Employees and Entrepreneurship
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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.
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Chapter 3: The Knowledge Problem in Firms

Ivan Pongracic Jr.

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3. The knowledge problem in firms In a free market . . . any advantages that may be derived from ‘central planning’ . . . are purchased at the price of an enhanced knowledge problem. We may expect firms spontaneously to tend to expand to the point where additional advantages of ‘central’ planning are just offset by the incremental knowledge difficulties that stem from dispersed information. On a small scale the latter difficulties may be insignificant enough to be worth absorbing in order to take advantage of explicitly coordinated organization. Knowledge problem dispersed over a small geographical organizational area may mean a Hayekian knowledge problem that, unlike that relevant to large, complex entities, is solvable through deliberate search. Beyond some point, however, the knowledge difficulties will tend to reduce the profitability of firms that are too large. Competition between firms of different sizes and scope will tend, therefore, to reveal the optimal extent of such ‘central planning’. (Kirzner 1992, p. 162) Coase and Williamson have had a great influence on modern economists, and it is mostly due to them that today we usually think of firms as designed, centrally planned institutions. But a different perspective on the theory of the firm has emerged over the last decade, one explicitly anchored on an Austrian, or more specifically Hayekian, epistemological basis rather than on transaction costs. The fundamental insight of this new Austrian theory of the firm is that much of the economically important knowledge is subjective (that...

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