08 August 2013

Many Hands Make Economies Prosper: Coordinating Smith's Invisible and Chandler's Visible Hands

For the US and most of the West, economic growth during the 20th century was unprecedented. Mind boggling. Per capita incomes rose by nearly 7X in the US in spite of a Great Depression, two world wars, and a period of double-digit inflation. Put another way, if people worked 6 days a week in 1900, they still wouldn't make as much as someone could make by 2000 in a single day. And of course in 1900, people were far more likely to work 6 days a week.

Growth in the West during the 20th century was previously unprecedented, but it has now been surpassed.

Shanghai's rise in per capita income from $920 to $13,000 in just 22 years represents an increase of more than 14X. Double our rate of growth in one-fifth the time. Essentially a child born in 1990 could make more in a month than his parents could at the same age in a year.

There are so many things that various folks could conclude from these facts. For me, it's an affirmation of at least two things: a move towards what we rather imprecisely call capitalism can be a boon to an economy that has previously rejected markets and, central planning and policy can - within the framework of a market economy - make a positive difference.

As companies, products, and economies became more complex, Adam Smith's invisible hand of the market was gradually supplemented by Alfred Chandler's visible hand of management. From Singapore to China, various Asian economies have seemed to understand this better than the West, where modern management first emerged. Planning has a role.

In my opinion, national economies could use more visible hand and corporations could use more invisible hand. Management -the kind that every corporation uses - is a wonderful positive, coordinating the efforts of groups who could not - on their own - succeed at projects that require the inputs of so many different groups and functions. Additionally, self-organizing complexity as we see in a market economy also creates predictably unpredictable outcomes, innovation, and wealth creation.

Dee Hock - the only CEO in history to create an organization (VISA) that exceeded $1 trillion in annual transactions - argues that we've entered a chaordic age in which all good things happen at the boundary of chaos and order. Go for the order of management - of Chandler's visible hand - only and you get something like China in the mid-twentieth century: stagnant, repressive, and oppressive. But go for free-market only - a rules free zone of pure capitalism - and you get robber barons, gross income inequality, and a litany of oppressive by neglect sort of stories. It seems to be at the boundary of markets and planning - in Hock's chaordic region - that phenomenal things happen.

And maybe the real story is one of autonomy supportive policies. Edward Deci wrote Why We Do What We Do in the late 1990s - about the time Shanghai was taking off. Aimed at managers, parents, and teachers, his framework could be valuable for policy makers as well. He argued that there are three models (of parenting, management, and teaching): controlling, abandonment, and autonomy-supportive. Controlling parents do little to create self-sufficiency in their children, dictating actions rather than provoking thought. Abandonment just lets people work through their own learning, find their own way. Finally, autonomy supportive works with the individual to coach them toward the place where they can make their own choices, choices for which they've been prepared by teaching, practice, and sufficient resources. The locus of control is with the student or employee or child, but only after they've been properly prepared to make choices. It is not about dictating what the authority figure wants but instead about enabling someone else to make their own choices with some authority.

Deci's model of autonomy-support could be made to work, it seems to me, not just by managers within corporations but by policy makers within local, state, or federal governments. Asia learned from the West, adopting so much of our market innovations. Given their success, perhaps it's time we learned from them as well. For us, that learning would take the form of two prongs. Our corporations could - like China in the late-twentieth century - open up to allow individuals within them to pursue their own goals, giving up on the controlling model. And our governments could do more to create support for individuals, not just through education but even through planning efforts, trying to create something chaordic.

1 comment:

Hamilton Bard said...

As the world's economy has grown, competition between nations as speeded up. American corporations are making profits, but job growth has not kept pace. That is because companies invest their profits, not in domestic expansion and hiring, but in expanding operations in other countries, even while laying off American workers.

What is needed, and what I advocate in my blog and book, is a new income tax rate structure for coproations that will levy different tax rates on corporations depending on whether or not they are hiring American workers. Those companies that are investing their profits in hiring in this country would pay a lower rate and companies investing their profits in other countries whould pay a higher rate.

Not only would this provide an incentive to invest here in the United States, but it will enable growing American companies to grow faster, producing jobs at a faster rate.