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:
  • 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.

Natural benefits

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.

Natural limits

There are limits on these benefits:

  • Individual self-interest: 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 and complexity - a natural trade-off : There is a geometric relationship between number of components and their possible configuration. The larger the firm the greater opportunity to wring economies from its scale, but there are inflection points. As soon as a firm is justified in deploying resources solely to lever its scale, greater complexity is assured. This is the scale paradox: 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.

The horribly public interior monologue of the corporate person

Unlike a real person, a corporation’s interior monologue is not private. Nor is it tactful or discreet. It is tactless and verbose comprising self-interested individuals shouting at the same time, adding each other to conversations they don’t care to be a part of. Joel Bakan says a corporation is like a psychopath. It might be run by them – that’s entirely plausible – but in its own personality it is more like a paranoid schizophrenic. In the analog world this was copeable; in this age of infinite information it has proven to be a far greater bane than anyone realised. Everything is discoverable; and like all communications that can be pulled out of context, inevitably it looks worse in hindsight than it did when it was written down.

There is a case that the law of privilege needs to be entirely re-thought for the machine age to recognise that a corporation's interior monologue should be allowed to be as private as an individual’s: judicial proclivities have been heading in the other direction[1]. This disincentivises the free expression of ideas and concerns within an organisation, which cannot be a good thing.

Other themes

  • Firms as the vessel for the gene – an extended phenotype for the individual
  • Firms as individual responsibility expungers.

See also

References

  1. Three Rivers No. 5, and Serious Fraud Office v Eurasian Natural Resources Corporation though more recent decisions are stepping back from this somewhat.