I/O, continued. Business management

Book 4, Chapter 12:

§1. The first step in expanding a business is hiring managers to handle logistics, thereby leaving “specialists” to focus on producing goods and services. Teachers, for example, have administrative staff to arrange classrooms, collect fees from students, etc.

§2. These managers (qua entrepreneurs) bear risk, provide capital and earn profits in proportion to their skill at matching producers with customers, or supply and demand.

§3. Marshall suggests, for example, the building contractor as a middleman who adds more value than a homeowner by reducing waste and confusion. A real estate developer, likewise, adds even more value by operating at a larger scale.

§4. Larger scales are not always better. In producing clothing or shoes, it may be better to concentrate production in a large factory or outsource to small home producers. Workers, likewise, can be better or worse off relative to home producers, depending on wage guarantees, competition over piece-rates, etc.

§5. Managers must understand things as well as employees. Differing mixes of these skills lead to different paths to success or failure.

§6. Although the sons of businessmen (Marshall writes in an age when women did not lead firms) learn business at the dinner table, they might prefer social or academic careers or living off their father’s work. Thus, it may be better to replace a founding father with professional managers.

§7. Manager-owners often find good replacements among their staff. In some cases, a qualified assistant can become a partner by marrying the owner’s daughter (Marshall comments approvingly on the hopes this path gives to many talented but underprivileged youth). Businesses run by equal partners with different skills can also be productive.

§8. Joint stock companies allow for a division of labor among passive investors, active managers and directors who oversee managers on behalf of shareholders.

§9. The managers of joint stock companies might not work as hard as they should for shareholders, a Principal-Agent dilemma (the term dates from the 1970s) that also arises when politicians put themselves before citizens.

§10. In co-operatives, employees share ownership, profits and decisions. This “perfect middle” will not work if employees do not trust each other, shirk in their duties or disagree on the value of each contribution.

§11. Business growth is not usually held back by a lack of capital (banks are eager lenders) but a dearth of talented, experienced and wise founders with the right combination of Geld, Geduld, Genie und Glück (gold, patience, genius and luck). Successful managers sometimes start on the shop floor, sometimes in the owner’s nursery.

§12. Good managers will accrue capital, market share and profits at the expense of bad managers over time.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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