Non-stupid people always underestimate the damaging power of stupid individuals. - Carlo Cipolla
A viable definition affords a frame with which events and people may be analysed. Hence in the previous article, I tried to evaluate the operability of Carlo Cipolla’s definition of stupidity, which states that a stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses; this is also the Third Basic Law of stupidity. I considered the modern founding of Singapore by the late Lee Kuan Yew through the lens of Cipolla’s construct and managed to glean insights that I did not before. There appears to be sufficient warrant to examine Cipolla’s treatise further.
I ended my last article with an allusion to the fall of Singapore to the Japanese during WWII; a defeat that was brought about by stupidity because the British’s inept defence of the island caused the people to suffer immense losses even as the colonial masters themselves took one heck of a beating. Many historians believe this lit the fire of independence in the post war years, the beginning of the end of Singapore as a crown colony. Eventually the empire was also no more. Just how dangerous is stupidity then, if it can cause a war to be lost and an entire empire to collapse?
One is tempted to believe that a stupid man will only do harm to himself but this is confusing stupidity with helplessness.
This is clearly summarised in the Fourth Basic Law which states that: Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake. - Carlo M. Cipolla
Cipolla was first and foremost an economist and his essay is more than just satirical. He argues that there is real danger to stupidity in that it is capable of leaving society poorer and devastated through the destruction of value in terms of wealth, welfare, and benefits (not in the moral sense). One way of illustrating how value might be destroyed is to contrast a chef and me. A chef is able to add tremendous value to a lovely piece of steak, creating a dish of wonderful flavours and nutrition. However, should the same piece of steak fall into my wrong hands, it will surely end up in the dustbin, with all intrinsic value originating from the cow destroyed and future possible value terminated.
According to Cipolla, the perfect bandit resides along the dotted blue line, in the bottom right quadrant (see the diagram above). The value that the perfect bandit gains is exactly the same as his victim’s loss. As such, wealth and welfare are merely transferred from the victim to the bandit, without destroying value. If the bandit moves closer to the intelligent quadrant, to the right of the dotted blue line, he creates value as he is able to register a bigger gain than his victim’s loss. In this instance, society actually benefits because wealth and welfare levels are increased in the overall pool. If, however, the bandit moves closer to the stupid quadrant, his gains are less than his victim’s losses. Overall, value has been destroyed and society is worse off. The same analysis can be applied to the helpless. Thus, every person in the blue triangle (see below) destroys value.
So, how is stupidity dangerous? It destroys value at an alarmingly quick pace with no gains whatsoever to mitigate the damage. This brings us to Cipolla’s Fifth Basic Law of stupidity - a stupid person is the most dangerous type of person.
Again, to test the validity of this theory, we need to ask if indeed value gets destroyed in real life. Well, a cursory scan of the business world and history in general is enough to unearth loads of evidence of precisely such.
The Flywheel Effect vs the Doom Loop
Jim Collins, of Good to Great fame, studied companies extensively in hope of making sense of why some do great, why some don’t, and why great companies are also susceptible to spectacular failure. One of the key factors that he and his research team identified to be critical for greatness is the flywheel effect. Conversely, companies that go out of business are inevitably caught in a doom loop.
The flywheel begins with the company leaders accurately distilling the company’s strengths from analyses of past successes and failures. What were the actions taken that led to success and which actions led to failure instead? A sequence of actions are then mapped to reproduce success. These actions are ordered in a loop such that each stage positively feeds into the next. That way, success in one stage will beget success in the next and the flywheel gains momentum, eventually leading to a breakthrough. The components of the flywheel are constantly fine-tuned based on evidence and results.
Conversely, the doom loop begins with experiencing disappointing results that fall short of expectations. This then compels the company leaders to react and react fast. Rather than taking a deliberate and considered approach of analysing strengths and capabilities (which is slow), the company launches itself into a new direction in search of a quick turnaround. Such decisions are often fuelled by a trending fad or through acquisitions. Before the launch effort has the opportunity to gather momentum and accumulate results, the seemingly unmoving needle prompts the company leaders to react once again and launch it in yet another direction. The company runs itself into a doom loop, all the while burning resources with each new initiative.
Let’s look at two comparison companies detailed by Jim Collins and his team in Good to Great. Both Nucor and Bethlehem Steel were in the steel business at the same time and experienced the same industry challenges - products that are difficult to differentiate and cheap imports.
​Nucor | Bethlehem Steel |
In analysing the challenges faced with the industry and company, nucor concluded that poor management and lack of innovation were the causes of the difficulties. | Bethlehem Steel executives instead blamed cheap imports for their troubles. |
​Company executives engage in dialogue and debates, some of which were decidedly heated, so that the truth may be articulated and heard thus understanding achieved. In 1965, Nucor was known as Nuclear Corporation of America and on the verge of bankruptcy. It did not produce any steel then but by 1995 it was the fourth largest steelmaker in the world and the most profitable American steel company by 1999. The arguing and debating resulted in the selling of the nuclear business, focus was then turned to steel joist which was an acquired business from earlier. Subsequently, more arguing and debating led to Nucor manufacturing their own steel, investing in their own mini-mill, then a second, third, fourth… mini-mill. Nucor faced the brutal facts confronting the company head on. | Bethlehem Steel while fully aware of the rise of mini-mills like Nucor, ignored the information and only woke up when they discovered that they have massive losses in market share. |
By confronting the brutal facts, Nucor learnt that they were good at creating a performance culture within the company and harnessing technology in manufacturing to bring down the cost of steel production. In combination, Nucor was able to drive their economic engine of maximising profit per tonne of finished steel product. | Bethlehem vacillated back and forth between diversification and focus on steel. Over the period studied by Jim Collins and his team, Bethlehem acquired 10 companies and divested 23. Nucor, on the other hand, had two acquisitions and three divestures. Each of Bethlehem's lunges between diversification and refocusing on steel burned through huge amounts of resources. Subsequently, they fell behind in technology and modernisation, and responded by launching a crash programme in hope of catching up; yet another lunge. |
Nucor’s creation of their performance culture entailed discipline in reducing inequality as far as possible. Even the colour of the hard hats was the same for everyone except safety officers and visitors. The result is a $3.5b company that has only four layers of management and a low cost headquarter set up with low staff count and cheap furniture. Certain perks such as post-high school education awards of $2,000 per year per child were granted to all workers but not executives. In the 1982 recession, worker pay was reduced by 25%, officer pay by 60%, CEO’s by 75%. In the good years, everyone will partake in the profits. | In contrast, Bethlehem built a 21-storey office building to house its executives. In order to give all vice-presidents a corner office, the building was designed like a cross. Bethlehem was also constantly entangled with the unions. |
From 1966 to 1999, Nucor posted 34 consecutive years of profitability. In the 1980s, Nucor was one-third the size of Bethlehem. By the turn of the century, Nucor surpassed Bethlehem in total revenues. | Over the same period, Bethlehem lost money 12 times and cumulative profitability was near zero. |
Today, Nucor’s share price is approximately $109 at the time of writing (July 2022), compared to $13 in 1999, the period of Jim Collins’ study. | Bethlehem steel filed for bankruptcy in 2001. |
In his other book How the Mighty Fall: And Why Some Companies Never Give In, Jim Collins found that there are five stages of decline:
Companies that spin into a doom loop in Stage 4, inevitably end up in Stage 5. If they pause to understand their company and confront the brutal facts, then institute a flywheel, they are able to reverse the decline. Put stupid people at the wheel and they will drive the organisation into the ground.
It would be a profound mistake to believe the number of stupid people in a declining society is greater than in a developing society. Both such societies are plagued by the same percentage of stupid people. The difference between the two societies is that in the society which performs poorly… the stupid members of the society are allowed by the other members to become more active and take more actions… - Carlo Cipolla, emphasis not in original
Stupidity is dangerous. It destroys value and leaves everyone poorer. Today, we are seeing a lot more evidence of such destructions of value.