Corporations: Market Free Zones

[ksen]

While reading about the new Greek finance minister I found that he did some work for the gaming company Valve. He wrote a blog about his time at Valve. One of the posts focuses on the internal structure, or lack of structure, within Valve. I haven't finished reading it yet, it's a bit long, but I thought the introduction raised some issues I hadn't thought about before so I decided to share it here and see what you guys think.

Why Valve? Or, what do we need corporations for and how does Valve’s management structure fit into today’s corporate world?

1. Introduction: Firms as market-free zones

Every social order, including that of ants and bees, must allocate its scarce resources between different productive activities and processes, as well as establish patterns of distribution among individuals and groups of output collectively produced.

While all societies featured markets (even primitive ones), market-societies emerged only very recently (around three centuries ago). The difference between a society-with-markets from a market-society is that in market-societies the factors of production are commodities (e.g. land, labour and tools) and, therefore, their employment is regulated through some market mechanism (e.g. the labour market). In this sense, market societies (which emerged during the past three centuries) have the distinctive feature that the allocation of resources, as well as the distribution of the produce, is based on a decentralised mechanism functioning by means of price signals: the activities, goods and services, and processes whose associated price rises attract more ‘attention’, and are invested with more resources (e.g. land and labour), while those whose prices decline repel producers.[1]

Market-societies, or capitalism, emerged when, some time in the 18th century, the expulsion of peasants from their ancestral lands (the so-called Enclosures in Britain), and their replacement with sheep (whose wool had become an internationally traded commodity), gave rise to the gradual commodification of land (with each acre acquiring a value reflecting the value of wool that could ‘grow’ on it) and, then, of labour (as the, now, landless peasants were eager to sell their labour time for a loaf of bread, money, anything of exchange value). Once land and labour became commodities that were traded in open markets, markets began to spread their influence in every direction. Thus, societies-with-markets begat market-societies.

Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!

The firm, in this view, operates outside the market; as an island within the market archipelago. Effectively, firms can be seen as oases of planning and command within the vast expanse of the market. In another sense, they are the last remaining vestiges of pre-capitalist organisation within… capitalism. In this context, the management structure that typifies Valve represents an interesting departure from this reality. As I shall be arguing below, Valve is trying to become a vestige of post-capitalist organisation within… capitalism. Is this a bridge too far? Perhaps. But the enterprise has already produced important insights that transcend the limits of the video game market.

I had never thought of corporations as being little command economies within the larger "free market" world but I think his description is quite apt.

 

[Axulus]

While reading about the new Greek finance minister I found that he did some work for the gaming company Valve. He wrote a blog about his time at Valve. One of the posts focuses on the internal structure, or lack of structure, within Valve. I haven't finished reading it yet, it's a bit long, but I thought the introduction raised some issues I hadn't thought about before so I decided to share it here and see what you guys think.

Why Valve? Or, what do we need corporations for and how does Valve’s management structure fit into today’s corporate world?

1. Introduction: Firms as market-free zones

Every social order, including that of ants and bees, must allocate its scarce resources between different productive activities and processes, as well as establish patterns of distribution among individuals and groups of output collectively produced.

While all societies featured markets (even primitive ones), market-societies emerged only very recently (around three centuries ago). The difference between a society-with-markets from a market-society is that in market-societies the factors of production are commodities (e.g. land, labour and tools) and, therefore, their employment is regulated through some market mechanism (e.g. the labour market). In this sense, market societies (which emerged during the past three centuries) have the distinctive feature that the allocation of resources, as well as the distribution of the produce, is based on a decentralised mechanism functioning by means of price signals: the activities, goods and services, and processes whose associated price rises attract more ‘attention’, and are invested with more resources (e.g. land and labour), while those whose prices decline repel producers.[1]

Market-societies, or capitalism, emerged when, some time in the 18th century, the expulsion of peasants from their ancestral lands (the so-called Enclosures in Britain), and their replacement with sheep (whose wool had become an internationally traded commodity), gave rise to the gradual commodification of land (with each acre acquiring a value reflecting the value of wool that could ‘grow’ on it) and, then, of labour (as the, now, landless peasants were eager to sell their labour time for a loaf of bread, money, anything of exchange value). Once land and labour became commodities that were traded in open markets, markets began to spread their influence in every direction. Thus, societies-with-markets begat market-societies.

Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!

The firm, in this view, operates outside the market; as an island within the market archipelago. Effectively, firms can be seen as oases of planning and command within the vast expanse of the market. In another sense, they are the last remaining vestiges of pre-capitalist organisation within… capitalism. In this context, the management structure that typifies Valve represents an interesting departure from this reality. As I shall be arguing below, Valve is trying to become a vestige of post-capitalist organisation within… capitalism. Is this a bridge too far? Perhaps. But the enterprise has already produced important insights that transcend the limits of the video game market.

I had never thought of corporations as being little command economies within the larger "free market" world but I think his description is quite apt.

It's surprising that you haven't thought about that. The key difference between that and society at large is the incentive structure. Are costs and benefits of making the best decisions adequately aligned and properly borne by the responsible parties? Are the incentives adequate to incentive to gather the data and information necessary for the best decision (which has a cost)? When it comes to politicians, the incentives are way off. Therefore, putting them in charge of the decision making process for production and resource allocation is a disaster.

 

[Alcoholic Actuary]

While reading about the new Greek finance minister I found that he did some work for the gaming company Valve. He wrote a blog about his time at Valve. One of the posts focuses on the internal structure, or lack of structure, within Valve. I haven't finished reading it yet, it's a bit long, but I thought the introduction raised some issues I hadn't thought about before so I decided to share it here and see what you guys think.

Why Valve? Or, what do we need corporations for and how does Valve’s management structure fit into today’s corporate world?

1. Introduction: Firms as market-free zones

Every social order, including that of ants and bees, must allocate its scarce resources between different productive activities and processes, as well as establish patterns of distribution among individuals and groups of output collectively produced.

While all societies featured markets (even primitive ones), market-societies emerged only very recently (around three centuries ago). The difference between a society-with-markets from a market-society is that in market-societies the factors of production are commodities (e.g. land, labour and tools) and, therefore, their employment is regulated through some market mechanism (e.g. the labour market). In this sense, market societies (which emerged during the past three centuries) have the distinctive feature that the allocation of resources, as well as the distribution of the produce, is based on a decentralised mechanism functioning by means of price signals: the activities, goods and services, and processes whose associated price rises attract more ‘attention’, and are invested with more resources (e.g. land and labour), while those whose prices decline repel producers.[1]

Market-societies, or capitalism, emerged when, some time in the 18th century, the expulsion of peasants from their ancestral lands (the so-called Enclosures in Britain), and their replacement with sheep (whose wool had become an internationally traded commodity), gave rise to the gradual commodification of land (with each acre acquiring a value reflecting the value of wool that could ‘grow’ on it) and, then, of labour (as the, now, landless peasants were eager to sell their labour time for a loaf of bread, money, anything of exchange value). Once land and labour became commodities that were traded in open markets, markets began to spread their influence in every direction. Thus, societies-with-markets begat market-societies.

Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!

The firm, in this view, operates outside the market; as an island within the market archipelago. Effectively, firms can be seen as oases of planning and command within the vast expanse of the market. In another sense, they are the last remaining vestiges of pre-capitalist organisation within… capitalism. In this context, the management structure that typifies Valve represents an interesting departure from this reality. As I shall be arguing below, Valve is trying to become a vestige of post-capitalist organisation within… capitalism. Is this a bridge too far? Perhaps. But the enterprise has already produced important insights that transcend the limits of the video game market.

I had never thought of corporations as being little command economies within the larger "free market" world but I think his description is quite apt.

I don't understand. Is there an example of a firm allocating resources via a non-price driven mechanism?

I think most firms at least consider the cost of capital when allocating resources, which seems price driven to me.

aa

 

[dismal]

1) In every corporation I ever worked at or consulted to there was a lot of competition for capital, talent and other resources.
B) Corporations are not economies, so they can't be planned economies. Corporations strive to compete efficiently, planned economies kill competition.

 

[Axulus]

While reading about the new Greek finance minister I found that he did some work for the gaming company Valve. He wrote a blog about his time at Valve. One of the posts focuses on the internal structure, or lack of structure, within Valve. I haven't finished reading it yet, it's a bit long, but I thought the introduction raised some issues I hadn't thought about before so I decided to share it here and see what you guys think.

Why Valve? Or, what do we need corporations for and how does Valve’s management structure fit into today’s corporate world?



I had never thought of corporations as being little command economies within the larger "free market" world but I think his description is quite apt.

I don't understand. Is there an example of a firm allocating resources via a non-price driven mechanism?

I think most firms at least consider the cost of capital when allocating resources, which seems price driven to me.

aa

But allocation of many resources within a firm are not price driven. There are attempts with cost accounting to account for the costs to make better decisions and better allocate resources, but that is very different than a market approach whereby one department is charged a price to use the resources in another department, and the department providing the resources accounts for the revenue earned from this approach, etc.

The main reason to avoid the market approach within a firm and why a firm is more efficient than outsourcing every activity is to avoid transaction costs.

http://en.wikipedia.org/wiki/Transaction_cost

Also see:

http://en.wikipedia.org/wiki/Theory_of_the_firm

 

[arkirk]

While reading about the new Greek finance minister I found that he did some work for the gaming company Valve. He wrote a blog about his time at Valve. One of the posts focuses on the internal structure, or lack of structure, within Valve. I haven't finished reading it yet, it's a bit long, but I thought the introduction raised some issues I hadn't thought about before so I decided to share it here and see what you guys think.

Why Valve? Or, what do we need corporations for and how does Valve’s management structure fit into today’s corporate world?



I had never thought of corporations as being little command economies within the larger "free market" world but I think his description is quite apt.

It's surprising that you haven't thought about that. The key difference between that and society at large is the incentive structure. Are costs and benefits of making the best decisions adequately aligned and properly borne by the responsible parties? Are the incentives adequate to incentive to gather the data and information necessary for the best decision (which has a cost)? When it comes to politicians, the incentives are way off. Therefore, putting them in charge of the decision making process for production and resource allocation is a disaster.

Richard Wolfe covers this in EVERY ONE OF HIS LECTURES AND TALKS...REALLY NOTHING NEW.

 

[dismal]

I don't understand. Is there an example of a firm allocating resources via a non-price driven mechanism?

I think most firms at least consider the cost of capital when allocating resources, which seems price driven to me.

aa

But allocation of many resources within a firm are not price driven. There are attempts with cost accounting to account for the costs to make better decisions and better allocate resources, but that is very different than a market approach whereby one department is charged a price to use the resources in another department, etc.

But it's an apples and oranges thing. Coordinating resources within one of many competitive companies is a different task than coordinating resources within an economy.

It's like person one says "golf is a competitive game" and person 2 says "they say golf is a competitive game, but when I see a good golfer their arms and legs are gracefully working together in cooperation".

 

[Axulus]

But allocation of many resources within a firm are not price driven. There are attempts with cost accounting to account for the costs to make better decisions and better allocate resources, but that is very different than a market approach whereby one department is charged a price to use the resources in another department, etc.

But it's an apples and oranges thing. Coordinating resources within one of many competitive companies is a different task than coordinating resources within an economy.

It's like person one says "golf is a competitive game" and person 2 says "they say golf is a competitive game, but when I see a good golfer their arms and legs are gracefully working together in cooperation".

But it's not market driven (or usually it's not) - you don't see the accounting department taking bids from the other departments for use of its time. The accounting department's resources are allocated using other mechanisms (and certainly cost is going to be a factor in any mechanism, but cost alone not the same as a market approach. Markets charge the price that the market will bear which is rarely equal to cost although it is effected by it).

 

[dismal]

But it's an apples and oranges thing. Coordinating resources within one of many competitive companies is a different task than coordinating resources within an economy.

It's like person one says "golf is a competitive game" and person 2 says "they say golf is a competitive game, but when I see a good golfer their arms and legs are gracefully working together in cooperation".

But it's not market driven (or usually it's not) - you don't see the accounting department taking bids from the other departments for use of its time. The accounting department's resources are allocated using other mechanisms (and certainly cost is going to be a factor in any mechanism, but cost alone not the same as a market approach. Markets charge the price that the market will bear which is rarely equal to cost although it is effected by it).

Yeah, my point is not that it is market driven, but that there's no particular reason it's supposed to be market driven.

Thus, it isn't insightful.

 

[Horatio Parker]

He's fudging a bit with numbers. Market economies didn't emerge until the nineteenth century, by which time land and labor were fully commodified. So it's more like two hundred years.

Traditional society was redistributive. Social standing was more important than how much you owned, and all had the right to their lives.

But it's a very interesting idea.

 

[Alcoholic Actuary]

I don't understand. Is there an example of a firm allocating resources via a non-price driven mechanism?

I think most firms at least consider the cost of capital when allocating resources, which seems price driven to me.

aa

But allocation of many resources within a firm are not price driven.

What are they driven by?

There are attempts with cost accounting to account for the costs to make better decisions and better allocate resources, but that is very different than a market approach whereby one department is charged a price to use the resources in another department, and the department providing the resources accounts for the revenue earned from this approach, etc.

If price = cost + markup, what is the difference?

The main reason to avoid the market approach within a firm and why a firm is more efficient than outsourcing every activity is to avoid transaction costs.

Assuming all transaction costs are the same or similar within a firm, what is the difference between pretending it is market driven (including transaction) or other driven (excluding transaction)? Also, why is the assumption poor (if it is)?

aa

 

[Juma]

A market is very expensive if you also have to take the costs for the losers.

 

[Togo]

But allocation of many resources within a firm are not price driven.

What are they driven by?

Growth estimates, strategic priorities, a desire to exploit an existing market opportunity, or a an existing capability. If companies were run according to mark-to market prices they'd be purely reactive, and never get anything done. Developing a new product, for example, is not price-driven, because by definition there is no existing price.

That's not to mention companies that have other priorities than making a profit, which despite our standard conception of corporations, is most of them. I've even worked in enviroments where making a profit was actively punished - the owners owned the company to provide a good quality service for them as cheaply as possible, so making an unexpected profit was a sign that you were overcharging them, and weren't in tight control of what was going on.

 

[dismal]

The mistake in the OP is that there are very specific problems with centrally planning an economy that do not apply within a company.

If the argument is "Centrally planning an economy is bad" because of specific challenges with centrally managing an economy, it is a fallacy to pretend the argument is "Centrally planning in general is bad" because central planning may work great with other things like a firm, an army or a football team.

The primary challenge of centrally planned economies is that information is widely dispersed. How does the planner know how many cell phones to produce? How does the central planner know how many resources should be devoted to be producing iron and where that iron should be allocated? If I appoint a Czar of Iron to make these decisions he can't make reasonable decisions without knowing about a billion other things. If the Czar of Oil decides not to drill enough oil wells and the Czar of Gasoline doesn't decide to make refineries it doesn't make sense to allocate iron to cars. If the Czar of Wood doesn't decide to allocate would to antique looking benches then it doesn't make sense to allocate iron to benches. And how do I even know how many antique looking iron and wood benches people want? Maybe they would be happier if that wood and iron went into snow sleds instead.

Prices contain information that allow me to make decisions without knowing the answers to all these other questions. The market clearing price for iron tells people "if your use of iron doesn't justify using iron at this price don't do it". It tells iron miners "if you can produce iron for less than this price invest resources to do it. Prices equilibrate supply and demand and in doing so send resource allocation signals that a central planner does not get. A firm engaged mining iron or making antique looking benches doesn't need to solve resource allocation for an entire economy in the absence of prices because it can observe prices and its task set is much more narrow.

 

[untermensche]

as the, now, landless peasants were eager to sell their labour time for a loaf of bread, money, anything of exchange value

They were not eager. They saw it as just another form of slavery.

They submitted and many submit to being a wage slave.

But submission is not freedom.

 

[Alcoholic Actuary]

What are they driven by?

Growth estimates, strategic priorities, a desire to exploit an existing market opportunity, or a an existing capability. If companies were run according to mark-to market prices they'd be purely reactive, and never get anything done. Developing a new product, for example, is not price-driven, because by definition there is no existing price.

That's not to mention companies that have other priorities than making a profit, which despite our standard conception of corporations, is most of them. I've even worked in enviroments where making a profit was actively punished - the owners owned the company to provide a good quality service for them as cheaply as possible, so making an unexpected profit was a sign that you were overcharging them, and weren't in tight control of what was going on.

Going back over what you and Axulus wrote, I think I get it. My interpretation is that firms are price (cost) driven. However, your (axulus/OP) point is that those prices are not market driven - and in many instances cannot be. They are hypothetical prices invented by the firm itself - at least until the market has time to respond.

Developing a new product will cost $X, but we can earn $Y in the market. Obviously if X > Y we don't develop the product, but there is also the chance that Y is incorrect, since it is only an estimate of what the market will do.

aa

 

[Togo]

Developing a new product will cost $X, but we can earn $Y in the market. Obviously if X > Y we don't develop the product, but there is also the chance that Y is incorrect, since it is only an estimate of what the market will do.

In abstract, sure... but... let's have a look at companies I have worked for.

Show

A large US consulting company. Aim was to increase market share, was willing to make a loss on individual engagements to do so.

A large clearing house, owned by their clients. Any profit made would be deducted from their budget from the next year. Tended to go on a spending spree every Autumn to avoid this. I was retained to increase their costs and was asked to please find something to do that looked useful.

A small boutique consultancy. Aim was to get bought. Profit taking was seen as bad, because it got in the way of the valuable bit - developing and marketing potentially valuable ideas that could lead to long-term relationships for a potential buyer

A French IT firm. Sold off their profitable products to a rival because it was in the UK, and thus too much hassle to manage.

A large UK bank. Entered a potentially profitable market at a large loss so the CEO could announce they were involved in the market, and thus raise the share price.

A small trading bank. Owned by a larger bank. Forbidden from making a profit. One year they made a profit and were subjected to discplinary action from head office.

A Bankrupt bank. Profit taking forbidden.

A large UK bank. They were buying another bank and planned to replace the entire division. Making a profit would make this look less valuable, so was quietly discouraged

A large US bank. Division was explicitly instructed to avoid considering profit in any way, as it would prejudice their decisions unfairly. As a part of this, price and income information was actively hidden.

Large IT firm. Profit central, various products and intiiatives discontinued on price grounds

Small IT firm. Profit ignored, because it's explicitly less important than growth.

I understand the reasoning, and I can see how it's true in abstract, but in practice, very few firms really stick to it, because there are plenty of other considerations to worry about. It's like saying the road maintenance crew is working to get the governor re-elected. Sure there's a relationship, but it's not something the road crew actually care about or use to measure their performance.

 

[untermensche]

A market is very expensive if you also have to take the costs for the losers.

Yes, great costs for the losers and great collateral costs, like the cost of pollution that the market in no way reacts to.