Tuesday, November 6, 2018

The Organization of Industry #1

The title is that of a seminal 1972 paper by English economist George B. Richardson. The entire text is here. It is also included in Richardson's book Information and Investment: A Study in the Working of the Competitive Economy  (Amazon link).

When Friedrich Hayek wrote about the spontaneous order of a market economy, his main concern was prices. He said that market prices help to guide and coordinate the actions of market participants. Richardson's view of coordination is more extensive.

"[C]o-ordination can be effected in three ways; by direction, by co-operation or through market transactions. Direction is employed when the activities are subject to a single control and fitted into one coherent plan. Thus where activities are to be co-ordinated by direction it is appropriate that they be consolidated in the sense of being undertaken jointly by one organisation. Co-ordination is achieved through co-operation when two or more independent organisations agree to match their related plans in advance. The institutional counterparts to this form of co-ordination are the complex patterns of co-operation and affiliation which theoretical formulations too often tend to ignore. And, finally, co-ordination may come about spontaneously through market transactions, without benefit of either direction or co-operation or indeed any purposeful intent, as an indirect consequence of successive interacting decisions taken in response to changing profit opportunities."

An example of such co-operative coordination is sub-contracting, such as when a manufacturer buys specialized parts from a supplier. The supplier learns in advance what specifications the parts must meet, and the supplier works to assure the specs are met.

Richardson's paper gives the British retailer Marks and Spencer as another example. "Not only do Marks and Spencer tell their suppliers how much they wish to buy from them, and thus promote a quantitative adjustment of supply to demand, they concern themselves equally with the specification and development of both processes and products. They decide, for example, the design of a garment, specify the cloth to be used and control the processes even to laying down the types of needles to be used in knitting and sewing. In the same way they co-operate with Ranks and Spillers in order to work out the best kind of flour for their cakes and do not neglect to specify the number of cherries and walnuts to go into them."

To further distinguish inter-firm co-operation from market transactions: "Where buyer and seller accept no obligation with respect to their future conduct, however loose and implicit the obligation might be, then cooperation does not take place and we can refer to a pure market transaction. Here there is no continuing association, no give and take, but an isolated act of purchase and sale such, for example, as takes place on an organised market for financial securities."

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