Employees and Entrepreneurship

Employees and Entrepreneurship

Co-ordination and Spontaneity in Non-Hierarchical Business Organizations

New Thinking in Political Economy series

Ivan Pongracic Jr.

Over the last few decades, there has been a great deal of management literature recommending the removal of firms’ hierarchies and the empowerment of employees. Ivan Pongracic, Jr. examines these themes through the lense of the economic theory of the firm. Balancing the tendency for management literature to overlook basic costs and trade-offs of decentralization, and the rigidity of economics that hinders an appreciation for the real world phenomenon of decentralization, this book arrives at a realistic middle ground between the two extremes. The dance between hierarchy and employee empowerment exists in even the most hierarchical firms, and this book explores this often overlooked dynamic.

Chapter 2: The Hierarchical Theory of the Firm

Ivan Pongracic Jr.

Subjects: business and management, entrepreneurship, economics and finance, austrian economics


2. The hierarchical theory of the firm [Klein, Crawford and Alchian (1978)] imply that in distinguishing between transactions carried out within the firm and in the market, I believed that all that existed were these polar and clear-cut cases. This is incorrect. Indeed, I was quite explicit about it. In ‘The Nature of the Firm’ I state that ‘it is not possible to draw a hard and fast line which determines whether there is a firm or not. There may be more or less direction.’ (Coase 1988, p. 27) The study of contractual relations plainly involves more than an examination of discrete markets on the one hand and hierarchical organization on the other. As Llewellyn observed in 1931, the exchange spectrum runs the full gamut from pure market to hierarchy and includes complex ‘future deals’ located between market and hierarchy extremes . . . Suppose that transactions were to be arrayed in terms of the degree to which parties to the trade maintained autonomy. Discrete transactions would thus be located at the one extreme; highly centralized, hierarchical transactions would be at the other; and hybrid transactions (franchising, joint ventures, other forms of nonstandard contracting) would be located in between . . . Whereas I was earlier of the view that transactions of the middle kind were very difficult to organize and hence very unstable . . . I am now persuaded that transactions in the middle range are much more common . . . Whatever the empirical realities, greater attention to transactions of the middle range will help to illuminate an...

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