(Excerpts from http://www.dialogonleadership.org/interviewArthur.html)

Xinfajia's Notes:
 
The interviewee:
        W. Brian Arthur is Citibank Professor at the Santa Fe Institute. From 1983 to 1996 he was Dean and Virginia Morrison Professor of Economics and Population Studies at Stanford University. He holds a Ph.D. from Berkeley in Operations Research, and has other degrees in economics, engineering and mathematics.
        Arthur is best known for his work on positive feedbacks or increasing returns in the economy–what happens when products that gain market share find it easier to gain further market share–and their role in locking markets in to the domination of one or two players. Arthur is also one of the pioneers of the new science of complexity – roughly speaking, the science of how patterns and structures self-organize from simple elements.
 
Interviewers: COS -- C. O. Scharmer, JJ.-- J. Jaworski
Place and Date: Palo Alto, California, April 16th, 1999
 
 
VI. Taoism and Economics: Mechanical Order vs. Unfolding
 
COS: How do Buddhism and Taoism relate to economics?
W. Brian Arthur: Standard economics is very good for being shoehorned into an image of 19th-century physics. It was precise and accurate and static; it concerns itself with equilibrium. I began to realize that what really interested me was to see the economy not as static but as unfolding, and as patterns that were always unfolding.
 
        I began to realize that if patterns were always unfolding it gives you two questions or problems. The economy is always unfolding, and at a more fine level business is always unfolding. John Seely Brown says if you leave your job for a couple of weeks and come back, the whole atmosphere is different. He’s exaggerating, but you know the game has changed. So let me try and contrast that with a different view. The standard way of looking at cognition and decision-making is very different from this other view I stumbled upon.
 
        You were asking how that fits. If you ask Taoists how they see the world, the first thing they’ll tell you is that the world is changing. Everything is always changing, everything is always unfolding, and it is our job as human beings to allow things to unfold. You can give a little nudge here and a nudge there, influencing things at the proper time in your own way, but the world is not seen as a machine. The world is seen organically as a collection of unfolding patterns. When I worked on my economic increasing returns theories, before I studied Taoism, I gave a talk at the University of Hawaii in 1985 and a student from the Chinese mainland came up to me and said, "All that you say has been said before." And I said, "All right, give me a citation." He said, "It was all said by Lao Tzu." I said, "In that case, I’m honored."
 
        Taoists see the world as patterns that are unfolding. I’ve gone back and read Sung-Dynasty Taoism and Neo-Confucianism. Cheng I, and Cheng Ming Tao, and various others writing and teaching in the late 1000s. It’s remarkably contemporary. They taught that all was in flux but that everything structured itself according to inner principles that governed it. Now we’d call those laws. They said principle is one, but its manifestations are many. In other words, things in this world emerge from elements that structure themselves. The mind, they said, is not a vessel to be filled with facts or ideas. It too emerges. The mind is an emergent phenomenon. All this they said a thousand years ago.
 
Complexity Theory
 
        Let me talk for a moment about complexity theory. It’s really a movement of the sciences. Standard sciences tend to see the world as mechanistic. That sort of science puts things under a finer and finer microscope. In biology the investigations go from classifying organisms to functions of organisms, then organs themselves, then cells, and then organelles, right down to protein and enzymes, metabolic pathways, and DNA. This is finer and finer reductionist thinking.
 
        The movement that started complexity looks in the other direction. It’s asking, how do things assemble themselves? How do patterns emerge from these interacting elements? Complexity is looking at interacting elements and asking how they form patterns and how the patterns unfold. It’s important to point out that the patterns may never be finished. They’re open-ended. In standard science this hit some things that most scientists have a negative reaction to. Science doesn’t like perpetual novelty. I once asked John Holland, who’s knowledgeable about chess playing, if chess has reached some sort of equilibrium where if everyone plays their best, games are lost and won, but chess overall does not progress. He said no. There is novelty in what’s discovered century by century in chess. A good tournament master now could possibly beat a grand master of a hundred years ago because the envelope has been pushed out of what’s known. So anything complicated and interactive seems to unfold and develop new structures.
 
The Mechanistic View of the Old Economy
 
        Now switch to business or the economy. The old thinking is that business and the economy are mechanistic. People talk of linkages, that things have to be "on the right track," that we need to fine-tune things, get it up to speed. If only we understood the mechanisms, we could fine-tune the economy. At deeper levels in business there are decision-makers, agents, and at any time each agent faces a set of problems, probably with a capital "P," and to those problems there are Solutions. This just happens to be a structure we laid on business, trying to make it a science. We believe there are Problems and there are Solutions. Implicitly it means that if you are managing there is a feeling here that you can actually frame the problem correctly so that there is a Solution with a capital "S," and it’s up to you to learn how to arrive at that solution. But all this only works in repetitive business, where you can optimize and the problems are well defined. It appears in that case that management’s problem is to optimize, to get it right. Lower costs, get quality up, keep everything moving, make it smooth, make things reliable, solve the problems, and find solutions. That’s old thinking.
 
The World of the High Tech Economy
 
        Let me contrast that with high tech. This is an article I wrote in the Harvard Business Review a couple of years ago, August 1996. There are several things that are different about high tech. One of them is that there are typically increasing returns, network effects, and upfront costs. So if you are the people who invented Java, you can make billions if you can lock it in. If you can lock people into doing documents digitally by Xerox rather than Canon, you can take most of the market. This is typical. High tech in my metaphor tends to be much more like a casino. It’s not the halls of production in repetitive industry, but rather the casino of technology. There are many tables in this casino. And at each table are different games. At this table we’re going to start up digital banking, and the outcome of the game is that two or three of the key players are going to take 90-something percent of the market. So this is not a situation where everyone gets 10 or 15 percent market share. You typically find 80 percent market shares, 70 or 80 percent, like CompuServe or Microsoft have in their markets. The next player might have 20 or 30 percent, and then there are a few bit players. This is because there are increasing returns and diminishing costs, and the more advantage you have the more advantage you get. The more people who use Windows, the more likely I am to use Windows. But it could have been some other operating system. When there is competition in this area, through those sorts of network effects or upfront cost effects, a winner will lock in most of the market. With Windows 98, the first disk will cost me maybe half a billion dollars and the second will cost me two or three cents. So the more I put out the cheaper my unit costs are. Therefore, the more market I take the more cost advantage I have. The more people are using that then the more that creates a network of users and so on.
 
Winners Take Most
 
        So in competitions in those areas, the winner takes most. This sets up a totally different set of problems for management. The problems are not optimizing ones. You’re sitting at this table and starting up in digital banking. You don’t know what the technology is going to be. You don’t know who’s going to sit at the table so you don’t know who the competition is going to be. You don’t know what the government regulations are going to be. You don’t know how the technology will work out. You don’t know how it’s going to be received by the consumer, and you don’t know whether it will work. You don’t know how consumers will take to it. You don’t know what ancillary technologies are going to be used and what alliances people are going to cobble together to make it all work.
 
        And so, the point I want to make is that there is no well defined problem with a capital "P." Imagine it’s five years ago and you’re thinking about Bosnia. You’re in the State Department or the UN and you’re going to put in a UN peacekeeping force. If I said to you, "Optimize the problem in Bosnia," you’d say, "What problem?" I mean, clearly things aren’t right, but is there a correct problem? Does a problem exist? No. I don’t mean there is no problem, but there is no correct problem. All you can say is that you have this situation and there are many ways to cognize it.
 
        These situations have a Rorschach inkblot feel to them. You have to read the problem into the situation. If I’m sitting here in Silicon Valley, it’s not that at any day I might have a particular problem with a capital "P." My supplier may not have sent me whatever processors I need or backup memory. That’s a problem, and maybe you can do something about it. But what I’m facing more typically as an entrepreneur or business person is a set of situations. And what I’m trying to do is to make sense of these. John Seely Brown says the challenge in the old economy is to make product. The challenge in the digital economy is to make sense.
 
        So in a sense there isn’t a problem; there is a situation or a set of situations and they continue to unfold. And your job, should you accept it, is to make sense out of it.
It’s like your own life. If I said to you, what’s your problem? You’d say, I don’t know. Is there a correct problem? No there isn’t. You could get banks of therapists and go deeper and deeper. So you have a set of situations you’re facing. And there might be less appropriate or more appropriate means of dealing with these.
 
VII. The First Thing You Do Is Observe
 
W. Brian Arthur: You can approach this from the point of view of complexity or economics or Taoism; certainly try all three.
 
        From the economics side, think of your own life or Bosnia or Belfast or high tech: You’re in a situation and varying conditions can be put in that.
 
        Cognition is never extracted from the situation. You don’t make sense from the situation, you impose sense upon the situation. Confusion is the absence of the framework, and known confusion just means that you have framework. You can label it. We have a nice saying in Belfast, "If you are not confused, you don’t understand anything."
 
        So what is facing management in high tech is confusion. The job of management in high tech, at the highest levels, is not to manage but to find frameworks. Once you have frameworks you’re willing to impose, they imply the appropriate reactions. Not optimal reactions, but appropriate. So you can’t optimize in this area. All you can do is to act appropriately.
 
        Switch then to Taoism. Taoism keeps saying that the world unfolds. There is no truth. There is only that which you impose upon it, and you can’t move the world. But you can move yourself appropriately. So the way Taoism would inform martial arts is to say you don’t know what your opponents are going to do, but when your opponent moves you can react appropriately.
 
        So you don’t have to face 4,000 pounds coming at you head-on. You should be able to move to the side and deflect it. This way of thinking would say that there is no correct solution. You allow the world to unfold and you act appropriately.
 
        So I’m sure you’re beginning to see why I say the first thing you do is observe.
 
JJ: It’s totally, completely understood.
 
W. Brian Arthur: Okay. Or think of driving at night. You’re driving on a narrow road in New England late at night with your headlights on. There might be deer or animals on the road. It has just snowed and there may be a little sheet ice out there, you’re not sure. What problem are you solving? There isn’t a problem. You’re not optimizing anything. You’re actually cognizing your feeling, you’re working from here, not from the head. Moment to moment you’re recognizing what you’re in and saying, "It felt like black ice going around that last corner and that wasn’t true half an hour ago, therefore I should do such and such." You are conforming to what’s arising, but not in a passive way. You are pre-positioning yourself. So in that sense it’s all about the position.
 
        This is the case with Taoism. Taoism doesn’t tell you to optimize your life. It doesn’t tell you that life is going to be happy. It just tells you that the world is always changing. It doesn’t tell you to mutely conform in a passive way, but you shouldn’t struggle either. You just go with whatever it is, and at each stage you put your all in appropriately.
 
Complexity
 
        The third thing is complexity. When you start to take the world seriously from the complexity point of view, you begin to see that organisms are in a world of continual change. If you look at a species in an ecosystem, the ecosystem is much more changeable than we ever supposed. I was watching "Nova" a week ago and they were saying that we’re in a period of remarkable stability. This wasn’t true ten thousand years ago, when there were huge changes worldwide. So it’s hard to talk about optimization or that a species is optimized. Everything is mutually adapting to everything else all the time, and the complexity point of view asks how things adapt to various circumstances.
 
        As we shift into a high-tech economy, making sense of situations and then taking appropriate proactive kinds of actions counts. This is opposed to the pre-high-tech economy, where the situation was unchanging, problems could be well defined, and therefore optimal solutions were possible.
 
        A totally different set of rules apply in this new environment. You hang back, you observe. You’re more like a surfer, or a really good driver at night. You don’t act out of deduction; if you do, you’re going to get creamed. You’re acting out of an inner feel, making sense as you go. You’re not even thinking. You’re at one with the situation.
 
Taoism
 
        Let me go back again to oriental thinking, to Taoism. In oriental thinking, you might just sit and observe and observe – and then suddenly do what’s appropriate. You act from your inner self. Traditionally, Chinese and Japanese artists sit and look at a landscape. They’ll sit on a ledge with lanterns for a whole week just looking, and then suddenly say "oooohh" and paint something very quickly. Consider a tea ceremony. With deep training and deep observation, you’re reacting appropriately, and the appropriateness of the reaction depends upon the degree to which you are at one with the situation. It’s the same with martial arts: If you have to think in martial arts, you’re dead. The twenty or thirty years of training you’ve had mean that you’ve internalized lots of possible patterns and instinctively know how to react.
 
XII. Reflection 
 
In this interview, W. Brian Arthur made three significant points: One, in order to understand today’s world economy, we need a different theoretical foundation of economic thought. On this point, Arthur is best known for his work on the economics of "increasing returns," which suggests a much more dynamic, fluid, and unfolding view of the economy. Two, what it takes to operate in this environment is a different kind of knowledge and knowing: a knowledge that does not stem from an abstract framework that we apply to or impose on a situation, but a knowing that emerges from the quietness of a deeper place. And three, what it takes to access this deeper source of knowing is to follow three steps: (1) total immersion: observe, observe, observe; (2) retreat and reflect: allow the inner knowing to emerge; (3) act in an instant: bring forth the new as it desires.