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"Why Managers Still Matter"

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09/29/2014

Some Austrians and libertarians think that managerial hierarchies, even within fully private companies, are inherently inefficient (or, worse, the indirect result of government intervention). I think this view is mistaken, for a variety of reasons (see these links for some discussion). There is nothing inherently inefficient (or illegitimate) about managerial authority. Decentralized forms of organization offer many advantages -- effective use of Hayekian "tacit knowledge," strong performance incentives, the development of esprit de corps -- but there are drawbacks too. Under certain conditions, the appropriate use of managerial authority fosters better coordination, more timely responses, stronger incentive alignment, and better use of shared resources. (I need hardly mention that there is nothing "coercive" about voluntary agreements between employers and employees.) Nicolai Foss and I have an article in the current edition of the MIT Sloan Management Review, "Why Managers Still Matter," arguing that managerial authority still plays an important and valuable role, even in our knowledge-based, networked, Wikipedia-style, peer-to-peer economy. (The piece is firewalled but you can read it with free registration.) We write:

“Wikifying” the modern business has become a call to arms for some management scholars and pundits. As Tim Kastelle, a leading scholar on innovation management at the University of Queensland Business School in Australia, wrote: “It’s time to start reimagining management. Making everyone a chief is a good place to start.” Companies, some of which operate in very traditional market sectors, have been crowing for years about their systems for “managing without managers” and how market forces and well-designed incentives can help decentralize management and motivate employees to take the initiative. . . . From our perspective, the view that executive authority is increasingly passé is wrong. Indeed, we have found that it is essential in situations where (1) decisions are time-sensitive; (2) key knowledge is concentrated within the management team; and (3) there is need for internal coordination. . . . Such conditions are hallmarks of our networked, knowledge-intensive and hypercompetitive economy.

The article builds on earlier writings such as Nicolai's "Misesian Ownership and Coasian Authority in Hayekian Settings" (QJAE, 2001), my Capitalist and the Entrepreneur (2010, e.g., pp. 20-21), and our "Original and Derived Judgment" (Organization Studies, 2007). As we point out, all forms of organization have benefits and costs, and most firms feature a blend of "market" and "hierarchy," the exact mix varying with firm and market conditions. A vigorous embrace of free-market principles within the economy does not imply that private organizations must always be as decentralized, or "market-like," as possible.

Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

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