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February 20, 2009



"One of my favourite claims, which I made in my book, is that if centrally planned economies are a bad idea, how come centrally planed companies are a good one?"

Ooh I must read that then. Whenever people argue against central planning by nutters, I always think of Apple...


Don Boudreaux challenged my analogy:
Unlike with government central planning, the size and scope of each firm on the market is itself constantly tested by competition.

Ah, but the same is true in a sense of governments. The "size and scope" of the centrally planned USSR was certainly tested by competition, and ultimately it collapsed because, among other things, its customers - the Russian people - reckoned that they could do better with a different provider of governmental services.


It's not a claim, it's a question. One possible answer is that if the company has to compete with others, it is obliged either to be competent enough to survive, to go under, or to use coercion. In the latter case, it has begun to resemble an arm of government.

The problem with RBS may well be (i) that it was far too big a company to be run centrally, and yet be effective, and (2) it was run by stupid twats.


Where exactly is your evidence that "more co-operative forms of company" are a better idea than "centrally planned companies"?

Because it seems to me that the market has weeded out vitually all of those co-operatives. You don't see many around, do you?

So if you truly believe that the market is usually more right than wrong, you should be very skeptical about claims that co-operatives are more effective than hierarchies.

passer by

But they were not competing with one another, they were in effect sharing each others risks and operating as one big bank, thus when one went whole parts of the system went too.


No, no, no: it's a simple logical error to leap from the fact that they sometimes "shared each others risks" [meaning what? That they traded with each other?] to concluding that therefore they never competed.

Bob B

I readily take the point about there not being many successful producer cooperatives around - consumer cooperatives are another story. However, there are and have been a few conspicuously successful examples, such as the John Lewis Partnership, a retail producer cooperative, and the Tower Colliery in Wales:

But my real intent here is to stress that there are many distinct forms of hierarchical corporate management structures, some of which tend to be more commercially successful than others. I'm not overly familiar with this literature - much of which derives from Oliver Williamson: Markets and Hierarchies (1975) - but this following presentation may serve as a basic introduction:
http://www.econ.ohio-state.edu/Fleisher/courses/econ508winter06/docs/stu_presentation/Matts_Presentation1.ppt#266,11,VII. Conclusion


Let's just try out this theory of Stalinism on a popular entertainment industry, shall we?

25 years ago the most successful enterprise in the country in this industry was run on collegiate lines (the famous Liverpool boot-room); today we have the situation of a long term domination by a socialist dictator (Ferguson) who has only really been challenged by a similar authoritarian - if not Napoleonic - figure (Mourinho) and a moody intellectual (Wenger). One might even allocate rough historically analogous roles to the challengers: Mourinho as Trotsky and Wenger as Bukharin.

What this suggests is not only is the market an imperfect check on Stalinism, so is the Premier League.

Investors times

I think it is possible for a centrally planned economy to succeed. However it must specialised in producing only certain types of goods like monaco or dubhai. If it has to produce a lot of goods then the free market would be more effective without doubt. The essense of free market is that it is the best at allocating resources and allocating qualified labour

Bob B

"The essence of free market is that it is the best at allocating resources and allocating qualified labour."

I feel sure that Dr Pangloss will be pleased with that affirmation:

Meanwhile, readers may be interested to know of this seminal paper by Francis Bator on: The Anatomy of Market Failure (QJE 1958) [large PDF file]


When looking at this, you must remember that the market we have now is not a free market.
The myriad of legislation and regulation we have encourages the big business model by preventing competition and entry into the market.

I'd argue that in a free market it is likely that there'd be fewer centrally controlled big businesses due to the greater competition.

Bob B

I prefer to go with the evidence. It's not the prospect of additional real competition that worries me.

The head offices of both RBS and HBOS are in Edinburgh. With this latest news about alcohol consumption in Scotland, I think we need additional regulations with strong enforcement - something like a new criminal offence of the kind: "Bank administration while under the influence . . " backed up with random breath testing:

"Scotland is in the grip of a health crisis after research revealed that more than half of men and 30% of women drink to excess."

Btw with economies of scale and scope, network economies and asymmetric information, it seems unlikely that a competitive equilibrium is like to be sustainable or even feasible in many real world markets for information and communication technology products and services.

What percentage does Microsoft hold of the market for PC operating systems? Around ninety something per cent? How many competition policy enforcement actions have there been by the EU Commission? But then perhaps Competition Policy is also scheduled for abolition in the deregulation process.

With the scale of fraud cases currently under investigation, relaxing enforcement of property rights is hardly likely to promote market growth with buyer confidence, let alone more competitive markets -- and I'm tempted to speculate that is the precise intention of some of those going around proclaiming the supposed social benefits of: Free Market Capitalism.

Heavens above, George W was forever proclaiming the benefits of Free Market Capitalism while making billions of tax cuts - mostly to benefit the rich - and look where we are now.


"This suggests the market is a very imperfect check upon Stalinist companies. Which in turn leads me to suspect that government intervention to promote more co-operative forms of company aren’t necessarily a bad idea."

Which in turn leads to another question: why do so few governments actually promote co-operative companies? All over the world governments today are bailing out and propping up old fashioned Stalinist companies. Governments in Europe are now truying to create their own Euro-Stalinist version of General Motors. To achieve that goal the entire Flemish government is travelling to the GM's Kremlin in Detroit. But even in normal times we don't see many policies to promote non-hierarchical companies.

Maybe we have here another case of market failure versus government failure. Because government is a major pillar of support for stalinist companies, the market is unable to check those companies. This suggest to me we should remove that pillar in order for markets to be a still imperfect but at least impartial arbiter between all kinds of companies.

Bob B

"To achieve that goal the entire Flemish government is travelling to the GM's Kremlin in Detroit."

They are probably much better advised to travel to Toyota City, just outside Nagoya in Japan, to learn how Toyota worldwide car sales have overtaken GM's car sales.

Toyota pioneerd just-in-time car manufacturing decades ago and in its ascent, its manufacturing operations were much less vertically integrated than GM manufacturing.

Btw in Oliver Williamson, terminology, GM is an M(ulti-division)-form company, which led to GM overtaking Ford, with its U(nitary)-form management structure, back in the 1930s. But how should we classify Toyota, which has been more successful than GM?

Bob B

Btw in the 1980s and early 1990s, there was a spate of academic studies of Japan's hugely successful automotive industry in an endeavour to illuminate the reasons for its evident competitive advantage in international markets [*].

The non-adversarial relationships in the industry's component supply chain was one factor picked out, along with the traditional Japanese feature of cross-share holdings between suppliers and their major customers, the large automotive manufacturers. Another was that plant directors were expected to wear company overalls at work and put in some time working on the shop floor. Japanese factories have a common works canteen for all employees.

One insight that emerged about Toyota in the studies was that the company post-war adopted a policy of recruiting demobbed non-commissioned and commissioned officers from Japan's military. In the course of the 1950s and 1960s, many of Japan's big companies moved corporate head offices to Tokyo - but with a few notable exceptions: Matsushita (= Panasonic), Sharp and Sanyo kept head offices in Osaka, and Toyota kept its head offfice in Toyota City, outside Nagoya, although the company did set up a large sales office in Tokyo, as it turned out opposite the Yasukuni War Shrine, because of the sheer size of the Tokyo conurbation.

The cost of land in Tokyo made it uncommercial to set car showrooms in the fashion we are familiar with. Companies sold their cars via door-knocking salesmen - an effectively protectionist practice which made it costly for foreign companies to sell cars in Japan, especially since there was virtually no equivalent to the company-car market there. VolksWagen achieved the largest penetration of Japan's car market and even that was modest.

The competitive success of Japan's automotive industry is sometimes mistakenly attributed to the fabled industrial policy of Japan's Ministry of International Trade and Industry (MITI). In fact, in the 1960s, Japan's automotive industry strenuously resisted MITI engagement. In the 1950s, MITI had attempted to warn off Honda, at that time a hugely successful motor cycle manufacturer and exporter, from entering car production so Toyota and Nissan would not have to face additional competition in their home market. Honda - for he ran the company - effectively told MITI to get lost. In due course, Honda became the third largest and generally very profitable car producer in Japan - its head office located close to Tokyo University, which was and is generally rated the best in Japan. In academic studies of Japan's MITI and its famed industrial policy, readers encounter frequent references about the need to avoid "excessive competition" as an essential feature of a successful industrial policy - I suspect a certain uncritical devotion to Schumpeter's notions.

[*] One byproduct of what developed into verging on paranoia in America about Japan's industrial success in the 1980s was a flood of books, journalism and commission reports, with this as a very respectable contribution from MIT economists: Dertouzos, Lester, Solow (eds): Made in America - Regaining the Productive Edge (MIT Press 1990). Some economists, commenting on Japan's economy, suggested that Baumol's sales revenue maximisation hypothesis was a more apt and illuminating description of corporate motivation in Japan's large companies than short- or long-run profit maximisation:

The bottom line is that Japan's large companies weren't Stalinist but they certainly didn't conform with the western capitalist stereotype either.

Kevin Carson

I don't think Boudreaux was obviously right at all. As Tristan says, this isn't a free market. The rate of failure among giant corporations is miniscule compared to genuine businesses in the competitive sector of the economy. The degree of competition, in the large corporate sector, is heavily constrained by regulatory cartels.

Brad Spangler

What Boudreaux overlooks here:

"Unlike with government central planning, the size and scope of each firm on the market is itself constantly tested by competition."

...is that government regulation and indirect subsidies serve to distort the market and thus partially insulate firms from fully open competition.


Do you have a link or two, or at least a Google search term, where you develop this idea about centrally managed corporations more fully? (The "new labour" focus of your book title turns me off because I'm American.)

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