Archive for  April 2017

Home / April 2017
2 Posts

Corporations are rather interesting institutions.  At least in the United States, Australia, and the United Kingdom, these institutions are legal fictions.  They are considered to be people even though they are not.  Unlike people, they have the unique ability to live indefinitely.  In practice, they do not.  There are several contenders for the oldest corporation in the world.  If we do not tightly hold to the idea that it needs to be a limited liability company, then we can take the rest of the world into account.  There are few that would contend to be as old as Islam, the current oldest contender is on Wikipedia claiming to be started in 578 AD.  There are 4 in the world from the 700s, 3 from 800, etc.  The evidence seems to show that despite their theoretical ability to live forever, they rarely do.  What are the feedback mechanisms that cause an institution with theoretically indefinite longevity to stop?

 

Much like the death of a human, a business may only be declared dead after long after the things that caused it to die have moved on.  All people are considered dead after they have been brain dead for a sufficient amount of time, but the cause of that may be trauma, infection, exsanguination, etc, that starts much farther away.  Like person, a business can be declared ‘dead’ when it no longer makes a profit/sustained operating at a loss for such a long time that it is declared to be insolvent.  Much like physicians we need to come up with some, admittedly arbitrary boundaries/typologies for how this can happen (for another look see Porter’s Five Forces, but note that the consulting firm he started was bought out after consulting to Muammar Qaddafi, so I think it is appropriate to weigh up the regulatory bit more than he did).  

  • Regulatory: A shift of one of the bigger/deeper institutions which changes taxes/fees to such an extent that you no longer have a profit margin
  • Suppliers: They charge more than anyone in the market can charge with the required markup to remain solvent
  • Consumers: Shift in demand for what you produce.  Consumers no longer demand whatever the institution makes, or there are good substitutes, and it is not able to shift rapidly enough to make other things that the consumer would like
  • Competitors: New/more productive competition for what you already produce
    • Economies of Scale: Being subscale in a world of giants
    • Diseconomies of Scale: Being slow and huge in a world of relatively modestly sized entities

 

There are a lot of feedback mechanisms here.  Most of these mechanisms will operate without any intervention by me, or anyone.  No one cries about the fate of the wheelwrights who used to be so valuable for ensuring that wheels were straight and true.  The world simply moved on, and no amount of effort by someone inside of this industry could have made it otherwise. There are other feedback mechanisms which are simply tragic.  There are fewer and fewer genuine differences between the cars that we drive.  For 99% of the time, we drive on good highways in moderate temperatures, at moderate speeds, and literally almost any modern vehicle will serve that purpose.  We may become infatuated with a given because of a particularly effective advertising campaign, but the functional difference is minimal, and most of us will never use all of the features in our owner’s manuals.  That one company cannot change fast enough to accommodate some minor consumer taste, and has so encumbered itself with debt that it becomes insolvent is truly tragic.  We do not end up with much better cars, or more of them, and many of the people who are unemployed in this process will simply go to work for the former competitor. This could be most accurately described as friction and heat in the economy.  Needed entropy, but not celebrated by anyone. Likewise, I personally think that diseconomies of scale are pointless, it is tragic that some of our largest corporations become so internally sclerotic that they require management consultants to come in and break down the internal institutional barriers.  This is often the result of individuals optimizing for their own needs instead of optimizing for the needs of the company.  These people are like parasites on the host company.  The company can continue with some of them, but eventually, there are so many of them that it can no longer carry them. Unfortunately, most of the time, like the poor ants that are convinced by this parasitic butterfly that the butterfly larvae is one of theirs, these corporations are often convinced that these parasites are their own, and they go to the ground protecting their big pay packages.  My personal opinion on which mechanisms are effective and not is pretty inconsequential.  My question in this post, as in the past few is, are there any homeostatic mechanisms that are missing or need some bolstering to be effective.

 

To answer question of whether there are mechanisms missing, we must first establish just why corporations are important.  Herein, I am going to use a broad definition of corporations that encapsulates liability companies (both public and private), nonprofits, social enterprises, partnerships and fusions thereof.  The key question in my mind is ‘do they produce goods or services that people are willing to pay for.’  I am not concerned if the people willing to pay are the recipients of the good/service.  For instance, hospitals are paid by a combination of insurance/government/philanthropy with very little paid by the recipient of the care in most cases.  In my definition, they would still be called ‘corporations’ though they may be for profit, not for profit, foundation-owned, government owned, etc. The question of what the ‘right’ corporate structure is was covered in a previous post.  This casts a rather wide net, so wide, in fact that people may say that it even covers government and religions.  On the first point, governments, it does not, because people are compelled to pay their taxes, some may willingly/joyfully do so, but I see the threat of jail as a sign that many people are not ‘willing.’ To the second point, religions, there is some merit, especially for religions like scientology, here I will only state that I have covered them earlier, and will leave the ecclesiastical components to one side.  There will be some religious organizations, like the Knights of Columbus which I have not defined as either religious or corporation.  For the purposes of this, I will leave their corporate or religious status ambiguous, as it is not core to this piece of work.

 

So now that I have defined what, for the purpose of this writing, corporations are, I can state why they are important.  Quite simply they fill some of the material and social needs that we have.  We as individuals could certainly fill some of these needs, for ourselves, and even trade with one another in our capacities as sole proprietors, but to achieve some cost savings, we must band together and specialize.  Even in ancient times, people found that they needed to trade for what they were ill-suited to produce.  Stone-age tools have been found thousands of miles away from their quarry sites because people traded to get them. Most people are also risk averse, that is, they feel losses more acutely than gains. Corporations allow us to spread these potential losses across many individuals, and makes them liable only to the extent that they are willing to invest.  This is institution is really rather ingenious.  It is not something that we reflect on often, but few, if any of the people who created the Model T Ford are still around, but unique systems that it put in place to make cars more efficiently than the competition, the unique absolution of risk that it provided despite the recalls that have happened over its history, and the flow of dividend and interest payments that it has provided to the limited-liability investors is really unique.  Without the existence of something like a Ford, every individual on an assembly line would need to contract with every other individual from every erstwhile ‘department’ to ensure that they are getting their due.  Cross-contracts with procurement, sales, post-sales support, marketing, and bankers. Such a web of contracts is obviously impractical.  It is remarkable that we have created this uniquely-flexible form of organization which allows for in-group cooperation, and out group competition on a grand, but limited (that is non-militant) scope.  Filling people’s material wants for things that they can in fact purchase more of, now that’s an important goal.  Compare this to governments where you can’t purchase any more clean air, the government regulates that for everyone equally, the same with your share of national security.

 

So is there anything missing in the feedback structure for corporations?  Is there some needed feedback loop that I could create, or one that I could bolster?  They already have a great deal of feedback from suppliers, competitors, consumers and regulators. I can think of only one thing, and it lies on the seem of religion and corporations.  It echos what John Kenneth Galbraith said in his affluent society book.  He brought up that corporations, and the current production system more generally, creates its own demand.  That is, it is not as though our G ‘needs’, ‘wants’, and mere ‘desires’ are fixes.  By nearly any standard, the lives that we lead today are more opulent than the lives that our ancestors led, but we are collectively not satisfied.  At least part of this lack of satisfaction is the result of our feedback that we obtain from the media around us. As I mentioned in my post ‘Enough’ I could find almost no limit to the amount that people seem to want.  At least part of the responsibility here needs to be laid at the feet of corporations which continually advertise the next model of everything that we own.  To me, there seems to be no feedback mechanism at all which says “what you have is sufficient.” At the next deeper layer of institution, the governmental level, I have seen no mainstream side of politics say that GDP is anything more than a useful convenience, and that we might want to question what level of consumption, exports, government spending, and investment are enough. Ultimately, this will bleed back to both the regulatory, and the consumer preferences which bound the corporation’s growth.

 

Now to the next important question of this series.  To the extent that this bolster is missing, what can I do to provide this feedback.  How much of a difference am I likely to make in this?  The current advertising industry is ~1% of global production, or ~$700B.  It seems unlikely that I am going to be able to provide much of an impact against this tune of consumption, that said, if I am one of the few voices doing it, then perhaps I can make a disproportionately large impact.  I just watched a movie, Minimalism, that I will not recommend because it lacked a lot of the needed storyline and post-production to make it a compelling documentary.  The movie followed two individuals who started the site ‘minimalism’ around on their book tour, and explored a few different branches of minimalism.  The reason I think it is pretty instructive is that if I had tried to create a documentary of myself and one of my friends talking about our jobs, then we would probably not get much air time.  These two created a pretty low-quality documentary, that didn’t do much other than follow them around their new lives.  There was such a yearning for this message that they were clearly able to get a camera crew, producer, distributor, etc together to create and launch this film.  Like value investors, they are running to where everyone else is not, and finding interesting things there.  With this in mind, I think that it is likely that I could sway a few people to move in a direction that is uncommon while the people at the top management consulting firms are desperately trying to raise their voice above the crowd and give the latest trick that executives will be unlikely to remember.  I don’t currently have any type of baseline estimate of how many minds my writing/conversations/speaking on this topic will change, but it is something that I can certainly collect data on in my blog.  I can see how many people’s minds my post ‘enough’ changes by adding a survey to the end of it, and seeing if that does, in fact, sway more people than other posts.  I could then change my writing focus to include more or less topics in this vein.  At this point, I don’t think it will be a lot of people.  I have had just over 3200 visitors to this site in the last 6 months.  Most of those spend more than a minute on the site, which indicates that they are indeed reading.  Of those, only 55 have gone to the ‘enough’ page.  Of those 39 have left after that page.  It is possible that given the long scroll dimensions on the page, I have had more readers of that page, nearly 700 people don’t click through to anything beyond the landing page.  I’ll assume that the proportion of views on enough is close to the amount of space that it has on the homepage, or 10 articles.  That will increase the viewership to 125.  If I assume a rather arbitrary idea-conversion rate of 10% then that’s 12.5 people’s minds that have been changed based on what I have written.  That’s not bad for a few conversations that I was interested in anyways and a few hours of writing.  

 

I will put that in as my line-in-the-sand ~12.5 people’s minds converted about how much they need for perhaps five hours of effort.  Is it worth doing. I believe so. Can I make a difference? Probably more of a difference than I can make in the military.

 

Interesting stuff since the last post

Finance/Econ

  • Nothing this time

Giving

  • Sometimes I get yanked back to my ‘old life’ on active duty.  Will went to the Infantry Officer’s Course with me, and was killed while I was in Helmand Province.  Another Marine who went to the Merchant Marine Academy with him sent me a note saying that they are trying to erect a memorial for him on the campus.

MISC

  • Hillbilly Elegy: A Memoir of a Family and Culture in Crisis: A simply fascinating read, especially when coupled with the book American Nations that I mentioned a while ago.  I can really relate to the Marine Corps components.  Oddly, though I didn’t grow up with tremendous material wealth, the cultural baggage that he talks about did not extend to my part of Wisconsin. Even with all of our similarities, the worlds we came from in America are different. He set up a funding site here. I do not know what the right answer is here.  There are memorials all over Australia to remind how many people died in WWI and WWII, that can be useful to remind us just what we should want to avoid, but part of these memorials commemorate the duty that someone did to their country, and that doesn’t much help the most disadvantaged people on the world, just looking to fill the bottom of Maslow’s hierarchy.  Of I am to donate, should it be to this?

Please, tell me what you thought before today this, and let me know if this changed your mind.