Expect Bigger Orgs

Me last year:

Over the last year I’ve reviewed several ~1900 era future dystopias, such as Metropolis, We, and Pictures of the Socialistic Future. I wanted to see fears of the industrial revolution, from an era when that revolution was still young. … The strongest concerns were about the new scales of social organization, arguably the central distinguishing feature of the industrial era. … People imagined entire cities and nations being organized as were factories and firms, with commands sent down from above, and little room for local discretion. … Today, it seems that such fears were overblown. … But it is also too soon to claim that these fears will not be realized. The scale of cities, firms, and nations continues to climb. (more)

Industry has made humans rich. And we have spent this wealth improving our lives in many ways. Which is why most long run industry-era trends are positive. But we aren’t very willing to give up the golden goose that lays our golden eggs: the industry processes itself. Which is why some trends are negative. For example, dense living is fairly central to industry, so density has increased, even though it seems to hurt our health, and many would prefer more space. Even more central to the industry process is big organizations. So firm sizes continue to get larger, even though most folks say they don’t like big firms.

Yes booster futurists often claim big firms are passé and the future is all startups and lean nimble firms. Don’t believe them. The rate of new firms has been declining with wealth and time, and firms continue to get bigger. (Data quotes below.)

I instead predict that future work life will look more like the work life at bigger firms today. So there will be less overall coordination and coherence, even as more effort is put into coordination via more meetings by more managers in more layers of management. Firms will have offices in more locations, with less in-person and direct communication. Workers will have more specific operational roles, and each do a narrower range of tasks. Firms will have stronger corporate cultures that depend less on distinctive individual personalities, and more on well-defined structures, like policy manuals and job descriptions.

Governments won’t save us from this: increasing regulation tends to favor larger firms, and government organizations are getting larger. Also, government functions are drifting up to be handled by larger scales of government. That is, functions once done by cities were next done by states, and finally by nations. I have seen the future, and it has many middle managers in long meetings discussing policy manuals. Count on it. Happy labor day.

Those promised data quotes:

FirmSizeUp

First, the entrepreneurship rate falls with per capita income across countries. Second, average firm size increases with per capita income. … Third, the standard deviation of fim size increases with per capita income across countries. Fourth, the skewness of the firm size distribution also increases with per capita income across countries. … Average firm size increased with per capita income over U.S. history (1900-70). Figure 2.2 shows that this time-series relationship persists. … Firm size dispersion is substantially higher in industrialized countries compared to emerging markets. (more)

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  • http://www.geoffreylandis.com/ Geoffrey Landis

    “so [population] density has increased, even though it seems to hurt our health”
    I’m not convinced that this stement is supported by data, particularly if you control for poverty. In the U.S., at least, higher population density seems to be positively correlated to life expectancy.

    • http://overcomingbias.com RobinHanson

      Even after controlling for income, density hurts: http://hanson.gmu.edu/EC496/Sources/JAMA98.html

      • http://www.geoffreylandis.com/ Geoffrey Landis

        The data you refer to seems to be in table 4? When I click on table 4 the link just goes back to the article; I don’t see data. What is data actually showing?

        The date in that paper is from ’86, a bit old. The gap between rural and urban death rate in the US wasn’t clearly visible until about ’92. A mortality graph showing difference between urban and rural death rate is here:
        http://www.dailyyonder.com/tracing-rural-americas-mortality-penalty/2009/09/30/2368

        A part of this is injury death rate: http://www.annemergmed.com/webfiles/images/journals/ymem/FA-5548.pdf
        –note that the injury death rate is higher in rural areas partly because people are farther from hospitals.

        Seems to be true in China, too:
        http://www.researchgate.net/publication/221695839_The_gap_in_injury_mortality_rates_between_urban_and_rural_residents_of_Hubei_Province_China

      • http://overcomingbias.com RobinHanson

        The link I gave is from ’98 and controls for sex, age, income, education, smoking, and exercise. Your links only control for age.

      • http://www.geoffreylandis.com/ Geoffrey Landis

        interesting data– I’d like to see a study that explicitly looks at population density controlling for other factors, though; this one has numbers, but they aren’t analyzed or discussed so it’s unclear what they mean.
        And data is from ’86 to ’94, so an effect that first manifests around ’92 isn’t going to show up.

      • AspiringRationalist

        But how does density affect those factors?
        Density probably increases income by making it easier to achieve economies of scale (please let me know if this is wrong).
        I have no idea how it affects smoking and exercise, or if that’s even known.

    • IMASBA

      “if you control for poverty. In the U.S., at least, higher population density seems to be positively correlated to life expectancy.”

      The correlation probably stems from the higher average intelligence and younger age of city people.

      “Seems to be true in China, too: [...]”

      Rural people in China are lucky to have a functioning toilet while major parts of Chinese cities look very futuristic.

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  • kurt9

    There’s another name for this phenomenon. Its called parasitism.

  • IMASBA

    If capitalism survives big firms will indeed rule the world, not something to look forward to if the sci-fi movies from the ’70s and ’80s are any indication…

    As to organizations, it’s all about how you define an organization (big firms are often losse conglomerates).

  • Robert L. Mayo

    Dr. Hanson,

    If the level of communications and information processing technology is inversely related to information cost, then the cost advantage of intra-firm production over inter-firm contracting should decline as technology improves.

    An anecdote: A few years ago I wanted to create a commercial website. I was able to solicit bids from programmers across the globe and contracted with one person in India and a small company in Russia. The cost to me of negotiating the contracts and monitoring their work was reduced by the internet to far below the cost of hiring employees to do the same work.

    I believe Moore’s Law will tend to increase the independent contractor/employee ratio and thus reduce average firm size.

    Comments/criticism are welcomed.

    • http://overcomingbias.com RobinHanson

      Firm size has consistently increased as comm, info, and computer techs have improved.

  • http://entitledtoanopinion.wordpress.com TGGP

    Schumpeter, Galbraith and Burnham were writing about the displacement of entrepreneurialism by managerialism in the early/mid 20th century. They’re generally considered to have been disproven by events. Do you think they’ve gotten a bad rap?

    • http://overcomingbias.com RobinHanson

      Perhaps they predicted faster change than we’ve seen, but the long term trend has clearly been in that direction.

  • blogospheroid

    The population of the world is moving from a pyramidal shape to a more rectangular shape. However, organizations maintain their pyramidal shape.

    Hence ceteris paribus (i.e.keeping unemployment rate, age of retirement, etc the same), a more rectangular shaped population should mean more number of smaller firms and lower average firm size. (If you honestly account for self employed people/contractors as a firm of 1)

    Another thing that works against larger orgs is the greater uncertainty that comes with more dispersed science and knowledge. Why keep more people on your payroll, when you don’t even know what is going to happen over the horizon?

  • Gabriel

    Aren’t you essentially saying that the future economy (ie digital era) will have firms that to hold the same characteristics as those that were useful in the industrial era?

    The Poshke paper can be read to be saying “poor countries don’t have large firms since they have not yet gotten to the stage in their industrial development to maintain these and therefore people can’t work for them”.

    This does not mean that as our technological development continues, we will continue to see larger companies, since the development required to go from poor to rich (centralise and massify) is different than that required for a rich country to continue growing (there are diminishing returns to larger and larger corporations).

    • http://overcomingbias.com RobinHanson

      Past trends are no guarantee of future trends. But without some good concrete reason to think otherwise, that is the way to bet. We have no good reasons to think the size tradeoffs are much different for “digital” firms.

      • Gabriel

        I think we do, the organisational challenge pre-digital was mostly physical scale, ie more stores, more machines, more employees. That doesn’t translate so well when scaling, for example, a development team.

        Just compare the theoretical limit on employees working in the assembly line that GM could have in 1950 vs. the theoretical limit that Google will have.

      • IMASBA

        After establishing an effective monopoly in one field a corporation can diversify to continue growing, which is exactly what Google seems to be doing with their autonomous cars, google glass, etc…

    • IMASBA

      “there are diminishing returns to larger and larger corporations”

      So? When you are an investor who already owns a profitable large corporation you can either expand the corporation, or buy other corporations, either way you are increasing the size of your organization. Size may very well become a problem beyond a certain point but the people who make the decisions have incentives to keep growing their organizations nonetheless because they will still get richer, just more slowly than before, even if overall society looses potential productivity. I guess it’s just another reason to be worried about the plutocracy.

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  • Alex Brands

    Dr. Hanson,

    Have you looked into Ecology’s adaptive cycle for a blueprint to what happens next?

    http://alexbrands.tumblr.com/post/45910226375/adaptive-cycles-and-the-industry-ecosystem

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