productivities than their US counterparts. But the Japanese soap, beer, and computer industries, like the Japanese food-processing industry, are not exposed to competition, do not apply the best practices, and thus have lower productivities than the corresponding industries in the United States.

Finally, let's apply these lessons to comparing different industries or industrial belts within the United States. Since the publication of Guns, Germs, and Steel, I've spent a lot of time talking with people from Silicon Valley and from Route 128, and they say that these two industrial belts are quite different in terms of corporate ethos. Silicon Valley consists of lots of companies that are fiercely competitive with each other. Nevertheless, there is a lot of collaboration-a free flow of ideas, people, and information between companies. In contrast, I'm told, the businesses of Route 128 are much more secretive and insulated from each other, like Japanese milk-producing companies.

What about the contrast between Microsoft and IBM? Since my book was published, I've acquired friends at Microsoft and learned about that corporation's distinctive organization. Microsoft has lots of units, each comprising five to ten people, with free communication between units, and the units are not micromanaged; they are allowed a great deal of freedom in pursuing their own ideas. That unusual organization at Microsoft-which is essentially broken into a lot of competing semi-independent units contrasted with the organization at IBM, which until four years ago consisted of much more insulated groups and resulted in IBM's loss of competitive ability. Then IBM acquired a new Chief Executive Officer who changed things drastically: IBM now has a more Microsoft-like organization, and I'm told that IBM's innovativeness has improved as a result.

All of this suggests that we can extract a couple of principles from human history. The first is that really isolated groups are at a disadvantage, because most groups get most of their ideas and innovations from the outside. The second-the principle of intermediate fragmentation-is that you don't want excessive unity or excessive fragmentation; instead, you want your society or business to be broken up into a number of groups that compete with each other while maintaining relatively free communication with each other. I see those as the overall principles of how to organize a business and get rich.

Let me conclude by emphasizing some obvious restrictions. One, as I mentioned at the beginning, is "all other things being equal." Obviously, even a business with the best organization is not going to thrive with an idiot as a CEO; the success of Microsoft certainly depends, at least in part, on the unusual qualities of Bill Gates. In addition, I've been talking about conditions that maximize productivity, creativity, and money-making ability. There are other considerations in organized human groups, and there are conditions under which productivity is not the top priority. Sometimes more centralization may be appropriate. For example, during a war, you want more centralized control than in peacetime; you do not want your air force, army, and navy competing fiercely with each other.

There are also groups for which productivity and differential money-making ability are not the overriding considerations. I don't want each of you to go home tonight and say to your spouse or significant other, "Darling, Jared Diamond says that within human groups, competition is what spurs productivity and innovation, so I think we need to follow his advice in our household. For the next month, let's see which of us earns more money, and at the end of the month, the one with the bigger income will keep on with the job, and the other can turn to scrubbing the floors and shopping at the supermarket." There are other considerations in a marriage besides optimizing productivity.

Neither do I want you to go home to your children and say, "Sweetie-pies, Jared Diamond has enunciated some principles that I think would be really good for rearing children. We're going to see what your grades are at midterm, and whichever one of you comes closest to getting all A's, we will support to the hilt-private schools, college, whatever you need; the rest of you can start jobs shining shoes." In a family, productivity is not the appropriate consideration for judging how best to organize the group.

Nevertheless, in some human groups, productivity is indeed a significant consideration: for example, in businesses, in industrial belts, and, to a considerable degree, in countries. In order to understand how to organize these groups, we could perform natural experiments. We could set up, if we were rich enough, a hundred businesses organized a hundred different ways, see which businesses went bankrupt, and after twenty years determine what is the correct industrial organization. But that's an inefficient way to do it. We can instead learn from the comparative approach, by looking to natural experiments of history. I hope that some of you will be able to apply these lessons to acquiring the wealth that has so far eluded me.

© 1999 by Jared Diamond.

This report is a condensed version of Dr. Diamond's talk "How to Get Rich," which appears in full on the EDGE website (www.edge.org), maintained by the Edge Foundation, Inc. It was published in the March/April 2000 issue of the Bulletin with permission from EDGE.

March/April 2000 Bulletin
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