More on Ideas

A successful implementation of an idea in a particular time and circumstance may not produce the same results elsewhere. This recognition of the indispensable role of local knowledge is critical to understanding why top down solutions are dangerous. When an unsuccessful top down solution is forced upon a people through government, the accountability feedback mechanism does not function well. Instead of trying something else, politicians save face and ask for more funding.

A classic example of a government top down action that had horrible consequences is Chairman Mao’s furnace mandate as part of the Great Leap Forward. From Wikipedia:

With no personal knowledge of metallurgy, Mao encouraged the establishment of small backyard steel furnaces in every commune and in each urban neighborhood. Huge efforts on the part of peasants and other workers were made to produce steel out of scrap metal. To fuel the furnaces the local environment was denuded of trees and wood taken from the doors and furniture of peasants’ houses. Pots, pans, and other metal artifacts were requisitioned to supply the “scrap” for the furnaces so that the wildly optimistic production targets could be met. Many of the male agricultural workers were diverted from the harvest to help the iron production as were the workers at many factories, schools and even hospitals. Although the output consisted of low quality lumps of pig iron which was of negligible economic worth, Mao had a deep distrust of intellectuals and faith in the power of the mass mobilization of the peasants.

If an entrepreneur tried a backyard furnace and failed it would not be a big deal. Innovators are constantly experimenting and trying to figure out ways to create value for other people. A positive profit means the entrepreneur is creating more benefits than the costs he is incurring. The profits signal to other individuals that they should consider doing something similar. No profits, and the business venture isn’t worth it.

Mao’s backyard furnace idea was a horrendous solution to increasing iron production. He didn’t take advantage of local knowledge. Iron manufacturers select themselves to make iron because they think they can do it well. Ninety-nine percent of the population can remain rationally ignorant about iron and specialize in something else. Mao didn’t know how to make iron, and neither did Chinese peasants.

Sadly, the market feedback mechanism wasn’t there to induce everyone to stop with the bad idea. Once Mao found out the furnaces were useless, he didn’t even stop production right away!

Mao and his entourage visited traditional steel works in Manchuria in January 1959 where he found out that high quality steel could only be produced in large scale factories using reliable fuel such as coal. However, he decided not to order a halt to the backyard steel furnaces so as not to dampen the revolutionary enthusiasm of the masses. The program was only quietly abandoned much later in that year.

If you haven’t seen this Milton Friedman clip at least ten times, then I recommend watching it again.