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Mutualist Blog: Free Market Anti-Capitalism

To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

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Location: Northwest Arkansas, United States

Monday, July 17, 2006

Robert Jackall on Corporate Bureaucracy

Recently Jeremy Weiland of Social Memory Complex, in a private email, mentioned that it would be nice if I blogged on books I was reading as part of my research on the anarchist theory of organizational behavior. I've resolved to do this more than once in the past, and then failed to follow through. This last suggestion was enough, at least, to jog one book review out of me.

Several things have come together to make this book especially topical.

Most recently, in the comments to "A Market Without Capitalists," Econoclasta wrote:

Capital intensiveness and advanced management techniques that can only be found (for reasons fairly obvious) in big capitalist companies... are the only way to reach an advanced industrial quality of life....

Before that Paul Edwards, a commenter at Mises Blog, disputed this statement of mine :

the ideal system for entrepreneurship is one in which the organization of production, product development, and analysis of market feedback are united in the same people.

He countered:

I disagree. Economics clearly shows that the optimal system is where those who excel in and prefer certain economic roles should perform those roles and should not be excluded from or coercively forced into such roles....

There is more to the entrepreneur than the optimal daily management of a business. In fact, it is almost nothing to do with this. It is the directing of capital to its most profitable and therefore most socially beneficial applications. It is the speculative aspect of the entrepreneur that cannot be replaced by factory workers, and this is part of what the syndicalist misses.
Of course that's a strawman; my argument is that the roles of entrepreneurship, product development, and marketing have all been coercively separated from that of productive labor, far beyond the degree of separation that would exist in a free market, by the state's weaking of the bargaining power of labor and its subsidies to centralization, hierarchy and capital-intensiveness. Anyway....

Some time still further back, Charles Johnson (aka Rad Geek) quoted this idiotic statement by Richard Posner on the non-viability of worker co-ops because of the workers' short time horizons:

The economic literature on worker cooperatives identifies decisive objections to that form of organization.... The workers have a shorter horizon than the institution. Their interest is in getting as much from the institution as they can before they retire; what happens afterwards has no direct effect on them unless their pensions are dependent on the institution's continued prosperity. That consideration aside..., their incentive is to play a short-run game, to the disadvantage of the institution....

All these strands mesh perfectly in Robert Jackall's Moral Mazes: The World of Corporate Managers.

In "On the Irrationality of Large Organizations," I remarked on their tendency to take on the internal character of planned economies.

Robert Jackall's account of the interior life of large corporations bears that generalization out, in spades. Jackall's book is a sociological study of corporate management, based on extensive interviews of managers at a number of corporations.

One of his findings corresponds to my own bottom-up observations at assorted employers. Those at the top who make the "entrepreneurial" decisions about where to direct funding, and where to cut it back, are about as clueless as the people at Gosplan headquarters.

For example, Jackall described a corporate "cost-cutting" drive (at "Covenant Corporation") during the economic downturn of 1981-82. The CEO relentlessly pressured division and plant managers to trim costs to the bone. But his pressure came in the form of orders to slash entire categories of spending or staffing by some arbitrary percentage like 20%. Such general edicts, without regard to the details of the production process, resemble the budget-cutting efforts of politicians who find, to their consternation, that no specific line item exists for "waste, fraud, and abuse." And naturally, for the bureaucrats who implement the cuts, the efficient functioning of their agencies is at the bottom of their list of priorities.

Likewise, in Jackall's private sector downsizing case studies, the chain of command's top priority in carrying out those orders was not to maximize efficiency and productivity, but to save as much of their patronage networks as possible from the axe. So the most likely targets for cuts were production workers, and the maintenance expenditures necessary for long-term productivity. The natural tendency of the corporate hierarchy, in such a "cost-cutting" drive, is to eat its seed corn.

It seems that the "division of labor" Paul Edwards wrote about, between workers and those with superior gifts in "entrepreneurship," is largely a figment of the imagination. It's hard to imagine any "speculative aspect of the entrepreneur" that workers could possibly do worse than the people currently at the top.

Certainly in terms of technological innovation, a subcategory of "entrepreneurship" that Paul Edwards mentioned in the quote above, production workers are the best judges of what would cut costs and increase efficiency (see "On the Superior Efficiency of Small-Scale Organization").

Even in terms of the entrepreneurial functions of shifting money around to its most productive use, we find senior management hampered by another of Jackall's findings: their incredible short-sightedness. Despite Posner's rose-colored view of things, about the only group with a shorter "time horizon" than corporate CEOs, or the managers of divisions and plants, would be fruit flies.

Whether the manager's jurisdiction is a plant, a division, or the entire company, his remuneration and chances for promotion are determined mainly by the short-term balance sheet and the price of stock. Anything he does to improve long-term productivity is unlikely to show its effects until he has left his current job, so that someone else will take credit for it. So the overwhelming incentive is to do whatever is necessary to inflate the quarterly figures--defer maintenance, draw down inventories, and neglect capital improvements that are necessary for long-term competitiveness. The trick is for the manager to time it just right, so that he runs his domain into the ground and milks all the credit for short-term profits, and then moves on leaves a successor to take the blame for the disaster that follows. The mark of a manager on the fast track is that he outruns his messes, leaving one gutted plant after another to experience catastrophe after he has been promoted. The mindset of the corporate manager, under these circumstances, is that of an Ottoman tax farmer: milk your jurisdiction for all you can get, even to the point of destroying its economy, because you won't be around long enough to benefit for making it more productive. The typical resume carpetbagger has often run one plant after another into the ground, and never gotten anything but praise for the profits under his immediate tenure. The guy who ran a plant into the ground often winds up at corporate headquarters, giving orders to the guy who inherited his mess.

This short time-horizon means that, despite all the lip-service to "reengineering" and Deming knockoffs like Six Sigma and ISO-9000, any corporate cost-cutting drive aimed ostensibly at increasing efficiency will really be aimed instead at milking the maximum possible short-term returns out of the firm at the expense of its long-term viability, before the CEO moves on to greener pastures.

Interestingly, though, management will always use "vocabularies of rationality" after the fact to justify ass-brained decisions.

Vocabularies of rationality are always invoked to cloak decisions, particularly those that might seem impullsive when judged by other standards.

* * *

...just after the CEO of Covenant Corporation announced one of his many purges, legitimated by "a comprehensive assessment of the hard choices facing us" by a major consulting firm, he purchased a new Sabre jet for executives and a new 31-foot company limousine for his own use at $1,000 a foot. He then flew the entire board of directors to Europe on a Concorde for a regular meeting to review, it was said, his most recent cost-cutting stragegies.

Also amusing, in the same line, is Jackall's anecdotes concerning the Potempkin Village-like measures taken at local plants to impress visiting dignitaries from corporate headquarters. The money spent by plant managers on purely cosmetic measures ($100,000 on paint alone, in one case) was often greater than the costs of necessary maintenance that they had deferred for the sake of "frugality."

Management's short time-horizon is exacerbated by the difficulty of tying rewards to productivity in a bureaucratic hierarchy. Beyond the necessity of being perceived to have some minimal level of competence, advancement and reward result more from the skills of careerism and political maneuvering than from any genuine contribution to the productivity of the firm. Indeed, political connections are the main determinant of receiving credit for organizational successes, rather than the reverse.

Another finding: despite Deming's call for "driving out fear," fear is all-pervasive in the corporate hierarchy. One of the central rules for career advancement, as perceived by those in the corporate bureaucracy, is not to tell your superiors what they don't want to hear. Don't be the bearer of bad news. Management doesn't want to hear that its policies created a clusterfuck. And if the boss has a bright idea, it's a good idea--no matter what. The value placed on being a "team player" is aimed primarily at suppressing dissent, and limiting the presentation of alternatives during the formulation of policy; it is a classic example of Irving Janis's "groupthink," the incestuous good ol' boy atmosphere that has led so many decision-making groups to disaster. So the hierarchical structure couldn't be better at suppressing good ideas for innovation and process improvement if it were designed to do just that. The managerial hierarchy seems deliberately designed to frustrate the aggregation of the necessary relevant information by anyone in authority, and to block any input from those most qualified to improve productivity.

Those at the top often deliberately avoid any substantive feedback on the details of how their orders are implemented, in order to maintain "plausible deniability." As Jackall put it, credit is pushed up the chain of command, while attention to detail is pushed downward. At the same time that top management seek plausible deniability on the reality of things in lower levels of the organization, they seek buy-in from those below in order to spread around the responsibility for potential failure. Those below, on the other hand, avoid sticking their necks out without implicating as many other managers as possible, in order to spread responsibility at their own end. The overall effect is paralysis. And when some decisive course is taken, it is usually a decision that could have been better made by a trained chicken.

In times of projected downsizings, the internal atmosphere resembles that of Stalinist Russia during the purges. Everyone's central obsession becomes finding ways to divert the axe from oneself to others, by false accusations, credit-stealing, and every other underhanded trick known to mankind. People spend more time setting each other up to fail than they do trying to get anything done. So a rational decision to cut staffing and budgets based on criteria of efficiency is almost impossible. Instead, as I already mentioned above, the parameters are likely to be set by general decrees from the top to cut entire categories of spending by some arbitrary percentage, and then carried out in practice in a way that targets productive resources for cutting in preference to well-connected management deadwood.

So Jackall bears out R.A. Wilson's assessment, thirty years ago, of the flow of information within a hierarchy. Simply put, people don't tell the truth to a man with a gun. Information is distorted by fear as it travels up the hierarchy until, as Kenneth Boulding put it, those at the tops of hierarchies live in almost completely imaginary worlds.

The short-term bias is made worse still by the business school culture, which focuses almost entirely on crunching numbers and monitoring the balance sheet, at the expense of managing the production process. And, Jackall argues, it is exacerbated by institutional investors and the threat of hostile takeovers, which promotes a similar focus on short-term returns.

Taking all of this into consideration, it's hard to see how the "entrepreneurial skill," or the "time horizons" of production workers, could possibly be worse than those of current management.


Anonymous Anonymous said...

For example, Jackall described a corporate "cost-cutting" drive (at "Covenant Corporation") during the economic downturn of 1981-82. The CEO relentlessly pressured division and plant managers to trim costs to the bone. But his pressure came in the form of orders to slash entire categories of spending or staffing by some arbitrary percentage like 20%. Such general edicts, without regard to the details of the production process, resemble the budget-cutting efforts of politicians who find, to their consternation, that no specific line item exists for "waste, fraud, and abuse." And naturally, for the bureaucrats who implement the cuts, the efficient functioning of their agencies is at the bottom of their list of priorities.

You might want to look at a book called "Your Disobedient Servant" by Leslie Chapman. I haven't read it, but attended a talk he gave some years ago. His argument was that the public sector in the UK at least could be cut back enormously, without impact on useful services but not by the sort of arbitrary hacking described in the quote above. He argued that those doing the jobs - and by extension this applies equally to the private sector - knew where the waste was and only they could idenitfy and make the savings and cost cuttings needed.


July 18, 2006 4:21 AM  
Anonymous Anonymous said...

Wow. Jackall's book sounds like exactly the sort of reference I need to add to my shelves. Not that any of this is news to me, but there's something about good research presented in print that can be useful in persuading others.

On a side note, one of the things I'vs seen at many of the places I've worked is the corrupting pressure on people who could be fine managers. It's not that they set out to follow the destructive trends you describe. They went into management out of a recognition of the good a good manager can do, supporting the people who actually do the work. Unfortunately, then they run into modern management culture. And the classic temptation arises, to do some crap in exchange for remaining in place with the hope of future good. And step by step it takes its toll.

They don't want to quit outright, because they can see - correctly, almost always - that their likely replacements would be worse. But the ratio of crap to goodness gets worse and worse. There is no really good way out of it short of leaving, in most cases, for a place where better terms can be established and protected from the outset.

July 18, 2006 4:45 AM  
Anonymous Anonymous said...


what an amazing small world coincidence!

my wife's mentor at a small NE liberal arts college was Robert Jackall!

she has taken his emperical/analytic approach and applied it to how mergers and aquisitions and the general new business climate/reality have effected the practice of law in large law firms as it relates to ethics.

her paper on the subject was just published in a law review journal...

July 18, 2006 7:57 AM  
Blogger Larry Gambone said...

Gotta get my hands on that book! One minor point. Corporate capitalist apologists never look at the empirical evidence, they only spout ideology. If strict separation of workers, consumers and corpopration bosses is necesary for entreprenuership, how does that explain the sucessful entrepreneurship of the cooperative movement?

July 18, 2006 8:43 AM  
Blogger quasibill said...

Paul Edward's comment strikes me as confusing the roles of "capitalist" with "entrepreneur". The first label fits his description.

In contrast, an entrepreneur is someone who succeeds in meeting a previously unmet demand. This role is not directly related to the direction of capital - for example, it could be as simple as offering your services as a tutor.

Sure, you may seek out capital in order to finance your endeavour, especially where a large initial investment is required, but that is, in fact, separate from the entrepreneur's function(s) in a) recognizing the unmet demand and b) providing a cost-effective solution to the demand.

Entrepreneurship can be facilitated by, but does not require in all cases, capital.

July 18, 2006 10:31 AM  
Blogger Kevin Carson said...


I'll have to check that book out. It certainly ties in with my own experience when I worked in the "public" sector (a VA hospital). The cluelessness of those at the top only gives those in the middle more slack to exercise their mendacity.

For example: at the VA hospital where I worked, managment contracted with some motivational consultant to conduct an all-day "team building" workshop at a local hotel. The administrators, however, decided they needed a special course of their own, which they arranged at a luxury resort in Branson, Mo. And of course, they had to spend the night there. Shortly afterward, management sent us an email announcing that travel funds for education were "exhausted," so not to bother putting in any requests. I've still got a copy of it, I think, in all the stuff I saved for "future reference" while working there.


What you're saying reminds me of the passages in the early part of The Grapes of Wrath, where everybody involved in the tractoring off of sharecroppers, from the guy driving the tractor to the eastern banks that own the local bank that holds the deed, argues that the situation is caused by a "machine," a structure beyond anyone's control. That's probably true. Many, if not most, mid-level bosses I've dealt with were doing the best job they could given impossible demands.


Your friend's reaction to the material on DeLong's blog is interesting. Why wouldn't the short-sightedness of humans be an argument against granting authority to those currently holding it? Apparently the people running the economic machinery today aren't human. Perhaps Ickes is right about those lizard people.


Small world indeed! Do you have a citation for the article?


Actually, Edwards specifically cited Mises on the fact that the degree of separation between labor and entrepreneurship would be determined by personal preference in a free market. Exactly my point--since we're not in a free market, the present degree of separation is the result of state intervention. Some libertarians are so used to implicitly identifying their "free market" principles with a defense of the existing capitalist system, that they don't register the implications of their own rhetoric.


And the function of entrepreneurship would naturally follow from the ownership of one's own productive property. Until the late 19th century, the overwhelming majority of people in this country were entrepreneurs, because they owned their farms or the tools of their trade, and adapted their products and production methods to the situation as they saw it.

And the rentier classes whose "entrepreneurship" consists of shifting money from this portfolio item to that are acting on the basis of returns that have little to do with internal efficiencies or autonomous demand, and everything to do with the political power of the firms drawing the returns. Sam Konkin distinguished the entrepreneur from the capitalist or rentier; the former's creative role had a lot more to do with his hands-on involvement *inside* the firm, choosing the most efficient production methods and responding most effectively to anticipated demands in the development of products. And it is in exactly these areas that production workers have the biggest advantage.

And arguably, in a free market anarchy, the main source of venture capital would be the pooled resources of ordinary people, not giant banks (which created the European cartels and Japanese zaibatsu).

The question is whether the wage system as it presently exists is a natural division of labor arising from a free market, or whether a free market would tend to promote more small-scale ownership and self-employment.

Many Misesians seem to assume that division of labor and "roundabout methods of production" have no point of diminishing returns. In this regard, they are indistinguishable from the most vulgar Marxists and technocratic of liberals.

July 18, 2006 4:16 PM  

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