Soviets, Second Economies and the Significance of Empowering Software Teams.
What is a Second Economy?
I’ve found myself increasingly interested in Soviet-era economics and what they say about human behaviour, power distribution, and problem-solving.
The USSR (in its early days at least) had a very control-driven approach to economics. James von Geldern, a professor of Soviet culture, states the following:
Economic activities regarded as normal in market economies not only were prohibited under Soviet law, but also carried heavy penalties. The acquisition of consumer services (repairs of appliances and autos, medical services) and residential housing, the resale of scarce consumer goods, trade in western consumer goods such as blue jeans or cigarettes were on a par with criminal activities such as the narcotics trade and moonshine liqueur.
5-year plans were created which declared production targets for a variety of consumer goods. The state planning committee, known as Gosplan, would set these by estimating capacity and demand with regional administrators. However, the quotas were always driven by a top-down strategic desire.
The issue with this is that data gathering was rife with pressured expectations. Fear of consequences for not hitting production quotas propagated throughout the USSR. This led to the bolstering of figures to keep central planners at the top appeased. In addition, a variety of other factors influenced data distortion including poorer / slower instrumentation and prevalent corruption as well.
Therefore, as an individual within the Soviet Union, you were faced with the challenge of a distorted reality between the demand you had for a particular good and the supply that central planning deemed necessary for that good within your region. It was under these conditions that, as UC Berkeley professor Gregory Grossman defines, a “Second economy” was created.
This is essentially a shadow economy that represents the covert choices made by citizens to plug a gap between individual demand and state/legal supply. It was a natural consequence of those closest to problems finding ways to solve them. A network of illegal supply lines and black markets were set up by Soviet citizens to ensure supplies could find their way to areas of the greatest demand.
From a macro-economic viewpoint, we can see the impact of this “Second economy”. The gap between per capita legal income and expenditure wildly widened to the point that there seemed to be little correlation between the two. This was because of the large inflow of undocumented wealth being generated in this Second Economy.
The funny thing is that the growth of this second economy only exacerbated the issues with the primary one described above. It made goods less available for state distribution and fostered a system of favour trading called “blat” which only increased existing corruption.
We can therefore define Second Economies as all those covert/illegal choices that individuals make when they feel the resources and guidelines their primary economy gives them do not fulfil their needs.
Second Economies in organisations
As discussed, the main reason this second economy existed was that there were genuine demands that weren’t being resolved.
For example, a festival is coming up in a town. It’s common knowledge to bakers there that demand for bread will spike during this period. They know that many will go hungry and reserves may become depleted unless there is a bolstered supply of grain and water for them to use.
Amongst the myriad towns that exist across the Soviet Union, this event represents a data point so insignificant that a central planner could be forgiven for missing it. However, in supplying it, an optimisation is made that would not have existed prior. Extrapolate this event thousands of times and we see the overall impact it has on large systems.
To go one step further, the recognition of demand can spur stronger innovation for those closer to the problem. If we look back at our baker example: perhaps, even on the black market, there isn’t enough wheat for our bakers to supply this festival. Instead, they substitute wheat with rye which, according to local knowledge, is in abundance in a neighbouring town. This trade generates wealth for both of these areas. My limited baking knowledge aside, the point here is that the information required to both resolve issues and innovate is much more readily available to those who are closest to them.
In organisations, there can often be a need to “create alignment” through things like standardisation and policy creation. These come from a high-level understanding of a core problem that leaders believe the company needs to gather momentum in resolving.
The definition of this is typically driven by business intelligence, stakeholder interactions and strong / powerful individuals who can argue for what they believe in. The main issue though is that in any hierarchy, problem proximity becomes more and more distanced as organisations scale. This means that those who set decisions at the top end up forcing solutions to problems they have little (if any) awareness of.
In addition, the path data has to take to make its way to those who want to make these decisions at the top becomes longer and longer as hierarchical organisations scale. This makes it far more susceptible to manipulation as it passes from one person to the next. Typically, data has to be framed so that it can be more easily consumed. It is almost inevitable that this cycle of framing, summarising and presenting data as it moves up a hierarchy will lead to many omissions. More omissions mean worse data, and worse data means worse decisions.
Finally, as we learnt with the Soviets, if these forced solutions don’t resolve problems then a Second Economy will be created to address them. This will consist of individuals trying to resolve problems they have proximity to covertly, often in direct conflict with instruction from above. In the end, this ironically leads to less alignment than those at the top had hoped to instil in the first place.
The Place of Leadership
So how can leaders avoid the creation of Second Economies? If they are no longer to make detailed decisions on behalf of others then what can we expect of leadership?
Well, the key is in our understanding of alignment. Alignment is not cascading decisions down from one person to the next until everyone is in step. Alignment is the recognition of blind spots between two different parts of a system so that a decision can be made between them that best serves the global optimum. Just as much as proximity to a problem puts us in the best place to understand it, it can also blind us from how other systemic issues will influence it in the future. Likewise, just as much as a high-level view of a system can give us the breadth of problems, it also blinds us from the depth of detail required to deal with each.
Therefore, both sides of this coin have the capacity to assist one another. To point out what may be “outside of the box”. To highlight how people’s mental models of a situation might be obfuscating things. I see this as a key role of leadership, to act as advisors who use their experience, scope and skillset to support teams in decision-making without making decisions for them. Economies are just systems of choices, as organisations scale, their economies become more complicated as the number of choices to be made multiplies rapidly. The leverage comes in understanding the high-level principles these economies should be serving without explicitly outlining the ways through which they should act to do so.
Empowering teams at Birdie
In my experience, software development is an incredibly mutable thing. Our understanding of problems is always changing and the conditions under which these problems exist are always changing.
Agility relies on our awareness and responsiveness to both of these. This is why at Birdie, the autonomy of our teams and their empowerment to deal with problems is a key priority for our organisation. We don’t standardise ways of working, we don’t tell teams that they have to use a certain tool, language or delivery framework like Scrum. That’s not to say that we don’t have golden paths on each of these, but we encourage teams to try whatever they feel best suits their needs.
We understand that they are in a much better place to decide these things. In addition, we have learnt just how much the nuances of alignment need to influence our setting of goals such as OKRs. Rather than having a top-level OKR that cascades down, we need to allow both leaders and teams to independently identify what success looks like in the face of the problems they can see. Once this is done they can come together and see where the inconsistencies are.
It’s only through this process that we believe we can foster success throughout our company. We are building towards an economy of trust at Birdie where those who are closest to problems are empowered to act on them and we couldn’t be more excited!
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