Freedom and the Firm

by Liberty and Power

[cross-posted at Austro-Athenian Empire]

What will firms look like in a free society?

“Capitalist” libertarians often tend to assume that they will look pretty much like today’s large-scale, hierarchical firms. “Socialist” libertarians often tend to assume that they will instead take the form of small-scale workers’ cooperatives.

(Why the scare-quotes around “capitalist” and “socialist”? See this post by Charles Johnson and this one by Brad Spangler for the massive ambiguity of these terms. That’s one reason I’ve started calling myself a market anarchist instead of an anarcho-capitalist.) [A similar ambiguity besets the term “globalisation.” Exercise for the reader: read this defense of globalisation by Tom Palmer and this critique of globalisation by Kevin Carson; then define “globalisation.”]

To address this question, let’s consider what function firms serve. As Ronald Coase famously pointed out, one of the chief advantages of organising a firm is to reduce transaction costs. This in turn creates one incentive for firms to grow in size; the more operations one can move in-house rather than relying on outside vendors, the more such transaction costs are reduced. (Economies of scale are an additional factor driving growth.) The need to reduce transaction costs also creates an incentive for firms to become more hierarchical; when decision-making power is concentrated in the hands of managers, the costs associated with building consensus are avoided. (Hierarchical organisation also allows successful entrepreneurs to exercise their talents unhindered.)

If that were the whole story, we’d expect to see larger and more hierarchical firms consistently prevail. But there’s a trade-off; the larger and more hierarchical the firm, the greater its problem of internal calculational chaos; at some point the costs begin to outweigh the benefits.

What size and degree of hierarchy are optimal? I don’t pretend to know; I would guess that it varies by industry, and that it also depends on a host of further factors specific to each situation. But in a free market firms would be rewarded for approaching the optimum and penalised for deviating from it.

We don’t have a free market, however; instead we have a highly regulated market. For familiar reasons, such regulations hamper the less affluent more than the more affluent, and so successful firms will tend to become somewhat insulated from competition by less established firms, thus removing one check on their inefficiency. And as Kevin Carson points out, regulatory standardisation also decreases competition among the successful firms – a form of de facto cartelisation. Government regulation thus lowers the costs associated with size and hierarchy more than it lowers the associated benefits; it stands to reason, then, that firms in a genuine free-market context could be expected to be smaller and less hierarchical than they tend to be today. This is doubly true once one takes into account the increased competition for workers that a less regulated economy would presumably see (assuming that workers generally prefer less hierarchical work environments).

So how different would firms be under a genuine free market? To answer that question one would have to be able to sort out which aspects of today’s economy derive primarily from the market and which primarily from regulation, and that’s no easy task. So I feel confident about the direction of difference, but not the degree. And in any case the degree partly depends on what workers are willing to put up with – which is a variable, not a constant (and one of the functions of a labour movement is precisely to influence that variable).

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Roderick T. Long - 12/6/2005

By the way, today's post by Kevin Carson is a good example of what I'm talking about. One reason so many find our libertarian panegyrics to the market unconvincing is that too often we give the impression that businesses under the present regime have been rendered mavelously efficient by market forces -- and this is simply contradicted by people's experience of the insanity that reigns in much of the business world (which is one reason Dilbert is so popular -- because it's so accurate!). But of course the insanity is not the fault of the market; it's partly due to government intervention (so the cure is a genuinely free market) and partly due to cultural factors (so the cure is, as I said above, working to change what people are willing to put up with). (And of course there's probably also a residuum that's just due to the perversity of the crooked timber of humanity; but there's no need to add to that.)

Andrew D. Todd - 12/6/2005

I think I would place much more emphasis on the particular details of particular industries than Roderick T. Long does. These details may make the industries "convergent," or "divergent," as the case may be.

In practice, the spectacularly big firms are those which have gigantic production processes or globe-spanning networks. One can pick out examples of plants which, in order to be fully efficient, would have to supply the entire United States, and even the world. A machine which goes ka-ching, ka-ching, ka-ching, etc. every second will be running at thirty million units a year. A state-of-the-art microprocessor factory now produces seventy-five million chips a year. Once you talk in terms of the logic of mass production, any departure from complete monopoly in an industry driven by one of these plants is probably due to government influence. Given the reality of the way mass production works, the "public utility as natural monopoly" argument applies.

This, however, is while we are talking about classical mass-production technique. It is sometimes subject to revision when we move on to programmable robotics. But again, this has to be considered on the basis of detailed analysis, not simply as a matter of abstract economic theory.

There are fields where corporations have failed more or less absolutely, for example, child-care. There was one company which tried to set up a chain of day-care-centers, but shortly found itself facing a wrongful-death suit after an unsupervised five-year-old had been killed in a preventable accident. This was a byproduct of the "McDonalds" style of organization, that is, using casual minimum-wage labor, and expecting a lot of employee turnover.

Charles Johnson - 12/6/2005

Grant Gould: "If (as the more mutualist or socialist anarchists hold) free markets led to dispersed and plural ownership of, eg, interstate highways, the scope of life would contract."

Why's that?

Roderick T. Long - 12/5/2005

Gary, do you think Benjamin Tucker, say, doesn't count as a libertarian? If so, why?

Gary McGath - 12/5/2005

I think you've got the scare quotes misplaced. Shouldn't that be socialist "libertarians"?

Grant Gould - 12/5/2005

If Coase is right about the purpose of the firm, and if free markets were to reduce transaction costs, we should expect to see more, smaller firms.

However, each of these 'ifs' is uncertain, and indeed they are at cross purposes. Firms have other uses than transaction costs, and if free markets lower transaction costs, low transaction costs would almost certainly cease to be the dominant purpose of the firm -- and if firms do help to reduce transaction costs, then that encourages people with transaction-cost-critical resources to strategially hold out from joining firms in order to maximize their rents.

I think that the shape of a free-market world would depend crucially on this interaction -- between firms and transaction costs -- as mediated by the ability of people to put together a rational mix of dispersed and aggregated propterty rights.

If (as the more mutualist or socialist anarchists hold) free markets led to dispersed and plural ownership of, eg, interstate highways, the scope of life would contract. Firms would arise to attempt to find efficient ways to move things and people, but these firms themselves would have to be local to minimize internal transaction costs. Local communes would be an obvious solution.

If instead (as the more libertarian and capitalist anarchists insist), free markets led to efficient aggregation of critical resources and effective competition among these aggregators, the scope of life would widen. Firms would be largely unnecessary. Global, informal coalitions and partnerships would probably replace them.

Which of these paths matters took would probably vary from place to place. You could probably in a free-market world find both insular villages surrounded by patchworks of dispersed properties and globalized semi-cities woven upon large continuous pieces of carefully aggregated infrastructure. And there would certainly be people who would prefer to live in each.