Thursday, March 27, 2008

The American corporation and the centrally planned economies of the soviet empire

Once in a while two loose neurons bang together and I look at the world differently.

That happened earlier today.

I'm almost always sure somebody's explored the idea, but in the dark ages there was no easy way to find out. I'd write my thoughts down move on. Now I just have to toss a few terms at Google.

Which is how I came to discover that this morning's unoriginal insight was the subject of a Brad DeLong paper written in 1997 when he worked for the Clinton administration.

My version of this insight struck because I've recently been thinking about some of the things all corporations have trouble with. This is work related rather than my usual idle speculation, so I can't provide details here. Suffice to say that my topic started small and concrete, but soon became quite grand. In the end I needed to consider three different sorts of exchanges of goods and services:

  1. exchanges within a corporation
  2. currency-based exchanges within a market economy
  3. collaborative exchanges between academics at different institutions or departments.

Sometime in the midst of this review, the obvious smacked me in the face:

The best publicly traded companies are an almost exact analog to the most finely tuned centrally-planned "command economies" of the Soviet empire, particularly the Czechoslovakian command economies of the late 1970s.

No wonder so many Soviet  and Communist Chinese bureaucrats had smoothly shifted into running massive corporations. Everything must have seemed so familiar. Conversely, the designers of the Czechoslovakian central planning process must have based it on their knowledge of American corporations.

I knew this insight couldn't be original, so I went looking for affirmation. Using the terms "corporation" and "planned economy" Google gave me a good hit on the first page:

The Corporation as a Command Economy by J. Bradford DeLong

University of California at Berkeley, and National Bureau of Economic Research July 1997

Most of us spend more than one-third of our waking lives working for large, modern corporations: organizations where we do not know personally either those at the top or the bulk of those at the bottom of the organization's administrative hierarchy. This is a striking change from two centuries ago, when a productive organization of more than thirty was unusual, and one of more than three hundred an extreme oddity....

...I am going to focus on the issues of corporate control. A corporation is a hierarchical organization. It has a boss--today the he (almost always a he) called the CEO, whose theoretical power is autocratic throughout the scope of the corporation, and subject only to the periodic continued approval of the Board of Directors and the annual meeting of the shareholders. But we were all told a decade ago, when the Soviet Union collapsed, that hierarchical organizations simply did not work as modes of organizing economic life--that you needed a market in order to achieve anything better than low-productivity, bureaucracy-ridden economic stagnation.

What, then, are all these large corporations--ATT and IBM, General Motors and Toyota, Microsoft and USX--doing? What methods of corporate control have saved them from turning into smaller versions of the unproductive Soviet economy?

So my comparisons are not original, and yet, as I scanned Brad's article, I was left with the impression that he gave too much credit to the efficiencies of General Electric , and not enough credit to the remarkable persistence of the planned economies.

My own prejudice is that today's corporations struggle mightily with the same challenges that brought down the planned economies of the Soviet era, and that they succeed more from their impressive ability to hold critical resources and to eliminate weaker competition, than through a unique gift for channeling and distributing resources.

If a new entity were to arise that combined the brute power of the corporation with the intelligence of a true market I think the modern corporation would go the way of the Soviet planning bureau.

That's a large if however. I am not aware of any serious challenger to the corporation, and so the planned economies of the world shall continue into the 21st century ...

No comments: