Format note: the substance of this post appears following the red text ~2/3 of the way down, but some lead-in quotes appear first to set the scene a bit.
This past Monday, Russ Roberts interviewed Don Boudreaux on Ronald Coase’s legacy, focusing on four papers. The first paper discussed is Coase’s 1937 landmark, “The Nature of the Firm”. The podcast conversation, like the paper it starts out discussing, addresses why we need firms, and why firms integrate (focus on vertical integration here), in Roberts’ words,
[7:20] “…and by doing so, lose power of the price system to induce competition, excellence, innovation, all the things we like about the market process. When they’re put inside a firm, have become a top-down, (to be blunt) socialist, command and control situation that seemingly, gives up all of the advantages of price and competition.”
Don Boudreaux explains,
“…a firm is what Hayek called an organization; it is administered from on top. It is conducted according to some conscious direction. …markets have transaction costs. …when the transaction costs of using the market are sufficiently high, it is worthwhile to take those transactions out of markets and put them in the firm…there are costs of operating a firm. I call these administrative costs…”
Russ Roberts goes on,
“The bigger challenge is you have to figure out what skills to use, what technology to use, what mix of people and machinery, if normally you just go to the marketplace and get the cheapest one that meets my expectations. There’s the cost of discovering mistakes. You’ve got loafing, while in the external market you say, ‘It’s late, we’re done’. But here, this guy says we had this bottleneck, how do we know it’s real? So it seems to be the monitoring and quality control and decision-making process within the firm is by far the biggest cost.”
“The general lesson here is, Coase is a realist….And in a competitive economy when people are allowed to experiment with their different forms, and firms aren’t constricted by regulation to fit some model, over time,…firms will emerge that minimize the entire costs of transforming raw materials into final products for final delivery to consumers…You still have the costs of using markets, you have administrative costs…But if firms get too large, then the administrative costs at the margin outweigh the costs of using the market, so firms will shrink. If the costs of using the market are too high at the margin, firms will emerge to reduce those costs and substitute the administrative cost with the cost of using the market, all the while lowering the cost of transforming raw materials into final outputs…[~12:00]
Moving forward to the tail end of the discussion on the same paper, Roberts bridges to Hayek’s, ‘The Use of Knowledge in Society’ (1945 American Economic Review):
[22:00] “…that paper was about the power of prices to solve what came to be called called the knowledge problem: the fact that a lot of the most valuable knowledge is not stuff you can look up, it’s not stuff you can compile in a report; it’s stuck in the heads of people, and how do you get that knowledge to come into play when its stuck in individual brains, scattered across time and space?…Coase is saying…that sometimes you’re going to give up that aggregation of knowledge, that ability of prices to convey knowledge, and you’re going to solve that problem, because you’ve got to solve it. And there’s a whole modern management literature about the culture and history and knowledge of an organization. It was an obsession for a while in the 90′s; I’m not sure if it’s an obsession any more, I don’t follow this literature any more, but…How does an organization preserve the knowledge that’s embedded in its employees, given that (1) they’re scattered around the organization, (2) they die, (3) they transfer, they quit, they leave, and they take with them, in their brain, a bunch of stuff, how do you get that knowledge out of them into some accessible way? Of course, you can’t; there’s no easy way to do it……but especially in this context…when you get rid of the competitive market-driven outcomes from price competition..but how does the firm solve that problem? Not solve it, but deal with those issues?”
“…Quoting Sowell, it’s a Coaseian notion that ‘There are no solutions. There are tradeoffs.’ You can reduce this cost only by increasing this other cost, and you’re hoping that the reduction in this first cost is greater than the increase in the subsequent resulting higher cost on this other front…Coase was a very, very free market guy. You want to make sure the economy is competitive, so that this balance is made as best as possible, and when external factors change, that the balance itself can change to reflect changes in external reality.”
“And talking about external factors, the value of the internet…allowing firms to find out what is the price…you can find out…the price itself,…and…the quality,…you’d expect that to change how firms are organized, what they decide to produce in house versus outside.”
“And these things are happening all the time, so you don’t want a rigid template for what the world ‘should’ look like, except to say it should be competitive; entrepreneurs should be free to experiment with different methods of organization….Coase published ‘The Nature of the Firm’ in 1937…perhaps Hayek’s most profound paper is his ‘Economics and Knowledge’ paper published in the same year, 1937…and what those papers share is an appreciation of the…pixelization of knowledge; that knowledge is not a whole, it’s spread out, it has to be captured, it has to be utilized, people utilize it differently, people have different subjective reactions to it…this might be the result of the intellectual climate at the LSE in the 1930s.”
Now I’m going to drop in an Albert Einstein quotation from Forum and Century, 1931, New York, which relates a similar description of the nature of organizations as appears near the beginning of the excerpts above:
“I am quite aware that it is necessary for the achievement of the objective of an organization that one man should do the thinking and directing and generally bear the responsibility.“
So, now we have a departed Nobel-Prize winning economist, two respected living economists, and a departed Nobel-Prize winning physicist, all generally agreeing on the nature of organizations. That’s the background for the rest of the post.
You can make the tradeoff of trying Oneslate. There is a risk is that it might not be for you–it’s possible. What has prevented concept mapping from being used to any great extent thus far is that implementations of it have been hard to use, with no clear immediate benefit or even viable implementation pathway. The potential upside is that it might be a positively transformative instrument. It may let you capture useful knowledge in a way that is immediately beneficial–by increasing its localized availability, and by helping to ensure a higher quality of operational knowledge.
What Oneslate may help to address is the “knowledge problem”, that “a lot of the most valuable knowledge…is stuck in the heads of people…stuck in individual brains, scattered across time and space”. This is the problem addressed when Roberts says, “How do you get that knowledge out of them into some accessible way?…There’s no easy way to do it”, and this might be true. Knowledge reflected in price can usefully circumscribe explicit communication requirements. However, this does not preclude possible edges from improved knowledge capabilities. No prior tool that is truly easy, can capture knowledge maps. And no prior tool that can capture knowledge maps, is easy (or, for that matter, realistically very conducive to collaborative work or broad implementation).
But, Oneslate is designed to permit low-barrier knowledge capture and retrieval. It is distinct from the methods of knowledge management craze which Roberts noted in his discussion with Boudreaux; knowledge management was attempted in the 90′s but faced difficulties since experts’ time was needed to be spent on tasks requiring their knowledge other than encoding that knowledge. Rather, Oneslate is a step forward in corporate memory management from the status quo, in as much as it is a step toward realizing the technical inevitabilities set forth decades ago but stopped mid-stream by the pervasiveness of linear information interaction preferences.
Finally, advances in computing hardware and software, and also the social integration of informational updates, are at the point where an application for interacting with a living shared brain is on the cusp of feasibility. It’s a new paradigm in some sense, but people are already acting as if our nascent social platforms are fulfilling parts of a promise of which they barely skim the surface, so it seems that the early adopters are at the virtual doorstep, almost.
Now, the point of this post is really to establish that a high-definition view of the knowledge work occurring within a firm does not jeopardize, but rather enhances, the necessary command and control nature of the organization.
To start with an analogy, there are no bullfights at night (I assume, hopefully that’s right). The bull would not be able see the red flag, the torero would be unable to issue command and control over the bull. There would be no spectacle, no crowd, no glory, no profit. Bullfights occur during the day. The bull can see the banderilla; the torrero can exercise great command and control.
With Oneslate, the firm still exercises the same command and control. It just has HD vision of its “pixelated knowledge”. One way to know what’s in the minds of employees is to walk the halls and pick up on conversations, but you can’t spend all you time doing that. Another way is to, for any topic, query the Oneslate instance and directly find out the available knowledge on some topic, or to quickly browse the latest, or most rated topics. In other scenarios, Oneslate is designed, through logic-tree scaffolding, bias surveying, and dialog capture capabilities, to encourage rationality and common understanding where, otherwise, inter-department specialization and competition can result in, not necessarily more innovative and faster-delivered products, but perhaps inefficiencies leading to sub-optimal decision-making and the opposite results than those desired by the top.
Oneslate is designed, through a shared knowledge space, to improve “monitoring and quality control and decision-making process within the firm…by far the biggest cost.” By trading a relatively small amount of time deploying and implementing Oneslate as a corporate memory solution, the idea is to reduce the “administrative cost” of dealing with complex knowledge and traditionally disparate knowledge so that higher efficiencies can be achieved for in house operations, by some amount shifting the point at which the in-house/outsource tradeoff occurs, permitting a more integrated firm that operates overall more efficiently than in other possible scenarios.
So, while an internet-based solution to communicating knowledge may have an impact on how firms are organized, it does not negatively impact the command and control aspect of the firm. If anything, the better view of knowledge, otherwise aggregated in price, enhances that command and control.