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Strategy & Policy. Strategy. Vision - Overall view of society Ideology Orientation Goals Policies. Hayek: 1945. Economy made up of millions of humans in wildly varying quickly changing circumstances.
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Strategy Vision - Overall view of society Ideology Orientation Goals Policies
Hayek: 1945 • Economy made up of millions of humans in wildly varying quickly changing circumstances. • Allocating resources to match the demands of particular places and time has great value. • Eliciting the subjective value of those opportunities is uncertain. • No single individual or institution could possibly process that much information.
Prices as Information • Centralized planning cannot provide an efficient co-ordination mechanism. • Market system provides decentralized means to allocate resources to time and place. • “The most significant fact about this system is … how little the individual participants need to know in order to be able to take the right action. …., only the most essential information is passed on and passed on only to those concerned.” • All necessary information is contained in prices.
Prices solve allocation problem • Assume either: 1) new use of tin appears; 2) source of tin goes offline. • Doesn’t matter which and most people don’t need to know which. All that matters is prices will rise. • This gives information to users of tin to shift toward substitutes and users of substitutes for tin to shifts to substitutes and so on. • Everyone automatically gets info on a need to know basis.
Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.
I am a Pencil Link • I am a lead pencil—the ordinary wooden pencil familiar to all … who can read and write…I am seemingly so simple… Yet, not a single person on the face of this earth knows how to make me.
Polanyi: Great Transformation • During 19th century, self-regulating markets dominated society. In 20th century, free market ran its course, ending in depression and war. • Market society was justified under the rubric of “Laissez faire” essentially “leave it alone” masking its true nature. • As if self-regulating markets were a natural outcome i.e. what would happen without society. • Ahistorical
Historical Economic Structure • Traditionally, economy was embedded within social structure and fell into three basic forms. • Autarky – Household production and Subsistence • Centralized – Allocation by chief/lord/headman • Gift Giving – Ritualized voluntary exchange of value. • Markets existed but were strictly limited by society, served as a tool of society.
Industrial Revolution: First Transformation • Disruptions of 17th Century, led to construction of philosophy and legal system necessary for market system. • Self regulating markets are necessarily part of a system of interacting markets through all of the commodities in the economy. • Inevitably, markets must include those for false commodities: 1) Money; 2) Labor; 3) Land.
False Commodities • Labor and land are false commodities in that their production cannot respond to market signals. • Labor and land are the essential elements of society itself. Subjecting them to self-regulating markets means disembedding economy from society. • Inevitably society will push back against market dominance of society for self-protection.
Varieties of Capitalism • Orientation and the Firm • Four spheres in which firm interacts with society. • Financial Markets (corporate governance); • Industrial Relations (regulating wages and working conditions); • Intrafirm relations (access to inputs and technology & institutional customers) • Education and Training
Corporate Governance Education & Training Interfirm Relations Internal Structure Of the Firm Labor Relations
Two types • LME – Liberal Market Economies • External relations are typically governed by arms-length, competitive markets • CME – Coordinated Market Economies • External relations often governed by modes of co-operation. • Institutions of co-operation have more specific nature.
USA Prototypical LME • Corporate Ownership – Management teams represent atomized shareholders; disciplined by buyouts. • Labor relations – Fluid labor relations, right to hire and fire; limited unions or firm level negotiations. • Training – Formal education, general skills. • Inter-firm Relations – Anti-trust legislation, reputation based relationships. No technology transfer.
Germany Prototypical CME • Corporate Governance – Patient capital, large or institutional shareholders. Rules & institutions prohibit takeovers. Stakeholder governance. • Labor relations – Work councils, national and industry level negotiations; employment protection. • Training – Apprenticeship systems; job or firm specific skills. • Inter-firm Relations – Research consortia; supplier relationship. Anti-trust legislation, reputation based relationships. No technology savings
External Relations and Internal Structure • LME’s give rise to firms with strong hierarchies. Managerial decisions unencumbered by non-market factors. Market pressure requires focus on immediate profitability. • CME’s have consensus decision making with stakeholder relations in all directions impacting choices.
Institutional Complementarities • Cooperative relationships in one area make cooperation in other areas more advantageous. • Ex. Workers with more job stability more likely to invest in specific skills. • Ex. Systems of cross-holdings of securities creates a greater likelihood of long-lasting relationships with suppliers. • Ex. Firms that co-operate with technology sharing more likely to form groups to train new workers . • Ex. Consensus model of corporate governance more likely to lead to cooperative model of labor relations.
Varieties and Comparative Advantage • Many varieties may co-exist in symbiotic relationship. • Institutional structure may offer comparative advantage which can lead to specialization in particular goods. • SME’s advantage in producing goods requiring long-term investment, continuous upgrading, specific skills. • LME’s advantage in producing goods requiring radical innovation.
Examples. • Varieties of Capitalism and Innovation: Patenting in LME concentrated in industries (pharma, infotech) typified by radical shifts; patenting in CME concentrated (auto, machine tools) typified by continous improvement • Industry Standardization – German industry organization able to enforce specific detailed standards [A4 paradigmatic example]; UK standards focus on voluntary
Nature of Japanese Competition • Large Japanese conglomerates have ready access to finance from banking system – other companies more limited. • Difficult for equity investors to replace management. • Exit Strategy: Legally difficult to fire workers. • Japanese firms emphasize market share rather than productivity or profitability.
Main Bank System Corporate Cross-Holding Anti-Takeover Legislation Banks support & Coordinate group Group cross-holding supports managemet Fi Keiretsu, Limited Anti-trust Research Consortia Lifetime Employment Firm level unions
Measuring Coordination • Subjective Measures • Objective Measures
Orientation • Free Market vs. Government Coordination • Labor vs. Capital • Consumer vs. Business • Nationalist vs. Globalized vs. Regional
