My most surprising discovery: the overwhelming importance in business of an unseen force that we might call "the institutional imperative. In business school, I was given no hint of the imperative's existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so. Instead, rationality frequently wilts when the institutional imperative comes into play.
For example: (1) As if governed by Newton's First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated."-- Warren Buffett, in the 1989 Berkshire Hathaway Chairman's Letter
Does this mean that corporations are hopeless? I would say, instead, that it means we can't expect corporations, or any other group of people, to amend themselves from within purely as a result of rational thinking or pure motives. It takes disruptive outside forces--the pain of failure--to make them change. Private institutions can be stupid and harmful, but they don't hold a candle to stupid and harmful government institutions, because it's so much harder to apply the pain of failure to the latter. Voter outrage is weak and delayed. Private companies can lose their customers; monopolies can't. Any government product that can outlaw its competition is almost guaranteed to become a monster.
4 comments:
Good morning, Professor Schumpeter! :)
Well, him and practically every other free-market enthusiast that ever existed!
His unique contribution seems to have been a recognition that people would experience so much painful resentment and envy over the success of others that they'd rather do without any benefit from an entrepreneur's innovation than permit him to enjoy an "unfair share" of the value of his improvement. Unfortunately, Schumpeter didn't have any useful ideas about how to overcome that self-defeating error, so he just sort of resigned himself to the notion that collectivism would push everyone into a shared pit of mediocrity and poverty.
I always understood his signal insight to be the OODA Loop avant la lettre, and applied to market economies instead of aerial warfare. The idea was that smaller companies, because they had a lighter and shorter decision-making chain, could outmaneuver larger companies. The concept Buffett is calling 'inertia' he called 'ossification,' but it's a very similar idea.
Which means that a government-backed monopoly can outlaw its competition, but it can't eliminate it. What you get is not just the government-backed monster, but a black market that will thrive because it can outperform the monopoly.
By the way, did you know that the word 'monopoly' is genuine ancient Greek? Aristotle gives two examples of them in the Politics. He has your insight about the importance of government backing, too: he says that although the word is usually thought to be from 'mono' plus 'polein' (i.e., 'to sell,') it's possibly 'mono' plus 'polis,' that is, the city-state. It's a form of commerce the state normally finds improper, Aristotle says, except when employed for its own purposes.
McArdle sounds like Schumpeter today, too. Must be in the air. :)
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