It is a complicated subject but the short answer is that they lose the capacity to see what the problems are.
If you don't know what the problem is, you will be incapable of solving it. This happens in software development all the time and many other human endeavors, I am sure. The boss insists that the problem is caused by a lack of positive thinking, when in fact the server simply does not have the correct protocols installed. The boss forbids anybody to suggest the problem is anything other than a lack of positive thinking. The boss knows if he waits long enough, the problem won't go away - it will be replaced in priority by other more serious problems that begin to accumulate as a result of simply being unable to say out loud ... the server does not have the right protocols installed. His nephew runs the server in a nepotistic deal with his company and his nephew tells him the problem is that his staff aren't thinking positive enough to make it work. So the problem becomes just one more intractable difficulty that piles up day by day until the company goes bankrupt. This is so common in my experience that I see it to be the rule, not the exception. You can see why the smart people will always be contractors in environments like these. You get paid no matter what happens and you get paid more.
After you've been doing it for a while, you'll start to recognize the path of least resistance. "Boss, I think you're right. We're not thinking positive enough about this problem. I will keep trying to think positive, you will keep paying my invoice every week and we'll just wait until the problem solves itself." It never does.