You might well have been able to make the same observation about the senior planning officials in Gosplan and the Soviet industrial ministries. The problem is that nobody’s “smart” and “competent” enough to administer a planned economy, and that’s what a corporation is. The question isn’t how “smart” or “competent” senior management is, but the nature of the information they act on given Hayekian information problems. More specifically, are they (as Kenneth Boulding said) in progressively more tangential contact with reality, the further up the hierarchy they are, until the guy at the top of the pyramid is living in a completely imaginary world based on information filtered from below. This is how hierarchies work—it’s what R.A. Wilson called the Snafu Principle.
We have such large organizations, so isolated from genuine market data, that nobody’s smart enough to run them. The solution is not to find the smartest guy you can to make CEO and put in charge of an enormous hierarchy. It’s to reshape organizations so that 1) information problems are reduced by putting authority in the hands of people who are dealing directly with the situation, and 2) agency problems are reduced by eliminating the conflict of interest involved in hierarchy as a result of the ability to externalize the costs of decisions on those below.
You might well have been able to make the same observation about the senior planning officials in Gosplan and the Soviet industrial ministries. The problem is that nobody’s “smart” and “competent” enough to administer a planned economy, and that’s what a corporation is. The question isn’t how “smart” or “competent” senior management is, but the nature of the information they act on given Hayekian information problems. More specifically, are they (as Kenneth Boulding said) in progressively more tangential contact with reality, the further up the hierarchy they are, until the guy at the top of the pyramid is living in a completely imaginary world based on information filtered from below. This is how hierarchies work—it’s what R.A. Wilson called the Snafu Principle.
We have such large organizations, so isolated from genuine market data, that nobody’s smart enough to run them. The solution is not to find the smartest guy you can to make CEO and put in charge of an enormous hierarchy. It’s to reshape organizations so that 1) information problems are reduced by putting authority in the hands of people who are dealing directly with the situation, and 2) agency problems are reduced by eliminating the conflict of interest involved in hierarchy as a result of the ability to externalize the costs of decisions on those below.