Economists are often stereotyped as claiming that firms are very economically efficient, i.e., that they very effectively minimize costs and maximize profits. This is a common source of derision of economists by other social scientists. And it is true that efficiency is the standard assumption made in textbooks and in math models. But over time I’ve been persuaded that it is often far from an accurate assumption. (And I doubt that most older economists believe it.)
I think this is a great list of problems for B2B / Enterprise entrepreneurs to find solutions for.
In fact, I'm working on a solution to number 9.
Some things that may explain the puzzles:
1) Some of the best companies are better at some of these things (e.g. Ray Dalio / Bridgewater and #14).
There are just too many factors that determine the relative competitiveness of a firm for one of them to be decisive for survival.
That's why firms can live with most of the inefficiencies as long as they have a comparative advantage somewhere.
2) Customer myopia is especially strong in B2B. This is counterintuitive, but often big and expensive solutions are less competitive than small - because there is a lot of legacy and myopia involved in change.
And it's irrational for firms to change if they don't benefit from them. That's why significant technological changes often take decades.
3) You don't list the inefficiencies that businesses don't deal with anymore or to a smaller degree, e.g. data entry and access, hiring only locally or based on nepotism.
All goes to say that firms under competition are relatively efficient, but that doesn't mean problems automatically solve themselves.
There are just too many problems and sources of inefficiency to be on top of all of them.
The best strategy is for firms to focus on relatively few things that make them efficient enough to succeed in their environment.
Why again did that fad for public ownership of production die out?
More seriously, if the evidence seems ambiguous it's because the industries that get the most attention are those look least like perfect competition, i.e. operating systems and their increasing returns to scale, communications and their large minimum efficient scale, and medicine where value is hard to judge and people have stubborn intuitions.
That each of these industries (except the IT ones) are heavily regulated everywhere makes the public/private question even harder to evaluate.
The clearer the empirical evidence is that a particular industry is more efficiently run privately - farming, manufacturing, delivering physical goods - the less likely it is we think about it often.
Further, once you know the processes that make such industries better run privately, the existence of those same processes in other industries is at least a strong hint that some private structure is ideal.
So high CEO pay is caused by fools who don't know about regression toward the mean and the million other, largely random, factors that actually dominate company performance instead of the CEO?
CEOs of really great, growing companies often don't need to be paid as much as CEOs of failing companies (their stock performance helps cover it, especially if they're a founder). Bad situations often require higher wages to bring someone in. I don't know about this at the CEO level, but I've seen it at my job (Anthony Bourdain talked about it for chefs in kitchen confidential, too).
I agree they will never allow it. But systemic collapse will happen none the less. It will happen, not through bond vigilantism or activism, but through the oldest of human frailties, complacency.
If you had a business there would be roughly two scenarios: 1) you are a shareholder of a public company in which case trying to cut CEO pay would bring you into conflict with the executives, which will disrupt the business and might very well cost you more of your dividend than the 0.5% or so you could gain by cutting the CEO's pay in half (and that's if you were to succeed), 2) you have a private company in which case you yourself are the CEO or you are a friend/colleague of the on the board who owes a lot to the CEO.
CEO pay will likely continue to rise until individual shareholders start really feeling the lost dividend enough to aggressively fight any further pay raises.
Then why is this continuing the same? If I had a biz and I knew about these stats I would change the CEO if is overpaid. Don't you? Maybe this is not the whole story, maybe the biz loses money but the owner gain more under the table, therefore a high paid CEO is actually good for the biz owners.
NIE is an approach to explain things. Thats not the same as putting all the puzzles in front of you on the table and what best explains them all together.
Does North Korea count as a planned economy? They've had crises. Australia hasn't had a recession in a very long time, which Scott Sumner attributes to their central bank targeting 4% inflation.
Calculation of GDP includes G, spending by government. A sufficiently powerful government is able to force the unemployed at gunpoint to work in labor camps and arbitrarily go into debt to increase G enough to make the calculated apparent value of GDP appear to increase even if they have to *destroy value* to do it. Perhaps they pay people to dig holes and fill them up again, or build factories that make trucks that are worth less than the components that go into them. This doesn't mean there's no business cycle and doesn't mean the government interventions that *masked* the business cycle has made people better off compared to nonintervention.
People in capitalist countries suffered and starved in the 1930s; people in communist ones did too - and in larger numbers. So where's the difference that makes a difference?
You have yet to show there WERE "economic benefits of planning" in this case. The fact that the soviet union ruined agriculture isn't a "political risk", it's an ECONOMIC risk - and one at the very core of the problem with socialism. People take better care of resources where there is ownership, profit, and a system of relative-value prices providing accurate information about scarcity and need.
The Soviet Union made a wreck of Russian agriculture. This is well-known: forced collectivization of agriculture was a disaster.
Nobody here is defending all aspects of the Soviet economy. I'm only saying it proves that business cycles are not inevitable. How can the economic benefits of planning be separated from the political risks? You're implying they can't; we disagree, but it's a different question.
A market does seem to have unique self-corrective mechanisms (perhaps, I haven't actually seen this established), but it corrects only as a statistical average, often over long periods of time: depressions are self-corrections.
But this process of self-correction is itself highly inefficient, Darwinian process.
I see no argument (do you?) that only a market can evaluate utilities. (Capitalist firms, after all, perform accurate market surveys before marketing.) The basic ways a sound planned economy would do this are by ultra-democratic institutions, science, and surveys. [I'm not setting out to design the details of a planned economy; only to refute the established dogma that markets are a priori more efficient government.]
Despite the Soviet economy being incompetently run, it had a functioning economy which for a long stretch performed spectacular feats of growth. The Soviet economy at least partly proved that you don't need a market. (Although, I admit, more of a market than they had would have actually been useful in a backward country like Russia was initially.) Its flaws lay more in a paucity of innovation, not in a gross failure to coordinate production (as Hayek would have to claim).
It is hard to be clear on China as there's much secretiveness and complexity. But the areas responsible for China's growth is planned infrastructure. Private industry is NOT responsible for most of China's growth.
The way the real-estate bubble is handled will be telling. But at present, this is just one of many threats to the Chinese economy that have been propagandized by capitalist economists; best bet, it will too turn out to be nothing much. That China has not experienced depressions is a strong argument that there is something very different about its economy, which has grown where almost everyone else has floundered (and again, has NEVER YET experienced depression).
Let me give you an example of how the Chinese economy is run. It's not by itself a dispositive argument, but it shows how radically different China is than Germany. At every factory, there is a Communist Party operative with the power to veto ANY decision by management. [This would surely horrify capitalist economists--and probably you too.]
But where is the academic literature that puts all these things together and then tries to take stock and make sense of them together? Does it make sense attribute this all to random mistakes, or are there plausible systematic explanations of the whole pattern of mistakes?
I think this is a great list of problems for B2B / Enterprise entrepreneurs to find solutions for.
In fact, I'm working on a solution to number 9.
Some things that may explain the puzzles:
1) Some of the best companies are better at some of these things (e.g. Ray Dalio / Bridgewater and #14).
There are just too many factors that determine the relative competitiveness of a firm for one of them to be decisive for survival.
That's why firms can live with most of the inefficiencies as long as they have a comparative advantage somewhere.
2) Customer myopia is especially strong in B2B. This is counterintuitive, but often big and expensive solutions are less competitive than small - because there is a lot of legacy and myopia involved in change.
And it's irrational for firms to change if they don't benefit from them. That's why significant technological changes often take decades.
3) You don't list the inefficiencies that businesses don't deal with anymore or to a smaller degree, e.g. data entry and access, hiring only locally or based on nepotism.
All goes to say that firms under competition are relatively efficient, but that doesn't mean problems automatically solve themselves.
There are just too many problems and sources of inefficiency to be on top of all of them.
The best strategy is for firms to focus on relatively few things that make them efficient enough to succeed in their environment.
Why again did that fad for public ownership of production die out?
More seriously, if the evidence seems ambiguous it's because the industries that get the most attention are those look least like perfect competition, i.e. operating systems and their increasing returns to scale, communications and their large minimum efficient scale, and medicine where value is hard to judge and people have stubborn intuitions.
That each of these industries (except the IT ones) are heavily regulated everywhere makes the public/private question even harder to evaluate.
The clearer the empirical evidence is that a particular industry is more efficiently run privately - farming, manufacturing, delivering physical goods - the less likely it is we think about it often.
Further, once you know the processes that make such industries better run privately, the existence of those same processes in other industries is at least a strong hint that some private structure is ideal.
So high CEO pay is caused by fools who don't know about regression toward the mean and the million other, largely random, factors that actually dominate company performance instead of the CEO?
CEOs of really great, growing companies often don't need to be paid as much as CEOs of failing companies (their stock performance helps cover it, especially if they're a founder). Bad situations often require higher wages to bring someone in. I don't know about this at the CEO level, but I've seen it at my job (Anthony Bourdain talked about it for chefs in kitchen confidential, too).
And then they'll just build another system, with even more sophisticated lies. Worked the last time!
I agree they will never allow it. But systemic collapse will happen none the less. It will happen, not through bond vigilantism or activism, but through the oldest of human frailties, complacency.
If you had a business there would be roughly two scenarios: 1) you are a shareholder of a public company in which case trying to cut CEO pay would bring you into conflict with the executives, which will disrupt the business and might very well cost you more of your dividend than the 0.5% or so you could gain by cutting the CEO's pay in half (and that's if you were to succeed), 2) you have a private company in which case you yourself are the CEO or you are a friend/colleague of the on the board who owes a lot to the CEO.
CEO pay will likely continue to rise until individual shareholders start really feeling the lost dividend enough to aggressively fight any further pay raises.
Then why is this continuing the same? If I had a biz and I knew about these stats I would change the CEO if is overpaid. Don't you? Maybe this is not the whole story, maybe the biz loses money but the owner gain more under the table, therefore a high paid CEO is actually good for the biz owners.
NIE is an approach to explain things. Thats not the same as putting all the puzzles in front of you on the table and what best explains them all together.
Does North Korea count as a planned economy? They've had crises. Australia hasn't had a recession in a very long time, which Scott Sumner attributes to their central bank targeting 4% inflation.
Calculation of GDP includes G, spending by government. A sufficiently powerful government is able to force the unemployed at gunpoint to work in labor camps and arbitrarily go into debt to increase G enough to make the calculated apparent value of GDP appear to increase even if they have to *destroy value* to do it. Perhaps they pay people to dig holes and fill them up again, or build factories that make trucks that are worth less than the components that go into them. This doesn't mean there's no business cycle and doesn't mean the government interventions that *masked* the business cycle has made people better off compared to nonintervention.
People in capitalist countries suffered and starved in the 1930s; people in communist ones did too - and in larger numbers. So where's the difference that makes a difference?
You have yet to show there WERE "economic benefits of planning" in this case. The fact that the soviet union ruined agriculture isn't a "political risk", it's an ECONOMIC risk - and one at the very core of the problem with socialism. People take better care of resources where there is ownership, profit, and a system of relative-value prices providing accurate information about scarcity and need.
The Soviet Union made a wreck of Russian agriculture. This is well-known: forced collectivization of agriculture was a disaster.
Nobody here is defending all aspects of the Soviet economy. I'm only saying it proves that business cycles are not inevitable. How can the economic benefits of planning be separated from the political risks? You're implying they can't; we disagree, but it's a different question.
A market does seem to have unique self-corrective mechanisms (perhaps, I haven't actually seen this established), but it corrects only as a statistical average, often over long periods of time: depressions are self-corrections.
But this process of self-correction is itself highly inefficient, Darwinian process.
I see no argument (do you?) that only a market can evaluate utilities. (Capitalist firms, after all, perform accurate market surveys before marketing.) The basic ways a sound planned economy would do this are by ultra-democratic institutions, science, and surveys. [I'm not setting out to design the details of a planned economy; only to refute the established dogma that markets are a priori more efficient government.]
Despite the Soviet economy being incompetently run, it had a functioning economy which for a long stretch performed spectacular feats of growth. The Soviet economy at least partly proved that you don't need a market. (Although, I admit, more of a market than they had would have actually been useful in a backward country like Russia was initially.) Its flaws lay more in a paucity of innovation, not in a gross failure to coordinate production (as Hayek would have to claim).
It is hard to be clear on China as there's much secretiveness and complexity. But the areas responsible for China's growth is planned infrastructure. Private industry is NOT responsible for most of China's growth.
The way the real-estate bubble is handled will be telling. But at present, this is just one of many threats to the Chinese economy that have been propagandized by capitalist economists; best bet, it will too turn out to be nothing much. That China has not experienced depressions is a strong argument that there is something very different about its economy, which has grown where almost everyone else has floundered (and again, has NEVER YET experienced depression).
Let me give you an example of how the Chinese economy is run. It's not by itself a dispositive argument, but it shows how radically different China is than Germany. At every factory, there is a Communist Party operative with the power to veto ANY decision by management. [This would surely horrify capitalist economists--and probably you too.]
I sort of had the impression that that was what New Institutional Economics was supposed to be about.
But where is the academic literature that puts all these things together and then tries to take stock and make sense of them together? Does it make sense attribute this all to random mistakes, or are there plausible systematic explanations of the whole pattern of mistakes?