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Jim Collins, author of the perennial business best-sellers Good to Great and Built to Last is back, and in this outing he presents what sounds like the most timely How the Mighty Fall: And Why Some Companies Never Give In. I must note that I count myself a big fan of his two earlier efforts, so I picked this up with high expectations.

A slender 240 pages (only 123 omitting appendices, notes, etc.), and just published this May, the book might initially strike you as a rush job designed to make a splash before our long economic nightmare is over. That may have been an understandable part of Collins' motivation, but he's too much the professional to do anything other than to provide a thoughtful, data-rich, empirically grounded and briskly written effort.

His thesis?

To borrow shamelessly from the promotional materials, which actually encapsulate his argument in a fashion that's overall fair:

Decline can be avoided.

Decline can be detected.

Decline can be reversed.

Amidst the desolate landscape of fallen great companies, Jim Collins began to wonder: How do the mighty fall? Can decline be detected early and avoided? How far can a company fall before the path toward doom becomes inevitable and unshakable? How can companies reverse course?

In How the Mighty Fall, Collins confronts these questions, offering leaders the well-founded hope that they can learn how to stave off decline and, if they find themselves falling, reverse their course. Collins' research project--more than four years in duration--uncovered five step-wise stages of decline:

Stage 1: Hubris Born of Success

Stage 2: Undisciplined Pursuit of More

Stage 3: Denial of Risk and Peril

Stage 4: Grasping for Salvation

Stage 5: Capitulation to Irrelevance or Death

By understanding these stages of decline, leaders can substantially reduce their chances of falling all the way to the bottom.

Great companies can stumble, badly, and recover.

Every institution, no matter how great, is vulnerable to decline. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall and most eventually do. But, as Collins' research emphasizes, some companies do indeed recover--in some cases, coming back even stronger--even after having crashed into the depths of Stage 4.

Decline, it turns out, is largely self-inflicted, and the path to recovery lies largely within our own hands. We are not imprisoned by our circumstances, our history, or even our staggering defeats along the way. As long as we never get entirely knocked out of the game, hope always remains. The mighty can fall, but they can often rise again.

The technique follows Collins' patented MO: With his research team, he gathers an extraordinary amount of raw material (here, "more than six thousand years of combined corporate history...beginning with sixty major corporations...and systematically identif]ying] eleven cases that met rigorous rise-and-fall criteria.") He then produces "paired" companies:

Loser--Winner; A&P--Kroger; Addressograph--Pitney Bowes; Ames--Wal-Mart; Bank of America--Wells Fargo; Circuit City--Best Buy; Hewlett Packard--IBM; Merck--Johnson & Johnson; Motorola--Texas Instruments; Rubbermaid--None qualified; Scott Paper--Kimberly-Clark; and Zenith--Motorola.

It takes little perspicacity to note that some of the "losers" today were viewed as big winners in his previous works (Circuit City and Motorola perhaps most conspicuous, and Motorola single-handedly performing the triple lutz of being identified both as a winner and as a loser, depending on the identity of the competitor). So it comes as no surprise that he devotes a fair portion of the introductory remarks to defending his previous methodology, by explaining, for example, that somebody who eats right, exercises, stays slender, and doesn't smoke can fall off all those wagons and no longer serve as a paradigm of strong health. If his point is simply that it's not "who a company is" but "what they do," I suppose, then, fair enough. But it takes a bit of a reach for him to get there.

What then of his taxonomy of failure?

Conceptually, stages 1 & 2 (above) address how companies get into trouble, and stages 3--5 address management's response. I found the second part of his analysis far more compelling than the first. We have all seen--and some of us have unfortunately been employed at--firms that were in denial about the peril they were in (#3), took desperate measures once it was undeniable (#4), and finally ran up the white flag entirely (#5). Collins does a strong job of describing the dynamics of these phases and, most interestingly, tries to identify what distinguishes those that pull out of their swoon from those that just accelerate and hasten their own decline. Good stuff.

But I was unconvinced by his discussion of how companies get into trouble in the first place, which, according to his own introduction, is the question that set him on the quest to write the book to begin with. The story he tells is of being invited to speak in 2004 at West Point, at the Conference Board and Leader to Leader Institute lecture, to address the small topic "America" in front of 12 US Army generals,12 CEOs, and 12 social sector leaders. The way he proposes to approach the topic is to ask whether America is renewing its greatness or is instead dangerously on the cusp of falling from great to good.

He then relates being approached by one of the CEOs at a break who asks, not implausibly "When you are at the top of the world,...the most successful company in your industry, the best player in your game, your very power and success might cover up the fact that you're already on the path to decline. So, How would you know if you were actually on the path to decline?"

Tantalizing indeed.

But alas, from my view, only asked and not persuasively answered by Collins.

How does he attempt to answer the question?

Stage 1 can begin when people become arrogant and begin to view success as an entitlement. Worse, they lose sight of exactly what behavior made for their success in the first place. Rigorous understanding of why the firm is successful--"because we understand why we do these specific things and under what conditions they would no longer work"--is replaced by the mere rhetoric of success: "We're successful because we do these specific things." Not to pick on GM, but a true story from early in its ossification and decline into irrelevance was the example of an engineer's determination to meet the bizarre, but real, corporate mandate of designing a dashboard ashtray that would work at -40°F. It worked, but it took two hands of strong men to open and close it. Hearing stories like that, of course, you gasp to yourself, "No wonder they were already on a greased flagpole of their own designing," but if it's that obvious do we need Jim Collins to tell us? Be it in sports, in Hollywood, or in investing and the hedge fund world, hubris has never been thought to be positively correlated with terrific outcomes.

Stage 2 shows more initial promise. The "undisciplined pursuit of more" (more scale, more growth, more acclaim) can indeed lead firms astray from their "core competence," as well as inviting senior executive edifice complexes, "Air RJR" (an indelible image from Barbarians at the Gate, describing the RJR corporate aircraft fleet), multi-million dollar birthday bashes for CEOs, etc. But my larger reservation about this hypothesis is that I believe the evidence is even stronger on the other side of this argument: That failure is more often due to companies that are so wedded to the notion of doing what they have always done best that they become oblivious to threatening ways in which the world is changing. 

This alternative, indeed contrary, hypothesis is the premise of the much more compelling and persuasive The Innovators Dilemma by Clayton Christensen.  That book documented how so many once-great companies foundered by focusing with blinkered vision on their suddenly outmoded methods of doing business.

Collins' own discussion of the A&P/loser--Kroger/winner saga would seem to bear this out. A&P failed not because it tried to move into used-car sales (Circuit City actually did, with CarMax--and you thought I was making this up), but because its small stores with narrow aisles were part of its "formula" and its management could not conceive that customers might want bigger, brighter, roomier stores (the Kroger recipe).

Where, then, are we left?

Unfortunately, with the most intriguing question unanswered.

So read How the Mighty Fall when you have a short (less than transcontinental) plane trip in front of you, for its rich cautionary tales of self-destructive and generally bone-headed behavior. But don't anticipate you'll come away with principles of wide applicability that you don't already know in your gut.

From time to time, people ask me what I'm reading when trying to figure out what is going on in the economy these days. A glib response might be, "anything I can get my hands on," but the question deserves a more thoughtful response, so herewith a book review and a few pointers to online sites that are more helpful than most.

The online sites, first as they're easy to handle in a condensed fashion:

• David Warsh's Economic Principals is perhaps the single most studious, well-written, thoughtful, and occasionally (but not doctrinally) contrarian site I know of. David publishes on a faithful, if quaint, once-a-week schedule, just like the print journalist he was, with provocative pieces such as "More than two aspirin," and "What comes after a golden age?."
• Truth on the Market bills itself as 'academic commentary on law, business, economics, and more," and it's surely worth checking out for that promise alone. While uneven at times, at its best it can be great fun.
• Matrix (on interpreting the real estate economy, with a focus on New York City) is a remarkably wide-ranging and thoughtful site covering the industry that's arguably at the root of all our evil woes, written by Jonathan Miller, who is the gold standard of appraisers in the New York City market.
• Academic Earth bills itself as "thousands of video lectures from the world's top scholars."  And it is.  Origins of the Financial Mess (Alan Blinder, Princeton) is a good place to start.
• Marginal Revolution talks about a wide variety of topics in an often irreverent tone. A current post about the AIG bonus PR nightmare consists in its entirety of:
  

  Outrage, outrage, blah, blah, blah, etc. Often I feel that some topics are too obvious to blog.
  The real lesson is that this is another reason not to nationalize banks. It means politicizing every decision which ends up in the newspaper.
  Here is a good post on why the bonuses should be paid.
  Outrage, outrage, blah, blah, blah, etc.

But forthwith to the book review.

Animal Spirits, by George Akerloff (Nobel Prize Winner in Economics) and Robert Shiller, father of the famous Case-Shiller real estate index, was reviewed in the Financial Times:

[The authors] argue that the key is to recover Keynes's insight about 'animal spirits'--the attitudes and ideas that guide economic action. The orthodoxy needs to be rebuilt, and bringing these psychological factors into the core of economics is the way to do it. . . . The connections between their thinking on the limits to conventional economics and the issues thrown up by the breakdown are plain, even if they were unable to make every link explicit. Even more than Akerlof and Shiller could have hoped, therefore, it is a fine book at exactly the right time. . . . Animal Spirits carries its ambition lightly--but is ambitious nonetheless. Economists will see it as a kind of manifesto.

What are "animal spirits," again?  The most concise explanation was actually provided by a reviewer on Amazon:

In his epoch-making General Theory of Employment, Interest, and Money (1936), John Maynard Keynes noted that concerning investment decisions, "most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits--a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities." Because of this propensity of investors to base decisions on variables other than "market fundamentals," the aggregate investment function of an economy will tend to be highly variable and erratic. Indeed, even today, it is virtually impossible to predict aggregate investment successfully, although the other sources of aggregate demand and supply are relatively well understood.

The book explores, in its Part I, five different dimensions of animal spirits and how they affect the economy: 

• Confidence
• Corruption
• The "money illusion" (basically, people's propensity to ignore modest levels of inflation and deflation and to believe in a constant value of money)
• "Stories" which can mislead (for example, "the Internet will revolutionize everything..."); and
• Lack of perceived fairness (for example, AIG bonuses).

Part II, in turn, looks at some consequences of animal spirits' role in economic decision-making, and how they can help explain the answers to such questions as:

• Why do economies suffer depressions?
• What's to be done about the current financial crisis?  (Caveat:  Events are moving so quickly on this front that the authors' discussion is already looking quite dated.)
• Why can some people not find a job?
• Why is saving for the future so arbitrary?
• Why are financial prices and corporate investments so volatile?

The most valuable aspect of the book is that the authors show how human decisionmaking—as it's really performed, animal spirits and all—violates the classic notion of purely rational homo economicus.  Consider this thought experiment they offer:

	Economic	Non-economic
Rational	Rational, economic decisions	Rational, non-economic decisions
Non-rational	Non-rational, economic decisions	Non-rational, non-economic decisions

Of course, neoclassical economic theory essentially addresses only the top left cell, whereas animal spirits help inform our understanding of the other three cells.  Actually, I would argue that we can ignore the entire right hand column for present purposes, since it's by hypothesis in the realm of the "non-economic," but even if you wipe that from the attention of your cortex, the bottom left quadrant is clearly where a lot of the fascinating debate today around "fairness" (AIG bonuses again), "moral hazard," "fragility," "systemic risk," and so forth revolves.

Indeed, our again-helpful Amazon reviewer, who has simulated the behavior of individuals in markets, reports:

There is nothing in economic theory that says that rational individuals interacting on markets will produce stable, efficient outcomes. The Walrasian general equilibrium model says that if there are no market externalities, there are market-clearing equilibria that are Pareto-efficient, but this model has absolutely NO attractive dynamical properties. When I subjected this model to an agent based simulation (Herbert Gintis, "The Dynamics of General Equilibrium", Economic Journal 117 2007:1289-1309), I found that there is a robust tendency towards market clearing equilibrium, but this is always offset by highly volatile stochastic movements in prices, wages, capital demand, and other macroeconomic variables. This stochasticity is due to the fact that the macroeconomy is a complex, nonlinear, dynamical system, not because of "animal spirits."

Jargon patrol:  A "Walrasian equilibrium" essentially means a competitive environment and not one populated by players with market power.  "Externalities" are costs imposed upon, or benefits enjoyed by, actors not participating in the market in question.  "Pareto-efficient" means that there is no possible change which would leave every player no worse off and at least one player better off.

The fascinating point here is that a core result is "always" "highly volatile stochastic [random] movements in [key] macroeconomic variables." 

And isn't that just what we've seen in the subprime meltdown and its aftermath?

The really stunning fact about the current macroeconomy is that disequilibrium in the home mortgage market could so seriously compromise the American financial system. Even those who foresaw the housing crisis did not predict so massive and credit collapse, leading to levels of government intervention that would have been inconceivable in the past.

Animal Spirits is without doubt an intriguing, thoughtful, and timely book (and a quick read as well at 264 pages including notes and index), but I fear that its very focus on the quirkiness of human decision-making might serve as a pleasant distraction from the core and unavoidable truth that under- or improperly regulated markets cannot be counted upon to produce economically or socially desirable results.

---

Given the general level of surprise and intellectual shock that have accompanied this global meltdown,, it has become increasingly common to hear calls for a "new capitalism" or for some inchoate reworking of the received canon of wisdom in economics to help us navigate these seemingly unprecedented times.

If you're tempted, as I admit I occasionally have been, to pursue this path, I commend to you Amartya Sen's Capitalism Beyond the Crisis in the March 26,2009 issue of The New York Review of Books.  Sen was the 1998 Nobelist in economics for his contributions to "welfare economics,"  ("Welfare economics," roughly speaking, is the branch that concerns allocative efficiency within a society, income distribution, and—you guessed it—achieving Pareto-optimal results.)

Sen's article is, by and large, an effective effort to debunk the mythologies that have been attributed, for motives base and innocent alike, to the Big Thinkers in economics including Adam Smith and John Maynard Keynes.  Perhaps we should not be surprised that the imprimatur of these legendary names would be appropriated for ideological or expedient means, but it's worth going back to what they actually said, as Sen does, to realize that we may have the blueprint for recovery in front of us if only we choose to see it. 

Here is Sen on the "public/private mix" that undergirds all of today's First World economics.  Forgive the somewhat lengthy excerpts, but Sen's argument is subtle and his prose pleasant:

What are the special characteristics that make a system indubitably capitalist--old or new? If the present capitalist economic system is to be reformed, what would make the end result a new capitalism, rather than something else? It seems to be generally assumed that relying on markets for economic transactions is a necessary condition for an economy to be identified as capitalist. In a similar way, dependence on the profit motive and on individual rewards based on private ownership are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist?

All affluent countries in the world--those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Australia, and others--have, for quite some time now, depended partly on transactions and other payments that occur largely outside markets. These include unemployment benefits, public pensions, other features of social security, and the provision of education, health care, and a variety of other services distributed through nonmarket arrangements. The economic entitlements connected with such services are not based on private ownership and property rights.

[...]

[T]he pioneering works of Adam Smith in the eighteenth century showed the usefulness and dynamism of the market economy, and why--and particularly how--that dynamism worked. Smith's investigation provided an illuminating diagnosis of the workings of the market just when that dynamism was powerfully emerging. The contribution that The Wealth of Nations, published in 1776, made to the understanding of what came to be called capitalism was monumental. Smith showed how the freeing of trade can very often be extremely helpful in generating economic prosperity through specialization in production and division of labor and in making good use of economies of large scale.

Those lessons remain deeply relevant even today (it is interesting that the impressive and highly sophisticated analytical work on international trade for which Paul Krugman received the latest Nobel award in economics was closely linked to Smith's far-reaching insights of more than 230 years ago).

[...]

Even though people seek trade because of self-interest (nothing more than self-interest is needed, as Smith famously put it, in explaining why bakers, brewers, butchers, and consumers seek trade), nevertheless an economy can operate effectively only on the basis of trust among different parties. When business activities, including those of banks and other financial institutions, generate the confidence that they can and will do the things they pledge, then relations among lenders and borrowers can go smoothly in a mutually supportive way. As Adam Smith wrote:

When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.[1]

Smith explained why sometimes this did not happen, and he would not have found anything particularly puzzling, I would suggest, in the difficulties faced today by businesses and banks thanks to the widespread fear and mistrust that is keeping credit markets frozen and preventing a coordinated expansion of credit.

It is also worth mentioning in this context, especially since the "welfare state" emerged long after Smith's own time, that in his various writings, his overwhelming concern--and worry--about the fate of the poor and the disadvantaged are strikingly prominent. The most immediate failure of the market mechanism lies in the things that the market leaves undone.

And here, if you will, is the punch line:

Smith called the promoters of excessive risk in search of profits "prodigals and projectors"--which is quite a good description of issuers of subprime mortgages over the past few years. Discussing laws against usury, for example, Smith wanted state regulation to protect citizens from the "prodigals and projectors" who promoted unsound loans:

A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.[4]

The implicit faith in the ability of the market economy to correct itself, which is largely responsible for the removal of established regulations in the United States, tended to ignore the activities of prodigals and projectors in a way that would have shocked Adam Smith.

The present economic crisis is partly generated by a huge overestimation of the wisdom of market processes, and the crisis is now being exacerbated by anxiety and lack of trust in the financial market and in businesses in general.

Sen also writes that unappreciated in the current crisis is the relevance of Arthur Cecil Pigou (a contemporary of Keynes, also at Cambridge and also in fact at King's College).  Whereas Keynes viewed the economy primarily through a mechanistic and hydraulic lens (the value of the famous "multiplier" being a primary example), Pigou put his focus on psychology, where Sen (and yours truly) believe it belongs.  At the root of economic fluctuations, Pigou wrote, were "psychological causes," namely "variations in the tone of mind of persons whose action controls industry, emerging in errors of undue optimism or undue pessimism in their business forecasts.[5]"  Sen goes as far as to say that "the real crisis...has become many times magnified by a psychological collapse," and he scarcely overstates the case.

Perhaps we should conclude with the culminating irony of this short tour of the landscape of Fabled Economists:  It is that while Smith and Pigou are traditionally seen as "conservative," and Keynes as something of a rebel, the first pair were far more outspoken, insightful, and insistent upon the importance of non-market institutions and non-profit values.

---

What else am I reading? Alpha by author:

• Geoff Colvin's Talent is Overrated:  What Really Separates World-Class Performers from Everybody Else.  This book, based soundly in empirical research, delivers the hard message that true excellence depends upon hours and hours (10,000 hours, to be precise) of "deliberate practice"—be it the young Mozart composing, the young Tiger Woods practicing, or any aspiring concert violinist.  The same, by extension, is true of surgeons, mathematicians, CFO's—and lawyers and writers.  As Colvin puts it, this is good news and bad news:
  
  "What would cause you to do the enormous work necessary to be a top-performing CEO, Wall Street trader, jazz, pianist, courtroom lawyer, or anything else? Would anything? The answer depends on your answers to two basic questions: What do you really want? And what do you really believe? What you want - really want - is fundamental because deliberate practice is a heavy investment."
  
  
• Jerry Coyne's Why Evolution Is True.  Demolishes creationism and "intelligent design"—and then intellectually carpet-bombs them again, to make sure "the rubble bounces," as Churchill described the goal of a particular bombing campaign in WWII—but does so with respect and patience.  I can do no better than to repeat the aphorism that "Nothing in biology makes sense except in the light of evolution."  Coyne explains why, and brings you up to date on recent developments in this endlessly fascinating science in the bargain.
  
  
• Niall Ferguson's The Ascent of Money: A Financial History of the World:  Ferguson recapitulates the history of money from the pre-Christian era through today's subprime meltdown and global credit freeze, noting that bubbles are as much a part of economic history as are booms and concluding with a warning that excessively precautionary regulation  cannot and should not remove the possibility of extinction for institutions which are weak.  That is to say, financial crises should and must result in casualties.  Or, as Joseph Schumpeter put it in The Theory of Economic Development (1934):  "This economic system cannot do without the ultima ratio of hte complete destruction of those existences which are irretrievably associated with the hopelessly unadapted."
  
  
• Dexter Filkins' The Forever War  A harrowing account of the "war on terror" from the rise of the Taliban in the 1990's through virtually today in Iraq and Afghanistan, by one of the New York Times' star reporters.
  
  
• Michael Lewis' Panic:  The Story of Modern Financial Insanity, a tour de horizon of recent financial embarrassments, using the tool of reproducing contemporaneous (and a few subsequent) accounts and analyses, and covering the collapse of Long Term Capital Management, the Asian financial crisis of the 1990's, the dotcom meltdown, and early warning signals of our present distress.  Plus c'est change.
  
  
• Jessica Livingston's Founders at Work:  Stories of Startups' Early Days.  The stories of mostly legendary (and a few relatively obscure) entrepreneurs, told in their own words through extensive interviews, about the early days at their would-be companies, including:  Max Levchin/PayPal, Steve Wozniak/Apple, Mike Lazaridis/Research in Motion, Mike Ramsay/Tivo, Charles Geschke/Adobe, and Ron Gruner/Alliant Computer.  Utterly charming.  And the moral?  (1)  Expect the unexpected.  (2) And meet it with persistence. 
  
  
• Daniel Pink's A Whole New Mind:  Why Right-Brainers Will Rule the Future.  Pink's thesis, fairly widely adopted today, is that human economic organization has moved from the agricultural to the industrial to the information and now to the conceptual age, where the value is on those individuals and firms capable of integrating empathy, meaning, design, and a narrative (a/k/a "story") to their products and services.  If you or your firm can't master those skills, beware of "Asia, Abundance, and Automation."
  
  
• Robert Samuelson's The Great Inflation and Its Aftermath:  The Past and Future of American Affluance.  An economic and political history of what is now a curiously forgotten period, the "great inflation" of the 1970's and early 1980's, famously cut off at the knees, along with much economic activity, by Paul Volcker and Ronald Reagan in the 1981-'82 recession.  Not, perhaps, a deep or subtle read, but a fascinating and thorough portrayal of, as I say, an oddly invisible era.
  

Enjoy.

Ten years after publishing The Future of Law, Richard Susskind is back with what in many ways is an extended sequel, The End of Lawyers?

If you don't know Richard (disclosure: I do, and consider him a friend), it's high time. From the dust jacket:

"Richard Susskind is Honorary Professor of Law at Gresham College, London, IT adviser to the Lord Chief Justice, and an independent consultant to professional firms and national governments. He is Chair of the Advisory Panel on Public Sector Information, a law columnist at The Times, and a Fellow of the Royal Society of Edinburgh and of the British Computer Society. He studied law at Glasgow University and has a doctorate in law and computers from Balliol College, Oxford. His views on the future of the legal profession have influenced a generation of lawyers around the world. He has written several books, including Expert Systems in Law (OUP, 1987), The Future of Law (OUP, 1996), and Transforming the Law (OUP, 2000), and has been invited to speak in over 40 countries.
He was awarded an OBE in the Millennium New Year's Honours List for services to IT in the Law and to the Administration of Justice."

Parts of the book were serialized last fall in The Times (UK), and by benefit of that Richard was able to pen a self-deprecating Preface to the print edition of his work, starting, "I already know what many people think of this book...." and going on to note that he found "the feedback posted at Times Online to be quite polarized--there were the skeptics (mainly lawyers) who did not seem to think they should read what I had to say before rejecting it; and there were the enthusiasts, often every bit as biased, who were immediately fond of anyone they thought might be taking a pot-shot at lawyers."

Were I a lazy reviewer, I would stop right here. Richard has indeed summarized the polarized reactions this book is likely to induce. But since you, and Richard, deserve a bit more, as the famous pop phrase has it, "But what do you really think?"

Actually, I'm an unfair--or at least unrepresentative--person to ask. For those of us who toil daily in the trenches of analyzing the economics of the legal ecosystem, and who try diligently to stay attuned to threats and opportunities surrounding that ecosystem, much of what Richard writes about has been on our radar for awhile--ranging from the wantonly speculative and hypothetical to the clear and present. Add to that that I find polarized debates singularly uninteresting--I live for the nuance and the grey areas.

So I'm probably a poor person to ask.

That said, The End of Lawyers? is a fascinating and timely book: Probably more timely, indeed, than Richard had any hope or clue when he commenced work on it.

We are, to state the obvious, in the midst of once-in-a-career challenges to the our familiar business models, where yesterday's conventional wisdom may not suffice for tomorrow.

This is where I believe The End of Lawyers? has its greatest virtue: It challenges many things you've assumed. This is a propitious time to invite your brain down that lane for a thought experiment writ large.

Here are a few examples.

The book opens with "four thoughts:"

• Sitting in the "dark wood panelled main hall of the Mercers' Company, in Ironmongers Lane in London, founded in 1394, [...] I thought about other ancient trades and craftsmen, now remembered in London largely because of the livery companies that bear their names--for example, tallow chandlers, cordwainers, and wheelwrights." The reflection was "whether lawyers might fade from society as other craftsmen have done over the centuries." (italics original).
  
  
• Second, Richard wondered why many lawyers seem to deny that they're lawyers--that is, to "downplay the legal content of their jobs." His hypothesis is that they do so because they recognize the need to change and diversify in response to shifts in the market. "Lawyers in denial" (my phrase) may be because they realize they need to widen their range of skills to remain relevant.
  
  
• Thought #3, the one "that urged me to write this book," came upon reflection when asked to talk to friends' teenage children about pursuing a career in law. He realized he couldn't predict the profession's future: "When honest lawyers are really pushed, most confess to being clueless about how their profession is likely to unfold in the long run."
  
  
• And finally: In the fall of 2006 Susskind attended a seminar on the implications of the Legal Services Act, where (evidently for the first time, at least in polite company) he heard a discussion of legal services "as though they were subject to the normal laws of the marketplace and not some kind of special case, sacred cow, or no-go zone."

Here is how Susskind himself summarizes the thesis of the book:

If I may give away the ending, [I] will point to a future in which conventional legal advisers will be much less prominent in society than today and, in some walks of life, will have no visibility at all. This, I believe, is where we will be taken by two forces: by a market pull towards commoditisation and by pervasive development and uptake of information technology. Commoditisation and IT will shape and characterise 21st century legal service.

To support this thesis, he discusses the "path to commoditization," including "decomposing and multi-sourcing," where he envisions sources of legal services evolving along a trajectory such as this:

• in-sourcing
• de-lawyering
• relocating
• off-shoring
• outsourcing
• subcontracting
• co-sourcing
• leasing
• home-sourcing
• open-sourcing
• computerizing
• no-sourcing

Don't be put off by the seeming jargon: Susskind nicely describes each of these alternatives and their costs, advantages, and benefits.

Above all, the theme is how technology will change our profession. Although Susskind purports to be an agnostic on "whether the future for lawyers could be prosperous or disastrous," and says that "the arguments and findings of this book can support either end game," it's clear where his heart lies:

"I predict that lawyers who are unwilling to change their working prcatices and extend their range of services will, in the coming decade, struggle to survive. Meanwhile, those who embrace new technologies and novel ways of sourcing legal work are likely to trade successfully for many years yet, even if they are not occupied with the law jobs that most law schools currently anticipate for their graduates."

As much as I admire Susskind's call to arms--and his thorough and accessible canvassing of the new technologies available not just to your teenagers but to you--he can occasionally launch fusillades which you may view as more incendiary than illuminating. For example?

I do not believe lawyers are self-evidently entitled to profit from the law. As I have said before, the law is not there to provide a livelihood for lawyers any more than ill-health exists to offer a living for doctors. Successful legal business may be a bi-product of law in society, but it is not the purpose of law. And, just as numerous other industries and sectors are having to adapt to broader change, so too should lawyers.

Economists, and MBA's, and yours truly, might have different views on whether profesionals are entitled to profit from their services, but that is far afield from the concerns of The End of Lawyers? Susskind is one of the small handful of genuine thought leaders writing about our profession and our industry (not self-promotingly noisy, spurious, shallow, mercenary, or craven). Agree or disagree with Richard, you need to know what's on his mind.

Contents

Introduction - the Beginning of the End? The Path to Commoditization Trends in Technology Disruptive Legal Technologies The Future for In-house Lawyers Resolving and Avoiding Disputes Access to Law and to Justice Conclusion - the Future of Lawyers

Rarely do I review books that disappoint, but there's a first time for everything, and I want to report that in my opinion David Nasaw's 850+-page  Andrew Carnegie (Penguin:  2007) is skippable.

This is a shame.

Carnegie, aside from being perhaps the most successful entrepreneur and businessman of the Gilded Age next to John D. Rockefeller, was a rags-to-riches story, one of the greatest philanthropists in modern history (in inflation-adjusted dollars), and, notably, a Scot.  First, a bit on Carnegie's life itself, and then more on why I can't recommend this treatment.

Carnegie arrived in Pittsburgh, then the center of industrial North America, in 1848 at age 12, son of a rather feckless and unsuccessful father and a hard-working mother from Dunfermline, Scotland.  With only the most rudimentary education, but an energetic, sunny disposition, and no fear of hard work, he started as a messenger boy in the telegraph office—the key hub in the only information network that mattered in those days—and soon became the most sought-after telegraph operator in the company because of his speed and accuracy.  Connections there (only the powerful regularly sent and received telegrams) enabled him to gain an introduction to the local manager of the Pennsylvania Railroad where, not yet 20 years old, the president offered him the opportunity to buy shares in another company (with a loan) and shortly thereafter receive his first dividend check:

"I shall remember that check as long as I live," he wrote many years later. "It gave me the first penny of revenue from capital -- something I had not worked for with the sweat of my brow.''Eureka!' I cried. 'Here's the goose that lays the golden eggs.'"

Spoken like the true capitalist that he was. 

By 1865 his reported income was $38,735, roughly $5.6-million today (according to Nasaw—not independently calculated by me), and by the time he sold Carnegie Steel to J.P. Morgan in March 1901 it was worth $400-million, or perhaps $80-billion today (same caveat). 

What few realize about Carnegie was that his  insatiable drive for more and more wealth, without limit, was tied linearly to his conviction that it was his duty to give it all away by the time of his death—so that, the richer he became, the more beneficent he could be.  Now, depending on one's view, this is either charming, or perverse, or a transparent excuse for rapacious behavior.  Here's how Carnegie expressed it, in decidedly Spencerian and, to our ears, antiquated, terms:

"Carnegie formulated a 'gospel of wealth,' relying heavily on Herbert Spencer, that rebutted 'protests against the unequal distribution of wealth by arguing that the common good was best served by allowing men like himself to accumulate and retain huge fortunes. The more wealth that landed in wise hands, the more that could be given away -- wisely -- by the retired capitalist acting 'as trustee and agent for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves.'"

Despite his lack of formal education, Carnegie was the classic autodidact and after the Civil War he began offering regular unsolicited advice to US Presidents and other luminaries.   Oddly full of insecurities for one so spectacularly successful, he didn't marry until his early 50's, although the marriage then was by all accounts remarkably happy and strong.  His work habits could be said to be odd, at the very least; he spent months and months of every year far away from Pittsburgh, either in New York (a full day's journey and more) or in Scotland, managing by telegram, with only the lightest finger on the tiller, delegating essentially everything (including the notorious, murderous, put-down of the Homestead steel strikers) to his managers on the ground.

Finally, by the time he died in 1919 he had nearly succeeded in his goal of giving away his entire fortune.

Now, what's wrong with this picture?

As full as it is of Carnegie the man (almost too full:  the book could easily be cut by 200 pages without material damage to its narrative thrust), it's almost devoid of insight into Carnegie the entrepreneur.  We only learn by inference how relentlessly innovative and determined he was. 

In a sense, he was in the perfect place at the perfect time.   As I said, Pittsburgh was the hub of industrial North America in the second half of the 19th Century and Carnegie's claim to wealth and fame was of course steel-making.   It was fortunate his parents saw fit to settle there rather than, say, New York City or upstate, and it was incredibly fortunate that the great continental build-out of the railway network was about to commence, which (we now know) would create immense demand for steel rails.

Prior to the Civil War, steel could only be made in small batches of 50-75 pounds or so at a time, making it prohibitively expensive for widespread industrial-scale use.  Rail track was made of iron, which rusted, wore out, and even shattered under heavy loads.  It was only when Henry Bessemer invented his eponymous converter that steel could suddenly be made at the rate of 25 tons at a crack (with enormous energy savings to boot), opening up the railroads as major league customers. 

In 1860 the entire United States produced about 1,600 tons of steel, but by 1900 Carnegie Steel alone was producing more than the entire output of the British steel industry.

"Voila," you may be saying?  Perfect place at the perfect time?

My question is slightly different:  How is it possible that no one but Carnegie saw this perfect confluence of immense demand (railroads for rails) and sudden ready supply (the Bessemer converter process).

Of course, it's not possible in the slightest; it would have been as plain as day.  And this is where Nasaw utterly fails to lend insight into why Carnegie Steel came to dominate and not, say, Frick Steel or Rockefeller Steel or (say) O'Reilly, Schultz, or Mancini Steel, there being plenty of Irish, German, and Italian immigrants alongside the Scots.

Reading between the lines, my diagnosis is that Carnegie was the master of creative destruction, including creatively destroying his own not-so-old mills by replacing them with new and improved equipment as soon as it became available.  He ran the mills relentlessly, 24/7, and was not in the least afraid to sell at or below cost in order to keep his hyper-productive mills running at the expense of competitors.  But these are conclusions one must infer, as they are not explained—certainly the economic and business consequences of his practices are not explained.

If I'm right, Carnegie's true competitive genius lay in his courage to continuously destroy his own competitive advantage in order to redouble it with the next generation of equipment and processes.  I am sure he never heard, much less uttered, the phrase, "If it ain't broke...."  Nor—listen up, lawyers—would he have countenanced the question/objection, "Who else is doing it?"  If no one else is doing "it" (it being the next generation in steel-making), that was precisely Carnegie's golden opportunity.

(Parenthetically, we may note that the sad dinosaur carcass that US Steel, successor to Carnegie Steel, became in the second half of the 20th Century was precisely because of its highly risk averse culture and its refusal to embrace the "mini-mill" technology introduced by the Japanese steel industry and such nimble domestic competitors as Nucor, which relied heavily on recycled steel as an input and produced relatively small-bore and unimpressive products such as thin rolled steel for kitchen appliances rather than massive trusses, stanchions, and I-beams.)

The ultimate question about Carnegie's life, of course, is whether his philanthropy trumps his ruder business practices or vice versa.  On this Nasaw prudently withholds judgment.  For my part, I think his almost furious philanthropy redeems whatever he may have done to amass his wealth.  Business standards 100 and 150 years ago were not as they are today, and it's blinkered and unfair to judge him by our nobler sensibilities (say we with loud self-satisfaction).  Some of what he did surely would qualify as insider trading today; other behavior was, as noted, murderous strike-breaking; and still other was simply pressing advantages without mercy.  But from the very earliest of ages he was driven, I believe, not by wealth for his or its own sake, but in order to multiply what he could give away.

According to Wikipedia, between 1883 and 1929 Carnegie and his trust funded the construction of 2,509 libraries,1,689 in the United States, 660 in Britain and Ireland, 156 in Canada, and others in Australia and New Zealand among other places. At the turn of the last century, more than half the libraries in existence in the US were Carnegie funded. He had vowed as a very young man to see to it that no one should be deprived of books growing up as he had been, and he came shockingly close to achieving this dream.

A complex fellow indeed.  I'm sorry this enormous effort by the indisputably talented Nasaw did not gain my critical favor.

A couple of weeks ago, the two volume history of the firm of Allen & Overy arrived FedEx from Europe.  I had just recently learned that the books existed, and the firm was kind enough to send me them when I expressed interest.  When they arrived, they were not remotely what I had expected.

First of all, the two books could not be more different, in format and typography, tone of voice, subject matter and organization, or even print quality (uniformly high, I hasten to add, but not remotely similar otherwise). 

Volume 1 (Allen & Overy The Firm 1930 - 1998, Allen & Overy, London, 1999), written by Humphrey Keenlyside, an alumnus of A&O, covers the years from the founding of the firm in 1930 through 1998, and resembles a classic law firm history with a greyish-silver cover, thick and heavy stock, and a standard chronological organization.

Volume 2 (A&O at 75, Allen & Overy, London, 2005), is a different beast entirely.  In format it's "landscape" not "portrait;" it's softbound not hardbound; it's printed in full, glorious, high-gloss color, with abstract commissioned drawings liberally sprinkled throughout; it covers no particular chronological period although it brings the story forward in time to 2005 (the firm's 75th Anniversary); and it's organized geographically, by office, rather than chronologically or by practice area or client. 

As Guy Beringer puts it in his foreword, "Rather than simply update the existing history of Allen & Overy, I thought it would be appropriate to focus on the single most important change that has happened to the firm -- our internationalisation."

Together, the two volumes tell what I believe is a story worth summarizing here in the pages of "Adam Smith, Esq.," for what it has to say about fortuity and foresight, luck and preparedness, vision and blinkered sight, and building on strength and recovering from disasters.

The history is voluminous enough that I will report it in three installments. Here is the first.

---

A&O opened its doors on a remarkably inauspicious day, January 1, 1930, at the start of what we now know was to be the Great Depression.  And although it seems alien to our current thinking, recall that Europe had still not psychically or physically recovered from World War I; the Continent, in particular, was still rebuilding.  Fortunately for A&O, George Allen and Tom Overy came from their previous firm, Roney & Co.—which they left because they were generating a large portion of the billings and receiving a small portion of the compensation—with a number of good clients that would get the firm on its feet. 

Conditions were, by today's lights, primitive.  The lift to the office "wheezed," heat, such as it was, came from coal, and transporting client files from Roney to the new global headquarters of A&O was accomplished in an overstuffed cab with Allen and Overy doing all they could to keep the piles from careening off onto the pavement.  (One imagines the same transfer of documents could be accomplished today through one or two zipped email attachments surreptitiously to oneself @googlemail.com.)

The history calls George and Tom "The Odd Couple," and indeed they seem to have been.  Allen "was exceptionally handsome, a dark, somber face offset by strong piercing eyes" and with an, austere, precise, scrupulously tidy military bearing.  Overy, by contrast, was all of 5'3" "and, if anything, gave the impression of being smaller, with the sort of face that scares small children."    In the first of several remarkably candid notes, the history states flatly that "it is quite possible that they were not even particularly good friends."  But share a commitment to the development of the firm they did.

The firm's first big break came when King Edward VIII abdicated the throne in December 1936 in order to marry Wallis Simpson; George Allen was the King's solicitor and arguably his key advisor during the crisis, spending the climactic ten days in almost continual close touch with his royal client.  Allen's gift for succinctness showed itself at a critical moment when the King, on the phone with Wallis Simpson (who was in France), covered the phone with his hand and asked Allen what he should say to summarize the situation to her.  Allen wrote, and the King relayed, "The only conditions on which I can stay here are if I renounce you for all time."

Although sensationally high-profile matters such as that undoubtedly helped the firm's profile, it's worth pausing for a moment to note that all is relative compared to the A&O we are familiar with today. 

After proclaiming that "the firm picked up quickly once the war [WWII] finished," it immediately follows with numbers which would be less than underwhelming today:  Total revenue for the year 1947 was £100,000, and Allen and Overy each earned nearly £12,000, which, we are reassured, was "the equivalent of £275,000 in today's money."

But if the firm was doing well, something I can only describe as human tragedy was in the offing.  In the summer of 1951, George Allen and Tom Overy decided to consult with their accountants to determine what they thought would be a simple matter:  The terms upon which they would retire.

The key issue was how the ongoing partnership would be able to repay the capital that Allen and Overy had contributed, together with the additional goodwill generated as a return on their investment.  The sticking point came to be how long the partnership would have to make good on the repayment.  The accountant initially suggested at three-year period, which Allen endorsed on the ground that even young partners were enjoying a high income by virtue of being partners.  Overy, on the other hand, favored giving the young partners longer to meet their sizable obligation.

Time was not on their side.

The partnership deed was due to be renewed January 1, 1952, and relations between Allen and Overy "became increasingly acrimonious," to the point that they were communicating only by written notes.  On December 31, 1951, they finally agreed on terms.  But the story was not ended. 

Early in 1952, as the junior partners began to realize the burden they had unwittingly assumed, they began lobbying to extend the repayment period from 3 years to 7.  Overy sympathized and took their side, but Allen "detected a conspiracy" and threatened to resign from the partnership altogether.  He even refused to attend a celebratory dinner with the partnership planned for the occasion of his knighthood by Queen Elizabeth in June 1952.   In June 1953 he formally retired from the firm.

George Allen in a formal portrait

And alas, the strain Overy had gone through began to take its toll as the decade continued, and "he began behaving strangely and unpredictably."  So long as this could be cabined within the four walls of the firm, it was manageable if awkward.  But the last straw was when he appeared unannounced one day at the offices of Morgan Grenfell (a client) demanding to be taken to lunch.  A senior A&O partner was summoned to pick him up, and shortly afterwards he would be committed.

As the book candidly puts it, "It is not clear whether Tom  Overy suffered a full-blown nervous breakdown or whether it was a temporary mental illness," but in November 1960 he was hospitalized and never again worked at the firm.  He died 13 years later at 80.

Tom Overy (undated photo)

In the early 1960's Allen & Overy seemed to be humming.  A 1962 book, Anatomy of Britain, identified it as one of the top four firms in the City, the other three being Linklaters & Paines, Slaughter and May, and Freshfields.   Customs of that time—well within the lifetime of many followers of "Adam Smith, Esq."—are as quaint and beguiling as they are unimaginable today.  For example, following the annual Christmas partners' lunch, all would proceed to Locks the Hatters in St James's Street to be sized and fitted for a new bowler for the coming year.

At the offices, each partner—in the absence of his own secretary, which of course all had—could buzz down to the general office where a light would blink next to his nameplate, prompting someone to rush to his office.  We are told that "if it was 4:00 pm and it was Tony Overy's buzzer going, the office boys would know the order that was coming:  a packet of DuMaurier cigarettes from the tobacconist opposite.  Years later, the instruction would more probably be for a visit to the off-licence."  [The "off-licence" is a liquor store, and Tony was Tom's son.  He had been made partner as of right under the original 1930 articles of partnership, which entitled George and Tom each to anoint one son as a partner.]

After Overy's departure, the role of "senior partner" was assumed by a triumvirate of Godfrey Morley, Willie Martin, and Jim Thomson, but "in reality it was Thomson who called the shots."  By all accounts he was a superb lawyer—some have said his reputation was as the finest commercial lawyer in the City—but it was his drive and ambition that gave him the impact he would have. 

"He was fiercely ambitious, not just for himself but also for the firm.  He made it his business to know everything that was going on.  No one, from senior partners down, escaped his attention.  He would call up files opened in the name of other partners without telling the partner responsible.  Whenever he passed anyone in the corridor he would shoot them a question about how a particular matter was being dealt with."

Thomson's leadership of A&O came at a time when the profession was undergoing a sea change whose repercussions are still being felt today:  It was no longer possible or desirable to be a generalist.  An update to The Anatomy of Britain published in 1965 read:

"'The new kind of lawyer is a more adaptable and positive person; he is staking his claim in the new corporate world, and prepared to deal with any business, including tax, pensions, and hire purchase, that his client might have.'  Substitute the words 'derivatives,' 'securitization,' and 'mergers' for those last three examples and that same sentence could just as easily be written today."

While the firm had made great strides during the  '60's, several large shocks hit it as the '70's began.  In the spring of 1970 John New, one of the new generation of leading lights, died of a heart attack at age 42.  He was the first at A&O to pursue the new field of intellectual property (and to realize its coming centrality to a sophisticated practice), and his death "left a huge hole."  In 1971, Robin Broadley, a partner since 1964, left to go to Barings.  He had been indispensable in developing the firm's banking work.

But the worst happened in the spring of 1971.  Thomson was in South Africa on business with a client.  On July 8, 1971, the car he was riding in to the airport for the return flight to London was forced off the road by a swerving driver; it hit a barrier and flipped over.  Thomson died on the way to the hospital.  Each of the other three people in the car was seriously injured, but ultimately survived.

The firm was "devastated.  Everyone went into a state of shock and a numbness spread throughout.  Allen & Overy revolved around Jim Thomson."  As the chairman of a major bank client put it:  "That will be the end of Allen & Overy."

Jim Thomson (undated photo)

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To be continued....

If you are fascinated as I am by the congeries of issues lying at the intersection of the "partnership ethos" and "corporate-like management," then you need to be familiar with the work of Dr. Laura Empson, as highlighted in Aric Press's recent "In-House" column for The American Lawyer.

Aric calls the just-released book which Laura edited, Managing the Modern Law Firm, a "valuable new collection of essays" that constitutes where "we all [should] start" in thinking about these issues. (Disclosure: I've met Laura and her publisher, Oxford University Press, sent me a reviewer's copy of the book.)

I just learned that Laura has moved from the University of Oxford’s Saïd Business School, where she was Director of the Clifford Chance Centre for the Management of Professional Service Firms, to Cass Business School, in the City of London, where she has joined the Faculty of Management as Professor in the Management of Professional Service Firms.

Lest you fear that Laura's approach might be too "academic," you should know that she began her career as an investment banker in the City and experienced the Big Bang first-hand. If you suspect that might have given her a keen curiosity about, and perspective on, how global professional service firms respond to change, you're absolutely right.

The relentless onslaught of business and management books often feels (to me, at least) like standing at the bottom of the sluiceways of the Grand Coulee Dam.  Fortunately, all but a tiny slice of the dead-tree armada is utterly inconsequential.  Of the remaining few books that penetrate consciousness for a week, a season, or a year, my secret suspicion has always been that far more are bought than are read.

A still slimmer slice are those select few that become household (or perhaps "office-hold") words:  In Search of Excellence, The Innovator's Dilemma, Good to Great, The Effective Executive, et al.

But even more unusual in my experience is the seriously-pedigreed book that questions the very foundations of the genre:  The business book, in other words, that's a meta-entry in the category.  In case you haven't guessed, I'm nominating The Halo Effect, by Phil Rosenzweig, a professor of strategy and management at the International Institute for Management Development in Lausanne.  He's a Wharton Ph.D, UCLA MBA, and former Harvard Business School Professor.  (I did say "seriously pedigreed," didn't I?)

New reviews of Halo, published this month, are coming out virtually daily, so I can't and won't attempt an exhaustive literature search here; besides, that's not what "Adam Smith, Esq." is all about.  I do want to focus on a piece Rosenzweig wrote himself in The McKinsey Quarterly, which, alas, is not yet available online (I subscribe to the print version, which arrived last night), but in the meantime the most capable review I can point your browser towards is courtesy of the stalwart FT. 

Rosenzweig begins with the inarguable observation that "The quest of every high-quality corporate executive is to find the keys to superior performance."  In this quest, they "too often" put their faith in books and articles that "have claimed to reveal the blueprint for lasting success, the way to go from good to great, or how to craft a fail-safe strategy or to make the competition irrelevant."

If you're starting to feel queasy at the claims of these books, in my opinion ever-so-fairly characterized by Rosenzweig, get on line.

His indictment of the accumulated managerial literature can succinctly be stated, in my view, as falling prey to mistaking correlation for causation.  Specifically, many management books that focus on excellence, strategic success, enduring and powerful cultures, and so forth, start out by looking for companies that have succeeded and then trying to tease out and analyze what they have in common.  Rosenzweig's point is that, when the business writer begins the search for superior traits in firms by examining those who are (we now know, in our wisdom) successful, that the writers have by hypothesis excluded from the dataset firms that underperformed or even failed.

Yes, of course, you may be nodding, but the issue is this:  What if some or many of the sub-par performers shared  the traits the author proceeds to identify as indicia of success?  We would never know, because the authors never asked.

The "halo effect" itself is a phenomenon first identified in the 1920's by Edward Thorndike, a US psychologist, and is "the tendency to make specific inferences on the basis of a general impression."  This may at first blush seem abstract, but Rosenzweig fleshes it out thus: A firm that is conspicuously successful (say, Cisco during the late 1990's) is typically praised for "its brilliant strategy, masterful management of acquisitions,a nd superb customer focus."  Then, when the dot-com's collapsed, observers were "quick to make the opposite attributions:  [That] Cisco now had a flawed strategy, haphazard acquisition management, and poor customer relations."

Rosenzweig's insight follows immediately:  "On closer examination, Cisco really had not changed much—a decline in its performance led people to see the company differently."   After all, those various attributes ("strategy," "customer focus," indeed "management" itself) are profoundly subjective, or, as he puts it, "ambiguous and difficult to define."

Elsewhere, I have made the observation that the problem with statements to the effect that your firm is pursuing maximum (or higher, or optimal, or whatever) "profitability" is that as a manager there's no dial on your financial dashboard that tunes profitability up or down. It's the residual, if you will, of everything else you do, from professional development and cultural hygiene to the needs and preferences of your clients and the exertions of your competitors.

The dashboard/race car analogy may actually be useful. How? What a race car driver would really like would be a dial on his dashboard for "faster lap times." Of course there's no such thing, and we all must work with the pedals and wheels that we can control:

• The innate performance capabilities of your tools: The engine, suspension, brakes, tires, steering, etc. (think your IT infrastructure, your KM system, your office layout, your support and administrative staff).
• The external environment including the track design and condition (think the regulatory and public-opinion environment, and if you doubt it matters, I have three words for you: Stock options backdating).
• The abilities of your team-mates and pit crew (your colleagues, partners and associates and paralegals, and your line staff).
• What the other drivers and teams are doing (your competitors: If you subscribe in principle to the observation that "no battle plan survives its first encounter with reality," ask yourself if you are truly mindful of how your competitors might preditably react to your firm's new initiative X). And
• The driver's own level of experience, reflexes, risk tolerance, peripheral vision, etc. (your expertise as both a legal practitioner and as a trusted advisor to your client).

But back to Rosenzweig. He proceeds to deconstruct the promises of the books, in particular the promises of absolute performance and of enduring success, as having especially pernicious consequences for executives who rely on their false hopes.

As for absolute performance, it's largely irrelevant. All that matters is relative performance.  Need an example?  Try GM. Its US auto market share has gone from 35% in 1990 to 29% in 1999 and 25% in 2005. That's the relative measure—the only one that matters.  In absolute terms?  Without question, GM cars in 2005, compared to those it put out in 1990, were of far higher quality, safer, with more features, performance, and comfort.  Yet the comparison that mattered was not to itself in 1990, it was to the Japanese, German, and South Korean competition, where GM was (sadly, but richly deservedly, in my view) was getting hosed.

And as for enduring success? 

In today's globally competitive environment, there is no such thing as incumbency.  There's both a statistical and an empirical dimension to this observation. 

The statistical reality is simply that in any given population of X (human beings, fruit flies, wonders of the world, companies), there will be some remarkably long-lived examples.  The problem is that they are only identifiable after the fact.

The empirical reality is that long-term successful firms haven't magically "unlocked the secrets of sustained greatness:"  Instead, they've strung together a long string of many short-term successes.  Rosenzweig doesn't mention this example in the McKinsey piece, but I would nominate GE as a long-term-successful firm that has achieved that privileged position only by continually re-inventing itself at a pace that would shame Madonna.

Managers cannot rely on principles of this or principles of that, seven habits programs (or 12-step programs), 2 x 2 matrices, or other guru wisdom @ $29.95.  Instead, we must realize that the world is uncertain and indeterminate:  We are affected more than we'd like to admit by:

• technological change,
• capricious customer preferences, and
• unknowable internal capabilities within our own firms.

This means we must learn to "see the world through probabilities," as summarized in this observation from ex-Goldman Sachs, ex-US Treasury Secretary Robert Rubin:

"Once you've internalized the concept that you can't prove anything in absolute terms, life becomes all the more about odds, chances, and trade-offs.  In a world without provable truths, the only way to refine the probabilities that remain is through greater knowledge and understanding."

So is Rosenzweig's thesis a counsel of despair?  Can we, indeed, know nothing meaningful about successful management strategies?

I view it, as does Rosenzweig, as a counsel of inspiration.

In this unknowable world, what attitude and what approach grace us with the best odds of success?  Only one:  Critical thinking. 

This means rigorous and unblinking analysis of reality as it is, not as you want it to be; a welcoming attitude towards mistakes as learning opportunities and a skeptical attitude towards successes as profoundly time-and-place specific; and a severe allergy to formulae, knee-jerk reactions, and wilful ignorance of the new, the foreign, and the "other."

As Rosenzweig puts it, "If a set of steps that could guarantee success did exist, and if greatness were indeed simply a matter of will, then the value of clear thinking in business would be lower, not greater."

Would you want it otherwise?

James Buchan, The Authentic Adam Smith (W. W. Norton & Company, Inc.: New York, 2006) has recently come out and it is an irresistible selection for this month's "Adam Smith, Esq." Monthly Book Review.  I hope you understand.

Buchan, a Brit, lives in Norfolk, England, and has been a foreign correspondent for The Financial Times as well as the author of Frozen Desire, an examination of money through history, as well as Crowded with Genius, a study of Edinburgh during the Enlightenment.  Better credentials for profiling Adam Smith are hard to imagine.

Which Buchan does succinctly:  In the small span of 145 not-large pages (not counting extensive endnotes).  And what story does he tell?  Essentially, a more complex and sophisticated view of Adam Smith than those ideologues of left and right today who would denounce or embrace him as a fairly one-dimensional proponent of laissez-faire, free markets, and limited government. 

Smith, in fact, viewed himself not as an economist (the term had barely been invented), but as a moral philosopher.  Buchan stresses the importance of The Theory of Moral Sentiments, which predated The Wealth of Nations by 17 years, and implicitly critiques too-casual "followers" of Smith today who invoke his name in ignorance of what Smith actually wrote.

As for Smith's personal life, it's safe to say he was an eccentric preoccupied with the life of the mind.  He never married and lived much of his life as an adult with his mother.  Although he became wealthy through tutoring the Duke of Buccleuch through a multi-year tour of the European continent, followed by a lifelong retainer of £900/year (more than the most highly-compensated Scottish judges at the time), and considered himself "as affluent as I could wish to be," it was only after his death that we learned he gave away most of his wealth to charitable causes.

An unexplored—or unknown, hitherto, by me—aspect of Smith's thinking were his views on maintenance of the British Empire, and specifically on control of the American colonies (recall that Wealth of Nations was published in the almost preposterously apropos year of 1776).  Smith's view, in a word?  Set America free.

He came at this both through his economic analysis of matters, and from his experience of military affairs.  The second first:  As Buchan puts it (p. 112), "Smith, who like many Scotsmen of his social class had wide connexions with military officers, was able to see that an American militia, once it had served long enough to achieve military discipline, might be a match for the redcoats."

And as for the first? He believed that Britain's attempt:

"To prohibit a great people, however, from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred right of mankind."

And there's more:  He foresaw the United States eclipsing the mother country economically. 

"Such has hitherto been the rapid progress of that country in wealth, population and improvement, that in the course of little more than a century, perhaps, the produce of American might exceed that of British taxation.  The seat of the empire would then naturally remove itself to that part of the empire which contributed most to the general defence and support of the whole."

As the expenses of the American war effort escalated, Smith became convinced of "the real futility of all distant dominions."

Smith died in Edinburgh on Saturday, July 17, 1790, aged 67, after a few years of declining health.  In February of that year he remarked:

"I meant to have done more; and there are materials in my papers, of which I could have made a great deal.  But that is now out of the question."

The night before he died, he took leave of his friends at dinner saying, as he left the room, "I believe we must adjourn this meeting to some other place."

Pick up Buchan's book; you'll learn much in short order, and may even, familiar as you believe you may be with Smith, learn something new.  I did.