I had the good fortune to recently participate in a conference on "Austrian Market-based Approaches to the Theory and Operation of the Business Firm”, in Arlington. Peter Klein has provided some thoughts on Organizations and Markets (one of the very best management/economics blogs I'm aware of), and I'd like to add some comments. During my presentation/paper Peter made a number of insightful points, and although I'm still pondering over a response it's about time I provided one. These aren't direct quotations, but hopefully close enough to what was said. I'm intending to keep the conversation flowing, rather than offer concrete answers.

What are the implications for the efficiency of resource allocation - if we take culture seriously?

Obviously there's a lot of experimental research on how fairness norms and other cultural factors affect market clearing, and there's no doubt that resistance to commercial transactions can be found in deep-rooted cultural factors. On one level this should be taken as a given, since it's part and parcel of the complex order we seek to interpret. However there's no reason why strong cultures should systematically affect basic economic principles. I assume that Peter is applying a basic distinction between atomistic individualism and collectivism, and that a serious approach to culture implies comradeship at the expense of the self-interest assumption that drives the invisible hand. This might be a semantic trick on my part, but a complete cultural framework does not require that everyone puts the group before themselves. In fact you can have a "strong culture" where people are characterised by their personal ego: a coalition of individualists who "share" a common world view (self-interest), and act accordingly.

So I guess my response is that firstly, we must take culture seriously because it's a given. This doesn't prevent us from running a thought experiment of a world of atomistic individuals without any connection or commonality to anyone else, but in reality culture is pervasive and not necessarily associated with collectivism. To me this isn't radical, it is basic support for the Coase/Williamson system where we adjudicate between the costs of market transactions, and the costs of command-and-control. Culture can enable exchange (by generating trust, or acting as a focal point, etc), and therefore a full answer to Peter's question requires an empirical (rather than theoretical) response. All I can offer is a possible way to operationalise it!



As an aside, I'm deeply skeptical about Corporate Culture literature that tries to tie "strong culture" with high performance*, for a number of reasons; chiefly because I can't fathom how culture can be operationalised as a dualism. Simple introspection provides many examples of strong - yet destructive - cultures. In the Grid/Group framework an organisation that is entirely individualist/egalitarian/hierarchist/fatalist would surely be "strong", but utterly unworkable. So culture is multifaceted, and the type of culture is more important than any measureable degree.



Do we need anything more than purposeful behaviour to explain this?

No, I don't think we do. The key issue is to use the axiom of purposeful behaviour in conjunction with a means-ends framework. A fundamental principle of the approach to culture that I'm advocating is that people are different, and that this ensures plural rationality; what is "rational" (in the neoclassical sense) to one person would be irrational to another (e.g. a meat-eater and a vegetarian both ordering a hamburger). This being the case we need a classification system that can help us to understand and compare these conflicting visions. Grid/Group is, pretty much, the distinction between law and legislation made by Hayek (1973) and is - I believe - a fruitful way to treat subjectivism seriously without lapsing into nihilism. (Having said that if I do turn the paper I presented into a book, the final chapter will give the last laugh to GLS Shackle...) So to some extent I don't think this is anything more than purposeful behaviour, it's just a means to classify it.

Whilst I'm here, I'll also add two further comments on the conference as a whole:

1.Hayek's Influence

I had lunch on Wednesday with Alastair Walling (from the MBMI), and we spoke about the costs associated with implementing internal markets too much. I was interested that he used a Coaseian framework to argue that sometimes the efficiency gains of a market might be outweighed by the costs of creating one, suggesting that there is an optimal blend between the two that's simply unknowable. As I mentioned in the intro to my paper there's a slight tension between interpreting Hayek as an economist famous for "The Use of Knowledge in Society" which argues better than any paper before or since that decentralised decision making is the only way to solve the knowledge problem; and as a Constitutional Political Economist who's principle of "Fatal Conceit" demonstrates the limits of human judgement. With regards to the firm I think the real value-added of an Austrian approach is to apply the constitutionalism associated with Hayek and Buchanan (and, of course, "it was all in Mises") to show that the real function of management is to not merely create the right set of rules that allow diverse individuals to utilise their knowledge, but to create the right constitutional order that allows those rules to emerge. We don't know whether more centralisation is preferred to less, ex-ante - we can only permit the experimentation necessary for an appropriate blend to develop.

2. Alertness: Sautet vs. Klein

On the surface Sautet and Klein take polar views on entrepreneurship, as Peter says:

I made the case for an Austrian analysis of entrepreneurship and the firm based not on the Hayekian knowledge problem and Kirzner’s concept of entrepreneurial discovery — the foundations of most contemporary Austrian work in this area — but on the Cantillon-Knight-Mises concept of entrepreneurship as judgment combined with an emphasis on property rights, asset ownership, and monetary calculation

My instinct is to treat alertness as something you either "get" or "don't get". Perhaps Fred just intuitively believes in it, and Peter doesn't. In this way it's similar to the concept of Knightian uncertainty - again, you either accept it or you don't. Austrian embrace it (since it pretty much demolishes probablity theory); Neoclassicists abhor it (perhaps for geniune reasons, perhaps for convenience); Bryan Caplan pretends to dismiss it but doesn't really(.doc)...(if the catch-all category has a p-value, it's Knightian); I think Peter's fairly happy with it. But I don't think that Fred and Peter are differing too much when it comes to alertness (especially when I re-read this post, and recollect the conversation I had with Fred, about this point, amidst the belly-dancing...), providing you make a clear distinction between entrepreneurial discovery and entrepreneurial profit. The first is costless, the second has a capital requirement to be realised. The first is entirely random, but is irrelevent unless you have the means to act upon it - and since those means require resources (and due to asymmetric information and/or subjectivism a person with those resources already (and not have need to borrow on capital markets) is at an advantage. As Chris Dillow says:

it's environment, not just pure skill, that is necessary for entrepreneurship.

The alertness vs. judgement issue is an important scholarly issue, but regardless of where you stand both concepts imply - once again - that institutions matter. This doesn't make micro-finance a silver bullet, but it does turn attention to the conditions that facilitate the capture of profit, not the circumstances of opportunity.

*e.g. Peters and Waterman (1982), Denison (1984), Kotter and Heskett (1992) - possible examples?