In response to my Apple and Central Planning post Eli Dourado writes
Armen Alchian takes this further in his 1950 article, Uncertainty, Evolution, and Economic Theory. Alchian models the economy as an environment that selects practices for survival on the basis of positive or negative profits. It’s not firms’ motivation that matters; it is results. This evolution-based account is necessarily more dynamic than the profit-maximizing (motivation-driven) model that economists usually adopt.
Which is interesting because this is precisely my view on the firm and almost everyone I mentioned it to has chuckled at it.
Though, I would perhaps take it further and say that ultimately no knowledge, planning, design, information or even intelligence is even necessary for this process to work.
Rather than being a signaling mechanism the price system is a selecting mechanism.
Further, I’ve argued that this is should be our concern with income taxes or at least taxes on capital. Not that they significantly reduce the incentive to accumulate assets, because this seems wildly implausible to me.
Instead, because almost by definition they remove assets from the command of people who – for whatever reason – are successful at accumulating them.
This is also why the predominance of small businesses is a sign of failure not success and so on.
Eli goes on
Framed in this way, we can now ask the important question: Is Apple successful because it was big and centrally directed, or is it big and centrally directed because it was successful? From a Hayek-Alchian perspective, the answer is clearly the latter. Having a Randian hero centrally direct a lot of resources is not, in spite of Apple’s story, a recipe for success. Instead, following a recipe for success will result in a lot of resources to direct.
Here I am not so sure. What is it about being successful that should lead you to being centrally directed? Big, of course. But, why not big and open?
What this is telling us is something about the nature of the evolutionary forces. To be more specific it could be the case that the market selected for maximum feedback.
Or in more human terms we could say the market rewarded companies that listened to their customers and responded to price signals. In business lore and in my own personal experience I would say this is exactly wrong.
Instead it seems that selection – at least in many cases – favors the ruthless implementation of a singular vision. That is, it selects for minimal feedback.
Indeed, to pick up on Eli’s metaphor – from my readings limited readings – the Randian Hero doesn’t give a hoot about local knowledge, consumer preferences, or even at times profitability itself. He seems not trivially annoyed at being constrained by the laws of physics. Fortunately, Rand supplies him with technological breakthroughs without being burdened with explaining how such breakthroughs are possible.
But I think this furthers the message. The molecular structure of Rearden metal is beside the point. It might as well be forged out of the sheer determination of Hank Rearden himself.
As individualist and pro-capitalist as that story is, it is very much not the story of the market aggregating information in ways that no human or committee of humans ever could. This is the anti-“I Pencil” because you can be damned sure that if there was an iPencil, Steve Jobs would know exactly how it was to be made.
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Wednesday ~ October 26th, 2011 at 6:15 pm
Eli
Alchian explicitly considers this and agrees with you!
Maybe a good way to frame the issue in general is, “To what extent is I, Pencil a good representation of the Austrian view of the market?” I think the answer is that it’s clearly part of it, but it’s incomplete, because it ignores this whole discussion of competition that is at the core of Austrian thought.
Wednesday ~ October 26th, 2011 at 6:35 pm
Wonks Anonymous
Will Wilkinson makes the anti-Rand case on how companies work here:
http://willwilkinson.net/flybottle/2009/03/06/john-galt-and-the-billion-tweaks/
Wednesday ~ October 26th, 2011 at 6:57 pm
Tel
There’s a chapter in Stuart Kauffman’s book “At Home in the Universe” where he runs computer simulations over what he calls “NK Networks”.
Then he considers optimal size for simulated firms within the network and points out that the optimal size of the firm depends on the problem domain. The “Stalinist limit” is one giant firm with one single objective, and it works well for non-complex problems (i.e. a smooth fitness landscape). The “Leftist Italian” limit (i.e. anarcho-capitalism) results in too much chaos to ever settle to the optimal solution, but there’s a “right size” for the firms and generally smaller firms are better at handling more complex problems (i.e. rugged fitness landscape).
Kauffman concludes that the hallmark of “right size” firms is that the system as a whole exhibits “edge of chaos” behaviour. I have very much paraphrased the chapter here, you kind of have to read the book because the real explanation is much longer. Also, this is a computer simulation, it may exhibit some interesting properties that are similar to the real world, but it’s not real.
Finally, Libertarian philosophy does not in any way discourage people from voluntarily forming into teams under a powerful leader, it merely states that such individuals must be free to choose to leave if they decide they don’t like the leader any more (i.e. they cannot be slaves), and the firm itself (or corporation if you prefer) should not have legal and political powers beyond what the individuals would have had anyway.
Wednesday ~ October 26th, 2011 at 10:41 pm
Pietro Poggi-Corradini
Going back to the size of the firm, even Jobs did not plan *everything*: some things were planned and others were farmed out, or contracted out. The actual size of the Apple firm was reached through a trial-and-error process, mainly driven by the price system (and the visions and motivations of the players involved: humans are not automatons). This does not affect the critique of central *govt* planning, since the latter is not subject to the same constraints and in fact will often result in too-big-for-their-own-good type of firms.
Thursday ~ October 27th, 2011 at 6:30 am
MP
There’s certainly something to the evolutionary view. (I first encountered it in Ormerod’s ‘Why Most Things Fail’, but it looks like it has a much longer history that that.) But you’re seriously overstating things to say that the price mechanism is about selection RATHER THAN signalling. After all, if the price of gas goes up, people drive less not because heavy drivers run out of money, starve to death, and exit the population. They respond to signals. Firms do the same. There’s room enough for both selection and signalling. Which is more important? I don’t even know how you would begin to say.
Thursday ~ October 27th, 2011 at 11:52 am
Lazy this morning.
MP, I think you’re correct about the mix of both selection and signalling. Perhaps there are people out there so special that their innate and unrefined ideas can generate large firms, but it seems more likely that some of the key ideas are selected for and some of the wrong cruft is signaled as being wrong by turning out to be costly. Especially so as the world moves on after the initial firm creation. Of course, that suggests that one of the features being selected for is the ability to adapt to a changing environment (often signaled through changes in prices).