Firm - Risk Article
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Risk Anatomy™
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The firm as a a bulwark against the vicissitudes of the market
Individuals devote much of their energy in mitigating the conditions of the free market. This is our evolutionary advantage. We are social, hierarchical, political animals.
We self-organise into anti-competitive associations – call them cartels - of all kinds: Families, Clubs, Firms, Parties, Governments. These organisations are not run on laissez faire lines. That would defeat their very purpose: they are designed to mitigate against the horrors of the brutish market.
That is to say, the exact point of human organisation at any level is to undermine market equality, not to promote it.
- At the highest level there is a free market, but it operates between firms (or even Governments).As with any dynamic system it survives and thrives courtesy of tensions between:
- Government (cartel) and market (nature)
- Government (cartel) and market (nature)
- market (nature) and Firm (cartel)
- Firm (cartel) and individual (nature)
Somewhere within these tensions – in the breakdown between nomological machines, we find the phenomenon – maybe phenomena – of nonsense jobs.
The firm offers these benefits
- Scale: Economies of scale through leverage and continuity. this benefits the firm predominantly, not the individuals in it – so there’s a natural limit to how far this will be pushed.
- Responsibility diffusion: A medium for diluting, diffusing or eradicating personal liability for actions done through the offices of the firm, and for internal decisions made by the firm. This accrues exclusively to individuals, so a stronger evolutionary advantage to one that accrues to the firm itself.
There are limits on these benefits:
- Cross-cutting interpersonal relationships, good and bad, between individuals at the firm relative to respective positions in the firm’s hierarchy, between individuals at different firms etc.
- Scale opportunities have natural costs: The larger the firm the greater opportunity to wring economies from its scale, but there are inflection points. The point where the scale opportunities are large enough to require active management: that is, “passive” scale benefits, that flow from the simple fact of size (eg adding another user to a flat fee all-you-can-eat licence automatically reduces the per-user cost of the licence, without anyone having to do anything) run off at the point where one needs to diverting firm’s resources and personnel towards managing these efficiencies or manufacturing scale efficiencies that don’t arise by themselves (eg negotiating law firm panel arrangements, outsourcing, offshoring). As soon as a firm is justified in deploying resources solely to lever its scale, greater complexity is assured. It may engage management consultants, middle managers and eventually a chief operating officer. That unit (call it COO) itself can become so complex that opportunities arise to lever its scale. So consolidating all the diaspora of COO groups into a single function, distinct from operations and the main COO function, and now big enough to have its own COO function.
- 'Size/complexity trade-off' and the scale paradox: There is a geometric relationship between number of components and their possible configuration. The more configurations the more scope for complexity. The more complexity the more confusion. The more confusion the more scope for fear. The larger a firm gets, the more complex it becomes. A sole trader is salesman, receptionist, janitor, legal and operations. At a point it becomes necessary and desirable to hire dedicated personnel to carry out these roles. Some of these roles are risk-taking, revenue-generating roles. The rest are operational in nature (legal, operations, risk) and they are costs. These roles are incentivised by means of cost reduction not revenue generation.
Other themes
- Firms as the vessel for the gene – an extended phenotype for the individual
- Firms as individual responsibility expungers.