HOW TO GET RICH ?

A Talk by Jared Diamond

Jared Diamond was in New York several weeks ago and we had an early dinner
across the street from the Museum of Natural History where he was scheduled to
speak later in the evening. Jared first visited the Museum in 1963, when he was
25 years old, preparing to go to New Guinea on his first expedition to study New
Guinea birds. Subsequently he analyzed his bird collections in the museum where
he is on the staff of the Museum's Department of Ornithology in addition to his
position at UCLA.

Jared noted that "probably most lectures one hears at the museum are on
fascinating but impractical subjects: namely, they don't help you to get rich. This
evening I plan to redress the balance and talk about the natural history of
becoming rich."

— JB

JARED DIAMOND, professor of physiology at UCLA Medical School, is the

author of Guns, Germs, and Steel: The Fates of Human Societies, which won the
Pulitzer Prize for general nonfiction in 1998 as well as Britain's 1998 Rhone-
Poulenc Science Book Prize. He is also the author of The Third Chimpanzee,
winner of the Los Angeles Times Book Award for the best science book of 1992
and the 1992 Rhone-Poulenc Science Book Prize; and Why is Sex Fun?

HOW TO GET RICH ?

A Talk by Jared Diamond

In Guns, Germs, and Steel I asked why history has unfolded differently over the
last 13,000 years in Eurasia, in the Americas, in sub-Saharan Africa, and in
Aboriginal Australia, with the result that within the last 500 years Europeans
were the ones who conquered Native Americans and Aboriginal Australians and
sub-Saharan Africans, rather than vice versa.

Most of that book, was concerned with comparing the peoples of different
continents, but 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 the Chinese or the people of 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 solution. Nevertheless, since the publication of Guns,
Germs, and Steel, I've received a lot of feedback, and the most interesting
feedback has been 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 a
lot of correspondence from economists and business people, who pointed out to
me possible parallels between the histories of entire human societies and histories
of smaller groups. This correspondence from economists and business people has
to do with the following big question: what is the best way to organize human
groups and human organizations and businesses so as to maximize productivity,
creativity, innovation, and wealth? Should your human group have a centralized
direction, in the extreme having a dictator, or should there be diffuse or even
anarchical organization? Should your collection of people be organized into a
single group, or broken off into a number of groups, or broken off into a lot of
groups? Should you maintain open communication between your groups, or erect
walls between them, with groups working more secretly? Should you erect
protectionist tariff walls against the outside, or should you expose your business
or government to free competition?

These questions about group organization arise at many different levels and for
many types of groups. They arise, of course, about the organization of entire
governments or countries: what is the best way to govern a country? 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 rise
about the organization of different companies within the same industry. How can
you 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 what we call different industrial belts? When I
was a boy growing up in Boston, Route 128, the industrial belt around Boston,
led the industrial world in scientific creativity and imagination. But Route 128
has fallen behind, and now Silicon Valley is the center of innovation. And the
relations of businesses to each other in Silicon 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
economies of different countries: the differing national average productivities of
Japan and the United States and 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 metal-working industry has a
productivity rivaling that of 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 the American beer-brewing industry. Or take Japan
— we Americans are paranoid about the supposed efficiency of Japanese
business, and the fact is that the Japanese steel industry is 45% more productive
than the American steel industry. Why is it, then, that the Japanese food-
producing industry is less than 1/3 as productive and efficient as the American
food-processing industry? Still another example: in Korea, the steel industry is
equal in efficiency to American steel making, but all other Korean industries lag
behind the United States. What is it about the different organization of the
German beer brewers and the German metal workers, or the different
organization of the Japanese food processors and the Japanese car manufacturers,
that accounts for the different productivities of these sectors within a given
country?
Obviously, the answers to these questions about the different success of
organizations partly depend upon idiosyncracies of individuals. The success of
Microsoft must have something to do with Bill Gates. If an idiot were in
command of Microsoft, then however superior Microsoft's organization,
Microsoft would be unlikely to be a successful business. But 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'm sure that there
are many of you here who are involved with businesses that would like to know
the answer to that question.

I propose to try to learn from human history. Human history 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 very differently, and the outcomes have been very
different. 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? I propose to go over two batches of natural experiments that will
give you insights into how to get rich.

The first batch of natural experiments concerns understanding the effects of

isolation and of group size and of communication with other groups on the
productivity of human societies. Let's learn from the extreme examples of
isolation of human societies. If isolation has any effect on human societies, the
places we're most likely to see that effect are the histories of those two islands off
southeastern Australia called Tasmania and Flinders Island. They lie about 200
miles off the southeast coast of Australia and are separated today from Australia
by Bass Straits, but those straits are relatively shallow, so their floor lay above
sea level at glacial times of low sea level up to about 10,000 years ago. The Bass
Straits between Tasmania and Australia were then dry land, and Tasmania was
part of the Australian mainland, just as Britain used to be part of the European
mainland. When the glaciers melted, sea level rose and cut off Tasmania from the
Australian mainland. So when Tasmania and Flinders were part of the Australian
mainland, Australian Aborigines walked down to Tasmania and Flinders from the
mainland.

And then 10,000 years ago the glaciers melted, sea level rose, and Tasmania
became cut off from mainland Australia by Bass Straits, which are really rough
waters. In addition, the watercraft of the Tasmanians were wash-through rafts that
got waterlogged and sank after about a dozen hours. The result was that the boats
of the Tasmanians could not reach Australia, and the boats of the mainland
Aboriginal Australians could not reach Tasmania.

Thus, for the last 10,000 years the Tasmanians represented a study of isolation
unprecedented in human history except in science fiction novels. Here were 4,000
Aboriginal Australians cut off on an island, and they remained totally cut off
from any other people in the world until the year 1642, when Europeans
"discovered" Tasmania. What happened during those 10,000 years to that isolated
4,000-person society? And what about nearby Flinders Island, which originally
supported a population of 200 cut-off Aboriginal Australians? — what happened
to that tiny isolated society of 200 people during those 10,000 years?
When Europeans discovered Tasmania in the 17th century, it had technologically
the simplest, most "primitive" human society of any society in the modern world.
Native Tasmanians could not light a fire from scratch, they did not have bone
tools, they did not have multi-piece stone tools, they did not have axes with
handles, they did not have spear-throwers, they did not have boomerangs, and
they did not even know how to fish. What accounts for this extreme simplicity of
Tasmania society? Part of the explanation 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. Incredibly, though, archeological investigations have shown one
other thing: during those 10,000 years of isolation, the Tasmanians actually lost
some technologies that they had carried from the Australian mainland to
Tasmania. Notably, the Tasmanians arrived in Tasmania with bone tools, and
bone tools disappear from archeological 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, and yet the Tasmanians went about either naked or just
with a cape thrown over the shoulder.

How do we account for these cultural losses and non-inventions of Tasmanian

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

To understand these losses in extreme isolation, the easiest case to understand is

Japan, because the loss of firearms in Japan was witnessed and described. It took
place in a literate society. Guns arrived in Japan around 1543 with two
Portuguese adventurers who stepped ashore, pulled out a gun, and shot a duck on
the wings. A Japanese nobleman happened to be there, was very impressed,
bought these two guns for $10,000, and had his sword-maker imitate 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 of any country in the world.
And then, over the course of the next century, Japan gradually abandoned guns.

What happened was that the Samurai, the warrior class in Japan, had been used to
fighting by standing up in front of their armies and making a graceful speech, the
other opposing Samurai made an answering graceful speech, and then they had
one-on-one combat. The Samurai discovered that the peasants with their guns
would shoot the Samurai while the Samurai were making their graceful speeches.
So the Samurai realized that guns were a danger because they were such an
equalizer. The Samurai first restricted the licensing of gun factories to a hundred
factories, and then they licensed fewer factories, and then they said that only
three factories could repair guns, and 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, until by the 1840s when Commodore Perry came to Japan, Japan no longer
had any guns. That represents the loss of a very powerful technology.

This loss 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 the prince next door
who did not ban firearms either walked in and conquered, or else the prince who
banned firearms quickly realized his or her mistake and reacquired firearms from
next door. The banning of the guns could work only in isolated Japan, where
there were no neighbors as a threat, and where there were no neighbors from
whom to reacquire the technology.

So 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 society, most innovations come in from the
outside, rather than being conceived within that society. And secondly, any
society undergoes local fads. By fads I mean a custom that does not make
economic sense. Societies either adopt practices that are not profitable or for
whatever reasons abandon practices that are profitable. But usually those fads are
reversed, as a result of the societies next door without the fads out-competing the
society with the fad, or else as a result of the society with the fad, like those
European princes who gave up the guns, realizing they're making a big mistake
and reacquiring the fad. 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 one of these fads result in the
permanent loss of a valuable technology. So that's one of the two sets of lessons
that I want to draw from history, about what happens in a really isolated society
and group.

The other lesson that I would like to draw from history concerns what is called
the optimal fragmentation principle. Namely, if you've got a human group,
whether the human group is the staff of this museum, or your business, or the
German beer industry, or Route 128, is that group best organized as a single large
unit, or is it best organized as a number of small units, or is it best fragmented
into a lot of small units? What's the most effective organization of the groups?

I propose to get some empirical information about this question by comparing the
histories of China and Europe. Why is it that China in the Renaissance fell behind
Europe in technology? Often people assume that it has something to do with the
Confucian tradition in China supposedly making the Chinese ultra-conservative,
whereas the Judeo-Christian tradition in Europe supposedly stimulated science
and innovation. Well, first of all, just ask Galileo about the simulating effects of
the Judeo-Christian tradition on science. Then, secondly, just consider the state of
technology in medieval Confucian China. China led the world in innovation and
technology in the early Renaissance. Chinese inventions include canal lock gates,
cast iron, compasses, deep drilling, gun powder, kites, paper, porcelain, printing,
stern-post rudders, and wheelbarrows — all of those innovations are Chinese
innovations. So the real question is, why did Renaissance China lose its
enormous technological lead to late-starter Europe?

We can get insight by seeing why China lost its lead in ocean-going ships. As of
the year 1400, China had by far the best, the biggest, and the largest number of,
ocean-going ships in the world. Between 1405 and 1432 the Chinese sent 7
ocean-going fleets, the so-called treasure fleets, out from China. Those fleets
comprised hundreds of ships; they had total crews of 20,000 men; each of those
ships dwarfed the tiny ships of Columbus; and those gigantic fleets sailed from
China to Indonesia, to India, to Arabia, to the east coast of Africa, and down 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.

Well, China's tremendous fleets came to an end through a typical episode of

isolationism, such as one finds in the histories of many countries. There was a
new emperor in China in 1432. In China there had been a Navy faction and an
anti-Navy faction. In 1432, with the new emperor, the anti-Navy faction gained
ascendancy. The new emperor decided that spending all this money on ships is a
waste of money. Okay, there's nothing unusual about that in China; there was also
isolationism in the United States in the 1930's, and Britain did not want anything
to do with electric lighting until the 1920s. The difference, though, is that this
abandoning of fleets in China was final, because China was unified under one
emperor. When that one emperor gave the order to dismantle the shipyards and
stop sending out the ships, that order applied to all of China, and China's tradition
of building ocean-going ships was lost because of the decision by one person.
China was a virtual gigantic island, like Tasmania.

Now contrast that with what happened with ocean-going fleets in Europe.
Columbus was an Italian, and he wanted an ocean-going fleet to sail across the
Atlantic. Everybody in Italy considered this a stupid idea and wouldn't support it.
So Columbus went to the next country, France, where everybody considered it a
stupid idea and wouldn't support it. So Columbus went to Portugal, where the
king of Portugal considered it a stupid idea and wouldn't support it. So Columbus
went across the border to a duke of Spain who considered this stupid. And
Columbus then went to another duke of Spain who also considered it a waste of
money. On his sixth try Columbus went to the king and queen of Spain, who said
this is stupid. Finally, on the seventh try, Columbus went back to the king and
queen of Spain, who said, all right, you can have three ships, but they were small
ships. Columbus sailed across the Atlantic and, as we all know, discovered the
New World, came back, and brought the news to Europe. Cortez and Pizarro
followed him and brought back huge quantities of wealth. Within a short time, as
a result of Columbus having shown the way, 11 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, so Columbus had many different
chances.

Essentially the same thing happened in China with clocks: one emperor's decision
abolished clocks over China. China was also on the verge of building powerful
water-powered machinery before the Industrial Revolution in Britain, but the
emperor said "Stop," and so that was the end of the water-powered machinery in
China. In contrast, in Europe there were princes who said no to electric lighting,
or to printing, or to guns. And, yes, in certain principalities for a while printing
was suppressed. But because Europe in the Renaissance was divided among
2,000 principalities, it was never the case that there was one idiot in command of
all Europe who could abolish a whole technology. Inventors had lots of chances,
there was always competition between different states, and when one state tried
something out 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 has a smooth coastline. Europe has an indented coastline, and each big
indentation is a peninsula that 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 that became important independent societies, Britain
and Ireland, while China had no island big enough to become an independent
society until the modern emergence of Taiwan. Europe is transected by mountain
ranges that split up Europe into different principalities: the Alps, the Pyrenees,
Carpathians — China does not have mountain ranges that transect China. In
Europe big rivers flow radially — the Rhine, the Rhone, the Danube, and the
Elbe — and they 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 B.C. and has
stayed unified most of the time since then, whereas for geographic reasons
Europe was never unified. Augustus couldn't do it, Charlemagne couldn't do it,
and Napoleon and Hitler couldn't unify Europe. To this day, the Europe Union is
having difficulties bringing any unity to Europe.

So, the lesson I draw is that competition between entities that have free
communication between them spurred on Europe. In China one despot could and
did halt innovation in China. Instead, China's experience of technological
innovation came 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 one billion people at the time of the Great Cultural
Revolution, whereas it's impossible for a few idiots to shut down the educational
system of all of Europe. This suggests, then, that Europe's fragmentation was a
great advantage to Europe as far as technological and scientific innovation is
concerned. Does this mean that a high degree of fragmentation is even better?
Probably not. India was geographically even more fragmented than Europe, but
India was not technologically as innovative as Europe. And this suggests that
there is an optimal intermediate degree of fragmentation, that a too-unified
society is a disadvantage, and a too-fragmented society is also a disadvantage.
Instead, innovation proceeds most rapidly in a society with some intermediate
degree of fragmentation.
Okay, let's now start to apply all this to what we should do if we want to try to go
out and get rich. Let's apply this to some affluent modern industries and
companies. I'll give you two examples. The first example concerns that image of
productivity that we Americans have as we look toward Japan. We fantasize that
the industrial productivity of Japan and Germany is greater than that of the
United States. And that's not true. On the average, American industrial
productivity is higher than the industrial productivity of either Japan or Germany.
But that average figure conceals differences among the industries of the same
country, related to differences in organization — and those differences are very
instructive. Let me give you two examples from case studies carried out by the
McKinsey Corporation, an economics study industry based in Washington. These
two examples involve the German beer industry and the Japanese food-
processing industry.

What about the German beer industry? Well, the Germans are very efficient in
some of their industries. The German metal-working industry and the German
steel industry are equal in productivity to those of the United States, but the
German beer-producing industry has a productivity only 43% that of the United
States. And it's not that the Germans make bad beer; the Germans make
wonderful beer. Whenever my wife and I go to Germany, we take along an extra
suitcase specifically for the purpose of filling it up with bottles of German beer,
which we take back and dole out to ourselves for the year after each of our trips
to Germany. Why, then, since the Germans make such great beer, and since their
industrial organization works so successfully for steel and metal, can't they
achieve a successful industrial organization for beer?

It turns out that the German beer industry suffers from small-scale production.
There are 1,000 little local beer companies in Germany, shielded from
competition with each other because each German brewery has virtually 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. Germany has
1,000 major beer breweries, producing only half as much beer per year as the
United States. That's to say that the average brewery in the U.S. produces 31
times more beer than the average brewery in Germany.

That fact results from German local tastes and German government policies.
German beer drinkers are fiercely loyal to their local brand of beer. And so there
is no national brand of beer in Germany, analogous to Budweiser or Miller or
Coors in the United States. Instead, most German beer is consumed within 30
miles of the place where it is brewed. And any of you who have been in Germany
know that Germans love their local beer and loathe the beer that comes from next
door. The result is that 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 the beer, and the
longer the bottle-filling line, the cheaper is the cost of brewing beer. So these tiny
German beer industries are relatively inefficient. There's no competition; there
are just 1,000 local monopolies.

That outcome, of Germans having their local beer loyalties, is reinforced by

German government law. The German government makes it hard for foreign
beers to compete on the German market. The German government has so-called
beer purity laws. The German government specifies exactly what can go into
beer, and not surprisingly what can go into beer is what German breweries put
into beer, and it's not what American, French, and Swedish breweries like to put
into beer. So it's difficult for foreign breweries to compete on the German beer
market. The result is that German beer is not exported very much. Any of you
who like to buy Lowenbrau in the U.S. should look at the label in the
supermarket: your U.S.-bought Lowenbrau is not brewed in Germany, it's brewed
on license in the United States with American productivity and American
efficiencies of scale.

The same inefficiency turns out to characterize some other German industries.
The German soap industry and the German 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 that disadvantage is not true for the
German metal-producing industry or steel industry. There, big German
companies compete with each other and they compete internationally, and
therefore they are forced to acquire best international practices through
competition.

There you have an example from the German beer industry about the
disadvantages of having lots of small groups that are secretive and don't compete
with each other. The other example that I want to tell you about is the Japanese
food-processing industry. I mentioned that we Americans are virtually paranoid
about the efficiency of the Japanese, and it's true for some Japanese industries,
but not for their food-processing industry. Japanese processed food is produced
with an efficiency 32% of American processed foods. There are 67,000 food
processing companies in Japan; there are only 21,000 in the United States,
although the U.S. has double Japan's population, so the average food-processing
company in the United States is six times bigger than its Japanese counterpart.
What is the reason why the Japanese food-processing industry, like German beer
industries, consists of small companies with local monopolies?

It turns out to be basically the same two reasons as with German beer: namely,
local tastes creating local monopolies, and government policies. The Japanese are
fanatics for fresh foods. Any of you who have been to Japan, as my wife and I
were in October, will remember what it says on Japanese containers. In the
United States, when you go to the supermarket, there's one date on the container,
the date by which you're supposed to throw away that bottle of milk. In Japan
there are three dates on the container: there's the date when the milk was
manufactured, and there's the date when the milk arrived at the supermarket, and
then there's the date when the milk should be thrown away, and these dates are in
big letters; the Japanese really care about the dates. So the result is that milk
production in Japan always starts at one minute past midnight, so that the milk
that goes to market that morning is today's milk. If milk had been produced at
11:59 p.m., the milk company would have to stamp on its container that this milk
was made yesterday, and no Japanese person would buy it. The result is again
that Japanese food-processing industries enjoy local monopolies. Obviously, a
milk producer up in Hokkaido, northern Japan, is not going to be able to compete
in Kyushu, in southern Japan, with a Kyushu producer, because of the several
days in transit from Hokkaido. By the time a carton arrives in Kyushu, the people
will read on the container that this milk is three days old, and no Japanese person
would buy it.

So that's one thing that creates local monopolies for food production in Japan:
Japanese fanaticism about really fresh food. And the second thing is Japanese
government policy, which reinforces these local monopolies. The Japanese
government obstructs the import of foreign processed food by slapping on a ten-
day quarantine. And because the Japanese care about food that was produced that
very day, naturally by the time that American beef, chicken, or whatever arrives
at the supermarket and the date says ten days old, the Japanese are not very
enthusiastic about buying those American products. And there are other
restrictions that the Japanese government imposes on foreign imports.

The result is that Japanese food-processing industries are not exposed to domestic
competition, they're all local monopolies, they're not exposed to foreign
competition, and they don't learn the best methods in the international trade for
producing food. And the result is that, in Japan, Japanese beef costs $200 a
pound. My wife and I had heard about that before we went to Japan, but what we
did not realize until we were brought into a supermarket by my wife's Japanese
cousin is that chicken in Japan costs $25 a pound. The reason the Japanese can
get away with that is that Japanese chicken producers are not exposed to
competition with super-efficient American chicken producers.

Now all those features are not true for some other Japanese industries. The
Japanese steel industry, the Japanese metal industry, the Japanese car industry,
their car-part industry, and their electronic industries have productivities greater
than our American counterparts. But the Japanese soap industry, and the Japanese
beer industry, and the Japanese computer industry, like the Japanese food-
processing industry, are not exposed to competition, do not apply the best
practices, and so have ended up with productivities below those of corresponding
industries in the United States.

Now let's finally apply these lessons to comparing different industries or

industrial belts within the United States. I mentioned that when I was growing up,
Route 128 outside of Boston led the world in productivity for an industrial belt,
but Route 128 has now fallen behind Silicon Valley. Since my book "Guns,
Germs, and Steel" was published, I've spent a lot of time talking with people from
Silicon Valley and some from Route 128, and they tell me that the corporate
ethos in these two industrial belts is quite different. Silicon Valley consists of lots
of companies that are fiercely competitive with each other, but nevertheless
there's a lot of collaboration, and despite the competition there is a free flow of
ideas and a free flow of people and a free flow of information between these
companies that compete with each other. In contrast, I'm told that the business of
Route 128 are much more secretive, and insulated from each other like Japanese
milk-producing companies.

Or again, what about the contrast between Microsoft and IBM? Again, since my
book was published, I've acquired friends at Microsoft, and I've learned about
Microsoft's organization, which is quite distinctive. Microsoft has lots of units,
with free communication between units, and each of those units may have five to
ten people working in them, but the units are not micro-managed, they are
allowed a great deal of freedom in pursuing their own ideas. That unusual
organization at Microsoft, broken up in to a lot of semi-independent units
competing within the same company, contrasts with the organization at IBM,
which until four years ago had much more insulated groups. A month ago, when I
was talking in the industrial belt of North Carolina, the Raleigh-Durham area
industrial belt, I met someone who is on the board of directors of IBM, and that
person told me, Jared, what you say about IBM was quite true until four years
ago: IBM did have this secretive organization which resulted in IBM's loss of
competitive ability, but then IBM acquired a new CEO who changed things
drastically, and IBM now has a more Microsoft-like organization, and you can
see it, I'm told, in the improvement in IBM's innovativeness.

So what this suggests is that we can extract from human history a couple of
principles. First, the principle that really isolated groups are at a disadvantage,
because most groups get most of their ideas and innovations from the outside.
Second, I also derive the principle of intermediate fragmentation: you don't want
excessive unity and you don't want excessive fragmentation; instead, you want
your human society or business to be broken up into a number of groups which
compete with each other but which also maintain relatively free communication
with each other. And those I see as the overall principles of how to organize a
business and get rich.

But, let me conclude by emphasizing some obvious restrictions. I'm sure all of
you are already thinking to yourselves, "But, but, but, he's forgot — but but
but...."— Yes, let's go back to those but-but-buts. One restriction is, I mentioned
at the beginning, "all other things being equal". Obviously the best organization is
not going to help with an idiot as a CEO, and the success of Microsoft certainly
depends, at least in part, on the unusual qualities of Bill Gates, as well as on the
unusual organization of Microsoft.

In addition, I've been talking about conditions to maximize productivity and

creativity and moneymaking ability. There are other considerations in organized
human groups, and there are conditions under which productivity is not the thing
you're most interested in. There are conditions where more centralization may be
appropriate. For example, during a war, you do not want your air force, army, and
navy to be fiercely competing with each other, but instead you want during a war
more centralized control than you do in peace time. And there are also human
groups for which productivity and differential money-making ability are not the
overriding consideration. I don't want you to go home tonight and each of you to
say to your spouse or significant other, "Darling, I've just heard this guy Jared
Diamond, who says that within human groups competition is what spurs
productivity and innovation, and so I think we need to follow his advice in our
household. For the next month let's see which of us earns a bigger income, and at
the end of the month the bigger income-producer will keep on with the job, and
the one of us who has lower income and is less efficient can turn to scrubbing the
floors and shopping at the supermarkets." That just illustrates: there are other
considerations in a marriage than optimizing productivity.
Again, I don't want you to go home to your several children, and say, "Sweetie-
pies, I heard this talk today by this guy Jared Diamond who enunciated some
principles that I think would be really good for rearing children. We're going to
see what your grades are at mid-term, and based on those grades, whichever one
of you comes closer to getting all A's, that one we will support to the hilt, private
schools, college, whatever you need, whereas those of you who get poor grades
can start jobs as a shoe-shine boy or girl" — No! In a family, and in some other
human groups, productivity is not the appropriate consideration for judging the
best organization of the group.

Nevertheless there are some human groups where productivity is indeed a

significant consideration. And that certainly includes businesses, industrial belts,
and to a considerable degree, countries. In order to understand how to organize
these businesses, 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 20 years figure that we now have 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.

Compiled by: Source: www.edge.org/edge56

Dr.Lanka Krishnanand,
Assistant Professor,
MED, NIT, Warangal – 506 004
Andhra Pradesh, INDIA.
Email: lankakrishnanand@hotmail.com