We Need to Know When to Opt Out of Optimizing

We love to optimize our home lives, to tweak our processes at work, to attain peak efficiency in all things and to squeeze all the juice from all of our lemons. I personally admit to choosing T-shirts “first in first out” — that is, pulling them from the bottom of the stacks in the dresser drawer instead of the top so each is worn with precisely the same frequency.

But optimization can go too far. It can be … not optimal. I have just finished reading two books that explore what to do when your optimization needs some dialing back. One is “Optimal Illusions: The False Promise of Optimization” (2023), by Coco Krumme. The other is “When More Is Not Better: Overcoming America’s Obsession with Economic Efficiency” (2020), by Roger Martin.

I also recommend an enjoyable read by my Opinion colleague Parker Richards that came out last week: “Down With Efficiency! (When We Get Around to It.)”

Optimization is a perfect subject for this newsletter because it’s the soul of economics. The marginalist revolution of the late 19th century enshrined efficiency. The intellectual advance was all about making trade-offs in a way that equalized the marginal utility derived from each choice — say, a tad more guns, a tad less butter.

But as both Krumme and Martin write, optimization has blind spots. Optimizing what’s within one’s frame of reference can inadvertently harm whatever is outside of the frame, whether that happens to be nature or social relations or simply peace of mind. For example, the Green Revolution vastly increased crop yields, saving millions or billions of people from starvation. But it squeezed small farmers and reduced biodiversity. Worth it? Of course, but the costs can’t be entirely ignored.

An over-optimized, tightly coupled system is brittle and eventually breaks. Slack is inefficient, so it’s eliminated. But there are times that you need slack in a system — such as excess power-generating capacity to deal with a heat wave. “Place” is lost too, Krumme writes. Optimization means homogenization: “The richness of a small-town community — its generations attending the same schools, diners, churches, local theater performances — thins and dulls.” The third loss is what she calls scale, but it might better be termed smallness. Using agriculture again as her example, she writes, “A small vegetable farm, with greenhouse crops, is more adaptive” than a giant agribusiness.

Krumme and Martin come at optimization from very different vantage points. She is an applied mathematician who forsook Silicon Valley to live on an island in the Pacific Northwest. Her subjects include sugar beet farmers, bison ranchers, the online retailer Zappos and Marie Kondo, the queen of decluttering. Martin is a former dean of the University of Toronto’s Rotman School of Management who is steeped in the language of the C-suite.

Yet there are sentences that could appear in either book.

Here’s Krumme: “The disillusionment with efficiency’s overreach is, I’ll argue, shared by many today, even those who don’t dabble in optimization as I do. It surfaces often as a feeling of malaise. … Am I doing the right thing? How do I even know what the right thing is?”

And here’s Martin: “Whether we realize it or not, our dominant model of the economy is that of a machine. … The problem, as is the case in all facets of life, is that too much of a good thing is no longer a good thing.”

Krumme’s book is the more lyrical and introspective of the two. She acknowledges the benefits of optimization, such as two-day delivery by Amazon even to her remote island home. And she wrestles with how to de-optimize. Is there an optimal way to do so? Is even asking that question a way of trapping oneself inside the optimization mind-set? But if she isn’t rational about how to curb optimization, is she just blindly groping back to a premodern past that wasn’t so great after all?

In the end, Krumme comes around to a third path, which is to separate life into two spheres: one optimized and one beyond the reach of optimization. One is like the mainland, big and streamlined. The other is like her little island. An island needs the mainland, clearly. It isn’t self-sufficient. But an island can serve the mainland as well. Beyond the metaphor, “Islands allow pockets or niches of species ecosystems to evolve without giant predators, insulated from disease and parasites,” she writes. “An island left insular can thus help revive the mainland in times of trouble.”

While Krumme researched her book during the Covid pandemic, Martin landed his final draft in January 2020. Still, the anxiety that we associate with Covid and other events (Jan. 6, 2021) was already present. In the preceding years, his Martin Prosperity Institute had interviewed people in depth to figure out how to save what he terms “democratic capitalism.” He found that they were “perplexed and sheepish” about politics, “disheartened and confused” about their economic status.

Instead of viewing society and the economy as a “perfectible machine,” Martin writes, we should strive for resilience. Don’t, he writes, confuse proxies (like test scores) for the real thing (a good education). Recognize when friction can be a good thing — as with the Tobin tax, which is a small tax on financial transactions aimed at curbing rapid-fire trading. Avoid “reductionism,” such as regarding employees as interchangeable parts in a machine.

Martin concludes that American democratic capitalism is “heading for an ugly fall” if it continues on its current path. “Our obsession with economic efficiency has featured too much pressure, too much connectedness, and too much pursuit of perfection,” he writes. The answer, he believes, is to “stay reflective” and “tweak relentlessly.” Because the system is nonlinear and unpredictable, he writes, there is no way to know what might happen: “America’s next chapter could be the greatest in its history!”

Nice, but let’s not call that an “optimal” outcome.

Outlook: Jonas Goltermann

The dollar has risen strongly against other currencies on the back of rising U.S. interest rates, but that trend “is nearing exhaustion, at least in the near term,” Jonas Goltermann, the deputy chief markets economist at Capital Economics, wrote in a client note on Friday.

True, Goltermann wrote, the strong September gain in payroll employment (336,000) raised expectations that the Federal Reserve would increase the federal funds rate again. The jobs report was actually a “mixed picture,” he wrote. In an email to me, he wrote that the unemployment rate was slightly higher than expected and wage growth was slightly lower.

Capital Economics expects the Fed to keep interest rates on hold, he wrote in the client note.

Quote of the Day

“Maradona ran 60 yards from inside his own half, beating five players before placing the ball in the English goal. The truly remarkable thing, however, is that Maradona ran virtually in a straight line. How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on. Monetary policy works in a similar way. Market interest rates react to what the central bank is expected to do.”

— Mervyn King, then governor of the Bank of England, May 17, 2005, describing this goal.

Scheduling note: This newsletter will take a break starting Wednesday and will return on Oct. 25.