Free to Fail

Free to Fail

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn

This challenging book tackles one of the most fundamental questions in economics: Why are commercial organizations more efficient than organizations in the public domain?

Chapter 7: Uncontrollability

Hugh van der Mandele and Arjen C. van Witteloostuijn

Subjects: business and management, organisation studies, strategic management, economics and finance, industrial organisation

Extract

This chapter is the result of a renewed acquaintance with a classic and seminal article of Oliver Williamson, ‘Hierarchical control and optimum firm size’, published in 1967 in the Journal of Political Economy. The result was that we were inspired to revive and, partly, reinterpret and enrich Williamson’s analyses by removing two of its restrictive assumptions. With the original model, Williamson (1967, p. 130) demonstrated the plausibility that ‘the cumulative effects of control loss are fundamentally responsible for limitations in firm size’. The introduction of the dynamics of the quality of vertical communication into Williamson’s static model and the development of a simulation to analyze these dynamics provide the opportunity to demonstrate the plausibility of a second conjecture: in each and every hierarchically organized firm, irreversible organizational uncontrollability is ultimately (in a Markovian sense) bound to arise, even in a completely stable environment. Moreover, we demonstrate that this conjecture is also valid for non-hierarchically structured organizations. In 2009, Sveriges Riksbank awarded their prize in memory of Alfred Nobel to Oliver Williamson ‘for his analysis of economic governance, especially the boundaries of the firm’. There is absolutely no room for doubt that Williamson received a just award for his contributions to economics; however, we will argue that he received the prize for the wrong reason.

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