Spans of control and the cost of entrepreneurial time
20 Jul 2014 Leave a comment
in applied price theory, Armen Alchian, industrial organisation, Ronald Coase, theory of the firm Tags: markets and hierarchies, Oliver Williamson, Robert Lucas, Ronald Coase, span of control, theory of the firm, Walter Oi
One constraint on the growth of any firm is entrepreneurs have a limited span of control (Coase 1937; Williamson 1967, Lucas 1978; Oi 1983a, 1983b). A span of control is the number of subordinates that an individual supervisor has to control and lead either directly or through a hierarchical managerial chain (Fox 2009).
There are only so many tasks that even the most able entrepreneurs can carry out in one day. Over-stretched spans of control motivate entrepreneurs to hire professional managers and delegate to them a wide range of decision-making rights over the firms they own (Williamson 1975; Foss, Foss and Klein 2008).
Entrepreneurs and the professional managers they hired to assist them must divide their respective time between monitoring employees, identifying new business opportunities, forecasting buyer demand and running the other aspects of their business (Lucas, 1978; Oi 1983, 1983b, 1988; Foss, Foss, and Klein 2008). The larger is the firm, the more employees there are for the entrepreneur to direct, monitor and reward. These costs of directing and monitoring employees will increase with the size of the firm and larger firms will encounter information problems not present in smaller firms (Alchian and Demsetz 1972; Stigler 1962).
The cost of entrepreneurial time spent monitoring employees will increase with the size of the firm (Lucas 1978; Oi 1983b). The time of the more talented entrepreneurs is more valuable because they had the superior managerial skills and entrepreneurial alertness to make their firms large in the first place and remain deft enough to survive in competition. Time spent on the supervision of employees is time that is spent away from other uses of the talents that got these more able entrepreneurs to the top and keeps them there (Williamson 1967; Lucas 1978; Oi 1983b, 1988, 1990; Idson and Oi 1999; Black et al 1999).
Firms in the same industry tend to exhibit systematic differences in their organization of production and the structure of their workforces because entrepreneurial ability is the specific and scarce production input that limits the size of a firm (Lucas, 1978; Oi 1983b). The less able entrepreneurs tend to run the smaller firms while the more able entrepreneurs tend to lead both the currently large firms and the smaller firms that are growing at the expense of market rivals (Lucas 1978, Oi 1983b; Stigler 1958; Alchian 1950).
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The Free Enterprise Philosophy In a 12-Cell Matrix
19 Jul 2014 Leave a comment
in applied price theory, law and economics, liberalism Tags: profit and loss, property rights
George Stigler on Thomas Malthus – with relevance to his modern day successors
18 Jul 2014 Leave a comment
Capitalists do not exploit workers
16 Jul 2014 Leave a comment
in applied price theory, entrepreneurship, Marxist economics Tags: marxist economics, Marxist exploitation, surplus value
Workers exploit capitalists who start businesses that fail. Workers are paid more than they add in labour value to failed start-ups.
- A self-employed farmer scraping a living with the help of a part-timer is exploiting that worker while a manager who owns no shares on a salary of $500,000 a year is a downtrodden and exploited member of the proletariat!
- Elite athletes, celebrities and TV and movie stars are the most exploited of all proletarians. Itinerant workers with no income security at all. At the mercy of the selectors, record companies and studios. 15 minutes of fame is fleeting.
- Many capitalists scrape a living and often go bankrupt and lose their house and marriage after business failures while many workers are highly paid.
- The university educated are well-paid proletarians with low unemployment rates.
- How is your superannuation portfolio going? Riding high on the fat of the working class?
- Pension fund socialism was never a promise of long-run super-normal profits.
- Despite the majority of labour surplus now going back into the hands of workers in their retirement savings, the share market is still a dog or is it?
To those who still doubt moral hazard
15 Jul 2014 Leave a comment
in applied price theory Tags: moral hazard
I’ve had arguments with people until I’m blue in the face trying to persuade them that the risk of accidents is influenced by incentives.
Female voting demographics and the growth of government
13 Jul 2014 1 Comment
in applied price theory, gender, income redistribution, Public Choice Tags: John Lott, The growth in government, voter demographics
The gender gap in voting dates back 2 generations or more and may now be in double digits.
A large share of all social spending is for the care of dependents – everything from children to non-working mothers and old age pensioners. Women support this spending because they benefit more from the social insurance it offers. Women both earn less and are more likely to be out of the workforce caring for children. Women also change their voting patterns more often than men as they marry and divorce or as they become single mothers.
John Lott pondered on why the government started growing precisely when it did. The federal government, aside from periods of wartime, consumed 2 to 3% of GDP up until World War I. In the 1920s, non-military federal spending began steadily climbing. FDR’s New Deal continued an earlier trend.
Lott explains the growth of government with women’s suffrage. For decades, polls have shown that women as a group vote differently than men. Without the women’s vote, Republicans would have swept every U.S. presidential race but one between 1968 and 2004.
A major gender gap issue is smaller government and lower taxes, which is a much higher priority for men. Women were more opposed to the 1996 federal welfare reforms, which mandated time limits for receiving welfare and imposed work requirements on welfare recipients.
Women are also supporters of Medicare, Social Security and educational expenditures more than men. Studies show that women are generally more risk-averse than men so they support government programs to ensure against certain risks in life.
- Women’s average incomes are also slightly lower and less likely to vary so single women prefer more progressive income taxes.
- Once women marry, they bear a greater share of taxes through their husbands’ relatively higher incomes so their support for high taxes declines.
Marriage also provides an economic explanation for why men and women prefer different policies.
Single women who believe they may marry as well as married women who most fear divorce, look for protection against possible divorce: a more progressive tax system and other government transfers of wealth from rich to poor.
Lott considers that A good way to analyse the direct effect of women’s suffrage on the growth of government is to study how each of the 48 state governments expanded after women obtained the right to vote.
- Women’s suffrage was first granted in western states seeking women migrants: Wyoming (1869), Utah (1870), Colorado (1893) and Idaho (1896).
- Women could vote in 29 states before women’s suffrage was achieved nationwide in 1920 with the adoption of the 19th Amendment to the Constitution.
The impact of granting of women’s suffrage was startling: state governments started expanding the first year after women voted and continued growing until real per capita spending more than doubled. The increase in government spending and revenue started immediately after women started voting.
There were 19 states that had not passed women’s suffrage before the approval of the 19th Amendment, nine approved the amendment, while the other 12 had suffrage imposed on them.
If some unknown third factor caused a desire for larger government and women’s suffrage, government should have only grown in states that voluntarily adopted suffrage. After approving women’s suffrage, government grew at a similar pace in both groups of states.
As more women voted and eventually voted in similar numbers as men, the size of state and federal governments expanded as women became an increasingly important part of the electorate. It took up to 30 years for women’s voting participation rate to equal that of men.
Lott also found that women’s political views on average vary more than those of men:
- Young single women are about 50 per cent more likely to vote Democratic.
- For married women, this gap is only one-third as large.
- Married women with children become more conservative still.
- Women with children who are divorced are suddenly about 75 per cent more likely to vote for Democrats than single men.
Not surprisingly, political parties pitch their platforms to women because they are more likely to change their vote over identifiable issues that are within the scope for government to change or influence
Sure, there’s a temptation to fix prices, but it isn’t as strong as the urge to put one over on your competitors
12 Jul 2014 Leave a comment
in applied price theory, industrial organisation Tags: Bill Allen, cartels
The desire to collude and thereby to raise prices must be distinguished from the ability to do so.
Not only is it difficult for rival companies to agree on the production cuts each must make in order to force up price, but it is difficult to prevent each company from undercutting the others in order to increase its sales. It is unlikely that, without–and sometimes even with–government support, firms will long curb their rivalry–even in industries with high levels of concentration…
It is not easy to organize a cartel, melding highly autonomous organizations into a monopolistic facsimile. There are markets to divide, prices to set, and production quotas to assign.
Successful operation is even harder than initial organization. Members must remain persuaded that they enjoy net benefits from collusion compared to acting as independent agents.
The more profitable the collusive efforts, the greater the incentive for outsiders to seek admission or to organize their own club or individually to compete.
The more numerous the participants and the more lucrative the tightening of the screws on consumers, the greater the temptation for individual members to cheat–and the greater the fear of each that some other member will cheat.
Long-term survival of the cartel has two fundamental requirements: first, cheating by a member on the stipulated prices, outputs and markets must be detectable; second, detected cheating must be adequately punishable without leading to a break-up of the cartel.
Bill Allen
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