1990s

The 1990s are presented not as a single episode but as a period in which the book’s central questions about trust, cooperation, information, and organizational design become especially visible. The decade’s stock-market boom enlarged the rewards for short-term corporate risk, tax-avoidance schemes spread, and institutions meant to protect the public sometimes failed to do so. At the same time, the book sets these failures against enduring problems of coordinating dispersed knowledge and sustaining collective action.

Trust and the Market

The book contrasts the corporate corruption associated with the late-1990s stock-market bubble with a longer history in which commerce developed toward greater trust and transparency. Its argument is not that businesspeople are naturally honest. Rather, trust can lower the cost of ordinary transactions, while suspicion forces people to spend more time investigating deals and enforcing promises. A functioning market therefore depends on confidence in commitments, though not on uncritical faith: the buyer still has reason to beware.

That historical contrast gives the decade’s scandals their significance. The author treats them not simply as isolated departures from a generally trustworthy system, but as evidence that the institutions and incentives supporting fair dealing can break down. The benefits of trust remain substantial, yet the more people rely on it, the more damaging exploitation becomes when safeguards fail.

The Bubble and Broken Incentives

The late-1990s stock-market bubble weakened what the book calls the shadow of the future: executives at firms such as Enron and Tyco could see that future cash flows might never justify their inflated share prices. When present gains became unusually large, and stock options rewarded executives immediately, long-term consequences counted for less. Boards of directors that paid little attention further reduced the pressure to protect the future health of their firms.

The example of Dennis Kozlowski makes the incentive problem concrete. The book observes that it is difficult to see how he could honestly have made $600 million while remaining Tyco’s chief executive, whereas dishonesty made the amount remarkably easy to obtain. Investors, meanwhile, failed to recognize that the incentives behind corporate promises had changed. Intoxicated by gains in a bull market, they also neglected the due diligence that should accompany even a trusting approach to investment.

Institutions designed to distinguish reliable companies from unreliable ones did not consistently correct the problem. Underwriters, analysts, stock exchanges, and auditors all had reputations that should have depended on identifying risk and verifying claims. In principle, self-interest would encourage these firms to protect their credibility: clients would abandon a service that repeatedly vouched for bad information. The scandals showed the weakness in that reasoning. Accountability works only if organizations that fail to do their job actually bear a cost.

Tax Avoidance and Collective Action

The decade’s growth in tax avoidance widened doubts about whether the tax system was fair. By its end, two million Americans had credit cards from offshore banks, compared with almost none fifteen years earlier. Promoters used the Internet to advertise complex trust arrangements, while other schemes relied on familiar tactics such as keeping separate sets of books or claiming personal expenses as charitable deductions. Rough estimates placed the resulting cost to the United States as high as $200 billion a year.

Most Americans continued to pay taxes honestly and told pollsters that cheating was wrong. But the visibility of schemes that seemed to work could still make ordinary taxpayers wonder whether they were being taken advantage of. Increasing complexity made it harder to determine what counted as a fair share, while the growth in corporate tax shelters added to public skepticism. The question was not only whether individuals obeyed the rules, but whether they believed that others did.

Taxation illustrates the collective-action difficulty behind that question. Taxes fund shared services, from defense and education to roads, policing, fire protection, and scientific research. Many such benefits cannot be withheld from people who decline to contribute. An individual can therefore have an incentive to free ride, receiving public goods without paying a fair share; if enough people do so, the goods themselves are threatened. The book connects this dilemma to a wider problem: a system may benefit everyone while leaving each individual reluctant to bear the cost of maintaining it.

Centralization and Dispersed Knowledge

The decade’s institutional problems also return the book to a tension between decentralization and central control. The case for decentralization rests partly on local and tacit knowledge: people close to a particular job or problem may understand details that are difficult to convey to distant decision-makers. But specialization alone does not guarantee that useful information will travel across an organization. A system must preserve local independence while finding ways to aggregate what its separate parts know.

That tension appears in the book’s account of U.S. intelligence. After the September 11 attacks, congressional criticism focused on failures to share information among agencies. Senator Richard Shelby described the FBI’s decentralized organization as leaving information fragmented into largely independent fiefdoms. The recommendation that followed was a stronger body positioned above and independent of disputatious bureaucracies. The argument echoed an earlier response to the division of intelligence responsibilities: fragmentation had left the country vulnerable to surprise, so centralization was presented as a remedy. Yet the book’s broader account cautions that neither decentralization nor centralization solves the whole problem on its own. Local knowledge can be lost if it is not shared, while command from the center can miss what only people close to the work can see.

Organizations Under Pressure

The decade also figures in the book’s account of corporate organization. For much of the twentieth century, successful American companies were understood as vertically integrated, hierarchical, and centralized. The corporation often did much for itself, arranged managers in layers, and reserved consequential decisions for headquarters or the chief executive. Even where divisions operated with day-to-day independence, ultimate strategic authority remained concentrated.

The costs of that arrangement became clearer when established American companies faced stronger competition. Earlier isolation from foreign firms and smaller competitors had limited the range of perspectives available to senior managers. By the 1970s, Japanese and West German companies were producing better products more quickly and responding more closely to consumers, while U.S. firms struggled to make the organizational changes the new competition required. The decade thus supplies a historical backdrop for the book’s continuing concern: institutions need both coordination and access to diverse, local information. Hierarchy can coordinate activity, but insulation from competition and outside perspectives can leave organizations unable to recognize trouble until it is unmistakable.