Economic Calculation in the Corporate Commonwealth (Part I)
[Note--My last post was an excerpt from Part II of a three-part article I've been working on lately. Since it resulted in a gracious offer of print publication for an article based on that post, I will limit the online posting of Part II to the excerpt as it originally appeared. I'm following it up, however, with Parts I and III.
Since this week's theme is science and technology, I'm submitting this post to Carnival of Anarchy]
Introduction. The general lines of Mises' rational calculation argument are well-known. A market in factors of production is necessary for pricing production inputs, so that a planner may allocate them rationally. [Human Action pp. 698-701] The problem has nothing to do either with the volume of data, or with agency problems. The question, rather, is how is the data generated in the first place? [Roderick Long, from a post to the LeftLibertarian yahoogroup] And "[h]ow does the principal know what to tell the agent to do?" [Peter Klein, “Economic Calculation and the Limits of Organization,” The Review of Austrian Economics Vol. 9 No. 2 (1996)] As Rothbard put it, "there can be no implicit estimates without an explicit market!" [Man, Economy, and State, p. 543]
But the question of whether market price is the only feasible method of making rational decisions about factor inputs (and this was the central question at issue) is far less important, from my standpoint, than what Mises had to say on the relation between technological and entrepreneurial judgments. "Technology," Mises wrote,
Technology describes the different technical possibilities for organizing production. At the same time, knowledge of the relative values of inputs is necessary to judge which technical process is most appropriate. Knowledge of technical possibilities, without knowledge of the relative value of production inputs to each other and to the finished product, is empty. But although Mises neglected to mention it, the opposite is true as well. Knowledge of the money prices of production inputs, and of finished goods, would be purely academic without the knowledge of how to organize production so as to economize on the most valuable inputs and to organize means properly in relation to ends.
Knowledge of the value of inputs without knowledge of their concrete use in the production process results in calculational chaos, to the very same extent as the reverse state of affairs. What Mises regarded as the "entrepreneurial" realm (whether the entrepreneurs be finance capitalists or corporate management), to the extent that it is isolated from knowledge of the production process, is an island of calculational chaos.
Fully rational decisions are possible only if the knowledge of the relative value of inputs is combined with knowledge of how those inputs are to be used internally. The separation of ownership of capital from the knowledge of the production process leads to decisions divorced from reality. The same is true of the separation of management from direct involvement in the production process, and the accountability of management to absentee owners rather than to workers. These functions are separated under large-scale corporate capitalism. The manager who knows much about the cost of production inputs, but lacks technical knowledge of the ends to which they are best suited, is ignorant and unqualified to judge "those employments in which they can render the best service." If he attempts "cost cutting measures," he is likely to use poor judgment as to which inputs can most afford to be cut, and reduce expenditures on the most important productive inputs first.
This is true regardless of whether Mises was right, or Lange and Schumpeter were right. The feasibility of non-price calculation of the relative value of production inputs is irrelevant. Under any system, whatever the method of calculating the relative value of producer goods, price or non-price, knowledge of the value of producer goods must be integrated with knowledge of the technical possibilities for using them. In any system, price or non-price, in which organizational size goes beyond the possibility of such integration, decisions will become irrational. So the management of a large corporation is operating in the same island of calculational chaos as the management of an old Soviet industrial ministry. The problem attends any system in which those who control the allocation of resources lack adequate knowledge of the effect their decisions will have on the production process.
It also makes little difference whether the entrepreneurial function of large-scale allocation of investment resources is carried out by outside investors and financiers, or internally by senior management. In their ignorance of the production side of things, the cluelessness of senior corporate management and the cluelessness of outside money shufflers are both of a kind. The investment bankers and rentiers simply shuffle money from one venture to another based on the expected return, while seeing the internal production process as a black box. But senior management, MBA types who focus on finance and marketing almost to the exclusion of production, likewise see the actual production operations of the firm as a black box.
Mises' contrast between the entrepreneur and the corporate manager, and his treatment of corporate bureaucracy, are fundamentally flawed. Mises overplayed the distinction between the entrepreneur and the mere corporate manager. He neglected the amount of investment generated internally through retention of profits, and likewise neglected the role of the senior management of an M-form corporation in allocating finance between divisions. He also ignored the extent of corporate management's discretion in how to spend available capital--i.e., to choose between alternative forms of production technology. At times, the entrepreneurial role of finance capital in allocating resources among firms becomes great indeed--as it has in the current era of the hostile takeover, with the elevation of global finance to its position of preeminence. At other times, the relative power of corporate management to make investment decisions is much greater--as it was in the early postwar form of corporate capitalism that Galbraith described. But at all times, including now, the entrepreneurial leeway of corporate management is considerable.
Mises also erred in the sharp contrast he made between the entrepreneurial function and the "mere" organization of production.
First of all, the general environment Mises assumes is a historically determined one, in no way necessarily connected to the essential features of the market economy as such. Mises assumes a society in which most investment capital is concentrated in the hands of a relatively small plutocratic class, the dominant form of enterprise is the large corporation, and investment decisions involve mainly the movement of large blocks of capital between the enormous enterprises. As an indication of his culturally bound conception of entrepreneurship, consider his equation of that function to the existence of "the stock and commodity exchanges, the trading in futures, and the bankers and moneylenders...." [Human Action pp. 708-09] In fact, he actually considered the existence of a stock market--which assumes the corporation as the dominant form of enterprise and corporate equity as the dominant form of property--the defining feature of a market society. As Murray Rothbard recounted:
Actually, the significance of a stock market is that the economy has a full-scale market in equity in firms, not in "titles to land and capital goods." Rothbard was almost as prone as Mises to confuse the historical accidents of corporate capitalism with the essence of markets, property and entrepreneurship.
Consider: if what the radical economists call primitive accumulation--the expropriation of the laboring classes in early modern times--had not taken place, a market society of small-scale property and worker-ownership might have evolved. Had the state not subsidized the corporate revolution and economic centralization, the economy might have remained dominated by small factories or artisan shops, with manufacturing consisting of small-scale machine production for local markets. In such an economy, the "entrepreneurial" function would have involved mainly the decision by workers themselves as to the reinvestment of their savings from labor income, supplemented by small loans financed by the cooperative pooling of such savings. Mises' basic description of the entrepreneur's function involves not the essential functions of employing resources as such, but the particular historical form that those functions have taken under state capitalism. Incidentally, in arguing that "Syndicalism" would not allow a market in factors of production, Mises made the same mistake of confusing a market in producer goods with a market in equity in firms. Rothbard, in assuming that an economy of producer cooperatives would rule out markets in credit or capital goods, likewise erred. [Man, Economy, and State, p. 544]
Entrepreneurship, in fact, is inseparable from decisions involving the direct organization of production. The "minor" decisions of which Mises was so dismissive, and the "great" decisions he regarded as truly entrepreneurial, are the same in kind. Shuffling great blocks of money around between enterprises, or between the divisions of an M-form corporation, are not different in kind from decisions of what kind of machinery to buy, how to link it together, and how to organize the human tasks of production around the machinery.
Start close to the small end of the scale, from the perspective of a small shop using small-scale production machinery: it is perhaps owned by a self-employed producer, or, if somewhat larger, a small factory cooperatively owned by its production workers. There is a wide range of possible ratios of input to output possible, depending on minute changes in the technical process of production. According to Barry Stein, a series of seemingly minor and incremental changes in the production process in an older factory with older machinery, "tweaking" things a bit here or there, often has a greater cumulative effect on productivity than building an entirely new factory with the latest generation of production machinery. [Size, Efficiency, and Community Technology] In these cases, such technical decisions have a larger effect on the total allocation of resources among ends than the decisions of investment bankers.
And the producers' decision of which technical means to choose and how to organize them is very much an entrepreneurial calculation that must take into account the relative costs of all the production inputs. Any meaningful decision to finance some new purchase of machinery or otherwise change the organization of production--whether from savings from the shop's income or through a small bank loan--will be inseparable from such an understanding of the production process. The self-employed production workers must also possess a knowledge of the local market for their product, how demand and price fluctuate with changing business conditions, and so forth--all quite entrepreneurial.
Multiply the scale of this shop by a thousand or more, and the only difference is that the people making the finance and marketing decisions are almost entirely isolated from the nuts and bolts knowledge of production, outside of which context their decisions are almost meaningless.
Mises at times came close to admitting as much, mentioning in passing that "[t]he function of the entrepreneur cannot be separated from the direction of the employment of factors of production for the accomplishment of definite tasks." [Human Action, p. 306] Or as he wrote at greater length elsewhere:
The problem seems to lie in his obstinate relegation of the "technician," as such, to a "purely technological point of view," and his dichotomy between the "entrepreneur, as such" and the technician, when the actual function of entrepreneurship is so closely intertwined with technical decisions. Mises' teachable moment having seemingly come and gone, he continued in the same passage:
The actual person making such technical decisions may have a far better knowledge of the relative money costs of alternative inputs, and of the money cost ratios of inputs and outputs under alternative methods of organizing production, than the "entrepreneur" has of the way that such technical decisions affect his money calculations of cost and benefit. Either way, it's a mistake to separate (even with the magical words "as such") the purely entrepreneurial from the purely technical function. The functions may be separated as a matter of definition. But as Rothbard said, "In the real world, each function is not necessarily performed by a different person." [Man, Economy, and State p. 542] The entrepreneurial and the technical are not so much two different bodies of knowledge, as two different ways of thinking about knowledge. It is possible to consider technical data with entrepreneurial considerations of factor and product prices in mind, as well as the reverse.
In addition, I've seen it argued quite convincingly that the distinction between purely "technical," as opposed to "economic" standards of efficiency, is a strawman; and that the cost of inputs is a basic efficiency consideration for engineers in developing a product or process. Max Chiz, in a comment to a Mises Economics Blog post by Peter Klein, wrote:
In response to a private email, in which I asked Chiz to clarify his position on entrepreneurship in relation to that of Mises, he added:
Both the technician and the entrepreneur possess what Hayek called idiosyncratic knowledge, and neither one can exercise his own art effectively without incorporating the other's art into his own immediate considerations. Knowledge cannot be entirely delegated, because it's impossible to judge someone else's use of his own art without possessing some general knowledge of that art for oneself. Neither specialty's considerations are conducive to being distilled into an executive summary, to be considered by the other specialty as an afterthought after it has already set priorities in terms of its own considerations. The technical possibilities of production have a direct bearing on questions of factor productivity compared to cost, and must be borned in mind continuously as entrepreneurial questions are being considered. The costs of inputs and of the finished product, likewise, have a direct bearing on which technical solution is the most efficient, and must be continuously borne in mind by one considering technical matters. If, as some neurologists suspect, the brain functions as a Bayesian calculating device ("taking various bits of probability information, weighing their relative worth, and coming to a good conclusion quickly," to quote Professor Alex Pouget), this is especially true.
If so, the body of knowledge must be in the original mix. Ideally, it is best if the two ways of thinking are combined in the same group of persons, as much as possible, or at least if the two kinds of thinkers are in close and continuing contact with one another and have an excellent layman's knowledge of their respective fields.
Under state capitalism, however, corporate size is promoted to the point that technical and entrepreneurial judgments are "stovepiped," with specialists making decisions with regard largely to their own field in isolation, and then trying to splice in the considerations of other fields as an afterthought.
When the organization reaches a sufficiently large size, the moneyed "entrepreneur" lacks any direct knowledge of the "various methods" or "minor matters," and hence is likely to be operating in an atmosphere of calculational chaos.
In short, coherent decisions cannot be made unless the relevant "technical" and "entrepreneurial" knowledge are aggregated by the same decisionmakers. And state capitalism has caused to a predominate organizations of such size and complexity that the relevant information cannot be encompassed by any such unified decisionmaker, and there are insurmountable agency problems involved in getting the necessary knowledge of the production process to the people making the grand "entrepreneurial" decisions. If anything, the "technician" and the production worker are probably more qualified to add the entrereneur's legitimate knowledge to their own and take over the functions of ownership and management efficiently for themselves, than the entrepreneur and manager are to obtain adequate knowledge of the production process.
The great investors are almost entirely clueless as to what their supposed "employees," the corporation managers are doing. The CEOs are almost entirely clueless as to what the branch and facility managers are doing. And the management of each facility are almost entirely clueless as to what is going on within the black box of the actual production process. In the light of this reality, Mises' "entrepreneur"--so carefully and closely involved in the minutiae of choosing between technical possibilities of production, a brooding omnipresence guiding the efforts of every employee--is largely a construction of fantasy. It's quite ironic, in fact, considering that Mises starts out the block quote above with the announcement that the entrepreneur is not omnipresent.
Since this week's theme is science and technology, I'm submitting this post to Carnival of Anarchy]
Economic Calculation in the Corporate Commonwealth
Introduction. The general lines of Mises' rational calculation argument are well-known. A market in factors of production is necessary for pricing production inputs, so that a planner may allocate them rationally. [Human Action pp. 698-701] The problem has nothing to do either with the volume of data, or with agency problems. The question, rather, is how is the data generated in the first place? [Roderick Long, from a post to the LeftLibertarian yahoogroup] And "[h]ow does the principal know what to tell the agent to do?" [Peter Klein, “Economic Calculation and the Limits of Organization,” The Review of Austrian Economics Vol. 9 No. 2 (1996)] As Rothbard put it, "there can be no implicit estimates without an explicit market!" [Man, Economy, and State, p. 543]
Part I: The Divorce of Entrepreneurial from Technical Knowledge
But the question of whether market price is the only feasible method of making rational decisions about factor inputs (and this was the central question at issue) is far less important, from my standpoint, than what Mises had to say on the relation between technological and entrepreneurial judgments. "Technology," Mises wrote,
shows what could be achieved if one wanted to achieve it, and how it could be achieved provided people were prepared to employ the means indicated....
However, the mere information conveyed by technology would suffice for the performance of calculation only if all means of production--both material and human--could be perfectly substituted for one another according to definite ratios, or if they all were absolutely specific. In the former case all means of production would be fit, although according to different ratios, for the attainment of all ends whatever.... In the latter case each means could be employed for the attainment of one end only.... Neither of these two conditions is present in the universe in which man acts.... The facts that there are different classes of means, that most of the means are better suited for the realization of some ends, less suited for the attainment of some other ends and absolutely useless for the production of a third group of ends, and that therefore the various means allow for various uses, set man the task of allocating them to those employments in which they can render the best service. Here computation in kind as applied by technology is of no avail. Technology operates with countable and measurable quantities of external things and effects; it knows causal relations between them, but it is foreign to their relevance to human wants and desires.... [Technology] ignores the economic problem: to employ the available means in such a way that no want more urgently felt should remain unsatisfied because the means suitable for its attainment were employed--wasted--for the attainment of a want less urgently felt.... Technology tells how a given end could be attained by the employment of various means which can be used together in various combinations.... But it is at a loss to tell man which procedures he should choose out of the infinite variety of imaginable and possible modes of production. What acting man wants to know is how he must employ the available means for the best possible--the most economic--removal of felt uneasiness.... The art of engineering can establish how a bridge must be built in order to span a river at a given point and to carry definite loads. But it cannot answer the question whether or not the construction of such a bridge would withdraw material factors of production and labor from an employment in which they could satisfy needs more urgently felt....
Technology and the considerations derived from it would be of little use for acting man if it were impossible to introduce into their schemes the money prices of goods and services. The projects and designs of engineers would be purely academic if they could not compare input and output on a common basis. [Human Action, pp. 206-08. Emphasis added]
Technology describes the different technical possibilities for organizing production. At the same time, knowledge of the relative values of inputs is necessary to judge which technical process is most appropriate. Knowledge of technical possibilities, without knowledge of the relative value of production inputs to each other and to the finished product, is empty. But although Mises neglected to mention it, the opposite is true as well. Knowledge of the money prices of production inputs, and of finished goods, would be purely academic without the knowledge of how to organize production so as to economize on the most valuable inputs and to organize means properly in relation to ends.
Knowledge of the value of inputs without knowledge of their concrete use in the production process results in calculational chaos, to the very same extent as the reverse state of affairs. What Mises regarded as the "entrepreneurial" realm (whether the entrepreneurs be finance capitalists or corporate management), to the extent that it is isolated from knowledge of the production process, is an island of calculational chaos.
Fully rational decisions are possible only if the knowledge of the relative value of inputs is combined with knowledge of how those inputs are to be used internally. The separation of ownership of capital from the knowledge of the production process leads to decisions divorced from reality. The same is true of the separation of management from direct involvement in the production process, and the accountability of management to absentee owners rather than to workers. These functions are separated under large-scale corporate capitalism. The manager who knows much about the cost of production inputs, but lacks technical knowledge of the ends to which they are best suited, is ignorant and unqualified to judge "those employments in which they can render the best service." If he attempts "cost cutting measures," he is likely to use poor judgment as to which inputs can most afford to be cut, and reduce expenditures on the most important productive inputs first.
This is true regardless of whether Mises was right, or Lange and Schumpeter were right. The feasibility of non-price calculation of the relative value of production inputs is irrelevant. Under any system, whatever the method of calculating the relative value of producer goods, price or non-price, knowledge of the value of producer goods must be integrated with knowledge of the technical possibilities for using them. In any system, price or non-price, in which organizational size goes beyond the possibility of such integration, decisions will become irrational. So the management of a large corporation is operating in the same island of calculational chaos as the management of an old Soviet industrial ministry. The problem attends any system in which those who control the allocation of resources lack adequate knowledge of the effect their decisions will have on the production process.
It also makes little difference whether the entrepreneurial function of large-scale allocation of investment resources is carried out by outside investors and financiers, or internally by senior management. In their ignorance of the production side of things, the cluelessness of senior corporate management and the cluelessness of outside money shufflers are both of a kind. The investment bankers and rentiers simply shuffle money from one venture to another based on the expected return, while seeing the internal production process as a black box. But senior management, MBA types who focus on finance and marketing almost to the exclusion of production, likewise see the actual production operations of the firm as a black box.
Mises' contrast between the entrepreneur and the corporate manager, and his treatment of corporate bureaucracy, are fundamentally flawed. Mises overplayed the distinction between the entrepreneur and the mere corporate manager. He neglected the amount of investment generated internally through retention of profits, and likewise neglected the role of the senior management of an M-form corporation in allocating finance between divisions. He also ignored the extent of corporate management's discretion in how to spend available capital--i.e., to choose between alternative forms of production technology. At times, the entrepreneurial role of finance capital in allocating resources among firms becomes great indeed--as it has in the current era of the hostile takeover, with the elevation of global finance to its position of preeminence. At other times, the relative power of corporate management to make investment decisions is much greater--as it was in the early postwar form of corporate capitalism that Galbraith described. But at all times, including now, the entrepreneurial leeway of corporate management is considerable.
Mises also erred in the sharp contrast he made between the entrepreneurial function and the "mere" organization of production.
The entrepreneur determines alone, without any managerial interference, in what lines of business to employ capital and how much capital to employ. He determines the expansion and contraction of the size of the total business and its main sections. He determines the enterprise's financial structure. These are the essential decisions which are instrumental in the conduct of business. [Human Action, p. 307]
First of all, the general environment Mises assumes is a historically determined one, in no way necessarily connected to the essential features of the market economy as such. Mises assumes a society in which most investment capital is concentrated in the hands of a relatively small plutocratic class, the dominant form of enterprise is the large corporation, and investment decisions involve mainly the movement of large blocks of capital between the enormous enterprises. As an indication of his culturally bound conception of entrepreneurship, consider his equation of that function to the existence of "the stock and commodity exchanges, the trading in futures, and the bankers and moneylenders...." [Human Action pp. 708-09] In fact, he actually considered the existence of a stock market--which assumes the corporation as the dominant form of enterprise and corporate equity as the dominant form of property--the defining feature of a market society. As Murray Rothbard recounted:
One time, during Mises' seminar at New York University, I asked him whether, considering the broad spectrum of economies from a purely free market economy to pure totalitarianism, he could single out one criterion according to which he could say that an economy was essentially "socialist" or whether it was a market economy. Somewhat to my surprise, he replied readily: "Yes, the key is whether the economy has a stock market." That is, if the economy has a full-scale market in titles to land and capital goods. In short: Is the allocation of capital basically determined by government or by private owners? ["The End of Socialism and the Calculation Debate Revisited," The Review of Austrian Economics Vol. 5, No. 2 (1991), p. 59]
Actually, the significance of a stock market is that the economy has a full-scale market in equity in firms, not in "titles to land and capital goods." Rothbard was almost as prone as Mises to confuse the historical accidents of corporate capitalism with the essence of markets, property and entrepreneurship.
Consider: if what the radical economists call primitive accumulation--the expropriation of the laboring classes in early modern times--had not taken place, a market society of small-scale property and worker-ownership might have evolved. Had the state not subsidized the corporate revolution and economic centralization, the economy might have remained dominated by small factories or artisan shops, with manufacturing consisting of small-scale machine production for local markets. In such an economy, the "entrepreneurial" function would have involved mainly the decision by workers themselves as to the reinvestment of their savings from labor income, supplemented by small loans financed by the cooperative pooling of such savings. Mises' basic description of the entrepreneur's function involves not the essential functions of employing resources as such, but the particular historical form that those functions have taken under state capitalism. Incidentally, in arguing that "Syndicalism" would not allow a market in factors of production, Mises made the same mistake of confusing a market in producer goods with a market in equity in firms. Rothbard, in assuming that an economy of producer cooperatives would rule out markets in credit or capital goods, likewise erred. [Man, Economy, and State, p. 544]
Entrepreneurship, in fact, is inseparable from decisions involving the direct organization of production. The "minor" decisions of which Mises was so dismissive, and the "great" decisions he regarded as truly entrepreneurial, are the same in kind. Shuffling great blocks of money around between enterprises, or between the divisions of an M-form corporation, are not different in kind from decisions of what kind of machinery to buy, how to link it together, and how to organize the human tasks of production around the machinery.
Start close to the small end of the scale, from the perspective of a small shop using small-scale production machinery: it is perhaps owned by a self-employed producer, or, if somewhat larger, a small factory cooperatively owned by its production workers. There is a wide range of possible ratios of input to output possible, depending on minute changes in the technical process of production. According to Barry Stein, a series of seemingly minor and incremental changes in the production process in an older factory with older machinery, "tweaking" things a bit here or there, often has a greater cumulative effect on productivity than building an entirely new factory with the latest generation of production machinery. [Size, Efficiency, and Community Technology] In these cases, such technical decisions have a larger effect on the total allocation of resources among ends than the decisions of investment bankers.
And the producers' decision of which technical means to choose and how to organize them is very much an entrepreneurial calculation that must take into account the relative costs of all the production inputs. Any meaningful decision to finance some new purchase of machinery or otherwise change the organization of production--whether from savings from the shop's income or through a small bank loan--will be inseparable from such an understanding of the production process. The self-employed production workers must also possess a knowledge of the local market for their product, how demand and price fluctuate with changing business conditions, and so forth--all quite entrepreneurial.
Multiply the scale of this shop by a thousand or more, and the only difference is that the people making the finance and marketing decisions are almost entirely isolated from the nuts and bolts knowledge of production, outside of which context their decisions are almost meaningless.
Mises at times came close to admitting as much, mentioning in passing that "[t]he function of the entrepreneur cannot be separated from the direction of the employment of factors of production for the accomplishment of definite tasks." [Human Action, p. 306] Or as he wrote at greater length elsewhere:
The entrepreneurs are not omnipresent. They cannot themselves attend to the manifold tasks which are incumbent upon them. Adjustment of production to the best possible supplying of the consumers with the goods they are asking for most urgently does not merely consist in determining the general plan for the utilization of resources. There is, of course, no doubt that this is the main function of the promoter and speculator. But besides the great adjustments, many small adjustments are necessary too. Each of them may seem trifling and of little bearing upon the total result. But the cumulative effect of shortcomings in many of these minor matters can be such as to frustrate entirely the success of a correct solution of the great problems. At any rate, it is certain that every failure to handle the smaller problems results in a squandering of scarce factors of production and consequently in impairing the best possible satisfaction of the consumers. [Human Action, pp. 303-04]
The problem seems to lie in his obstinate relegation of the "technician," as such, to a "purely technological point of view," and his dichotomy between the "entrepreneur, as such" and the technician, when the actual function of entrepreneurship is so closely intertwined with technical decisions. Mises' teachable moment having seemingly come and gone, he continued in the same passage:
It is important to conceive in what respects the problem we have in mind differs from the technological tasks of the technicians. The execution of every project upon which the entrepreneur has embarked in making his decision with regard to the general plan of action requires a multiplicity of minute decisions. Each of these decisions must be effected in such a way as to prefer that solution of the problem which--without interfering with the designs of the general plan for the whole project--is the most economical one. It must avoid superfluous costs in the same way as does the general plan. The technician from his purely technological point of view either may not see any difference in the alternatives offered by various methods for the solution of such a detail or may give preference to one of these methods on account of its greater output in physical quantities. But the entrepreneur is actuated by the profit motive. This enjoins upon him the urge to prefer the most economical solution, i.e., that solution which avoids employing factors of production whose employment would impair the satisfaction of the more intensely felt wants of the consumers. He will prefer among the various methods with regard to which the technicians are neutral, the one the application of which requires the smallest cost. He may reject the technicians' suggestion to choose a more costly method securing a greater physical output if his action shows that the increase in output would not outweigh the increase in cost required. Not only in the great decisions and plans but no less in the daily decisions of small problems as they turn up in the current conduct of affairs, the entrepreneur must perform his task of adjusting production to the demand of the consumers as reflected in the prices of the market. [Human Action p. 304]
The actual person making such technical decisions may have a far better knowledge of the relative money costs of alternative inputs, and of the money cost ratios of inputs and outputs under alternative methods of organizing production, than the "entrepreneur" has of the way that such technical decisions affect his money calculations of cost and benefit. Either way, it's a mistake to separate (even with the magical words "as such") the purely entrepreneurial from the purely technical function. The functions may be separated as a matter of definition. But as Rothbard said, "In the real world, each function is not necessarily performed by a different person." [Man, Economy, and State p. 542] The entrepreneurial and the technical are not so much two different bodies of knowledge, as two different ways of thinking about knowledge. It is possible to consider technical data with entrepreneurial considerations of factor and product prices in mind, as well as the reverse.
In addition, I've seen it argued quite convincingly that the distinction between purely "technical," as opposed to "economic" standards of efficiency, is a strawman; and that the cost of inputs is a basic efficiency consideration for engineers in developing a product or process. Max Chiz, in a comment to a Mises Economics Blog post by Peter Klein, wrote:
First off, I know what I'm talking about on this: I have an undergraduate degree in Electrical Engineering. I've worked in engineering R&D -- building computers. I've built and administrated networks....
It is a general misconception, shared by Dr. Klein, that "technological value is not the same as economic value". The entire job of an engineer, and what you spend years in college learning how to do, is to combine the data of the market (in the form of prices for materials, components, land, buildings, labor, assembly equipment, etc) with knowledge of science to better meet the needs of the customer. Engineers try to find the optimal tradeoff between quality, cost, and time to market. It is true that engineers often describe products in terms of "elegance", "beauty", etc., but these terms would have no meaning if it weren't for the market. A device is "elegant" precisely because of the ingenuity that went into satisfying customers -- it uses less parts (and hence costs less), it fits in less space (and hence has higher quality in the eyes of the customer), it will let you get your product out the door in half the time (and meet consumer desires sooner). I am especially embarrassed that an Austrian blog can't get this simple point -- as it is a critical part of the calculation problem. After all, if I don't have prices for all of those factors, the combination of things I can build is effectively infinite. [Peter Klein, "Government Did Invent the Internet, But the Market Made It Glorious," Mises Economic Blog, June 12, 2006]
In response to a private email, in which I asked Chiz to clarify his position on entrepreneurship in relation to that of Mises, he added:
Engineers do two things:
1. They make technology using science.
2. They design goods using technology.
#2 requires prices in order to correctly make the trade-offs between time-to-market, quality, and cost.
I don't consider this to be the entrepreneurial function because the uses of the inputs are almost always not marginal (and hence their price will be determined in broader factor markets.)
Both the technician and the entrepreneur possess what Hayek called idiosyncratic knowledge, and neither one can exercise his own art effectively without incorporating the other's art into his own immediate considerations. Knowledge cannot be entirely delegated, because it's impossible to judge someone else's use of his own art without possessing some general knowledge of that art for oneself. Neither specialty's considerations are conducive to being distilled into an executive summary, to be considered by the other specialty as an afterthought after it has already set priorities in terms of its own considerations. The technical possibilities of production have a direct bearing on questions of factor productivity compared to cost, and must be borned in mind continuously as entrepreneurial questions are being considered. The costs of inputs and of the finished product, likewise, have a direct bearing on which technical solution is the most efficient, and must be continuously borne in mind by one considering technical matters. If, as some neurologists suspect, the brain functions as a Bayesian calculating device ("taking various bits of probability information, weighing their relative worth, and coming to a good conclusion quickly," to quote Professor Alex Pouget), this is especially true.
if we want to do something, such as jump over a stream, we need to extract data that is not inherently part of that information. We need to process all the variables we see, including how wide the stream appears, what the consequences of falling in might be, and how far we know we can jump. Each neuron responds to a particular variable and the brain will decide on a conclusion about the whole set of variables using Bayesian inference.
As you reach your decision, you'd have a lot of trouble articulating most of the variables your brain just processed for you. Similarly, intuition may be less a burst of insight than a rough consensus among your neurons. ["Mysterious 'neural noise' actually primes brain for peak performance"]
If so, the body of knowledge must be in the original mix. Ideally, it is best if the two ways of thinking are combined in the same group of persons, as much as possible, or at least if the two kinds of thinkers are in close and continuing contact with one another and have an excellent layman's knowledge of their respective fields.
Under state capitalism, however, corporate size is promoted to the point that technical and entrepreneurial judgments are "stovepiped," with specialists making decisions with regard largely to their own field in isolation, and then trying to splice in the considerations of other fields as an afterthought.
When the organization reaches a sufficiently large size, the moneyed "entrepreneur" lacks any direct knowledge of the "various methods" or "minor matters," and hence is likely to be operating in an atmosphere of calculational chaos.
In short, coherent decisions cannot be made unless the relevant "technical" and "entrepreneurial" knowledge are aggregated by the same decisionmakers. And state capitalism has caused to a predominate organizations of such size and complexity that the relevant information cannot be encompassed by any such unified decisionmaker, and there are insurmountable agency problems involved in getting the necessary knowledge of the production process to the people making the grand "entrepreneurial" decisions. If anything, the "technician" and the production worker are probably more qualified to add the entrereneur's legitimate knowledge to their own and take over the functions of ownership and management efficiently for themselves, than the entrepreneur and manager are to obtain adequate knowledge of the production process.
The great investors are almost entirely clueless as to what their supposed "employees," the corporation managers are doing. The CEOs are almost entirely clueless as to what the branch and facility managers are doing. And the management of each facility are almost entirely clueless as to what is going on within the black box of the actual production process. In the light of this reality, Mises' "entrepreneur"--so carefully and closely involved in the minutiae of choosing between technical possibilities of production, a brooding omnipresence guiding the efforts of every employee--is largely a construction of fantasy. It's quite ironic, in fact, considering that Mises starts out the block quote above with the announcement that the entrepreneur is not omnipresent.
posted by Kevin Carson | 7:08 PM
6 Comments:
Kevin,
I think you mean "borne" not "borned" in the para after you quote Chiz - or am i just ignorant of that usage? (I wouldn't even mention it, but you seem to be likely to publish this stuff).
The last few paragraphs make me think of when I was in pharma. We had project teams for new products, and we were working on a new cream. It was a tremendously technically difficult project, one that we in the lab knew was probably beyond our physical facilities, and definitely beyond the capabilities of our formulators. But the company threw alot of money down that rathole, because it was a virgin market (and a huge one) for generics. At team meetings, the marketing team member would constantly state "just make it!" when we would report the myriad of problems we were having.
To my knowledge, there are still no generics (except the innovator's off brand) for the cream. And I doubt there ever will be. This is one of those cases that make Bailey's "disclosure" argument about patents truly nonsensical. That patent was a joke, but it's been expired for a long time now, and noone else really has any ability to replicate it.
Fixed it--thanks!
I wonder if what's happening in the video game market is a good example of this information problem, or even focusing on Sony. If you consider products like betamax and minidisc, it shows a kind of irrational drive to provide stuff that most people don't actually want.
Perhaps in the calcualtion realm, the insistence on Blu-Ray for the Playstation 3 is a better example of bad management calculation. The costs got so out of hand that the PS3 is still way too expensive even though Sony is taking a hit of several hundred dollars on each console.
So, it's possible that Sony as a company may be a good example of management at some distance from reality - success in the past may have led to a feeling of invincibility, leading to the sinking of huge amounts of capital into less-than-productive areas.
Interesting example, scumble. Overproducing stuff based on internally-generated needs and capabilities, and then trying to find ways to get people to buy it, is often called the "supply-push" model of distribution. I think there's clearly some connection with calculation problems, but whether it's chicken or egg I can't say.
"The separation of ownership of capital from the knowledge of the production process leads to decisions divorced from reality. The same is true of the separation of management from direct involvement in the production process, and the accountability of management to absentee owners rather than to workers. These functions are separated under large-scale corporate capitalism. The manager who knows much about the cost of production inputs, but lacks technical knowledge of the ends to which they are best suited, is ignorant and unqualified to judge "those employments in which they can render the best service." If he attempts "cost cutting measures," he is likely to use poor judgment as to which inputs can most afford to be cut, and reduce expenditures on the most important productive inputs first."
Well said, but not all managers and not al investors have to be like that. Many of the better managers are those who really understand the work. They are like leaders, and not "managers". They are there tu support people, to coach them, not to patronize them. And I remember reading Warren Buffet(arguably the best investor ever) saying he doesn't invest in business that he doesn't understand. And there is a class of investors who tend to hire good managers (who know the stuff) and tend to respect their decision.
Besides, Who is one of the wealthiest companies n the World? Microsoft. And is run by its founder who actually know how to program computers. He currently has a role called "Chief Software Architect". He can be a bad guy, but he really knows his stuff.
Best Regards,
Carlos
Thanks for the comments, Carlos. I agree that some large corporations are internally less pathological than others. Most of the management fads associated with Tom Peters over the years have involved either simulating markets within the corporate hierarchy, or simulating decentralization and worker self-management.
My objection to such an approach is that (as I titled a post here some time ago) it's putting new wine in old bottles. Such experiments take place within a state-enabled corporate framework where the headquarters retains control of finance and "intellectual property" (see, for example, Naomi Klein's description of Nike).
I don't dispute that such experiments make the large corporation more efficient and less pathological than it would be without them.
But I believe the state's subsidies to the costs of large size, and the state's protections from the competitive costs of inefficiency, together enable the corporation to get by with only such half-measures; and it reduces the pressure to adopt them at all.
Gates retains enough ties to the hacker culture that the internal culture of MS goes partway toward simulating the atmosphere of peer-group production. Still, his comments on Stallman et al about copyright "commies" indicate he is very ambivalent toward that culture.
And as is the case with corporate culture in general, Gates has the leeway to play around with half-measures because he's cushioned from full-scale competition by the state.
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