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Are Managers of Large Firms Like Central Planners?

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Chris Dillow is a thoughtful man of the left. Evidence of both his leftism and his thoughtfulness are clear in this post [2] at Stumbling and Mumbling.

Like Arnold Kling [3], I was especially struck by this passage from Dillow:

We all know a centrally planned economy is a stinking idea. So why is a centrally planned company a good one? (This question was raised by Hilary Wainwright years ago in Arguing for a New Left. Disappointingly, it’s been ignored.) Hayekian arguments can be applied to company bosses as well as central planners. For me, what’s really offensive about capitalism isn’t (just) the huge wages paid to bosses, but the fact that their claims to justify such rewards – that they are capable of managing massive institutions – are utterly unfounded.

Dillow’s question is fair, but the answer seems to me to be obvious: private companies, even massive ones, are private. Shareholders voluntarily buy (and sell) stock in these firms: creditors voluntarily lend (or not) money to these firms; workers voluntarily work (or not) for these firms; suppliers voluntarily supply inputs (or not) to these firms; and consumers voluntarily buy goods and services (or not) from these firms.

Because no one is coerced into participating in a private-firm’s activities, for it to survive, the organization must promote the ends of enough of its participating agents. If the organization fails to promote these ends (as judged by each of these agents), it shrinks, disappears, or otherwise changes – indeed, perhaps it grows, if by growing it enhances its ability to promote the goals of its participating agents.

Relatedly, unlike with government central planning, the size and scope of each firm on the market is itself constantly tested by competition. A firm that succeeds today might be bankrupted tomorrow if another firm arises to out-competes it. That is, the sizes of firms in markets are themselves the result of market experimentation, competition, and discovery – experimentation, competition, and discovery that is never static.

None of the above is to say that markets are perfect. (Indeed, I don’t believe that the concept of perfect markets is meaningful.) Sure some managers might be overpaid – but, if so, they’re overpaid with monies voluntarily contributed. Sure some firms might be too large – but, if so, they’re too large with resources voluntarily contributed. And in both cases, the forces of competition and entrepreneurial discovery – fueled in large part by the profit motive and by consumers’ quotidian efforts to get the most value for their money – put constant pressure on these firms to correct their errors.

Managers of even the largest private firms — that are not protected by government from competition or swaddled with state favors — are simply not comparable to central planners in socialist countries.

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