Does Management Science Have Much to Say that Economics Doesn’t Know?

I’ve just recently finished reading The Future of Work by Thomas W. Malone for the conference on the firm that Peter Boettke and I are attending tomorrow. Malone is a professor of management at the MIT Sloan School of Management and the Founder and Director of the MIT Center for Coordination Science (CCS).

The book deals with the way many firms (but not all) could and should be organized in the future. The basic idea is that more decentralized, market-like structures should be used within firms when it makes sense. Organizations should shift from the ‘command-and-control’ to a ‘coordinate-and-cultivate’ type of management.

While I am very interested in studies about firm structure (having myself done a bit of work on the subject), I often find books written with a management perspective frustrating. It is true that Malone offers an interesting framework in which he advises managers to start thinking in a different way. To make a firm more successful, he explains, managers should relinquish some of their prerogatives and let more market-oriented systems take place. This is difficult to do for most people because of the need to be in control and the idea that management power comes from the command-and-control aspect of the job.

At a fundamental level, there is not much new in this book. A lot has been written on firms and internal markets for a while (see for instance the work of Cowen and Parker on market-based management). Moreover, my frustration as an economist comes from the lack of intellectual framework. At the end of the day, it is not clear, in the book, why one should decentralize.

Austrian economists on the other hand have, to my knowledge, the best explanation: planned orders (firms) are limited in their growth by knowledge problems. In other words, the double Hayekian knowledge problem limits the possibilities for management to expand the firm’s activities without accessing knowledge that is not under its control (because most of the time it doesn’t even exist). In order to do so, the firm structure must be changed and adapted in a way that promotes entrepreneurial discovery.

If you read between the lines, you will find references to this Austrian explanation in Malone’s book (for instance on p. 93 where Malone explains that freelancers must be like entrepreneurs or on p. 165 where he states that no one at the top can ever know enough). However, the book is full of assertions that most economists would find unsubstantiated. For instance, Malone has a romanticized view of democracy and how it can be used in firms (chap. 5). He barely mentions the drawbacks of voting systems (contrary to what Malone thinks it is not true that democracy forces people to do things for the overall good) and he asserts that it is, somehow, an intermediary step between command-and-control and the market. Moreover, while he proposes decentralization, he offers little in the way of explaining how control will take place. Indeed, it is great to give incentives to people, but self-interest rules, and aligning incentives (personal and organizational) is crucial for the firm survival.

Malone offers many interesting examples and has indeed done a lot of research on the subject. The book is good for managers who have little knowledge of these issues and need guidance. However, like a lot of work in the management literature, it is poor on the ‘why’. This tells me that even at MIT (and at CCS) the focus of managerial studies is not the same as that of economics. In some ways, it is simply because they are interested in the ‘ought’, when economists are interested in the ‘is’. Still, it seems to me that economics has more to offer than management science to explain the inner world of firms.

Comments

[Eric H]

I've offered my observations on the Lean or Just-In-Time management revolution at the links below (or look for the articles "Kaizen, learning, and coordination" and "Is Lean Production Hayekian?"

http://www.zianet.com/ehusman/weblog/2005/10/is-lean-production-hayekian.html
http://www.zianet.com/ehusman/weblog/2005/12/kaizen-learning-and-coordination_07.html

I certainly think there is room for exploration in the Lean and other management material for economic analysis, and for investigation of why some systems work better than others in economics. The firm tends to be treated as a given, a black box, but all firms are not equal. This is surprising, given that not a few economists have noted that management or organization is as important an input as the others (raw materials, capital, land, etc.). My attention in this regard has been drawn by Oliver Williamson and NIE, but I haven't read much of it.

[Pablo H.]

You might be interested in this upcoming event:

https://www.kmcluster.com/nyc/PM/PM.htm

What is the conference you are going to tomorrow?

[Naveen]

Economics is a system-level science, and management is an actor-level subject. It maybe a tad unfair to compare. I am more interested in the following, in the time since economics has evolved, is there anything that economics can learn from business practices? What about the priorities of a firm? Yes, I do know Austrian school is much more management-oriented (its focus on entrepreneurship)than the rest of economics.

[Lab_Frog]

Does the book address the fact that while the lower workers may have better knowledge, the senior executive may have superior intelligence and/or charisma/contacts? This trade-off becomes more important in organizations where the boss actually gets to the top through merit, and is also limited by the amount of experimenting one person can do, but it is still important to note.