My daughter’s 4th grade class read The Emperor’s New Clothes (a two minute read) and today I led a discussion of the story.  Here are my notes.

The Emperor, who was always to be found in his dressing room, commissioned some new clothes from weavers who claimed to have a magical cloth whose fine colors and patterns would be “invisible to anyone who was unfit for his office, or who was unusually stupid.”

Fast forward to the end of the story. Many of the Emperor’s most trusted advisors have, one by one, inspected the clothes and faced the same dilemma. Each of them could see nothing and yet for fear of being branded stupid or unfit for office each bestowed upon the weavers the most elaborate compliments they could muster.  Finally the Emperor himself is presented with his new clothes and he is shocked to discover that they are invisible only to him.

Am I a fool? Am I unfit to be the Emperor? What a thing to happen to me of all people! – Oh! It’s very pretty,” he said. “It has my highest approval.” And he nodded approbation at the empty loom. Nothing could make him say that he couldn’t see anything.

The weavers have succesfully engineered a herd. For any inspector who doubts the clothes’ authenticity, to be honest and dispel the myth requires him to convince the Emperor that the clothes are invisible to everybody.  That is risky because if the Emperor believes the clothes are authentic (either because he sees them or he thinks he is the only one who does not) then the inspector would be judged unfit for office.  With each successive inspector who declares the clothes to be authentic the evidence mounts, making the risk to the next inspector even greater.  After a long enough sequence no inspector will dare to deviate from the herd, including the Emperor himself.

The clothes and the herd are a metaphor for authority itself.  Respect for authority is sustained only because others‘ respect for authority is thought to be sufficiently strong to support the ouster of any who would question it.

But whose authority?  The deeper lesson of the story is a theory of the firm based on the separation of ownership and management.  Notice that it is the weavers who capture the rents from the environment of mutual fear that they have created.  They show that the optimal use of their asset is to clothe a figurehead in artificial authority and hold him in check by keeping even him in doubt of his own legitimacy.  The herd bestows management authority on the figurehead but ensures that rents flow to the owners who are surreptitiously the true authorities.

The swindlers at once asked for more money, more silk and gold thread, to get on with the weaving. But it all went into their pockets. Not a thread went into the looms, though they worked at their weaving as hard as ever.

The story concludes with a cautionary note.  The herd holds together only because of calculated, self-interested subjects.  The organizational structure is vulnerable if new members are not trained to see the wisdom of following along.

“But he hasn’t got anything on,” a little child said.

“Did you ever hear such innocent prattle?” said its father. And one person whispered to another what the child had said, “He hasn’t anything on. A child says he hasn’t anything on.”

“But he hasn’t got anything on!” the whole town cried out at last.

Herds are fragile because knowledge is contagious.  As the organization matured everyone secretly has come to know that the authority is fabricated. And later everyone comes to know that everyone has secretly come to know that.  This latent higher-order knowledge requires only a seed of public knowledge before it crystalizes into common knowledge that the organization is just a mirage.

And after that, who is the last member to maintain faith in the organization?

The Emperor shivered, for he suspected they were right. But he thought, “This procession has got to go on.” So he walked more proudly than ever, as his noblemen held high the train that wasn’t there at all.