Command, Competition, and Cooperation

Coordination in the firm is by command, although persuasion and various sorts of exchanges may also be important. A manager determines the exact task a person performs. The manager's challenge is to decide how best to use the available resources. Coordination in the market is based on voluntary transactions. The ability of command to coordinate is obvious, whereas the ability of the market to coordinate is not so obvious. This difference is apparent whenever the economy experiences a problem; there is always a demand that the government "do something." In the 1930s it responded with massive public works. In the early 1970s, when the public realized that inflation was a problem, the clamor for action led to wage and price controls. The rapid rise in oil prices in the late 1970s led to a mass of regulations. In each of these cases and in a huge number of others that could be cited, restrictions are placed on the market. Instead of relying solely on coordination through the market, the government decides to rely at least partly on command. What is remarkable, however, is that in few of the cases of government intervention is there convincing evidence that the government action had its intended effect. In many of them, there is evidence, though often not conclusive, that government action had harmful side effects. The difficulty of achieving results through government action may be largely due to the costs of using command--the visible hand--as a means of coordination.

If there were no costs to using command, one would expect the vision (or nightmare) of Karl Marx to be reality today--monopoly capital. In Marx's vision, one capitalist would gobble up another until in the end only a few giant capitalists would own and run everything. Then, the revolution would come. But this vision of the giant capitalists ignores the costs of giving incentives to workers, monitoring their behavior, and deciding how best to use their skills. It is ironic that the closest approximations to the monopoly capitalists that Marx predicted were the centrally-planned states of Eastern Europe and the Soviet Union. In their attempt to eliminate the market, they organized their economies as a giant state-run enterprise. The poor performances in satisfying consumer wants that these economies experienced were largely due to their use of command in places where the market was a much cheaper way to organize.

Industries that have the ability to easily monitor quality and speed will find coordination by command cheap. Such industries will generally have increasing returns to scale and thus large firms. Industries in which it is not easy to monitor quality and speed will tend to have many small firms. Agriculture is an example of this second sort of industry. Attempts to farm on a large scale have not been notably successful in the United States. In the former Soviet Union and in other socialist countries, the structuring of agriculture in large organized farms was disastrous in terms of food production. Agriculture cannot be made into an assembly-line process, and the many factors that determine the success of the crop make it difficult to determine responsibility if someone does shirk. As a result, very large land owners in the United States more often rent their land to independent farmers than hire farmers to cultivate it.

In the abstract theory of exchange economics, the internal world of the firm does not exist. All coordination is through the price mechanism. However, the existence of large organizations, established on a voluntary basis, points out that coordination through the invisible hand requires resources, and that those who find ways to coordinate more cheaply can profit from their discoveries. In a way, the existence of large firms is an irony in a market economy. They indicate that a way to succeed in a market economy is to find a better way to coordinate people than market coordination, to replace the market by command.

Perhaps a reason that team sports are so popular in a country that so honors the individual is that they reflect a paradox of the modern world: those groups that cooperate best internally are best able to compete externally. Team sports encourage both cooperation and competition; the two are not incompatible. The often-heard criticism of capitalism, that it encourages competition and thus discourages cooperation, ignores the very existence of the large coordinated enterprises that are most visible in the economy.

Next we discuss screening and signaling.