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I need a little help and hope that you can provide it. I've had a thought which I haven't the time or will to research. It's a question that goes like this: If an underlying premise of capitalism is that the greatest good results from the collision of individual self-interests (i.e., firms acting in their own self-interest – for profit) is acceptable as a truth on the macro level, does the same thing apply at the micro level? In other words, at the firm level does the greatest good result from the collision of individual self-interest?
As I recall, whether its Mill, Smith, or Locke, we accept that the rationality of the firm makes its interests primarily profit, growth, efficiency, etc: making the best use of capital to create wealth. As long as this premise doesn’t change, capitalism appears to hold. Should the primary rationale of the firm be different – to do good things, to distribute rather than accumulate wealth (so it can’t be reused as capital to generate more wealth) – the capitalist logic begins to falter, I think. Be that as it may, let's say that on the whole capitalism works as intended.
That's at a macro (firm) level. But does it hold at the personal level inside a firm? Could the combination of competing self-interests of stakeholders (shareholders, directors, executives, employees) result in the greatest good for the firm? I can think of relatively trite and exceedingly hollow answers both for and against. On the one hand, yes: the allocation of capital within a firm will be made to the self-interest that shows best utility for the capital. So it holds. On the other hand, no: self-interests that are rewarded are not genuine individual self-interests but the interests of the firm (e.g., an initiative to create a new line of business) brought forth by an individual. The true self-interest of the individual within a firm has to be presumed to be greater wealth, status, and/or power which are the rewards for best defending the interests of the firm. What’s left out of the equation is self-interests that are not oriented around those drivers, such as meaning. So it doesn't really hold except as a second order effect.
Scratch the surface of these two answers – and so many more – and there are only more presumptions of rationality, none of which to my knowledge (which is, admittedly, limited) are proven out. Adam Smith did raise the matter of the principle v. the agent and divergent interests consistent with those raised above. But, I'm relatively sure that A. Smith didn't contemplate mega corporations of the like that bestride the world today.
The question fascinates me (and don't get me wrong, I don’t stay awake at night wondering) because of the fairly extensive study I’ve done of chaos and complexity theories. One of the features of chaotic and complex systems is that they are recursive. Like a Mandelbrot, every feature is itself made of the same shape and so it goes ad infinitum. That is, every time you zoom in on a part of the shape, the same shape appears in your view. There is good cause to believe that the principles of non-linearity, etc. being defined within chaos and complexity science have application in business and economics. That is, just as the more recent “Law of Increasing Returns” questions the fundamental economic wisdom of the Law of Diminishing Returns, in certain circumstances, other bedrock presumptions about business and economics may be worth re-evaluating.
It also fascinates me because it ought to call into question the corporate entity of the firm – particularly the large, publicly traded, multi-national share capital corporation. That is, if the individual stakeholders and their own self-interests are not fundamental (except in a second order way) to the mind of the organization, then the organization is its own consciousness (in a peculiar and, undoubtedly misused sense of the word). What I'm trying to say is that if capitalism doesn’t hold within the firm then the firm has to be outside the system rules. If that's the case, there is something to study because it’s an interesting circumstance in the complexity science context. There's a lot more to this business of being outside the rules of the system yet being part of the system, but I've gone on quite long enough already.
So, to the question: Does anybody know whether this has been studied and addressed somewhere? Can you point to the literature?
Posted by Grayson at January 25, 2005 06:21 PM