"In his landmark 1776 work The Wealth of Nations, Adam Smith showed that a clever division of labor could make a commercial enterprise vastly more productive than if each worker took personal charge of constructing a finished product."

"Four decades later, in On the Principles of Political Economy and Taxation, David Ricardo took the argument further with his theory of comparative advantage, asserting that because it is more efficient for Portuguese workers to make wine and English workers to make cloth, each group would be better off focusing on its area of advantage and trading with the other."

"These insights both reflected and drove the Industrial Revolution, which was as much about process innovations that reduced waste and increased productivity as it was about the application of new technologies."

"The notions that the way we organize work can influence productivity more than individual effort can and that specialization creates commercial advantage underlie the study of management to this day."

"This happens because the rewards arising from efficiency get more and more unequal as that efficiency improves, creating a high degree of specialization and conferring an ever-growing market power on the most-efficient competitors."

"The resulting business environment is extremely risky, with high returns going to an increasingly limited number of companies and people—an outcome that is clearly unsustainable."

"The remedy, I believe, is for business, government, and education to focus more strongly on a less immediate source of competitive advantage: resilience."

"If economic outcomes are random, statistics tells us that they will follow a Gaussian distribution: When plotted on a graph, the vast majority of payoffs will be close to the average, with fewer and fewer occurring the further we move in either direction."

"Superefficient businesses create the potential for social disorder."

"The classic way to think about an industry, however defined, is that it will have a small number of winners, a small number of losers (who are probably going out of business), and lots of competitors clustered in the middle."

"In such an environment, most efficiency gains are swiftly erased as others adopt them, and as firms fail, new ones replace them."

"And if the outcomes do follow a random distribution, and competitive advantage does not endure for long, competing on efficiency is sustainable."

"Now think about what happens when someone is deciding whom to follow on Instagram. Typically, he or she looks at how many followers various users have. People with just a few don’t even get into the consideration set."

"Conversely, famous people with lots of followers—for example, Kim Kardashian, who had 115 million at last count—are immediately attractive candidates because they already have lots of followers. The effect—many followers—becomes the cause of more of the effect: additional followers. Instagram followership, therefore, tracks a Pareto distribution:"

"The amount of money in the world at any one moment is finite. Every dollar you have is a dollar that is not available to anyone else, and your earning a dollar is not independent of another person’s earning a dollar."

"Business outcomes also seem to be shifting toward a Pareto distribution."

"In more and more industries, profits are concentrated in a handful of companies."

"In 1978 the 100 most profitable firms earned 48% of the profits of all publicly traded companies combined, but by 2015 the figure was an incredible 84%."

"The success stories of the so-called new economy are in some measure responsible—the dynamics of platform businesses, where competitive advantages often derive from network effects, quickly convert Gaussian distributions to Pareto ones, as with Kim Kardashian and Instagram."

"Complexity scholars, including UCLA’s Bill McKelvey, have identified several factors that systematically push outcomes toward Pareto distributions."

"Among them are pressure on the system in question and ease of connection between its participants."

"In business outcomes, gravity’s equivalent is efficiency."

"Looking at the cost structure of the business, he saw that two big factors were truck acquisition (the vehicles were expensive, and because they were used intensively, they needed to be replaced regularly) and maintenance and repair (intensive use made this both critical and costly)."

"Huizenga realized that if he acquired a number of routes in a given region, two things would be possible."

"First, he would have much greater purchasing leverage with truck manufacturers and could acquire vehicles more cheaply."

"Second, he could close individual maintenance facilities and build a single, far more efficient one."

"As he proceeded, the effect—greater efficiency—became the cause of more of the effect."

"Like a collapsing sandpile, the industry quickly consolidated, with WM as the dominant player, earning the highest profits; fellow consolidator Republic Services as the second-largest player, earning decent profits; several considerably smaller would-be consolidators earning few returns; and lots of tiny companies mainly operating at subsistence levels."

"The answer is that a superefficient dominant model elevates the risk of catastrophic failure."

"Almonds were once grown in a number of places in America. But some locations proved better than others, and as in most production contexts, economies of scale could be had from consolidation. As it turns out, California’s Central Valley is perfect for almond growing, and today more than 80% of the world’s almonds are produced there."

"Such efficiency comes at a price. The almond industry designed away its redundancies, or slack, and in the process it lost the insurance that redundancy provides. One extreme local weather event or one pernicious virus could wipe out most of the world’s production."

"And consolidation has knock-on effects. California’s almond blossoms all need to be pollinated in the same narrow window of time, because the trees grow in the same soil and experience the same weather. This necessitates shipping in beehives from all over America."

"As we saw with WM, another result of efficient systems is that the most efficient player inevitably becomes the most powerful one."

"Given that people operate substantially out of self-interest, the more efficient a system becomes, the greater the likelihood that efficient players will game it—and when that happens, the goal of efficiency ceases to be the long-term maximization of overall societal value"

"Instead, efficiency starts to be construed as that which delivers the greatest immediate value to the dominant player."

"You can see this dynamic in the capital markets, where key corporate decision makers make common cause with the largest shareholders."

"The most obvious losers are employees who are laid off because of the company’s flagging fortunes."

"But long-term shareholders also lose, because the company’s future is imperiled. And customers suffer in terms of product quality, which is threatened as the company reduces its investment in making improvements."

"A superefficient dominant model elevates the risk of catastrophic failure."

"Advocates of shareholder value argue that competition from entrants with superior products and services will compensate: The newcomers will employ the laid-off workers, customers will flock to their products, and shareholders will switch to the investments that promise better returns."

"But this assumes that the market is highly dynamic and that power is not concentrated among a handful of players."

"But it is not easy to start a bank, build a chip factory, or launch a telecom company."

"Ironically, entry is perhaps most difficult in some of the hottest areas of the new economy, where competitive advantage is often tied up with network effects that give incumbents a powerful boost."

"The pension fund business provides a particularly egregious case of abuse by dominant insiders."

"In theory, fund managers should compete on the quality of their long-term investment decisions, because that is what delivers value to pensioners."

"The most straightforward way to do so is to accept inducements (typically offered by hedge funds) to invest in a particular way (one that benefits the hedge funds)."

"A particularly insidious pension-fund practice is lending stock to short-selling hedge funds (pension funds are the largest such lenders), in return for which the funds’ managers earn relatively modest fees that help them meet their returns goals."

"Pensioners suffer while hedge funds and pension fund managers benefit."

"If a system is highly efficient, odds are that efficient players will game it."

"The invisible hand of competition steers self-interested people to maximize value for all over the long term only in very dynamic markets in which outcomes really are random."

"And the process of competition itself works against this as long as it is focused exclusively on short-term efficiency, which, as we have seen, gives some players an advantage that often proves quite durable."

"As those players gain market share, they also gain market power, which makes it easier for them to gain value for their own interests by extracting rather than creating it."

"We must pay more attention to the less appreciated source of competitive advantage mentioned earlier: resilience."

"Resilient systems are typically characterized by the very features—diversity and redundancy, or slack—that efficiency seeks to destroy."

"Limit scale."

"In fact, in the United States and the European Union, “increase in efficiency” is considered a legitimate defense of a merger challenged on the grounds that it would lead to excess concentration"

"We need to reverse that trend."

"Market domination is not an acceptable outcome, even if achieved through legitimate means such as organic growth."

"Our antitrust policy needs to be much more rigorous to ensure dynamic competition, even if that means lower net efficiency."

"Introduce friction."

"Rather than design to keep all friction out of the system, we should inject productive friction at the right times and in the right places to build up the system’s resilience."

"For example, lower barriers to international trade should not be seen as an unalloyed good. Although David Ricardo clearly identified the efficiency gains from trade, he did not anticipate the impact on Pareto outcomes."

"Small French baguette bakers are protected from serious competition by a staggering array of regulations."

"The result: Although not cheap, French baguettes are arguably the best in the world."

"Japan’s nontariff barriers make it nearly impossible for foreign car manufacturers to penetrate the market, but that hasn’t stopped Japan from giving rise to some of the most successful global car companies."

"This has meant that they first allowed the New York Stock Exchange to acquire numerous other exchanges and then allowed the NYSE itself to be acquired by the Intercontinental Exchange."

"U.S. regulators should act more like the EU, which blocked the merger of Europe’s two biggest players, the London Stock Exchange and the Deutsche Börse."

"Promote patient capital."

"Common equity is supposed to be a long-term stake: Once it is given, the company notionally has the capital forever."

"The difference in value to the company notwithstanding, the two types of equity investments are given exactly the same rights. That’s a mistake; we should base voting rights on the period for which capital is held."

"Create good jobs."

"In our pursuit of efficiency, we have come to believe that routine labor is an expense to be minimized. Companies underinvest in training and skill development, use temporary and part-time workers, tightly schedule to avoid “excess hours,” and design jobs to require few skills so that they can be exceedingly low paid."

"This ignores the fact that labor is not just a cost; it is a resource that can be productive—and the current way of managing it drives down that productivity as it reduces the dollar cost."

"In The Good Jobs Strategy, MIT’s Zeynep Ton describes how some discount retailers have doubled down on their employees, seeking more-engaged and more-knowledgeable workers, better customer service, lower turnover, and increased sales and profits, all leading to further investment."

"A key but counterintuitive element of the strategy is to build in slack so that employees have time to serve customers in unanticipated yet valuable ways."

"It’s not just businesses that can benefit from a good jobs strategy. The cheap labor model is extremely costly to the wider economy. When they cut labor costs, companies such as Walmart simply transfer expenses traditionally borne by employers to taxpayers."

"Teach for resilience."

"Of course, none of these in itself is a bad thing. A corporation should maximize shareholder value—in the very long term."

"The problem is that today’s market capitalization is what defines shareholder value."

"Similarly, this quarter’s reductions in labor costs are what define efficiency."

"In his 1992 work The End of History and the Last Man, Francis Fukuyama argued that the central theme of modern history is the struggle between despotism and what we now know as democratic capitalism."

"Every day we find evidence that economic efficiency, which has traditionally underpinned democratic capitalism, is failing to distribute the concomitant gains."

"The stark realities of the Pareto distribution threaten the electorate’s core belief that the combination of democracy and capitalism can make the lives of a majority of us better over time."