For reasons that I hope will become apparent later, I’m reading a book1¹ Forecasting Political Events: The Future of Hong Kong; de Mesquita, Newman, Rabushka; Yale University Press; 1985. that opens up with a comparison between markets and politics.2² These qoutes are lightly edited for brevity, but convey the same ideas as the original. That said, feel free to compare to keep me honest.

A market is a device enabling people to negotiate exchanges. In the marketplace, individuals compare their personal valuations as they buy or sell goods and services. Buyers and sellers conclude their exchanges after settling on a price, which is typically expressed in a common unit of exchange. […] We are considering specifically a free market, a simplified model used by economists, where the government does not interfere with the prices established by market forces and resources are free to move. A free market is a method of organisation in which people make individual decisions to produce, distirbute, and consume on the basis of unregulated prices.

Market transactions are voluntary exchanges between buyers and sellers. Markets not only allow each person to exchange the goods and services he produces for those he wants, they also allocate resources for the society as a whole. People interacting with markets determine what products and services are provided within a society, how much of each is produced, what price is attached to each item, and so forth.

So long as free entry and unregulated prices prevail, every individual transaction represents a voluntary and unanimous agreement between parties in the exchange. Although we think of economic activity as competition among producers for the attention of consumers, cooperation is the defining characteristic of the final agreement between buyer and seller.

This, quite obviously, represents a mathematical, idealised view of a free market that has never existed in the real world, and the authors also admit just that, noting that things like property rights, contract enforcements, fraud protection, monopolies, externalised costs, etc. often require government intervention, making the market unfree.3³ And the introduction of market regulation brings its own problems to the table, and the debate goes on about the appropriate level of market regulation. That’s not where I’m going now.

Then the authors start to contrast markets with politics.

Many also want to accomplish various social and political purposes through the medium of government: advancing education, imposing religious values, preventing abortion, signing international agreements, and so on. These activities often force people to behave in ways they would otherwise not behave. Only givernment, with its legal monopoly on coercion, has the power to regulate to attain these objectives. […] A distinguishing feature of politics is its coercive nature: citizens can be forced to act against their will.

But equating politics with government is too narrow. The study of politics more generally encompasses the study of power, authority, and conflict. Politics is found wherever power relationships or conflict situations exist – activities that are not resolvable through voluntary market exchanges. Coercion replaces voluntariness, and some decision rule, ranging from dictatorship to majority rule, replaces unanimity.

Underpinning the concepts of conflict and power is the idea of people or groups trying to influence the behaviour of others and the outcomes of decisions that affect society. […] Political decisions are authoritative for a given social milieu, from a club to an entire nation; they are binding on all members, even those who dislike the results and may have to bear the costs. In brief, politics has to do with the use of power, frequently through institutions of governments, to resolve or settle conflicts over social values and the distribution of public goods.

I want to emphasise that I’m not trying to make a political point by quoting this. We’re going somewhere with this, and it’s not “so markets are clueless” or “so politics should be less coercive”.

Hang on and let the authors close off their line of reasoning.

Let us recapitulate the main differences between markets and politics. In the marketplace, costs and benefits are largely individual affairs. People are rewarded on the basis of their productivity and the return on their investments. The key aspects of market exchange are voluntariness and unanimity. No individual is forced to buy something they do not wish to buy.

Political choice, in contrast, entails a group decision, such as a majority vote. The group agreement required in political decisions narrows individual choice. Political competition requires individuals to group themselves into coalitions; markets do not. In addition, under all less than unanimous decisions, some portion of the population will have views enforced upon it that are not its own. […]

In short, economics involves the cooperation of buyer and seller, whereas politics entails conflict among individuals and groups over the social use of material things or values.

What this means for organisational structure

When we discussed toolmaking, we looked at the five organisational leverage points I know about. One of them was structure, how the group organises themselves to reduce wasted effort. This is an area where we – at least in the cultures around the northern Atlantic – are extremely unimaginative. I don’t know exactly what the scales are, but one of the hyperquadrants represents organisations that are highly political and feudalistic, and every organisation I’ve been a part of is somewhere in there.

The structure of most organisations I’ve explored has been a relatively static hierarchy, with branches based on political skill and prior interpersonal relationships. A lot of effort goes into maintaining this hierarchy, through coercing people to do things a certain way, then appropriating the benefits of their work and distributing resources to one’s political allies.4⁴ I’m throwing rocks in glass houses here, to be sure. I’ve been part of that cycle before and I expect to be plenty of times in the future. Maybe there’s a reason this high-level structure is dominant. Maybe it is the most effective way to do things.

But really? All that effort spent on maintaining the hierarchy, could it not be more usefully spent on other things? After all, we no longer view feudalism as a good ideal for the national economy, or the activity on the floors of the Chicago Board of Trade. If the national economy benefits from running as a relatively lightly regulated market, why wouldn’t other organisations, too?

These are questions economists and other people probably have good answers to, but I’m not an economist so it’s an open question to me. I like exploring hypotheticals. What can we learn from an idealised view of free markets about how to structure organisations to make them less coercive and political?

How can we design systems so that voluntary exchanges between individuals have second-order effects that improve the state of the group? Would this improve an organisation’s efficiency over feudalism?

Here is a small set of ideas, some of which are parts of formal consensus decision-making. I’m not saying these are good ideas, they’re just there to spark our imagination. If you have further ideas, send me an email to let me know!

• Do not consider a decision made until everyone affected by it has consented to it. Adjust the proposal until consensus is possible.5⁵ This does require that people are educated in the process, so they understand what a great responsibility it is to have the ability to block any proposal.
• Allow departments to coordinate through prices, i.e. purchase from and sell services to each other – even within an organisation.
• Set a price on e.g. time to delivery and give anyone authority to change requirements to reduce the time to delivery as long as it comes in at less than the cost of a unit time of delivery delay.
• Set up an internal market to allocate resources to projects and teams, with the profits of successful allocations distributed to the people who allocated, to imcrease the power of successful allocators to do more allocation in the future.6⁶ What is it really that says a chief operations officer is the best person in the company to allocate resources? Did they get their position for the track record of their past allocations? Hah! Besides, the average allocation from many people is probably more accurate than whatever just one person can accomplish.
• Rotate authority positions.7⁷ Here I’m using authority to mean a person who is granted the ability to speak on behalf of a group of people in a situation where multiple groups are trying to consent to something that affects all of them. This is another type of authority than a person who can coerce people within their group to perform any action.
• Create conditional prediction markets to elicit the expected value of outcomes under different decisions.8⁸ This is some variant of Robin Hanson’s futarchy, I suppose.
• Allow people to be a part of only one interest group discussion at a time.9⁹ In any group, there will be more and less influential people. If the more influential people are forced to pick one interest group to be a part of at any given time, their influence contained in a fair way.

Comments

2024-09-18: matklad

If the national economy benefits from running as a relatively lightly regulated market, why wouldn’t other organisations, too?

I’ve once read an interesting explanation for this dynamic, which I’d love to share. Sadly, I don’t remember the source (0.8 sure it was some econ book, but which one….). Also, not claiming that this explanation is right (in fact, I am going to counter-example it in a bit), but it is curious.

The idea is that (coercive) organizations are a result of the market. I’d maybe phrase this in terms of a market vs. central planning. In a market each actor takes decisions individually, coordination emerges as a consequence of individual decisions and the rules of the game. In central planning, coordination is explicit – someone tells everyone else what to do.

The hypothesis is that some tasks are better tackled by the market, and some tasks are better tackled by central planning, where the main “cost function” differentiating between the two cases is the overhead of coordination – if a task admits an efficient coordination structure, it is best tackled by a centrally-planned group. If communication overhead is too high, the market might be a more efficient mechanism.

If this hypothesis holds, then, because organizations themselves participate in the market, market pressure would force the best boundaries between central-planned and market-coordinated worlds. That is, if two firms A and B, together are more efficient than a single firm C in a particular domain, A and B will win over C. Conversely, if a single unified firm is expected to function better than two distinct ones, the one firm will emerge. On the margin, market-based coordination is exactly as efficient as central planning.

In this sense, the market is a gradient descent for finding the tipping point between coordination overhead and economy of scale.

Not sure I buy this though! This model seems to predict that all firms should converge to roughly the same size across some metric, but I am not sure I am seeing this. Firms like Apple or Microsoft seem to scale a lot in terms of the variety of things they do. Firms like (insert your country’s largest grocery store chain here) scale a lot in terms of the number of humans involved in an organisation.

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