Conference on Austrian Economics and the Firm

28 May 2007 at 10:15 am 6 comments

| Peter Klein |

Last week I attended an interesting discussion conference sponsored by the Atlas Foundation, “Austrian Market-Based Approaches to the Theory and Operation of the Business Firm.” Former O&M guest blogger Dick Langlois was there, as were Pete Boettke and Fred Sautet of The Austrian Economists, Tony Woodlief of the Market-Based Management Institute, Saras Sarasvathy, Peter Lewin, Ivan Pongracic, Anthony Evans, and several others. (A selection of papers, written for the conference, will appear in the Review of Austrian Economics.)

The participants clearly believe the Austrian tradition has something of value for researchers and teachers in business administration. There may also be Austrian lessons for practitioners, though there was less consensus on exactly what these lessons are and how they should be communicated. One theme that emerged clearly from the discussions was the depth and variety of the Austrian approach. Despite a shared commitment to the general framework of the Austrian school there were many disagreements about core theoretical issues and much uncertainty about what these ideas imply for firm boundaries, strategy, entrepreneurship, and public policy.

An issue that came up many times was the relationship between the liberal market order and the internal organization of the firm. Several participants argued that just as a free society encourages creativity, productivity, and innovation by respecting the dignity of the individual, protecting personal liberty and property, and relying on the “spontaneous order” of the market to make efficient use of dispersed specific knowledge, so should organizations embrace radical decentralization, flatter hierarchies, employee empowerment, use of internal markets, and other elements of what I’ve called the “wikified firm.”

Part of this argument is positive: decentralized firms outperform centralized ones. But theory and evidence suggest some circumspection here. Clearly decentralization has advantages, but it has disadvantages as well, and these drawbacks must be taken into consideration. (See previous discussions here, here, here, and here.)

For some Austrians, the argument has a normative element as well. If we support free markets and private property then, to be consistent, we should also want firms to be as “market like” as possible. The Hayekian concept of spontaneous order should apply inside the firm as well. Certainly this is the view of market-based-management founder Charles Koch, whose influence on much of the scholarship discussed at the conference was obvious. In a sense, Koch is reviving a strand of American libertarian thought most closely associated with the late Samuel Konkin, and represented today by writers such as Kevin Carson and Roderick Long. This tradition holds that hierarchical organization is per se harmful and should be resisted, whether it is the result of government coercion or private business behavior.

At the conference I tried to make two points: The first is that private hierarchy, whether inside the firm, family, club, church, or other voluntary organization, is fully compatible, both legally and morally, with the (classical) liberal order. The second is that the performance advantages of decentralization within private organizations must be weighed against the potential benefits of hierarchy (in Herbert Simon’s sense). More generally, I made the case for an Austrian analysis of entrepreneurship and the firm based not on the Hayekian knowledge problem and Kirzner’s concept of entrepreneurial discovery — the foundations of most contemporary Austrian work in this area — but on the Cantillon-Knight-Mises concept of entrepreneurship as judgment combined with an emphasis on property rights, asset ownership, and monetary calculation, themes discussed in several of these papers. (A paper summarizing my arguments from the conference will be available soon.)

Entry filed under: - Klein -, Austrian Economics, Theory of the Firm.

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6 Comments Add your own

  • 1. Vladimir Dzhuvinov  |  28 May 2007 at 12:05 pm

    Companies are concerned with structure (hierarchy).

    The market is concerned with interactions (transactions).

    Can interactions lead to the emergence of structures (“spontaneous” order)?

    What kind of interactions do we get with certain types of structures? And vice versa, what kind of structure do certain types of interactions effect?

    Can companies benefit from worrying less about structure, and focusing instead a bit more on the interactions within?

  • 2. David Hoopes  |  1 June 2007 at 12:48 am

    The benefits of coordination. Decentralization makes the most sense when units do not have interdependencies (see Thompson, 1967 and other contingency theory work). Inasmuch as departments rely on each other, there are numersous modes of coordination and numerous incentive systems. If what is best for the company is closely coordinated effort across departments, rewarding each department for pursuing strictly local objectives will likely lead to global sub-optimization. If each department can act independently the question arises: why are the in the same firm?

  • 3. Peter Klein  |  1 June 2007 at 8:17 am

    David, you are right that it all comes back to the basic Coasian question.

    Some of the participants at the conference took the view that the role of central management is not to intervene in operational affairs but simply to formulate general rules for decision making and dispute resolution — to establish a constitution, in other words. My reply was that this does not tell us anything about the boundaries of the firm. In other words, such a constitution could apply across firms, or the same firm could contain multiple such constitutions. In other words, the constitutional approach may tell us something about the characteristics of teams, but not firms, if firms are understood in terms of the ownership of alienable assets.

  • 4. Kevin Carson  |  5 June 2007 at 6:52 am

    Thanks for the mention.

    By the way, although your connection of Koch to Konkin went right by me on first reading, Jesse Walker pointed out that Konkin (who coined the term “Kochtopus”) might not like the association.

  • 5. Peter Klein  |  5 June 2007 at 11:44 am

    Well, does the Mutualist community agree with the interpretation?

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