8 Feb 2011

The Company -- The Review

This short (190pp) well-written history of the company (from 3,000 BC to present) provides an interesting overview of the evolution of an institution responsible for enriching our lives.*

The book gets into important questions:
  • Where is the line between the corporation and market (Coase 1937)?
  • Why do corporations see social responsibility as profitable (Ford's $5/day wage, etc.)?
  • How do we regulate the tension between shareholders and managers (the principal-agent problem)?
The authors, like me, agree with Friedman's prescription: Companies exist to maximize profits within a clear and fair legal framework (watch the video), and this book highlights how that framework has changed over time, as the East Indian company has lost its power to rule India, and English and American merchants lost their power to own and trade slaves.

The key theme in this book is how companies evolve in response to opportunities in technology, markets and consumer demand. Why do companies evolve so quickly to give us what we want? Because markets reward those who do the most good (quality goods and services at low prices) for the most people.

That leads us to an interesting comparison: why are governments less nimble at giving us what we want? First (and legitimately), because they provide communal goods that are complicated to finance and create. Second (and here's where governments overreach), because they provide private goods (healthcare, education, water service) as monopolists without competition to "customers" who cannot easily leave the market.

The lesson -- to me -- is not that we need governments to behave more like companies. Governments need to get out of a lot of activities where companies (or individuals!) would do a better job.

Assuming such a fantastic, wealth- and happiness-enhancing event should come to pass, then what would make governments improve their basic services (from monetary policy to defense to the environment)? More competition from other governments. How is that possible? Give every human a second passport, so that they can easily live in another country.

I've had this idea for a long time (and I have two passports, so I can live in the US plus any of 27 EU countries), and this book reminded me of it. (It's also known as Tiebout migration.) I can't think of a single politician worldwide that would approve of the idea (of losing a captive audience), but I reckon that a LOT of citizens would love the opportunity to leave their failure of a state for opportunity elsewhere.**

Bottom Line: Companies make it easier for us to work together and provide services that improve our lives. I give this book FIVE STARS for explaining how we got the companies that we have.

* Some people are suspicious or hostile to companies, contrasting them with some romantic vision of a charitable organization that picks up your kids from school and serves organic food to starving peasants with a side of educational enlightenment. They are deluded. In a comparison between "the state" and "the company," companies are better 95% of the time. First, because companies do not have the legal power to kill and punish;*** second, because they acquire customers and employees on a voluntary basis, while competing with other companies and opportunities.

** Yes, I'd open the borders -- but not the welfare system -- to non-criminal migrants.

*** I see the corporate "right of free speech" to bribe US politicians as an extension of political corruption. No such right (as far as I know) exists for non-US companies. OTOH, bribes are still tax-deductible in some countries. In others (e.g., Russia and China), it's hard to tell where the State ends and companies begin.


Eric said...

On a related note is the article "Welcome to the Machine" in National Review (December 2010 I think) that lays out a compelling reason why companies do many things better than government. The bottom line is the same as yours--for many services, companies have to adapt rapidly to changing customer preferences (Ben and Jerry do not make Rainbow Crunch any more) while governments don't.

Jay said...

Many excellent points.

Kohlberg's Theory of Moral Develpoment http://psychology.about.com/od/developmentalpsychology/a/kohlberg.htm(Level 3) leads to conclusions that borders sould be open and countries compete, but all political discussions I have ever heard focus on Level 1 and Level 2 arguments.

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