It’s rather tricky…
- Netflix is in a market
- Netflix does not have a market
- Netflix is not a market
You gave the example of a restaurant…
- The restaurant is in a market
- The restaurant has a market
- The restaurant is not a market
Netflix subscribers don’t have the opportunity to use their subscription dollars to help rank the content by usefulness. Restaurant patrons, on the other hand, do have the opportunity to use their dollars to help rank the dishes by usefulness.
So just how beneficial is it for consumers to have the opportunity to use their money to help rank an organization’s products by usefulness? In other words, just how useful is it for an organization to have a market?
“Think of a small restaurant. The owner does not give the cook incentives to choose which meals to prepare. The owner gives commands. The restaurant operates within the context of the invisible hand, but internally there is a visible hand.”
Let’s put it like this… the owner decided which chef to hire. But the fact of the matter is that the market has the final judgement on the goodness of the owner’s hiring decision. Imagine that the owner decides to hire a chef that only knows how to make meat dishes. Yet, the restaurant is located in an area that is predominantly vegetarian. In this case the owner would have made a mistake. There was a big disparity between his hiring decision and economic reality.
When a businessman makes a business error…a bad mistake, you’ll look back and say, gee, what did I do wrong. I made a bad decision. I made a wrong decision. What do you mean by that? Do you mean that you made a mistake in arithmetic? You mean your computer kicked out the wrong answer? No, that’s not what you mean. You mean you fed the wrong data into the computer. That’s what you mean. You figured wrong. You opened a hardware store in a place where nobody buys hardware. You went to law school in a country where nobody litigates (not this country). That’s where you make a mistake. You made a mistake where you assess the future wrongly. You got a wrong picture of what you were choosing between. That’s a business mistake.
And what’s a correct decision. A correct decision is one where you saw correctly. You saw right. You saw what the future held…more or less. Nobody’s got a PhD in prophecy. You can peer ahead and have a hunch for the future and act and if you act right…and if you’re an entrepreneur… that means you see things right more of the time than you don’t. — Israel Kirzner, Competition and Entrepreneurship
Elsewhere Kirzner defines “mistake” more specifically in terms of consumers’ preferences…
Once we have understood the central position of the doctrine of consumer sovereignty in Mises’s overall system, we can surely sense and appreciate the deep respect Mises felt for the actual prices of productive resources. Certainly these prices are likely to be “false” prices, in that they necessarily imperfectly anticipate the true future valuations of consumers for the various possible potential products (at the times when these products might conceivably be made available to consumers). Nonetheless these prices, and the transactions in which they emerge, are wholly governed — of course, ignoring now the special exception of the monopoly price case — by the preferences of consumers; these prices and these transactions fulfill Menger’s vision, they express consumer sovereignty. Mises would of course not deny that, in the absence of omniscience, actual prices and actual plans for production, may only imperfectly reflect the patterns of intensity of consumers’ preferences. But “sovereignty” need not imply that the wishes of the sovereign are instantaneously, successfully, carried out; it may surely mean that each act of those directly or indirectly acknowledging that sovereignty, is motivated by the incentive of fulfilling those wishes as far as human effort and human will can succeed in doing. Even the mistakes which may occur under pressure of this incentive, must also be attributed to the supremacy of the sovereign. Surely this was Mises’s profound insight into the character of the market process: at every moment the decisions made by entrepreneur-producers and resource owners, are directly or indirectly made under the powerful incentive to cater to the true pattern of consumer preferences. — Israel Kirzner, The Driving Force of the Market: Essays in Austrian Economics
The leaders of the Libertarian Party (LP) usually decide their convention theme. Last year the leaders allowed the market to decide the theme. The LP put a list of theme options on its website and donors used their donations to help rank the options by usefulness…
$6,327.00 — I’m That Libertarian!
$5,200.00 — Building Bridges, Not Walls
$1,620.00 — Pro Choice on Everything
$1,377.77 — Empowering the Individual
$395.00 — The Power of Principle
$150.00 — Future of Freedom
$135.00 — Life, Liberty and the Pursuit of Happiness
$105.00 — Rise of the Libertarians
$75.00 — Free Lives Matter
$42.00 — Be Me, Be Free
$17.76 — Make Taxation Theft Again
$15.42 — Taxation is Theft
$15.00 — Jazzed About Liberty
$15.00 — All of Your Freedoms, All of the Time
$5.00 — Am I Being Detained!
$5.00 — Liberty Here and Now
The market could also have decided the convention date, location and speakers.
The same exact system can also be used to decide which chef the owner hires. It can also be used to decide the restaurant’s name and location. It seems pretty true that any decision that an owner can make, can also be made by the market.
Of course there’s the logistics of putting the market in the driver’s seat. But these logistics are a moot point if it can be proved that owners make less mistakes than markets would.
A couple years back I remember you posted this entry… Alchian and Demsetz on Specialization and Firms. In my effort to try and refind this entry I found a couple other relevant entries…
I still think that Alchian-Demsetz is the best place to start. Suppose that a bunch of computer programmers, loan officers, and bank tellers get together to start a bank. They cannot just bargain with one another on roles, responsibilities, and pay. You need a decision-maker. And that decision maker must serve a definitive owner. The owner is the “residual claimant” on the firm. — Arnold Kling, Why Do Firms Exist?
Also…
When you do this thought experiment, you realize that firm size is not determined by the tangible variables that are central to neoclassical economics. Instead, you have to turn to principal-agent problems and whatever else might help deal with the “boundary of the firm” problem that has been articulated but not necessarily solved in a satisfactory way by Coase, Williamson, and Alchian and Demsetz. —Arnold Kling, What is the limit on firm size?
In the first passage you said that a decision-maker is needed. Decisions definitely have to be made. But you didn’t consider the possibility of the market being, to some extent, the decision-maker. Personally, my own thoughts on the subject used to be very vague. It was only when I learned of the LP’s experiment that I was able to think about the subject more clearly.
Here are a couple passages from the paper by Demsetz and Alchian…
As a consequence of the flow of information to the central party (employer), the firm takes on the characteristic of an efficient market in that information about the productive characteristics of a large set of specific inputs is now more cheaply available. Better recombinations or new uses of resources can be more efficiently ascertained than by the conventional search through the general market. In this sense inputs compete with each other within and via a firm rather than solely across markets as conventionally conceived. Emphasis on interfirm competition obscures intrafirm competition among inputs. Conceiving competition as the revelation and exchange of knowledge or information about qualities, potential uses of different inputs in different potential applications indicates that the firm is a device for enhancing competition among sets of input resources as well as a device for more efficiently rewarding the inputs. In contrast to markets and cities which can be viewed as publicly or nonowned market places, the firm can be considered a privately owned market; if so, we could consider the firm and the ordinary market as competing types of markets, competition between private proprietary markets and public or communal markets. Could it be that the market suffers from the defects of communal property rights in organizing and influencing uses of valuable resources? — Harold Demsetz, Armen Alchian, Production, Information Costs, and Economic Organization
Also…
In other words, opportunities for profitable team production by inputs already within the firm may be ascertained more economically and accurately than for resources outside the firm. Superior combinations of inputs can be more economically identified and formed from resources already used in the organization than by obtaining new resources (and knowledge of them) from the outside. Promotion and revision of employee assignments (contracts) will be preferred by a firm to the hiring of new inputs. To the extent that this occurs there is reason to expect the firm to be able to operate as a conglomerate rather than persist in producing a single product. Efficient production with heterogeneous resources is a result not of having better resources but in knowing more accurately the relative productive performances of those resources. Poorer resources can be paid less in accord with their inferiority; greater accuracy of knowledge of the potential and actual productive actions of inputs rather than having high productivity resources makes a firm (or an assignment of inputs) profitable. — Harold Demsetz, Armen Alchian, Production, Information Costs, and Economic Organization
It feels somewhat relevant to the Hayekian concept of the “man on the ground” who has access to the knowledge associated with that specific time and place. Well… it’s also a Smithian concept…
What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. — Adam Smith, The Wealth of Nations
A restaurant is a local situation that everybody can’t have physical access to. But what about virtual access? I don’t necessarily mean having cameras everywhere like in some reality show. But it seems possible that employees who don’t directly interact with customers can certainly put some of their work online.
Let’s say that the restaurant owner decides to use the market to decide which accountant to hire. The market would rank potential accountants by usefulness. Whichever accountant is at the top of the list would be hired by the owner. But the list of potential accountants wouldn’t disappear. It would still be there. People could still spend their money to help improve how the accountants are ranked. This means that, at any time, the second highest ranked accountant could become the first. If this happened, then the owner could fire the previously top-ranked accountant and hire the new top-ranked accountant. Therefore, it would always behoove the top-ranked accountant to prove his usefulness to the market. Logically this would entail putting his work on the restaurant’s website.
Tyler Cowen sure does love restaurants. I wonder which is his favorite restaurant in his area? Of course he’d be really sad if this restaurant failed. So perhaps it’s not so far-fetched to imagine Cowen taking the time, and making the effort, to regularly examine the financial health of this restaurant. Given enough eyeballs, all bugs are shallow. Heh. Linus’s Law is funny in the context of a restaurant.
The owner of Cowen’s favorite local restaurant obviously wants it to be as profitable as possible. But it’s impossible for the owner to know everything that Cowen does. It would clearly be in the owner’s best interest if he could have easy access to all of Cowen’s relevant knowledge and experience. Two heads are better than one. But why stop at two heads? Why not give everybody who values the restaurant the easy opportunity to help maximize its chances of survival and success?
Too many cooks spoil the broth?
All else being equal, organizations that make better informed decisions will compete resources away from organizations that make worse informed decisions. Given that markets make the best informed decisions… my best guess is that the most pro-market organizations will be the fittest.
Turning to your last point, the political power of public employee unions troubles me. But that is a different topic.
I think it’s the same topic. Unlike a restaurant, unions don’t have a market. Employees aren’t given the opportunity to use their union dues to help rank union activities. This logically means that there is a big disparity between…
- the supply of union activities
- the demand for union activities
If there wasn’t a big disparity between these two things, then markets would be completely unnecessary.
You being concerned about the political power of public employee unions is like a pacifist being concerned with how much money the government spends on war. For me the real problem is that neither unions nor the government has a market. The problem has nothing to do with dues/taxes being compulsory.
Coincidentally, while searching my database for Demsetz I found this relevant passage…
A possible way out of this quandary is offered by modern biology. The innate propensities of man, especially when he deals with day-to-day problems of living, may not allow for a very great supply of effort or inclination to aid others. A genetic endowment producing large amounts of such helping in individual behavior, it is thought by some modern biologists, would be (and presumably was) competed out of existence by genetic varieties that confined altruism close to home. A generally altruistic genetic endowment must succumb to genetic free riders who take without giving. The selfish genetic endowment tends to displace the altruistic genetic endowment on which it rides free, but it does not displace altruism completely. Biologists have found that limited amounts of such aid even in the absence of reciprocity confer survival ability to genetic endowments. To a large extent altruism is limited to kinship relations. Genetic endowments have greater survival ability if they encourage the helping of others when it can be expected that by doing so the survival power of that genetic endowment is enhanced. A person who willingly sacrifices himself to save two siblings, eight cousins, and so forth, who but for his sacrifice would surely die, increase the probability that “his” genes, independently of which body contains them, will survive, because “his” genes also exist, with descending probability, in the bodies of siblings, cousins, and so forth. The arithmetic of genetic inheritance guarantees that relationships more distant than uncles, aunts, and first cousins are not reliable sources of paternalistic care. Similarly, a culture generous only to its own will be more resistant to freeloading and to its displacement by freeloading cultures. (There are special situations, particularly in the insect world, for which this need not be true.) — Harold Demsetz, Ethics and Efficiency in Property Rights Systems
Free-riding is certainly relevant to the Libertarian Party, unions and governments. But we generally don’t think of this problem being relevant to restaurants. The food is only supplied to the people who are willing to buy it. However, like I mentioned earlier, Cowen would sure be sad if his favorite restaurant failed.
Here are some more, or less, relevant passages…
When a Manhattan bakery that the sisters loved, Ruby et Violette, threatened to close, depriving the Mercers of their favorite cookies, they bought it. In a Fox News interview, Heather Sue recalled telling the others, “We are going to buy a bakery!” The Mercers still own the business, although it is now online-only. — Jane Mayer, The Reclusive Hedge-Fund Tycoon Behind The Trump Presidency
…
On the Rue de Buci, my favorite shopping street on the Left Bank, two wonderful pâtisseries have been transformed in the past decade into trinket shops for tourists. I mourn the délices au Grand Marnier. But I could not hand out a subsidy sufficient to keep the places going, and the arrondissement could not, either. — Adam Gopnik, Jane Jacobs’s Street Smarts
…
Consider first how immediately every private enterprise is dependent upon the need for it; and how impossible it is for it to continue if there be no need. Daily are new trades and new companies established. If they subserve some existing public want, they take root and grow. If they do not, they die of inanition. It needs no act of Parliament, to put them down. As with all natural organizations, if there is no function to them, no nutrient comes to them, and they dwindle away. Moreover, not only do the new agencies disappear if they are superfluous, but the old ones cease to be when they have done their work. Unlike law-made instrumentalities…these private instrumentalities dissolve when they become needless. — Herbert Spencer
…
I never expected any sort of success with ‘Mockingbird.’ … I was hoping for a quick and merciful death at the hands of the reviewers but, at the same time, I sort of hoped someone would like it enough to give me encouragement. Public encouragement. I hoped for a little, as I said, but I got rather a whole lot, and in some ways this was just about as frightening as the quick, merciful death I’d expected. — Harper Lee
…
G.C. Coleman, The Winstons’ drummer who actually played the original Amen Break, never made any money from its popularity; he died homeless in 2006. His bandmate in The Winstons, front man Richard Spencer, also did not benefit from the widespread use of his band’s music. But in 2015, a couple of British DJs launch a GoFundMe drive asking people who have benefited from the Amen Break to give back. Two versions of the drive have now netted Spencer almost $33,000. — David Goldenberg, It Only Takes Six Seconds To Hear The World’s Most Sampled Song
