One indicator that we need a very different concept of what we call business is Eroom’s Law, a buzzword from the world of pharmaceutical drug development. Erooms’s Law is that the increasing complexity of a system inexorably keeps driving costs up. It’s Moore’s Law backwards, and Moore’s Law is that computing speed of an integrated chip doubles about every 18 months while its cost drops by half. For the past half century this phenomenon has enabled the flood of software now saturating our lives.
But because computing power helps increase the complexity of everything else, Moore’s Law activates Eroom’s law elsewhere. For example, computing power decoded the human genome. The steadily dropping cost of DNA analysis propels research into areas like the microbiome. Researchers identify pathways to medical interventions that were undreamed only a generation ago.
Along the way pharmaceutical companies brought out more super drugs – “billion dollar molecules” – turning them into investor blue chips. Venture capitalists bet on hot biotech startups. Many cities bet on biotech as a new engine of economic growth. However, is Eroom’s Law now drowning this magic in its own complexity?
According to Tufts University, developing a drug to market now costs between is $2 and $5 billion. These costs keep rising, and failing FDA approval is an inherent risk. To spread the risk, investors prize full development pipelines, but companies increasingly can’t afford them. Assuring drug safety and effectiveness for a big population requires large, lengthy clinical trials, but post-approval monitoring is still necessary. To keep up with the complexity, regulations keep ballooning, but the number of FDA reviewers doesn’t, which drags out approval processes. After clearing all these hurdles, some drugs fail in deployment just from misjudging user habits or logistical needs.
Pharma and biotech companies try to offset this complexity with predictable business logic: Cut expenses – including support of basic research. Outsource work like “cookie cutter” clinical trial procedures. Go for orphan disease drugs; approval is easier. Extend patent protection by seeking new diseases for which an old drug may be effective. Reorganize. Merge, to obtain more economy of scale. And of course, heavily promote existing drugs that are still patented.
Critics accuse the pharmaceutical industry of price gouging and disease mongering, just to keep the big financial returns coming. We can barely sketch this tangled mess.
In A Prescription for Change, Michael Kinch maps it in much more detail as Eroom’s Law at work. The drug industry is but one part of a bigger systemic mess – the American health system – where high U.S. prices “pay for drugs sold for less in other countries.” No amount of price negotiating seems to reverse the rise of American health care cost. The system keeps discovering more and more conditions to treat with more and more drugs, tests, and procedures while the industry complains that drug development is moving too slowly. The viruses they combat are mutating ever more rapidly.
Eroom’s Law hovers over other industries too. For example, the complexity of a new vehicle greatly exceeds that of 1960 cars. Your can see it just looking. A really stark contrast compares a new car swaddled in software with a 100-year old Model T, which beat walking and straddled stumps. However, few of us would rely on one (ever crank start a struggle buggy on a cold morning). Travel speed topped out about 1970, and traffic jams limit it, so we seek more reliability, convenience, comfort, and entertainment. The system considers this progress because in constant dollars, the added complexity today costs little more than the Model T did 100 years ago. That is, a person of average income works about the same length of time to buy one.
However, this progress measured by price excludes the complexity of system overhead. Vehicles needed roads, bridges, gas stations, parking lots, traffic lights, and of course, garages for repair we can’t do ourselves. Today, without diagnostic software, do-it-yourself is limited. The automotive support system has become complex, including the training and education needed to keep it going. The total system is big and it may be vulnerable.
Suppose malevolent hackers cracked a car manufacturer’s systems, corrupting all the software. Ripping up all back up systems might be nearly impossible, but the point is that maintaining this huge system takes energy and ingenuity. Well known is the tendency of huge software systems to bog in accumulated patchwork. Thirty years from now, will a company still support millions of lines of code in a car sold today?
We keep expanding and complicating this system, pointing toward driverless cars, but its most rickety prop may be roads, bridges, and other “infrastructure.” Fees to maintain them are a constant political patchwork. Yank away most of this support, and one has a Detroit, or Flint, or dozens of other Rust Belt relics, struggling to maintain appearances – and safety.
Arguments about Detroit’s blight usually center on fairness, or lack of it. For example, teachers sued the Detroit School District for neglecting maintenance and cleaning until student and faculty health was threatened. However, the city’s huge decline in population and tax base is like old empires that expanded their reach until, for whatever reason, their monuments and infrastructure could no longer be sustained. Their bloat had to shrink and simplify until it fit a smaller base of support.
Is there general economic evidence of bloat floating on a shaky foundation today? Yes, one is the attention economy: everyone can now compete for attention as their “own brand,” so the jumble of “stuff” from us competing for attention from each other is a distracting mish-mash. However, anyone good at it, like the Kardashians, can make a nice income off their own contrived celebrity.
A broader example is hot investment going to software-based companies. The return on equity of software companies is 12-13%, while old companies serving us with capital intensive “basics” hover around 3%. The latter include utilities, metal mining, and automotive companies. Petroleum and airline companies boom and bust depending on the vagaries of fuel costs. (From CSIMarket)
As this blog has noted many times, financial incentives promote expansion. Incentives to protect and promote basics, including the environment, are minimal. They don’t fit the mindset. The system is inherently boom-bust – overconfidence followed by depression. Our environmental predicament needs new thinking – much broader imagination about business, about quality of life, and about our relationships with the natural environment. Every business and every individual being independently solvent no longer is adequate evidence that all is well with the world. These measures are self-deceptive. We need to watch measures of local and global health, both for humans and for our environment.
That is, business needs a guidance system that gives other concerns priority over making a profit. And the economy needs more diverse direction than growth in jobs and GNP. Such a change seems to make decision-making more complex – but perhaps it lets us deal with complexity that already exists, but that our guidance system tells us to ignore. Fixation on a single mission gives direction to any operational organization. Limiting our focus has been called “linear thinking,” good if our direction helps the human condition, but deadly if it blinds us to existential problems.
This type of change requires learning that digs deeper than specialized expertise in technology and techniques. Technical learning may not question our basic intents and beliefs. However, in present circumstances, we need to question our why-to more than our how-to.
Learning to reflect on why-to as well as how-to is one distinguishing characteristic of what we call Vigorous Learning. It’s more than intensive how-to learning. Among other things, we have to learn to deal with messes that may be characterized by Eroom’s Law.