Organization Theory [Paperback]

It isn't a criticism of someone to suggest they have been overly thorough in their analysis. Having said that, Carson perhaps didn't need to give so much documentation in describing the harmful effects and mass waste of hierarchical management, and could have only used one or two examples and then referred to other ones online, otherwise the book tends to drag on for the first two thirds. Although I felt it was dragging on, I'm glad I didn't skip anything in the end.

In his usual manner he takes the vulgar libertarian right to task, even daring to tread firmly on the feet of Mises due to his inconsistencies and occasional falling into neoclassical traps. My favourite section is later on when he speaks of the dissolution of the state and defends the gradualist position against the disappointingly stubborn and potentially harmful measures proposed by those who advocate immediate abolition at all opportunities.

For those who feel as though an egalitarian, environmentally friendly and sustainable future is either an impossibility or something incompatible with individual liberty, this book provides optimism and shows that such a future is, not only happening as we speak, but is vastly becoming the only solution as (to paraphrase Benjamin Tucker) the "Great Mechanisim devours mankind" evermore.

Long, but brilliant. Carson's Magnum Opus perhaps, better than his earlier "studies in mutualist political economy". Now if only he'd gain more bloody recognition!

I will begin my review by stating its main conclusions. These are that Kevin Carson has written one of the most significant books the libertarian movement has seen in many years. I do not agree with everything he says here. I do not suppose any libertarian will unreservedly accept what is said. Even so, I doubt if there is a libertarian who can read this book and not, in some degree, have his vision of a free society enriched and even transformed by it.

Summarising an argument that is worked out over more than six hundred pages is not easy. However, Mr Carson begins by observing that, while economic theory seeks to analyse the behaviour of individuals and small groups within a market system, the economic reality is a world dominated by large corporations within which prices are largely administered and there is an absence of competition.

He asks why this should be so. Why is there so much substitution of hierarchy for individual contracts? The standard answer, provided by Ronald Coase, among others, is that large firms are more efficient than small firms. The further the division of labour is carried, the larger the potential economies of scale. In an open market, however, the division of labour involves transaction costs - these being the costs of negotiating exchanges between many different suppliers of goods and services. Within a firm, these costs are not abolished, but are much reduced. Therefore, a firm will expand to the point where the cost of organising one more transaction within itself is equal to the cost of letting that transaction be made on the open market.

According to this analysis, firms grow large so far as their lower internal transaction costs make them more efficient than their smaller competitors. And there is an obvious temptation to regard size in a market economy as evidence of greater efficiency.

Against this analysis and its conclusions, Mr Carson argues that the point at which internal transaction costs become equal to the costs of transactions via the market has been artificially raised by state intervention. There are few objective benefits in size. Lowest long run average cost is often achieved by rather small scale production methods. There is little evidence that large factories are more efficient than small factories. There is little evidence that large firms are more innovative than small firms. Anyone who looks inside a large firm will see information and management and resource allocation problems similar to those described by Hayek and von Mises in their work on socialist calculation.

For two hundred years, economists have been content to repeat and elaborate on the example of the pin factory described by Adam Smith - in which the operations of making a pin are divided among many workers, thereby raising average output. In fact, these efficiencies can be realised just as easily by dividing the operations so that individual workers perform them one after the other.

If large firms predominate, it is not because they are the outcome of free market forces. Rather, they are called into being by systematic distortions of the market that amount to a subsidy on size. These distortions include the following:

First, there is subsidised transport and communication infrastructure. According to Mr Carson,

[i]t's... important to remember that whatever reductions in unit production cost results from internal economies of large-scale production is to some extent offset by the dis-economies of large-scale distribution.[p.34]

The British and American railway networks, for example, were built in the nineteenth century by private companies. However, investment was only made profitable by compulsory purchase laws, or actual grants of land. Without this help, the returns on investment - never very exciting in any event - would in at least most cases have been negative. Once built, though, the railways in both countries enabled the growth of national wholesale and retail markets that could now be served by large firms. The modern road networks were mostly paid for out of taxes, or with loans services by the taxpayers. They did for the concentration of enterprise in the twentieth century what the railways had done in the nineteenth. Distribution costs have thereby been externalised on other users or on the taxpayers.

Again, there is the building of ports and blue water naval defences and the forced opening of foreign markets. Without the very costly work of the British and American navies over the past few hundred years, it would not have become so cheap and convenient to carry goods about the world - a carrying trade that also widens markets and thereby subsidises the emergence of the large firms best able to benefit. There are foreign policies that make other countries more stable markets for large firms. How the Americans organised their southern neighbours for the convenience of the United Fruit Company needs no more than a mention. There is also the hugely expensive oil-based Middle Eastern policies of the British and American Governments during the past hundred years. Even with all the taxes heaped on it, petrol may have been made far cheaper than it would have been in the absence of government intervention. Perhaps, indeed, it is the artificial cheapness of oil that has shaped the whole structure of our civilisation by crowding out smaller scale alternatives.

It may be argued that subsidising transport tends to create large positive externalities. Perhaps it does. Nevertheless, the most visible benefits - being those enjoyed by large firms - have always been smaller than the full costs. As Mr Carson says,

If production on the scale promoted by infrastructure subsidies were actually efficient enough to compensate for real distribution costs, the manufacturers would have presented enough effective demand for such long-distance shipping at actual costs to pay for it without government intervention. ...[a]n apparent `efficiency' that presents a positive ledger balance only by shifting and concealing real costs, is really no `efficiency' at all. Costs can be shifted, but they cannot be destroyed.[p.69]

The same can be said of every communications network from national post offices to the Internet. They widen markets at far less than full cost to those who benefit from it. In particular, the satellite-based telephone and Internet revolution of the past few decades has allowed production and distribution right across the world to be organised from a single location.

Second, there are patents and copyrights. In a natural order - that is, in a society without a state - property rights in intangible items would be at least difficult to have recognised. The reason is that, while only one person can possess my notebook computer - and to take it away from me would be an obvious injustice, easily prevented or rectified - this review can be reproduced without limit. Similarly, the computer itself can be copied. In neither case is anyone deprived of his own possession. Intellectual property rights are essentially artificial property rights. They do not derive from scarcity, but from the creation of scarcity. They are essentially grants of monopoly privilege. They can only be created by the State. They can only be enforced by limiting what people can do with physical objects they have bought.

The claim that rights to intellectual property encourage the creation of intellectual property is unfounded. There is much evidence that firms would continue to develop new products in the absence of patent protection. There are many other ways of rewarding artistic creation than copyright. What does seem to be the case, however, is that patents are routinely used to hinder innovation; and the sharing of patents between large firms has the effect of shutting smaller competitors out of the market. And payments for the use of intellectual property enter very heavily into the supply cost of nearly all goods and services. This is particularly the case with pharmaceuticals, where patents serve less to encourage innovation than to increase prices to dozens of times their natural level.

Third, there is the cartelisation of costs brought about by laws prescribing minimum standards of product quality or of fair trading or of payment and treatment of workers. When, for example, cigarette manufacturers are stopped from advertising, there is the same effect on cost and profit as if the companies had agreed among themselves to stop advertising. Mr Carson says:

A regulation, in essence, is a state-enforced cartel in which the members agree to cease competition in a particular area of quality or safety, and instead agree on a uniform standard which they establish through the state. And unlike private cartels, which are unstable, no member can seek an advantage by defecting.[p.80]

Taxes have a similar effect. Value added tax, for example, is applied whenever money changes hands between businesses - above a low turnover threshold, that is. The effect of this is to raise the costs of transactions via the market, without touching those taking place within a firm.

Fourth, there are the incorporation laws. These allow a firm to be defined as an artificial person, with most of the civil rights and obligations of a natural person. One of these obligations is the same unlimited liability for debt as a sole trader has. However, while the firm has unlimited liability, the liability of its owners is limited to the extent of their investment. This privilege alone allows incorporated firms to raise large amounts of capital on the financial markets. Yet, while the shareholders theoretically own them, such firms in practice are the property of their managers, who feel none of the moral responsibility that comes with ownership. Read more ›