The Candlemaker's Fallacy: Innovation, Pencils, and Metallica

This is going to be a bit of a different article than what I normally write, but this represents one of the largest issues in the world that I’ve been able to identify. What is the Candlemaker’s Fallacy? This Fallacy is the reason (at least one of the reasons, anyway) that big companies often lose to smaller ones when it comes to innovations. It’s the reason that underdogs have an advantage when it comes to making quick changes in orientation. More importantly, it’s the reason that large organizations so often become bloated and inefficient. Without further ado, let us begin.

Imagine you are the owner and head of the world’s largest candle-making company in the early 1800’s.

(While not necessary, it may aid in your imaginings to make yourself very British and very uptight. For the sake of the argument, we’re also going to say you’re immortal, but only so you don’t have to create several pseudo-British personas. Unless you want to, in which case… as you were.)

You’re very involved in the large-scale operations of your long-running enterprise, and, as a result, are somewhat removed from the ins and outs on the level of the chandlers themselves.

You begin to hear whisperings from some of your associates of a new sort of technology being pioneered by some tinkerers, who are supposedly using electricity to make metals glow. Some had been working on it since the turn of the century, but the process required massive batteries to produce even small lights. You shake it off as inconsequential, and continue making money the same way as you always have.

A few decades pass, and you start to hear of these electric wires being contained inside glass containers. They last longer, and aren’t as impractical as they used to be- although they still can’t hold a candle to… well, candles. Besides, the average person hasn’t got the access to batteries or steady supplies of electricity, anyway. You shrug it off as a novelty that’s bound to pass.

It’s the late 1800’s now, and there are several patent wars going on between these inventors. They’ve introduced vacuums into the bulbs, and they’re beginning to seem like a viable lighting source. They’ve started to use these lights in factories and other large commercial buildings. They’ve even started to put these lights on the streets, instead of the trusty oil lamps that you have a hand in the business of. At this point, you’re beginning to get concerned. They have to be dangerous to the business public health, right? The Pope banned gas lamps in 1831, surely we should ban these, too.

A German newspaper printed,

“God had decreed that darkness should follow light, and mortals had no right to turn night into day.”

“Surely this will stop these Faustian devils,” you think to yourself. However, some fool named Edison manages (perhaps questionably) to make great strides on an “incandescent bulb,” and he’s quoted as saying,

“We will make electricity so cheap that only the rich will burn candles.”

This is bad news- you’re rich because people burn candles. At this point, you’ve begun to panic. Why didn’t you see this coming? It seems so obvious now, but a hundred years ago the thought of these electric lights were completely preposterous. You certainly had the resources to get in the business early, and you could have acquired the means. Instead, you’ve missed the chance to innovate completely, and you’re soon to be relegated to a small lot in most American malls, selling (God forbid) scented candles. The horror, the humanity, the injustice of it all.

Where did you go wrong?

You were doing everything right, making good money, and providing a valuable service, to boot. Instead of wasting a century investing in some fringe technologies or liquidating capital to engage in patent wars, you stayed the course with the tried-and-true business model that had always worked in the past. By all accounts, you should have come out on top.

Of course, that’s not the way that these things work out. In reality, anyone with a bit more foresight and a sense of innovation could have told you by the mid 1800s that electricity was the way of the future. Some of them may even have tried. However, your proximity to a business model that depends on electricity not succeeding ended up leaving you blindsided completely when the future became the present.

Let’s break this down.

There’s a metaphor that’s commonly used in the tech fields to examine how new ideas are adopted- it’s all based around the pencil. (If anyone knows who originally came up with this, please let me know. It seems to be beaten to death and I can’t find the original source.)

For this next bit, imagine a classic Ticonderoga No. 2 pencil, the kind with the green metal bit (called a ferrule, remember this for later) to hold the eraser.

candlemaker's fallacy ticonderoga pencil

The lead point of the pencil represents the leaders of innovation. They’re strong (well, it’s not a perfect metaphor), sharp, and well ahead of the general population. These types can withstand being ground down by the process of innovating, and they’re used to being alone in the process. This is okay, though, they know that time will tell and their work will prove itself, eventually. This type is normally so far ahead from the average individual that their perspective is impossible for them to explain. They just “get it,” and they don’t understand how everyone else can’t see what they see. (In the electricity/light bulb metaphor, the lead would be Nikola Tesla, or some of the early 1800s tinkerers who were in it for the sake of science.)

Next, we have the part of the wood that supports the lead, or the “sharp ones.” (I don’t care for this title, but it seems to be the norm.) These are the early adopters- people that aren’t necessarily the iconoclastic, innovative loners, but they have a good eye for quality and a greater than average sense of practicality. This population is the place where good ideas get combined and packaged up for mass consumption. Steve Jobs, while in a few cases may have been the lead, was actually more of a sharp one. He wasn’t specifically responsible for much of the technical aspects of innovation at Apple, but he had a strong sense of what was coming. With that, he was able to take what the lead was working on and combine that with a strong sense of practicality. This made the unfamiliar seem inevitable, and he was able to sell that to the next part of the pencil.

We’ve arrived at the long, unsharpened “wood” section. These types are open to new ideas if they are presented in such a way that converting requires as close to zero effort as possible. This population is why Hollywood continues to remake old movies, or why phones have remained virtually the same since we lost Jobs. These types are represented well by the current Apple CEO, Tim Cook. He’s not innovative, but he manages (for now, at least) to keep the company running, releasing slight variations on the old stuff that’s tried and tested.

Edison is a special case- in some instances, he was a sharp one, because he was pretty far ahead of his time as far as the lightbulbs were concerned. In other instances, he was the wood- he went to war with Tesla for years, claiming that DC (direct current) was superior to AC (alternating current). Hint: it wasn’t. If I remember correctly, Edison only admitted his failing on his deathbed.

After the wood, we come to the little green metal bit, the (you’re a sharp one, you remember…) ferrule. These types are obstinate and almost entirely change-averse. If you haven’t guessed by now, this is your British-candlemaker-CEO-O.B.E.-guy (assuming you went far enough with your imagination.) This population is the sort that inevitably arises when anyone in the history of the world has ever had a cool idea. “That’s crazy, that’s dangerous, that’s impossible,” and so on. You certainly have met one, and if you haven’t, it may be you. (The fact that you’re on this site suggests otherwise, says I, master of flattery.)

Here’s a fine list of quotes from these sorts of miserable bastards:

Finally, we have the eraser. I’ll make a special case here- while in most versions of this metaphor, the eraser is considered to be separate from the ferrule, I’ll argue that the eraser is actually the same type of person, just turned malicious. The eraser is a special type of awful- these are the sorts of people that are so impotently blind to the future that they cannot conceptualize new things as anything but the actual, immanent end of society as we know it. This population is exemplified in a number of ways- politicians, “concerned” parents (or the fusion of the two, Tipper Gore), and business executives that are incapable of competing.

This is where the Candlemaker’s Fallacy comes in.

As organizations grow in size, they become increasingly inflexible in the manner that they operate. Their continuing success at whatever they are doing has allowed them to expand in such a manner that they begin to shift their focus from first-order problems to higher order problems. Because of this shift in intellectual resource allocation, when new information is introduced, the organization will fail to examine said information appropriately on the first order level, and instead, will either ignore or misinterpret it due to high-order concerns. As competing first-order solutions are proven viable and begin to transition to higher order levels, the organization, instead of accepting the new technology and adapting, will seek to compete with higher-order countermeasures- aggression or government intervention.

More simply:

As your candle company went from being just a small town, mom-and-pop operation to a multinational candle conglomerate, you obviously perfected the process of making candles. Because of this, you got away from the actual business of lighting rooms and started focusing on things like mass-production and building a supply chain. When you did this, your company had to shift the serious brain power away from the front lines, which means when someone talks about a new mom-and-pop business that makes electric lights, you don’t see them accurately- as a legitimate threat. You either see it as a fluke fad that won’t last, or as something that will never work at scale (because it lacks electric infrastructure, for example). Since you’ve dismissed the underdog, you fail to watch them transition from a novelty to a legitimate business concept.

By the time you realize that they’re going to rapidly put you out of business, you’ve already missed the chance to adapt. Even if you had seen it, it would have required the kind of forethought (the lead) that is ultimately very rare in the larger, high-order businesses. The lead and the sharp ones are always going migrate in the direction of freedom- there are distinctly different types of people that want to run start-ups and want to take over an established company.

Ultimately, we arrive at the Fallacy itself-

An entity of sufficient size, due to their higher-order perspective and acquired incapacity to innovate, will seek to eliminate competitors through any means means other than direct competition.

This can take several forms.

Many very wealthy organizations will attempt to bleed smaller competitors dry. This is an effective means of stifling innovation when the competitors are sufficiently small. Obviously, foresight is required here, which makes this form of the Fallacy even more malicious. To do this well, the organization has to understand that the competitor is actually a threat at an early enough stage to disable them. This is ironic for the fact that, at this stage, there’s still a good chance that smart investment and hiring could actually serve to establish the organization in question as an industry leader, given proper application.

Next, we have the coward’s application of the Fallacy. This will be henceforth referred to as “pulling an Edison.” Tesla (whose patents were licensed by Westinghouse, one of Edison’s major competitors in the so-called “War of Currents”) was going around in his boundless kindness trying to show the world the superior nature of AC. (This may be a bit of an embellishment, to be fair, but as you may have guessed, I’m a Tesla fanboy.) Edison, on the other hand, had a great deal of capital invested in DC becoming the standard, and he may have actually failed to understand the mechanics of AC. Whatever the case, he used every resource at his disposal to scare people about the “dangers” of AC- including partnering with Harold Brown to demonstrate said dangers by electrocuting tons of stray dogs in public spectacles.

What a reprobate.

Finally, we have the final form of the Fallacy’s application- the long arm of the law. Governments have managed to be a weapon against innovation since time immemorial. Any organization of sufficient size and influence becomes capable of directing their resources towards the manipulation of government officials and power towards their ends. In some sense, this has a sort of fairness to it- if the government is capable of limiting the power of business, isn’t it only right for the businesses to have some say in it?

The problem comes from an essential fact that underlies the entire Fallacy:

A problem must be solved at the level from which it originates.

This is perhaps the most misunderstood fact in the history of the human race. This website’s slogan, “Save the World- Master your Self,” is actually built on this principle. If the world is made up of individuals, you’re probably going to have more of an effect if these individuals improve themselves (and solve their own first-order problems) than if you try to deal with the symptoms of these problems from the top, down.

Maslow’s Hammer comes to mind-

“If all you have is a hammer, everything looks like a nail.”

What is the basic premise of the Fallacy, then?

Given sufficient time, innovation always wins.

We could take a bit of a Buddhist tact to the Fallacy and say that the real problem is one of attachment. When we get used to doing something a certain way, eventually, it becomes routine. An interesting parallel in neurology- when a person begins practicing a new skill, new links (synapses) between neurons (brain cells) are created. As the skill gets practiced more and more, the brain begins to build what is called a “myelin sheath” around those neural links, which speeds up the signal transmission. This comes at a price, however, because the increase in speed means a decrease in flexibility. Basically, it gets easier to do the thing, but only easier to do it the same way you’ve always done it.

In a loose sense, this is the same thing as attachment- because we’re so used to doing something a certain (easy) way, doing something different becomes hard. Change is scary for this reason, because we’re attached to the old way of doing things. Thus, attachment is the cause of suffering.

It’s this attachment that prevents us from doing anything about the emergent innovations, even if we can acknowledge them.

A great example of this is with Napster and Metallica in the late 90’s. If you’re not familiar, Napster was an early peer-to-peer (P2P) file-sharing service that more or less popularized MP3 sharing online. Long story short, a certain Metallica song got leaked and led the band to realize that their entire discography was available for free through the service. The band sued, Napster filed for bankruptcy, and Metallica’s drummer Lars Ulrich became one of the most hated people in the country.

This is a really interesting example, because it shows us two things.

One, the emergent problem caused by the internet- file sharing is very easy (because there’s no physical manufacturing required for replication) and, for the same reasons, nearly impossible to regulate. Despite the appeal of P2P, this is a significant and legitimate concern- artists already weren’t making a huge amount of money due to the entrenched nature of record labels. Throw file-sharing in the mix, and it became even harder to make a living making music. This fact is, in no small part, partially responsible for the kind of crap pop music that emerged in the 2000s. The only stuff that major record labels would touch had to be universally appealing, usually leading to very generic, uninteresting crap.

Post-Black-Album-Metallica, being (something like) a fairly high-order organization at that point, saw the high-order effects of this emergent technology, but they (and the courts) failed to see this first-order technology (internet sharing of music) as an opportunity. Instead, it was just a threat, and they used the Government to defeat their new, indirect competitors.

The problem here was that these high-order organizations didn’t (or couldn’t) realize something incredibly important:

People will pay for basically whatever, as long as you make it stupidly easy for them. Remember that the wood is “open to new ideas if they are presented in such a way that converting requires as close to zero effort as possible.”

Two innovations appeared as a result of this.

The first came from our boy Steve Jobs.

I don’t know if you remember post-Napster P2P, but I do. Before LimeWire, there was KaZaa.

It took hours to burn a CD, and half of the time what you’d get was wrong. I distinctly recall attempting to make a Summer Jams CD and ending up with at least 30% of the songs being in Japanese. By the time LimeWire came out, I was fairly wise to the risks inherent, and I got to watch idly by as many a friend lost a computer to viruses in the form of Crank Dat Soulja Boy.

Poetic justice, if you ask me.

Somewhere in this crisis of epic proportions comes Jobs with the miracle that was iTunes. There were no viruses, the software was (emphasis on was) fast as hell, and you could preview the songs before you bought them. Plus, it was cheap. $0.99 for a song? I was in. I think my grand total of songs purchased through iTunes was something over 2,000.

This worked, for a while, but as internet speeds improved and smartphones were introduced, there emerged a new opportunity that took some time to arise- streaming.

This was the real solution to the continuing problem of music sale losses to different forms of P2P. I don’t know about you, but I am more than happy to pay something like $15 a month to have access to almost every song in the world.

To reiterate- people will pay for basically whatever, as long as you make it stupidly easy for them.

The moral of this interlude (music pun, deal with it) is that the old models will attempt to strangle the new models without actually addressing the problem. Part of this is because of a legitimate need to maintain order. If lightbulbs became popular overnight, many a chandler would have been out of a job. As much as I may seem to be opposed to the entrenchment of the anti-innovation powers-that-be (and I am, don’t get me wrong), this system works the way it does because it maintains the integrity of society as a whole. Overnight revolutions are foolish and destructive.

The real issue is when these systems that should maintain a reasonable degree of control abuse their power and actually prevent necessary innovation from occurring. We need to find a proper balance- a system that can adapt quickly while still maintaining stability. Sometimes we need our Teslas and Jobs, and sometimes we need our Edisons and Cooks. We need the innovative power of the former, and the stabilizing factor of the latter- united as one.

I will leave you with this quote from Victor Hugo-

“There is only one thing stronger than all the armies of the world:

and that is an idea whose time has come.”

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