Monday, January 16, 2012

Hierarchical, or Managerial, Capitalism

John Kay endorses in a Financial Times column ("Business leaders of today are not capitalists") an analysis of contemporary “capitalism” that I developed in “The Second Twentieth Century: Decline of Hierarchies and the Future of Nations” (Hoover Press, 2006) and extended in an article in the French review “Commentaire” (“La crise des capitalismes hiérarchiques”, Hiver 2006-2007).

While in XIXth century capitalism “the economic and political power of business leaders derived from their ownership of capital and the control that ownership gave them over the means of prouction and exchange”, “the business leaders of today are not capitalists in the sense in which Arkwright and Rockefeller were capitalists. Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital. They have obtained these positions through their skills in organizational politics, in the traditional ways bishops and generals acquired positions in an ecclesiastical or military hierarchy”.

What Kay does not mention however is that they often got their position through progress in the political system, and thanks to the support of the state hierarchy.

This system is still capitalist in the sense that managers need the consent of shareholders, even if it is only formal. But it is more accurately described as “managerial” (the power is detained by salaried managers), hierarchical, and corporatist (there is a deep collusion between political managers and business managers).

What Kay does not mention either is that, as I explain in my analysis, the extent of hierarchies in society is governed by the abundance or scarcity of information. As explained by Ronald Coase a long time ago, productive hierarchies (business firms) exist in order to economize on information, relative to a decentralized mode of production operating through individual craftsmen intensively using market exchanges (in the polar case).

And market exchanges are much more intensive in information than hierarchies, thus an increase in available information (a decrease of its cost) leads to a shrinkage of hierarchies and a development of markets.

The result is that in a period like ours, at a time when there is an extraordinary abundance of cheap information (the IT revolution), hierarchies tend to shrink while markets expand.

And this is the source of the present crisis of hierarchical, or managerial, or corporatist capitalism, a regime inherited from the previous period of high production and scarce information, extending from the last quarter of the XIXth century (the second industrial revolution) to the last quarter of the XXth century. This was the apex of the hierarchical capitalism, an organizational regime that produced the Rockefellers but also the Lenins and other totalitarian dictators, while empires expanded as never before.

The current trend is one of complete reversal of these organizational structures. And the problem for managerial capitalisms (and their managers) is how to get out of the previous system, and reorganize production, both public and private, along more markedly markets lines. How to break up big structures to bolster productivity again.

To conclude, there is one last thing that Kay does not mention: it is my book, even though it has been translated into English! Come on John, be a little more generous next time …

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