On (In)effective Management, Conflicts of Interest at Different Levels of the Hierarchy, and the Invisible Foot. Column in КомпьютерреOnline #96

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Dmytro Shabanov
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The dispute between the informed and the misinformed: how to find an optimal solution On (in)effective management, conflict of interest at different levels of hierarchy and the Invisible Foot How we are deceived: an analysis of a portion of anti-vaccination arguments from the "primary source"

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We live in a complex and poorly managed world. How to improve the quality of decisions made? It seems to me that the most effective way is to restructure the management system so that at each of its levels, the logic of its operation itself pushes the manager towards the right decisions. Lately, I have been concerned with the problem of managing hierarchical systems with conflicting interests at different levels of organization. This interest is related to multi-level selection in the hybridogenic complex of green frogs. However, in this column, I will talk about what concerns most readers – about the functioning of social systems. I will start by considering a simple scenario. Fortunately, in my main job, I do not encounter such types of relationships, but I remember something from the times when I dealt with business, and I know other things from the stories of trusted people. Let's imagine an Enterprise engaged in a Necessary Action. Since the managers authorized by society make decisions, special Controlling Authorities are supposed to oversee the activities of this enterprise (and the entire industry). Laws and Instructions are adopted – to simplify further discussion, let's assume that all these documents are developed solely with good intentions. They regulate everything that is needed – including the work of both enterprises and Controlling Authorities. What happens when controllers arrive at the enterprise? Let's consider a typical, simple, and, in fact, relatively prosperous scenario. The chief inspector enters the manager's office and says the following. "We have come to you for an inspection. We are obliged to find violations in your company and impose fines of at least one million (a conditional figure). You can point out the required number of shortcomings to us by tomorrow and express our appropriate gratitude. If you refuse, we will look for them ourselves and find not one million, but ten." What should the manager do? One can complain about extortion. This Inspection will find violations worth twenty million, the Super-Inspection – another thirty, and the manager himself will end up in prison. One can independently point out some of their non-critical violations, officially pay one million, and give another million as a "gratitude" (= bribe) in cash. This cash must be obtained from somewhere – and not from salary. It will have to be laundered somehow. Launderers will take on additional risks, and part of the laundered money, by rights, should remain with them. One can say "no, we do not violate the Laws and Instructions," and watch as professionals impose fines of ten million – they will find something, they will find it anyway, and even if they don't find anything, they will just hang over you. Following the traces of violations, other Responsible Persons will come to the manager, and he will not even have anything to buy himself off with – he tried to work according to the rules. Everything is clear. It is necessary to choose the second option. Do not rush to say that the manager, who has partially "scraped together" some money, managed to buy off the inspectors, is a bad person. Bad, yes, bad, but probably not initially. He was made a thief and a bribe-taker by the system, which, as we remember, was built for good purposes. The other options for the manager's actions considered by us are worse for both him and the enterprise. And do not forget: the next ones will come after these inspectors. They will be interested in the execution of the approved work plan, the protection of personal data of employees, software licensing, spending of budget funds, metrological verification of measuring equipment, fire safety, compliance with GOSTs and technical specifications, compliance with quotas, sanitary and hygienic conditions, compliance with labor legislation, storage of toxic substances and precursors, payment of license fees, waste disposal, environmental pollution, equipment certification, protection of state secrets, accounting, compliance with Special Instructions, and God knows what else. The only difference is the amount (partly non-cash, partly cash) needed for them to go their own way and allow work to continue. Citizens who feel the inefficiency of the entire industry (and what else can be expected under such rules?) will support the authorities who promise to create another dozen Controlling and Super-Controlling Authorities to restore order. The authorities, tired of this eternal bureaucratic system, will establish standards that will spur these Authorities to work tirelessly. The management of enterprises, under the burden of new fees, will go to extremes. The interests for which management decisions were made will become even more ephemeral. You might say that the key link in the sad picture I have painted is the inspector who came for the inspection. He is supposed to follow his instructions and act according to his conscience, isn't he? Let's consider his possible courses of action. The inspector's salary consists of two parts: a base rate and a bonus, which depends on the amount of fines imposed by the inspection. His income can increase due to receiving bribes. If he receives bribes, he will take risks; he will have to share with his superiors and take enough bribes to buy himself off from the Super-Inspection if necessary. One can work according to conscience, look only for real violations and be happy when there are none. There will be no bribes, and not only the "righteous" inspector but also his colleagues and bosses will be deprived of their bonuses. Perhaps colleagues will tolerate the fool-truth-seeker, but not indefinitely. When the Super-Inspection comes to them, they will have to buy it off, and cash will be needed for this. Therefore, the plan for fines must be fulfilled at all costs. Which course of action is less destructive? Of course, it is best to present the inspected party with the choice we considered at the beginning. Is it necessary to take bribes in this case? Of course. By acting this way (including through a conscientious unwillingness to ruin a useful cause), the inspector himself becomes a violator, and he himself will eventually have to buy himself off. Now let's consider what parameters are optimized at different levels of organization in the hierarchical system where the inspector works. National level. Is the inspector interested in the enterprises under his responsibility working smoothly, honestly, and efficiently? Yes. As a citizen of his country, he benefits from its prosperity, which is facilitated by the successful operation of enterprises. Inspection level. Is the inspector interested in the enterprises under the Inspection's responsibility working smoothly, honestly, and efficiently? No. The Inspection's work will be deemed ineffective, it will not pass the Super-Inspection's checks and will be reorganized, and its key employees will be punished. Executor level. Is the inspector interested in the enterprises under his responsibility working smoothly, honestly, and efficiently? No. He will receive more from bribes from an inefficiently operating Enterprise, tormented by inspections and money laundering for the inspectors. He will not have to overwork, and good career prospects will open up for him (the Inspection encourages effective employees). Thus, we have an example of a conflict of optimization criteria at different levels of hierarchy. This is not the result of subversive work by saboteurs or conspiracies of enemy special services. Do not look for conspiracies here! This situation is the result of the good intentions of its architects. Do our leaders understand the harmfulness of such a control system? Probably, yes. Example. If the Ukrainian authorities want the Shell company to actually explore for shale gas, they exempt it from inspections by agreement – work must be done, not inspectors fed! And should other enterprises, those with a queue of inspectors, work? As they can... I myself am disappointed by what I have written: a bleak picture is being built. It is time to think not about why the system works inefficiently, but about why it is still alive. Let's console the readers with two circumstances. Firstly, the picture described does not correspond to the realities of either Russia or Ukraine. For example, are laws and instructions always written here based on good intentions? Of course not; one of the most important tasks of our management structures is the redistribution of property. Therefore, the sad picture described is not our case. Secondly, fortunately, the described rules work inefficiently. To justify this, I will refer to my experience – I mentioned it in one of the previous columns. Ministry regulations governing the work of universities put teachers who take bribes in a favorable position compared to those who do not. Campaigns against bribery only destroy the mechanisms that prevent conscientious teachers from being corrupt. At the same time, I know for sure that not everyone is corrupt (at least in some places) – I speak from my own experience and the experience of respected colleagues. It is only important to understand that we do this not thanks to the controlling and guiding administrative mechanism, but in spite of it – due to its (thank God!) insufficient effectiveness. That is why I do not want to offend all representatives of any category without exception. I believe in inspectors who sincerely strive for the prosperity of the inspected enterprises. I believe in managers who take money for bribes from their salary, and do not extract it from the entrusted process – believe me, I have seen them with my own eyes (although only at the middle, relatively low level of the administrative vertical)! Fortunately, our people are much better than the system in which they work. And yet, I think that the manager who invents a mechanism by which controlling authorities are interested in the success of the controlled structures, and can also implement this mechanism in practice, will perform a great charity for humanity. No, these are not all the conditions to consider such a manager a benefactor. The same goal can be achieved by other methods. Do you think inspectors went to the "sharashkas" (secret research labs) in the department of the all-powerful Beria with proposals like "admit to violations of such and such an amount yourself, and we will find ten times more"? Could an inspector from the sanitary-epidemiological station stop the operation of a tank factory relocated beyond the Urals during the German occupation of a significant part of the USSR? Of course not – people there sought to solve the common task not so much out of conscience as out of fear. Rules and norms were less important than completing the assigned task, and performers at all (almost all) levels sought not to maximize their income, but to stay alive. How did such a system function in terms of conflicting optimization criteria at different levels of hierarchy? It ensured the priority of the interests of the higher level (the state, the administrative apparatus of violence) over the interests of the lower levels. Large-scale achievements were ensured at the cost of inhumanity. Could such a system work for a long time and successfully? It could exist for a limited time, especially in conditions of danger. Resources (primarily human) for further development are not accumulated in such a system, and sooner or later it must transform into a more peaceful structure. Now we can better assess the magnitude of Adam Smith's discovery. Do you remember what I wrote about the Invisible Hand and the Invisible Foot? Allow me to quote myself: "The Invisible Hand operates in systems whose goals are consistent with the goals of their subsystems. The Invisible Foot manifests itself where the optimization of subsystems contradicts the optimization of the system." Indeed, in conditions of market competition among small producers, the vectors of optimization of the private entrepreneur's activity and the functioning of the economy coincide. A private entrepreneur or a small bourgeois will receive the greatest profit if they maximally satisfy the public interest. But the market economy is not limited to trifles. Over time, corporations with complex hierarchical structures grow within it. Different floors of this hierarchy, due to its organization, acquire their own interests that contradict each other. Stumbles from the Invisible Foot repeatedly disrupt the functioning of a magnificent structure that impresses with its scale... The planned economy had a grand advantage over the market economy: it allowed for a much broader planning horizon. Unfortunately, it was undermined by the conflict of interests at different levels. What works more effectively: "everything around is collective, everything around is mine" or "my own shirt is closer to my body"? Social competition and the glorification of front-rank workers partially combined private interests with general ones, but they also did not divert the Invisible Foot. In competition with a short-sighted and inefficient market economy, the far-sighted, but even less efficient planned economy lost. Is the situation hopeless? I hope not. I do not have a ready-made solution. However, I am convinced that when building any organizational structure, it is necessary to carefully analyze the possible pros and cons of each course of action for each person located at each of its nodes. We need to think, in general...

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Dmytro Shabanov
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The dispute between the informed and the misinformed: how to find an optimal solution On (in)effective management, conflict of interest at different levels of hierarchy and the Invisible Foot How we are deceived: an analysis of a portion of anti-vaccination arguments from the "primary source"

Column in KompyuterraOnline #95 Column in KompyuterraOnline #96 Column in KompyuterraOnline #97