Firms: Who Knew?

by on April 4, 2017 in Economics

One of the controversies buried by contemporary economists in their great cause of advocating market freedoms, is that of the role of central panning. There was a time when economics accomodated controversy. Nowadays it’s arguments are securely contained within the narrow bounds of saltwater versus freshwater type spats that are little more than professional name calling inspired over minor differences of detail.

Recall the capital controversy? No?

How about the socialist calculating controversy? No?

They were real differences. Time has allowed modern economics to ignore its larger conflicts in the name of ideological purity.

Yet central planning lives on.

Bigly, as our new president might say.

One of the greatest deficiencies of modern economics is its total blindspot to the middle layer of economic activity. Few, if any mainstream economists, refer to a “meso-economics”on a par with their hallowed micro and macro versions. Indeed the most ideologically pure insist that macroeconomics is simply a summation of their micro version. So they try to pummel everything into one flat layer.

And yet that meso level exists. We call it business, and if you want to understand what’s going on in most modern economies you have top grasp what’s going on in business.

Businesses are massively influential in setting the trends that we see manifest in the aggregate numbers.

Take, for example, current trends in employment. For a few decades now business has been dominated by an offshoot of ideologically right wing economics, called shareholder value. This is an idea that is based on the sand of what the purists insist is the “free” action of individuals. That was transformed into a body of thought applicable to business and can be summed up as: the only goal of a business is the to further the interests of its shareholders. Nothing else matters.

Since in that ideologically pure microeconomics there is no space for social action — it is entirely premised on individuals after all — there is no tolerance for a focus on anything else. Naturally when such a theory was translated into the business world this lack of social awareness was elevated into a basic management principle. That shareholders are a group or a collective, is ignored. That they might accumulate power by virtue of being a group was sidelined. Their collective interest were said to dominate. Referring to it as a singular interest made it easier to overlook the power relationship inherent in it.

Within the context of business, shareholder value then was elaborately embellished and changed into a technology that the bureaucratic processes and central planning of executive management could apply. With gusto.

The consequences of the avid activity of the central planning in business are everywhere around us. The application of the shareholder value technology affects us all. Outsourcing and globalization are its most obvious outcomes. In the incessant pursuit of profit and its so-called maximization, business realized that they ought shed any activity not deemed “core” to its “value proposition”. This is an administrative response to the pressure for profit even in slow growth economies. So out went any employee not employed in those core activities. Some work was sent overseas to lower its cost. Some was eliminated entirely. Some was sub-contarcted, with former employees being brought back to perform the exact same activity as before, only now at a lower cost and within highly circumscribed timeframes.

The entire purpose was to reduce cost. Since wages are the highest cost borne by business it is nor surprise that, after a few years, wage trends were flattened out. Nor is it a surprise that employment is less secure. Or that the number of people covered by strong retirement or health care benefit packages has plummeted. Inequality skyrocketed, and the share of our national wealth going to wages shrank dramatically. Meanwhile profits boomed.

You could describe these trends as macroeconomic, but that would be misleading. They are only explained by looking at the middle layer of the economy. By getting inside the “black box”, as economists prefer to see business, we can start to explain the bigger shifts in the economy. These aren’t consequences of individual consumer choices. Nor are they outcomes explained in those impossible models of decentralized economies that economist love to think about.

No. The big trends in the economy are best theorized about in the context of what we call the business firm.

And the business firm is a local example of central planning.

Ronald Coase knew this in 1937, quite why modern economics turns a blind eye to business eighty years later is perplexing. Maybe it has something to do with its fixation on decentralized market forces? Surely not?

In any case: anyone seeking to understand the economy needs to begin with a theory of the firm. Everything else can be built from there.

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