Balancing Interests: The Agency Theory of Management

A FIRST ORDER PROBLEM

There are some issues, which are also fundamental and deep-rooted, I refer them as "first order problems". In other words, the few root causes that are in turn responsible for so many of the issues that we face today as society.

If we ask ourselves, what is the fundamental underlying principle, upon which we run our companies; the idea that is so widespread and implicit that we never actually think about it, that idea would be the agency theory of management, otherwise known as shareholder primacy.

Over the course of the last 40 years this idea has become so deeply embedded in modern corporate governance, it never even gets questioned. The interest of bringing this idea out of the shadows and into the light, we're going to discuss:

• Where did this idea come from in the first place?

• How did it become so deeply embedded in how we do business?

• What are the unintended consequences that society has been asked to shoulder?

• What are the ethical frameworks that help us situate these ideas?

• What are the alternatives ways of running companies to balance social interests?

THE SEED OF AN IDEA

Back in the 1970's, two eminent academics both arrived (separately and independently) at the realisation that there is a fundamental disconnect between those who "own" companies and those who "operate" companies.

Whether companies are public or private, the "principal" is the party who legally owns the company, and must live with the positive or negative consequences of business outcomes; it could be the private owner(s) of a company, or the collective shareholders in a publicly listed company.

The 'principal' delegates authority for everyday decision-making to an 'agent', who in this case would be the organisation's management team - responsible for developing and executing strategy on behalf of the owners. At its most reductive, the role of the agent is to maximise the value created for the Principal.

The tricky part comes, when the incentives of these two groups are not well-aligned. Whilst agents may have a "fiduciary responsibility" to the owners, the sometimes problematic interplay between these two parties, has become known as the 'principal-agent problem'.

The theory was codified in a groundbreaking 1976 paper by Michael C. Jensen and William H. Meckling, who described the ways in which agency problems arise and how they might be mitigated through monitoring, incentives, and bonding mechanisms. The idea gained traction quickly, transforming corporate governance with a clear message: managers must be watched and incentivised to ensure they act in the owners’ interests.

THE SEED DISEMINATES

By the late 1970s, business schools around the world (and especially in the United States) had adopted agency theory as part of their core curricula. It became a fundamental lesson in MBA programs, embedded in courses on corporate finance, management, and organisational behaviour. The theory’s appeal was in no small part due to its simplicity—it offered a tidy framework for understanding the separation between ownership and control, without having to deal with the complexities of weighing-up potentially conflicting interests between multiple stakeholders.

Shareholders reigned supreme, all other interests came a distant second....

As graduates from these programs moved into senior positions in industry, and the theory caught the imagination of consultants at McKinsey, BCG, Bain et al; these principles took hold in the boardrooms of companies across all industries. Corporate governance structures were reshaped, often with an intense focus on aligning the interests of managers with those of shareholders; performance-based pay, stock options, and executive bonuses became the new norms, designed to tether managerial ambitions to company performance.

A purely economic problem, with a simple and elegant economic solution. Align all incentives to the principal.

UNINTENDED CONSEQUENCES

By the 1990's, Agency Theory had become ubiquitous and went unchallenged; but like any idea taken to an extreme, its flaws started to surface through the unintended consequences it created:

1. Short-Termism and Tunnel Vision

Whether intentional or not, the emphasis on maximising value for shareholders has driven short-term thinking and a myopic focus on share price.

Executives under pressure to meet quarterly earnings targets often prioritise actions that boost immediate results (i.e., cost-cutting, share buybacks, or even strategic mergers that look good on paper but might not add long-term value) rather than decisions that may not pay dividends (literally) for year to come, but are nonetheless in the long-term interest of the business.

This approach has all kinds of negative consequences, not least of which is the dramatically increased risk of disruption from new market entrants. Companies that fail to invest and place bets on long-term innovation are doomed to fail.

2. Excessive Executive Compensation

According to the Economic Policy Institute, CEO compensation rose 1,400% above inflation between 1978 and 2021, while the average worker’s pay increased by just 18% over the same period. This stark contrast highlights a growing imbalance that has deepened economic inequality more than anyone anticipated. While it’s true that top executives have significant leverage to create value, the widening gap between their compensation and that of their employees raises important questions about fairness and sustainability.

In many publicly-listed companies, executive pay is directly linked to share price performance. On the surface, this seems reasonable; after all, it aligns the interests of CEOs with those of shareholders. However, this approach oversimplifies what should be a nuanced set of incentives. It often drives executives to prioritise short-term stock price gains, even when those decisions come at the expense of long-term stability, growth, or the well-being of employees.

This pay structure has contributed to a significant shift in corporate culture, reinforcing a system where executive enrichment and shareholder returns come first, while the contributions and well-being of other stakeholders often take a back seat. The result is not only a wider economic divide but a diminishing sense of shared purpose within organisations. Addressing this imbalance is essential for building a more inclusive and sustainable corporate landscape, one that values all contributors and measures success by more than just the numbers on a stock ticker.

3. Increased Risk-Taking

When incentive structures become extreme, they can drive excessive risk-taking as executives strive to meet ambitious performance targets. These structures, often tied heavily to short-term stock performance, can create a mindset where immediate gains outweigh sustainable growth or long-term health. This focus can lead executives to prioritise high-stakes strategies that may boost short-term metrics but introduce significant vulnerabilities into the business model.

We saw the consequences of this behaviour play out dramatically during the 2008 financial crisis. Financial institutions pursued risky products and leveraged complex financial instruments to inflate profits and meet targets, driven by a culture where executive compensation was closely tied to immediate performance. In this environment, long-term risks were overlooked, and the ripple effects of these choices were underestimated or ignored. The relentless chase for short-term rewards ultimately contributed to widespread economic destabilisation.

4. Neglect of Broader Stakeholders

One of the most significant issues with agency theory is its focus on shareholder primacy, often sidelining other vital stakeholders. When companies concentrate solely on boosting short-term profits, employees are frequently affected through cost-cutting measures like layoffs and reduced benefits. While these strategies may temporarily inflate earnings, they erode trust, loyalty, and innovation—essential elements for long-term growth. A disengaged workforce isn’t just a number on a balance sheet; it’s a missed opportunity for creativity and resilience.

The environmental impact is another overlooked consequence. Companies driven by profit-first thinking might meet the bare minimum of environmental regulations but skip genuine, impactful sustainability efforts. This approach leads to practices that can harm ecosystems and contribute to climate change—problems society at large must then address. Similarly, community interests can suffer when businesses make decisions that, while profitable in the short term, lead to job losses or reduced economic stability in their local areas.

This narrow approach risks alienating employees, communities, and even loyal customers, chipping away at the trust that sustains a business. The antidote lies in embracing frameworks like stakeholder theory and Confucian ethics, which encourage leaders to value people and the planet alongside profit. Companies that weave these principles into their practices don’t just create shareholder value—they build robust, lasting legacies that thrive on integrity and care for all.

ADDING NUANCE TO THE CONVERSATION

If agency theory has taught us anything, it’s that simplicity can be seductive—but dangerous when taken too far. The laser focus on shareholder primacy has given us short-term wins and, let’s be honest, plenty of headaches. So, where do we go from here? Thankfully, we're spoilt for choice with a host of thinkers who offer richer, more balanced ways to lead. Enter Confucian ethics, Rawls’ theory of justice, social contract theory, and stakeholder theory—ideas that nudge us to zoom out and see the bigger picture.

Confucian Ethics calls on leaders to think beyond their own bottom line and lead with virtues like benevolence and integrity. Imagine a corporate world where decisions aren't just measured in quarterly gains but in trust built and relationships nurtured. That’s not just feel-good fluff; it's long-term strategy. Companies rooted in these values make choices that sustain growth without sacrificing the well-being of employees, customers, or the broader community. A leader with a Confucian mindset understands that sustainable success is about creating a harmonious whole, not just scoring wins at the expense of others.

Then we have Rawls’ Theory of Justice, which shines a spotlight on fairness. Rawls argued that inequalities are only justifiable if they lift up those who are worst off. Now, look at today’s executive pay scales—it's hard not to see a disconnect. In a Rawlsian world, we'd be talking about capping excessive executive compensation and crafting pay structures that don’t just benefit a handful at the top but spread success more evenly. The ripple effect? A more balanced workplace that feels less like a gladiatorial arena and more like a community working toward shared goals.

Social Contract Theory, that age-old reminder that businesses don’t exist in a vacuum, feels more relevant than ever. Rousseau would tell us that there’s an unspoken agreement between businesses and the society that sustains them. Companies that prioritize short-term profit at the expense of their communities are breaking that contract. Picture a world where businesses invest in fair labor practices, meaningful sustainability efforts, and community support—not just to check a box, but because they see themselves as partners in society’s long game.

And let’s not forget Stakeholder Theory, brought into the spotlight by R. Edward Freeman. This isn’t just a theory; it’s a call to action. It suggests companies should aim to create value for all stakeholders—employees, customers, suppliers, even the environment—not just shareholders. What would this look like in practice? It’s more transparent reporting, boardrooms that look like the world they serve, and decisions that weigh social and environmental impacts as heavily as financial ones. It’s about asking not just “How will this affect our stock price?” but “How will this affect everyone who has a stake in our future?”

We’ve clung to agency theory as if it were the only story worth telling. But the world is shifting, and our playbook should too. Drawing on these rich perspectives doesn’t just add color to the grey areas; it changes the entire landscape. Because when we lead with empathy, fairness, and a genuine respect for all stakeholders, we don’t just create profitable companies—we build legacies worth celebrating.

So what can we do differently?

The good news is, there are plenty of companies who are actively working to balance out their incentive structure so management are taking a broader and more holistic view of success.

1. Redesign Incentive Structures for the Long Haul

Rethink compensation packages to go beyond quick wins. For instance, instead of only tying bonuses to quarterly earnings, introduce metrics that reward sustained progress, such as customer retention, employee engagement scores, and reduction in carbon emissions. Companies like Unilever have done this by linking executive pay to their Sustainable Living Plan targets, which include environmental and social benchmarks. This encourages leaders to prioritise actions that create long-term value, not just immediate profit.

2. Redefine Success to Look Beyond the Balance Sheet

Expand what it means to be successful by incorporating measurable non-financial outcomes. For example, Patagonia consistently reports on its impact on local communities and environmental projects, showcasing its commitment to the planet. Companies can start small by including employee satisfaction surveys, community impact metrics, or sustainability reports in their annual disclosures. These tangible measures build trust and prove that success is about more than numbers on a balance sheet.

3. Cultivate Ethical Leadership That Walks the Talk

To instill ethical leadership, build programs that go beyond theory and focus on real-world application. For instance, launch a mentorship initiative where senior leaders coach managers on how to make decisions that balance profit with integrity. Danone has introduced a leadership framework that includes training on social responsibility, ensuring that leaders are equipped to make empathetic, fair, and community-minded choices. This tangible approach reinforces that leadership is about more than just results—it’s about leading with purpose.

4. Champion Transparency Like It’s a Competitive Advantage

Adopt transparency as a core value, not an afterthought. For example, Salesforce provides clear disclosures on its diversity statistics and progress toward equality goals, which has strengthened stakeholder trust. Companies could also follow the lead of Bank of America, which includes detailed executive compensation reports and rationales in their annual proxy statements. These actions demystify decision-making processes and help bridge the trust gap between executives and other stakeholders.

Ultimately though, board culture is the greatest determinant of whether these issues get onto the agenda. Having a collaborative and diverse board leads to higher-quality conversations that bring in critical perspectives that are often lacking. The companies that will win in the long-term, are those that are infusing this thinking into the DNA of the organisation so whether consciously or not, executives are building for the long-term benefit of all stakeholders.

to sum up (the TLDR)

• Agency theory's focus on shareholder primacy has driven short-term gains but has contributed to deep-rooted problems like economic inequality, short-termism, and the neglect of broader stakeholder groups.

• The theory gained widespread influence through business schools and corporate consultants in the 1970s and 1980s, embedding it deeply in modern corporate governance.

• This narrow focus has fuelled excessive executive compensation, increased risk-taking, and eroded trust within organisations, with significant societal and environmental impacts.

• We can draw on Confucian ethics, Rawls' theory of justice and social contract theory, develop more nuanced and balanced approach for sustainable results

• Boards should consider incentive structures, greater employee participation in wealth creation, redefining success to include social outcomes, fostering ethical leadership, championing transparency, and ensuring board diversity for long-term stakeholder value.

Further Reading

Economic Policy Institute (2022) CEO pay has skyrocketed 1,460% since 1978: CEOs were paid 399 times as much as a typical worker in 2021. Available at: https://www.epi.org/publication/ceo-pay-in-2021/ [Accessed 8 November 2024].

Fleming, P. and Jones, M. T. (2013) The End of Corporate Social Responsibility: Crisis and Critique. London: SAGE Publications.

Freeman, R. E. (2010) Strategic Management: A Stakeholder Approach. Cambridge: Cambridge University Press.

Henderson, R. (2020) Reimagining Capitalism in a World on Fire. New York: PublicAffairs.

Jackall, R. (2010) Moral Mazes: The World of Corporate Managers. New York: Oxford University Press.

Low, K. C. P. (2013) Confucianism and Modern Management. Singapore: Springer.

Ross, S. A. (1973) Origin of the Theory of Agency: An Account By One of the Theory's Originators. Available at: https://www.researchgate.net/publication/228124397_Origin_of_the_Theory_of_Agency_An_Account_By_One_of_the_Theory's_Originators [Accessed 8 November 2024].

Rawls, J. (2001) Justice as Fairness: A Restatement. Cambridge, MA: Harvard University Press.

Stout, L. A. (2012) The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. San Francisco: Berrett-Koehler Publishers.

Wheatley, M. J. (2006) Leadership and the New Science: Discovering Order in a Chaotic World. 3rd edn. San Francisco: Berrett-Koehler Publishers.

The Philosopher's Seat (at the table)

Alright! You’ve got me. Plato never actually stepped foot inside a boardroom. He never read a board-pack, chaired an audit committee nor dialled into a conference call. But his influence on what happens in the modern boardroom is deepening over time and becoming ever more clear. 

Plato is rightly considered the father of philosophy. Whilst several came before him, Plato laid the foundations for western philosophical thought and basically founded political philosophy when he wrote The Republic. In fact some even gone so far as to say:

“The safest general characterisation of the European philosophical tradition is that it consists of a series of footnotes to Plato”

— Alfred North-Whitehead

Call me dramatic, but I truly believe that we’re making decisions now that will affect how we live for the next 1000 years. If we take a step back and think about where we stand as a species, I’d argue that humanity is at a transformative moment; defined by the dual forces of extraordinary progress and profound challenges.

We’ve reached an era where AI can revolutionise industries and connect billions, yet it brings the looming spectre of mass unemployment. Climate change threatens our very existence, while the liberal democratic progress we believed to be inevitable, has been proven otherwise under the strain of deep polarisation and division. Capitalism, once the undisputed engine of economic progress, now stands at a crossroads, criticised for prioritising short-term profit over long-term sustainability.

Set against this backdrop, business leaders now more than ever, need more than commercial acumen; they need a strong moral compass and philosophical underpinnings to navigate the complexities ahead.

an Ethical blindspot in Business Strategy

Philosophical objectivism may be closer it appears…

While businesses may have mastered the art of making money, this often comes with unseen costs, as the relentless pursuit of growth often sidelines ethical considerations and social responsibility.

As ever, new technologies have brought significant advancements and allowed companies to drive efficiencies - but as AI and Robotics become more sophisticated, it’s also raised important questions:

1. What do we do when unchecked growth exacerbates inequality?

2. What happens when these efficiencies lead to job losses on a massive scale?

3. Who is responsible for answering these questions on behalf of society?

In the corporate world, focusing solely on quarterly earnings and shareholder value risks amplifying these challenges. Corporate Social Responsibility (CSR) appeared for a while as a bolt-on; repackaged and rebranded as “ESG”, it’s most often part of the marketing department and has no real teeth to affect change.

Leaders who ignore the long-term impacts of their actions may find themselves contributing to societal instability that even the most robust profits cannot buffer against.

This is where a new mindset is needed - one that integrates sustainability and ethical principles as core business practices rather than afterthoughts.

Guiding Modern Leaders

Boards play a critical role in guiding leadership

It hasn’t always been this way, but the prevailing wisdom since the 1970’s has been “The Agency Theory of Management”, which is a fancy way of saying: “maximise profit for shareholders at the detriment of all others”, but business leaders cannot just be profit-maximisers.

The role of a modern leader should be to look beyond the immediate gains and embrace a broader view that considers the well-being of all stakeholders—employees, communities, and the environment. Success needs to be redefined to include the positive impacts a company makes on society and its resilience in facing external challenges.

Businesses that embed accountability and social responsibility within their operations create not just stronger companies but stronger societies. They position themselves to weather economic fluctuations and societal shifts with greater adaptability. The evolution from “business as usual” to ethical stewardship is not just an ideal; it’s fast becoming a competitive advantage.

Consciously moving Beyond the Profit Motive

The traditional model that prioritises profit at any cost has reached its limits. Both Executive Directors and their Boards, must step into the role of ethical stewards, setting the tone for responsible corporate behaviour that prioritises long-term value over short-term gain. This approach doesn’t mean abandoning profitability; it means expanding the definition of success to align with values that benefit more than just shareholders.

We can already see this shift in forward-thinking companies. B-Corps, for instance, strive to balance purpose and profit, making decisions that consider their broader impact. Some tech companies are investing heavily in training and upskilling their workforce to prepare for the shifts that AI and automation will bring. These examples show that responsible growth is not only possible but essential.

Ethical considerations can no longer be optional in the boardroom; they must be integral to decision-making. Leaders who adopt a holistic approach, incorporating social, environmental, and economic factors, are better equipped to navigate complex global challenges. The essence of leadership today lies in asking deeper questions and guiding companies to answers that benefit everyone.

The Mission statement

“I had lost the ability to bullshit…” - Jerry Maguire

When I studied Philosophy at university, I really had no idea how useful it would be in life.

Yet, every year that passes I realise more and more how relevant and interconnected it is with the world around us, and particularly in business. It looks to address all the most important issues that humanity faces today; Bioethics, Artificial Intelligence, Climate Change, not to mention the nature of capitalist economics. 

It’s been really heartening to see that over the last 5 years in particular, there has been a renewed interest in Philosophy, with writers like Alain De Botton, Mark Manson and Ryan Holiday bringing ancient wisdom to the question “how can we lead better lives”.

What I think is missing though, is the application of these ideas to modern business, and the wide-ranging societal implications that are going to shape how we live for millennia to come.

Plato in the Boardroom, is my attempt to explore the intersection of philosophy and business (for my own edification if nothing else) by looking at the moral dilemmas posed by a rapidly changing world.

So how do we collectively step-up and lead ourselves through these tectonic shifts?

Some of the best answers, I strongly suspect, are to be found in both ancient, enlightenment, and modern thinking can provide clarity and direction. As we embark on this path, I invite you to reflect: What kind of future are we building, and is it one we’d all want to live in?

Thanks for coming on the journey with me!

Thought Experiments: Plato's Cave

Written by Joss Duggan (Reading Time: 7 mins)

For obvious reasons, I had to start our series on Thought Experiments with the great man himself and explore Plato's allegory of the cave. It appears in book seven of The Republic wherein Plato discusses the nature of reality with his older brother, Glaucon, and his mentor, Socrates.

This particular part of Plato's writings has been discussed and debated for centuries and is still the starting point for many an undergraduate course in Philosophy because it's such a great jumping-off point into the wider canon of philosophical literature. It also now raises new questions when we link it with modern ideas about honesty and transparency in the workplace, and our own skepticism and rejection of the unknown. But before we get into all of that, here's the story...

The Cave

Imagine yourself in a deep, dark cave, far beneath the cold ground. Water drips down off the ceiling where prisoners sit, chained down, unable to stand, facing a tall grey wall. They have lived this way their entire lives, never having seen the outside world, much less the sun. A fire burns on the other side of the cave and between the fire and the prisoners, a stone path winds it's way from the depths of the cavern all the way up to the surface.

Every day, people come walking through, travelling to and fro, carrying items from the surface into the cave and back; but the prisoners, with their face to the wall and unable to move or turn around, perceive only the outlines of these figures, their shadows cast starkly against the grey wall with the light emanating from the fire on the other side of the cave. 

The shackled prisoners, having never properly seen their surroundings, believe these 'shadows' to be the 'real' world as the sounds and voices within the cave echo off the walls and appear to come from the shadows themselves.

One day, one of the prisoners has his shackles loosened so that he can turn around and see his surroundings. Blinded by the light emanating from the fire, he instinctively turns away, refusing to look around and see his situation for what it is. He turns back towards the wall, eyes still burning, but taking comfort in the knowledge that with his sight returning to him, he can go back to his safe, normal existence.

Suddenly and before he can gather himself, a guard pulls him away from the wall where he's sat and begins dragging him up the long winding path towards the surface. The prisoner screams and cries out to be left alone, but the guard pays no attention. He continues his long and arduous journey towards the bright light of the surface, kicking and screaming in fear as he goes. 

As he edges closer and closer to the surface, his eyes slowly adjust until they find themselves at the cave's mouth and he is thrust into the real world. He slowly stands, taking in the landscape; the green trees swaying in the wind, the blue cloudless sky and the hot yellow sun beating down upon him. The prisoner, now freed from the cave, starts to understand the nature of this 'true' reality and that he has been living all his life in an illusion, one still shared by his fellow inmates down in the cave.

The world outside is equally beautiful as it is grotesque, but having now seen the real world he realises how naive he had been and desperately wants to free his fellow inmates. So he rushes back down into a cave that seems darker than he first remembered because his eyes are now accustomed to the light from the world outside. Though he worries he may never see the light again, he courageously pushes on, further down into the darkness below. 

By the time he reaches his old home, he can barely see at all - the darkness is so acute, even the fire in the corner doesn't give enough light for him to see well and he can no longer see the shadows on the walls as he did before. He hurries over to his friends and begins to tell them about his journey to the surface. At first, his former compatriots dismiss his ideas as outlandish and wild, they say he's lost his mind and leaving the wall has turned him insane. Convinced he must 'show' them the light by force, the first now enlightened former prisoner tries to drag the other inmates out into the light, to show them the path. But they quickly turn on him, even becoming violent. They don't want to see the light, they aren't ready for it and perhaps they never will be. For now they're happy to sit in the cave, shackled to the ground, watching the shadows dance across their dark, grey wall.

Interpretation - So what's it all about?

The allegory of the cave describes what Plato believes it is to be a philosopher or 'enlightened' human being. He describes the initial refusal of the truth, the blinding pain at seeing it for the first time and the difficult path that we must go on to learn and grow as human beings. Eventually, once we have expanded our consciousness with new knowledge, it's impossible to go back and live inside the cave and we naturally want to bring others into that new understanding too. 

If this idea seems a little familiar to you....then it may be because it been the basis of many blockbuster science-fiction movies such as 'The Matrix', 'Dark City' and 'The Truman Show'. In fact, all science-fiction have deeply philosophical themes at their core; the nature of reality, what does it mean to be human, what is consciousness, etc - which will be the topic of a future post, but I digress...

But we have to exercise some humility here - we so often feel SO certain that we know better and that the way we see the world is the right one. It raises the question, are we the prisoner who made it to the surface already? OR are we the prisoner who's still trapped in the cave? Perhaps we only escape one cave to find ourselves in another, trapped by a new set of ideas and understanding that still doesn't represent the 'true' nature of reality (if there even is such a thing.)

We see something similar every day with the people we live and work with - we talk a lot about how important honesty is in both our personal and professional lives, but the truth isn't just uncomfortable, it can be excruciating and unbearable. Do we really want the truth? We do if we want to be better human. 

This is the insight behind the 'Radical Candor' movement. Assuming for the moment (and it's a massive assumption) that our colleagues' feedback about us is accurate (and therefore synonymous with an objective 'truth'), then receiving it as often as we can is like rocket-fuel for our growth. If we can withstand enough of the truth and live outside our comfort zones for long enough (where the truth often lives and growth always happens) then we'll grow stronger and faster than those who choose not to. This is one of the core ideas of 'Growth Mindset', first conceived of by Carol Dweck at Stanford University.

Some people aren't ready for that kind of truth, they need to move to the surface more slowly and that's absolutely fine; everyone is walking their own path, at their own pace. But like learning a new language, between you and fluency lies a thousand embarrassing and painful mistakes that if you don't find a way to cope with and normalise, will drive you back down into your cave.

(Parenthesis: For an incredible guide to getting your children to better embrace their mistakes, take a look at 'The Straight-A Conspiracy' by education experts Hunter Maats and Katie Locke O'Brien.)

It takes a huge amount of courage to turn and face an unpleasant truth. There's an important idea from psychology called 'cognitive dissonance' which we'll explore in another post but when we have conflicting ideas, we tend to find a way to rationalise them or ignore the more painful of the two. Plato knew how hard people will fight to maintain their world-view; when Socrates was put to death in ancient Athens, it was precisely because his lectures conflicted with accepted wisdoms and the ruling elite of the day decided it was easier to execute him than to deal with their own internal dissonant ideas. 

Plato's cave reminds us that we all live in the dark - there are always new things to discover and things that we are completely unaware of. The question is, as we live our lives, when the light beckons us forward, do we fearfully retreat? Or do we instead, step bravely away from our own shadow-walls and struggle up towards the surface where the promise of personal growth awaits.

To Sum Up

• Plato describes the journey of a prisoner who finally learns the true nature of the reality after having been trapped inside a cave all of his life, believing that shadows were the real world
• The prisoner tries to show his friends a way out of the cave but they don't want to leave
• The cave is an allegory to describe how people are often afraid to face the truth of reality
• Embracing the truth and developing self-awareness is the only way we can start to grow
• It 'can' be a painful process, but the more painful truth we are able to withstand, the better
• We all have our blindspots and live in the dark to some degree and so we must stay humble

pOPULAR Articles

• Philosophical Razors: The Cutting Edge In Ancient Wisdom
• Blockchain Democracies: Where Freedom Meets Technology

Further REading

Dweck, Carol S.: 'Mindset: Changing The Way You Think To Fulfil Your Potential' (Robinson, 2012)

Festinger, Leon: 'A Theory Of Cognitive Dissonance' (Stanford University Press, 1957)

Locke O'Brien, Katie & Maats, Hunter: 'The Straight A Conspiracy' (368 Press, 2013)

Plato: 'The Republic' (Penguin, 2008)

Scott, Kim: 'Radical Candor: How to Get What You Want by Saying What You Mean' (Pan, 2018)

Syed, Matthew: 'Black Box Thinking: Marginal Gains and the Secrets of High Performance' (John Murray, 2013)

Philosophical Razors: The Cutting Edge in Ancient Wisdom

Written by Joss Duggan (Reading Time: 11 mins)

Razors...cutting edge wisdom? See what I did there? Putting philosophical puns to one side for a second, there's an old adage that 'there's nothing new under the sun'; that somehow, all 'new' ideas are somehow just remixed versions of wisdom that has been around for millennia. Philosophical razors are a brilliant example of this; critical thinking tools that when used correctly, just at the right moment, can be a valuable asset when sat in the boardroom or the bar.

Similar to the idea of heuristics from the world of psychology, razors work by figuratively 'cutting away' the unnecessary parts of a question and stripping it down to the essentials, so we can better understand the problem at hand. 

With that in mind, here are some of the most useful razors, with some ideas for how you can apply them yourself to your life. So with that in mind, let's start with the big one...

1. Occam's Razor (Keep it simple stupid!)

By far the most famous example (and an obvious place to start), Occam's Razor is at first glance a simple truism that seems so obvious as to be unworthy of discussion. But don't be fooled! The logic and usefulness of Occam's Razor is hotly debated by the scientific community. But before getting into the nitty-gritty, here it is:

“Entities should not be multiplied beyond necessity”

— William of Occam

Well.....for accuracy, what he actually wrote was "Plurality should not be posited without necessity", but another medieval scholar (a guy by the name of John Punch), decided that it just wasn't snappy enough and rewrote the phrase, which is now widely attributed to William of Occam. Thanks to Arthur Conan-Doyle, yet another version of this should be much more familiar to you: "When you eliminate the impossible, whatever remains, however improbable, must be the truth". 

In a nutshell, what Sherlock was telling us here, is that the simplest explanation for anything, is the most likely. So if confronted with two or more possible explanations, the one that satisfies all available evidence and has the fewest assumptions is most probably the right one. 

“Things should be made as simple as possible, but no simpler!”

— Albert Einstein

But there is the key - it must satisfy all available evidence. Just because an explanation is the simplest one available, doesn't make it the best one. If it fails to explain (or flat-out ignores) key facts, then it remains problematic. The best explanation then, is the one that fits the evidence, using the fewest assumptions. 

2. Grice's Razor (yOU kNOW WHAT i MEANT)

Our second razor comes from philosophy of language and semantics: Paul Grice was a British philosopher who spent the majority of his career at Berkeley, developing theories on how meaning and language interact, and particularly what people mean when they 'imply' meaning.

Grice's Razor is a play on Occam's, highlighting the value of simplicity (AKA 'parsimony') in interpreting meaning. I'll spare you the long version (it's pretty dense) but the short version is:

“Senses are not to be multiplied beyond necessity”

— Paul Grice

Grice is saying that context is king and the 'literal' version of what is being said shouldn't be taken in isolation. Let's look at a quick example:

David: Kate - Are you coming to the sprint planning meeting?

Kate: Let me just grab a coffee...

After David asks the question, in the literal sense, Kate hasn't answered the question. Now I know what you're thinking: 'Don't be pedantic, we know what she meant'. But 'how' do we know?

As a reader/listener, you 'infer' meaning from the sentence; namely that Kate is going to join the meeting immediately after she has grabbed a cup of caffeine (because presumably it's going to be a long one). Even thought there isn't a definitive 'yes' or 'no' present in her response, it's safe to assume that's she'll be along soon and we when we make these assumptions every day, and when we do, we're using Grice's Razor.

Now this is why it's so frustrating when people violate this unspoken trust. When you're 'economical with the truth' and say something that whilst 'technically' true, you know it's going to mislead the listening/reader, that's a lie of omission. Honesty isn't just about using precise speech and avoiding explicit lies, it's also about being forthright with the truth when you know that someone is expecting it. To do otherwise just wouldn't be cool would it? Come on....don't be that guy.

3. Hume's Razor (Evidence must equal claims)J

The first two precepts describe the value of parsimony; how simplicity can lead us to better answers. The following concepts, then build on those ideas towards a kind of theory of knowledge. Next up is Scottish enlightenment philosopher, David Hume:

“No testimony is sufficient to establish a miracle unless that testimony be of such a kind that its falsehood would be more miraculous than the fact which it endeavours to establish”

— David Hume

Ummmm...thanks Dave. Clear as mud.

An interesting (and incredibly annoying) feature of philosophy is that ancient writings are often easier to understand than more modern ones because someone has done the hard work of translating both the language and the meaning into plain english. With the medieval and enlightenment philosophers, whilst they 'technically' wrote in English, often they can be as impenetrable as Shakespeare to the uninitiated. So let's turn to the legendary American cosmologist and philosopher, Carl Sagan, to give us a simpler explanation:

“Extraordinary claims require extraordinary proof”

— Carl Sagan

What has now become known as 'Sagan's Standard', is a reformulation of Hume; in order to prove something incredible, the evidence must be equally incredible. For example, proving a claim such as the existence of extra-terrestrial life, would require the extraordinary levels of proof. So the literal 'awesomeness' of claims and evidence must be equal and opposite.

4. Hitchen's Razor (No evidence, no argument)

Following on from Hume and Sagan, (your extraordinary claims need some extraordinary evidence please) is Hitchen's Razor. Irrepective of your philosophical leanings, you have to marvel at the dry, acerbic and sardonic style of Christopher Hitchens. Let it never be said that Hitch ever shied away from a good debate, taking down arguments with a barrage of rhetorical techniques, whether bona fide logical device or straight-up sophistry.

First appearing in an article for Slate in 2003, and then later in his 2007 book 'God Is Not Great: How Religion Poisons Everything', Hitchen's Razor is all about the burden of proof (or lack thereof) on the recipient of an unsubstantiated claim. Here's the man himself:

“Forgotten were the elementary rules of logic, that extraordinary claims require extraordinary evidence and that what can be asserted without evidence can also be dismissed without evidence”

— Christopher Hitchens

It's a variation of an old latin proverb: "Quod gratis asseritur, gratis negatur" that can be accurately translated as "that which is easily asserted is easily negated". Mr. Hitchens means to say, that if you turn-up to a debate without any empirical evidence, don't expect anyone to entertain your claims and don't be surprised when you get shut-down. It's the rhetorical equivalent of bringing a knife to a gun fight and you do yourself a disservice. Though Hitchens applied this line of thinking mainly in theistic debates, it's applicable everywhere. Watch the man in action to see for yourself.

So if you've ever sat in a meeting, listening to someone talk about their pet theories (especially the HiPPo's) or observe that decisions are being made based on opinion instead of fact, this is the moment to invoke Hitchen's Razor (perhaps more diplomatically than Hitchens himself did) and swiftly bring that discussion to a close with the following phrase:

"I think that's a really interesting point you make, what data has led you to believe that?" 

5. Alder's Razor (No experiment, no argument)

Mike Alder is an australian mathematician who in his now famous article for Philosophy Now magazine, claimed that his version is '...sharper and more dangerous than Occam's Razor'. Alder's Razor is much better known by it's altogether more colourful moniker: 'Newton's Flaming Laser Sword' (see above photo for incontrovertible existential proof of aforementioned item). 

Now, I know what you're thinking....and yes. A 'Flaming Laser Sword' is really just a fancy light-saber. But less important the name and more important the concept. So what is Alder's Razor?

“That which cannot be settled by experiment is not worth debating”

— Mike Alder

It's a philosophical debate dating back thousands of years on whether or not 'pure reason' alone can solve the mysteries of the universe with intellectual giants of the field on both sides of the argument. Whatever your opinion, Alder's Razor is a useful little tool for moving forward when you get bogged down in conference room debates. 

If you've read The Lean Start-Up by Eric Ries (and if you've haven't, you definitely should, it's a game-changer!) you'll understand how well the scientific method can be applied to organisations of all shapes and sizes, from start-ups to multi-national corporations and everything in between. The main idea, is to get all your assumptions out on the table and systematically work through them all to find out if your hypothesese are correct or not. This produces what Ries calls 'validated learning', which is what all young ventures should be focused on.

Now you may have spotted a problem with the application of Alder's Razor. There are many areas which it's either incredibly hard to run experiments (politics) or completely impossible (religion). Add to that, it basically kills off more than 50% of the entire philosophical canon of literature. So use with EXTREME CAUTION - let's not accidentally kill off the field completely, philosophers struggle to find jobs as it is.

6. Hanlon's Razor (People aren't evil...just stupid)

Whilst described as a computer programmer from New Jersey, something of a mystery surrounds the true identity of Robert J. Hanlon. When Alfred Bloch was compiling a book of funny philosophical musings in 1980, he received the following submission that has since become known as Hanlon's Razor. Whilst the essence of the aphorism has appeared in the writings of David Hume, William James and Richard Feynmann, Hanlon's version remains the one that's stuck:

“Never attribute to malice, that which can be adequately explained by stupidity”

— Robert J. Hanlon

When things go wrong, we seem to have a cognitive bias towards ascribing wrong-doing and 'evil' intent; when someone is late to a meeting we've called...they're disresepecting us on purpose. When the kids a few rows in front at the movies are talking, they're doing it annoy us! 

In fact, this is very closely related to a well-known and substantiated cognitive bias in psychology called the actor-observer bias, wherein, whenever 'we' make a mistake, we blame temporary, external influences (e.g., the traffic made me late). Whereas when someone else makes the exact same mistake, we attribute the infraction to an internal, permanent characteristic of that person (e.g., that guy is lazy and disrespectful).

Those most susceptible to this line of thinking are those suffering from narcissistic personality disorder, as they see everyone else's actions only in reference to themselves. So if your boss, or someone you know constantly flies off the handle, blames people for their maliciousness, or even calling people 'evil'.... you may, in fact, have a narcissist on your hands.

“No-one is the villain in their own story”

— George R.R. Martin

Whether consciously or not, we all think of ourselves as the heroic protagonist in the sweeping, epic tales of our own lives - though we may well be the villain in someone else's.

So we must give people the benefit of the doubt; if someone has screwed up (or worse) really hurt us, it's probably not personal or intentional - they probably just didn't think it through. Everyone is doing the best with that they have - includes both IQ and EQ. So next time it feels like someone is out to get you, use the empathy that you only wish they had been able to exercise themselves.

Caveat: Never rule out the possibility of both stupidity and malice in combination, it does happen...

To Sum up

• Occam - All things being equal, simple answers are better as they have less assumptions

• Grice - Honesty is as much about what you don't say as what you do say

• Hume - All claims need equally substantial evidence (quali or quanti) to back them up

• Hitchens - If you don't have any evidence, then we don't need to have a debate

• Alder - If you can't go and get evidence by running an experiment, well...refer to Mr Hitchens

• Hanlon - Be patient with people (especially those without evidence) they're not (that) evil

pOPULAR articles

• Blockchain Democracies: Where Freedom Meets Technology

• Thought Experiments: Plato's Cave

Further Reading

Mike Alder: 'Newton's Flaming Laser Sword' (2004)

Bloch, Arthur: 'Murphy’s Law Book Two: More Reasons Why Things Go Wrong' (1980)

Hyman Arthur & Walsh, James J.; 'Philosophy in the Middle Ages' (1973)

Carroll, Robert Todd: 'Occam's Razor'  (2014)

Grice, Paul: 'Studies in the Ways of Words' (1989)

McAleer, Michael: 'Simplicity, Inference and Modeling: Keeping it Sophisticatedly Simple' (2002)

Ries, Eric: 'The Lean Start-Up' (2011)

Sober, Elliot: 'What is the Problem of Simplicity?' (2004)

Sober, Elliot: 'Occam's Razor: A User's Manual' (2015)

Stone, John R.: 'The Routledge Dictionary of Latin Quotations' (2005)

Thorburn, W. M., 'The Myth of Occam's Razor' (1918)

Blockchain Democracies: Where Freedom Meets Technology

Written by Joss Duggan (Reading Time: 10 mins)

Some people will try to tell you that democracy isn't all it's cracked up to be: "Wouldn't you prefer a nice, efficient (totalitarian...cough) authoritative ruler who can make decisions quickly?" they say.

Plato didn't 'love' democracy either. Or at least the version he knew. This was the 'democratic' regime that duly voted to put his great friend and mentor, Socrates, to death for riling up the young people of ancient Athens with heretical philosophical ideas. 

“Democracy is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequals alike”

— Plato

Democracy has it's problems because all human systems are as flawed as the people who build, maintain and operate within them. We as human-beings aren't perfect, so is it any wonder that we haven't found or created a perfect system? (Just in case you're in any doubt as to why democracy makes sense, check out this enlightening thought experiment). But don't just take my word for it...

““NO ONE pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of Government, except for all those other forms that have been tried from time to time.””

— Winston Churchill

Winston knew what he was talking about and democracy is worth safeguarding, but before we get onto how Blockchain may save democracy (a bold claim, I know), let's take a quick look at what kind of democracy we 'actually' have.

There's more than one kind of democracy?

Part of the problem is that there's no 'one' single definition of what democracy is. All definitions share similar characteristics, but none are identical. There are many favours but the two most important versions are:

1) Direct Democracy - Everyone votes on everything. From the macro issues like capital punishment, abortion and euthanasia to the micro issues like what colour our city buses should be, everyone votes. You may have already spotted the flaws with this system. 

• We don't have time to educate themselves on all the issues in order to make wise choices

• Holding a referendum every five minutes gets really expensive

• If we don't vote on everything, where do we draw the line? (Brexit anyone?)

Direct decision-making can also lead to mob rule, which is exactly why we have impartial judges.

2) Representative Democracy - Only a few people who we think would be good decision makers, get to make the decisions. Professional politicians read the analyses, do the thinking, consult with the experts, debate policies and then make the best decision they can...or so the theory goes.

This is what we (most often) mean when we say 'liberal democracy'.

So why is democracy so frustrating?

1) Lack of Engagement - People don't get as much as a say as they want and don't believe their vote will count. So they stay away. Those likely to believe this are statistically more likely to come from disadvantaged socio-economic groups which only entrenches that inequality.

2) Lack of Inclusion - Too often, voters can be obstructed or intimidated away from voting. People find out they can't vote because they don't have a 'specific' kind of ID (you may suddenly need a passport, instead of a driving license. In democratic nations, this doesn't really occur to us but in many developing countries, going to vote can be dangerous.

3) Lack of Integrity - In many nations, we just don't trust that an election will be fair. Voting stubs disappear, voting machines get tampered with, foreign nations tamper with our elections through social media....'allegedly'. Even when malice is not at play (see Hanlon's Razor) votes can be lost through sheer incompetence. If we can't trust the process, why bother voting? Refer to point #1

And so we see an increasing trend where people want to 'buck the government' and 'shake things up' as a protest vote instead of reflecting real political values. Desperate for change - any change - people turn to extreme options...(Trump? Brexit? I don't think I need a third here

This is where blockchain technology can step in and help...

So what is this magical technology?

Needless to say, there's a lot of hype around blockchain at the moment and there are some great primers on blockchain fundamentals are available 'here', 'here' and 'here'. For our purpose though, there are two main ideas to grasp.

The first critical feature to know is that a blockchain is a registry of information that is almost impossible to hack, once it has been created. One dataset is captured in a single block, which then becomes linked to a second dataset and then a third and so-on, with the ID number of each block dependent on the content and ID of the previous block. So to change the content inside a block that has already been sealed, would have a cascading, ripple effect on all the others. Any changes would be immediately identifiable and the consensus protocol would correct it to whatever the majority decides.

That leads to the second critical feature: it's distributed. The set of data is kept on potentially thousands, if not millions of computers that are all checking in with each other in real-time. This consensus between the nodes of a blockchain network mean that to change the blockchain, you would have to hack more than 33% of the computers in the network to cause confusion. 

The combination of cryptographic security (the linking of the data and their ID numbers) and the extended distribution (held on thousands of machines) gives the system a robust level of integrity. A system that has integrity, is a system we can trust. 

Can blockchain save democracy from decay?

Whilst Blockchain is still a young technology, I'm sure you're already connecting the dots. Political processes lack trust because they lack integrity. Blockchain has the potential to provide that integrity and therefore reinvigorate the electoral process with greater trust.

Actually, the benefits go a step beyond that. Whilst we don't want to be voting on EVERY single issue that governments deal with (we wouldn't have time to live our own lives) Blockchain is so fast and secure that we could vote electronically.

No more having to find and attend a polling station, no more forgetting your personal ID or voter registration papers. All your voting could be validated online through an official government account, set-up uniquely for you, which links to a desktop or smartphone app.

Voting for a general election could be done within a 1 hour window, the results of which, immediately available and transparent to all once the voting window closes. We could save millions of pounds/dollars/euros that could be redirected into other government services.

Liquid Democracy: The hybrid option

The immediacy and security of blockchain also opens up another hybrid model that sits somewhere between 'direct' and 'representative' democracy.

When you vote for an elected official, you'll never agree with the 100% on all issues. 

Maybe you're a fiscal conservative and they're liberal, perhaps they're pro-life and you're pro-choice. We end up having to make trade-offs that all-too-often feel like the 'lesser of two evils' (or more!).

Well, what if instead of only one vote, we got ten; each one representing a different them. One vote on the euthanasia debate, one on narcotics legalisation, etc. By default, the elected official for constituency would have our votes, unless we wanted to delegate/transfer them to other elected officials within the same parliament/senate/etc. 

This is what 'Liquid Democracy' (or 'Delegative Democracy') indeed is; the benefits of politicians who are informed and educated on the issues, with the flexibility to influence the outcome.

In Australia, the 'Flux Party' are trying to get this idea off the ground. They have the underlying technology ready and they promise that if they can get a candidate elected, that candidate will pledge to vote, based on the collective will of it's party members - but so far, it's still just a theory. 

What blockchain can't solve

1. Journalistic Objectivity - Projects like Real Clear Politics and Politifact have made real progress in trying to establish an objective version of events with impartial analysis but as the news media has striven for monetisation, sensationalist, polarising content has increased exponentially.

2. Critical Thinking Skills - Plato argued that education was paramount to produce a population that could realise the potential of any democratic system. Good decisions come from both accurate information on current events and the critical-thinking skills to make good judgements. (Sign-up to the newsletter to get access to thought experiments and mental models to sharpen your thinking)

3. Campaign Finance Regulation  - We still have deep problems with interference from large corporates or high-net-worth individuals in our elections. Outsized campaign contributions, even those disguised and funnels through shell companies at an arm's length are still damaging to trust. The Harvard Law Professor and one-time US Presidential candidate, Lawrence Lessig, writes about this very problem in his critically-acclaimed book 'Republic Lost: How Money Corrupts Congress and A Plan To Stop It'.

So...we should just use this right?

Remember that I said Blockchain was a young technology. It's still unproven and has a lot of kinks to work out. Even though the blockchain itself maybe unhackable, your smartphone definitely is. Other parts of the electronic electoral system could be vulnerable to attack so the devices gathering the votes themselves could be compromised. Joseph Kiniry is an expert in electoral technology and  runs his own transparent software house:

“We have really good ways of [storing personal votes and totals] without using something as complex as a blockchain. Adding a blockchain to a voting protocol is the worst thing you could do - it increases complexity for no extra benefit”

— Joseph Kiniry (Chief Scientist, Galois Labs Inc.)

It will take years to become a standard feature of our electoral system. Even if we created an electronic system today, we would need to keep physical polling stations open for several years, in the same way that banks keep branch networks open for those who haven't yet adopted digital service channels. 

““A refusal to use this kind of technology will ultimately be a proclamation of corruption. There is no reason whatsoever, as a political figure, party or national government, that you should not want to improve the security of a result,””

— Jamie Skella (CEO, Horizon State)

But if we aren't bold, if we don't embrace new ideas and technology-enabled solutions, we may well continue the slide into apathy which in turn enables populism. Blockchain isn't a silver bullet, but if it helps facilitate the move towards mass digital transformation of our elections, it could help strengthen the democratic freedoms we often take for granted.

TO SUM UP

• Democracy isn't perfect, but we can't forget that the alternatives are REALLY bad

• Voter apathy is driven by lack of integrity and trust in the electoral system

• Liquid Democracy as a hybrid model could give us more choice at the virtual ballot-box

• Blockchain technology isn't a silver-bullet solution to reinforce democracy

• Education provision and an impartial media are still critical to good decision-making

• Blockchain isn't a technology for mass adoption yet, but it's almost inevitably going to be

POPULAR ARTICLES

• Philosophical Razors: The Cutting Edge In Ancient Wisdom

• Thought Experiments: Plato's Cave

FURTHER READING

Anonymous: 'How Agora Will Use Blockchain To Bring True Democracy' (Hackernoon, 2018)

Casey, Michael J. & Vigna, Paul: 'The Truth Machine' (Harper Collins, 2018)

Crichton, Danny: 'Liquid Democracy Uses Blockchain To Fix Politics' (TechCrunch, 2018)

Del Castillo, Michael: 'Russia Is Leading The Push For Blockchain Democracy' (Coindesk, 2018)

Firth, Niall: 'Bitcoin Tech To Put The Power In The Hands Of Voters' (New Scientist, 2018)

Gell, Aaron: 'Blockchain Disciples Have A New Goal' (Medium, 2018)

Gupta, Vishal: 'Can Blockchain Reboot Democracy' (Entrepreneur.com, 2018)

Lessig, Lawrence: 'Republic Lost: How Money Corrupts Congress' (Twelve, 2012)

Lewis, Simon 'This Australian Party Has A New Voting Idea That Could Radically Change Politics' (Time.com, 2016)

Nakamoto, Satoshi: 'Bitcoin: A Peer To Peer Electronic Cash System' (Bitcoin.org, 2007)

Palmer-Derrien, Stephanie: 'Why Blockchain Is The Future Of Democracy' (Smart Company, 2018)

Plato: 'The Republic' (Penguin Classics, 2007)

Sahakya, Armine: 'Is Blockchain Really The Future Of Democracy' (Huffington Post, 2017)

Tapscott, Don & Alex: 'Blockchain Revolution' (Portfolio Penguin, 2016)