Markets inside the organization

By | August 12, 2012

There’s a double standard in the rhetoric around markets that’s always intrigued me:

  1. Free markets are the best way to organize society
  2. Central planning and command leadership is the best way to organize large organizations such as corporations and government

The first claim is regularly heard in political discourse, while the second is rarely made openly, but is instead implied by the status quo. The double standard comes from the fact that absent some clear distinction, if market-based solutions are the best approach to organizing society at large, they ought also to be the best approach to organizing large organizations. Worse, the first argument is most commonly heard from people established in positions of power within some centrally planned organization. Given that, it’s very hard to hear this as anything other than hypocrisy designed to maintain power and wealth.

This issue is not unknown to economists. This afternoon, I read Yanis Varoufakis discussing the issue in the context of Valve, a game company that uses a radically different management structure to most companies that is arguably much closer to the philosophic ideals behind free markets. He describes the situation as follows:

Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!

The full article is a little long, and could use a little editing, but really interesting, particularly if you’re interested, as I am, in how to build organizations that can attract good people to work on interesting consulting jobs and projects in an open and distributed manner.

Read the article: Why Valve? Or, what do we need corporations for and how does Valve’s management structure fit into today’s corporate world?