Risk management has been forever changed by technological innovation. The roots of this boom date back centuries, but disruption-loving engineers have made a particularly huge impact on the financial services industry, and on technology risk management, over the past quarter century.
This week happens to be the 25th anniversary of the publication of Michael Lewis’ book, The New New Thing, which projected that engineers would seize control of technology — and therefore of society — from Wall Street and traditional MBA corporate executives. Recently, it was announced that The New New Thing will be made into a motion picture, joining The Big Short, Moneyball and The Blind Side.
Aaron Brown
So, now seems like an appropriate time to consider the accuracy of its key forecast: that the future will consist of constant disruption based on engineering logic, rather than tradition or group preferences. The implication of this prediction for risk managers was that technology risk management could not be conducted from a traditional business, financial or regulatory perspective.
The drivers of change, Lewis suggested, would not be market demand, return on capital or the desires of regulators, academics and leaders. Instead, “move fast and break things” iconoclasts with engineering genius and no respect for tradition or caution — in fact, often with overt contempt for those things — would make our choices for us.
The New New Thing provides a sketch of Silicon Valley in the 1990s, featuring a profile of technology pioneer Jim Clark — engineer and founder of Silicon Graphics, Netscape, Healtheon and many smaller companies. At the time of its writing, Mark Zuckerberg was in high school and Robinhood’s founders were in middle school; Vitalik Buterin had not yet entered kindergarten in Russia; Digicash, the most successful version of cryptocurrency at the time, had gone bankrupt the previous year; artificial general intelligence had been largely abandoned as a goal (it would be revived three years later); YouTube was six, Twitter seven, the iPhone eight, and Instagram would not be launched for another 11 years. Elon Musk, Larry Page, Peter Thiel, Sergey Brin, Jeff Bezos and other major 21st century technology disruptors were active — but had not yet become key economic disruptors.
Innovation Across the Centuries
Michael Lewis was not the first to propose engineers would shape the future. The sociologist Thorstein Veblen made the same argument all the way back in 1919 in The Engineers and the Price System.
Veblen pointed out that during the first Industrial Revolution — between, say, 1760 and 1830 — there was little distinction between engineers, managers and financers. The fields were not yet specialized to the point that an intelligent person could not master enough of all three to oversee the physical production process, manage the business and negotiate the financings. Inventors like James Watt might hire people or take partners to specialize in management or finance, but the engineer could remain at the head of the organization, and there was little pressure to make the business grow beyond the natural market for its basic technology.
By the time of the second Industrial Revolution, 1870 to 1914, great engineers like Thomas Edison, Nikola Tesla and Alexander Graham Bell required agreements with professional managers and financiers to pursue their research. They transferred their inventions to huge corporations run primarily by specialists in business and finance — people with little technical expertise.
Those corporations were controlled, both economically and socially, by a class of professionals who were prone to slow innovation and who wanted to minimize disruption and competition. There was pressure to grow, combine and cooperate with other businesses, often businesses with unrelated technologies. Increasing government regulation encouraged these tendencies.
Veblen noted that the experience of the first World War had made clear that business and financial specialists were inefficient at running innovative businesses, and that control should pass to engineering experts who followed the natural course of technology, rather than enforcing outmoded business practices and pursuing profits.
For the half century following the publication of Veblen’s work, his prediction did not pan out. Instead, corporate management became increasingly professionalized, and included some trained business managers who understood technology. But there’s an enormous personality difference between people who major in profit and minor in understanding existing technology versus people who dream of building future technology and often drop out of school — or get kicked out. The conservatives were still running the businesses, fighting disruption and slowing innovation.
Modern Agents of Disruption
Things began to change in the late 1960s, headlined by the founding of Intel by engineers in 1968.
Around that same time, economists began developing what would be called endogenous growth theory, and disruptive innovations like personal computers, electronic trading and gene splicing appeared. All grew significantly, without major input from managerial or financial professionals, and free from the control of large, established corporations. This trend accelerated into the 1990s, when it reached the frenzy of the Internet bubble that Lewis chronicles.
The biggest challenge to this trend was Microsoft, and Jim Clark’s battles and alliances with “the Evil Empire” are a major thread in the book. Although Bill Gates was proficient technically, he ran his company more like a mid-20th-century behemoth, buying much of its key technology, hiring engineers and rewarding them generously — but running the company around acquisitions, alliances, financial power and monopolies. Microsoft has stood for slowing innovation and integrating it into legacy businesses before release, minimizing disruption.
A quarter-century later, Microsoft is still around, still mighty. Amazon is another giant founded and run by a businessperson rather than an engineer. But technology and social disruption has mostly come from engineers chasing technical visions, rather than from technologists working on projects assigned by managers or from financial people looking at capital budgets, internal rates of return and effect on legacy businesses.
The changes from 1999 to 2024 have owed more to the Jim Clark types than Veblen’s Captains of Industry and Captains of Finance. Interestingly, this has not led to chaos. Society and the financial system have proved resilient, able to absorb the inventions of disruption-loving engineers.
Parting Thoughts
The technology sector is among the most volatile in the economy, and the least amenable to Graham-Dodd style value principles. It often seems to drive valuations in the entire stock market. However, investors and financial institutions have learned to tolerate those features, and have consequently reaped generous rewards. Big companies like Meta, Alphabet, Apple, Nvidia and Tesla seem to combine engineering leadership with corporate stability — even if they irritate regulators and baffle traditional financial analysts and management gurus.
The implication for risk managers is if engineers shape the future of the economy and society, we must understand engineering — not to the level of building new products, but to a level to evaluate the plausibility of future scenarios and their timings. Few people, if any, are capable of doing this in all major fields of technology.
Past innovations, moreover, have often exploded out of fields not considered major at the time. Therefore, risk management organizations should seek diversity in technology backgrounds, and should make sure at least one person is following each of the major channels for conveying technical information.
The disruption that threatens your business could come from literally any field, and you cannot expect that it will be anticipated by line risk takers or mainstream publications.
Topics: Data, Innovation
