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 3: The Knowledge Problem in Firms

Ivan Pongracic Jr.

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


It is only in the last ten years that economists have begun to consider the possibility that firm owners/managers face the Hayekian knowledge problem. In a way, that is not too surprising: the mainstream of the profession has in general given little attention to Hayek’s epistemological insights, and the few Austrian and Hayekian economists have mostly devoted their scarce time to topics other than the theory of the firm. Fortunately, the 1990s saw much greater interest and inquiry into the implications of the knowledge problem to the firm organization. 52 Employees and entrepreneurship Hayek famously defined the knowledge problem as: the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is . . . [one] of the utilization of knowledge which is not given to anyone in its totality. (1945, p. 77–8) In this quote it becomes obvious why the knowledge problem is also often referred to as the problem of dispersed knowledge: as Hayek explains, economically relevant knowledge is often dispersed among (or held by) many different individuals. Almost all productive activities require that this dispersed knowledge somehow be either collected or co-ordinated, frequently not easily done – thus the ‘knowledge problem’. The usual (implicit) assumption about firms has been that the entrepreneur-promoter-coordinator possesses superior knowledge relative to his employees, and therefore that the knowledge problem...

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