Tag Archives: The Nature of the Firm

What Does Steve Jobs Show Us About Central Planning, Democracy, and Occupy Wall Street?

Karl Smith playfully suggests that it is ironic that Steve Jobs has so many fans among Austrian economists:

Apple was principally the complete opposite of the decentralized local-knowledge driven catallaxy that Austrian’s trumpet. It was a highly centralized, tightly controlled integrated company that managed every step of the process from design to retailing.

…Apple seemed to operate on the basis of “Five Year Plans” in which the Politburo decided what the future was going to look like and did what was necessary to bring it into being.

This is exactly what is supposed to not work, yet it worked spectacularly.

I am not an Austrian, but I do have a certain fondness for Hayek. I also believe that Steve Jobs is about as close to a Randian hero as can be expected outside of a novel. But contra Karl, I don’t think there is any tension here. In fact, I think a Hayekian (and Alchianian) view of competition can help us better understand why Steve Jobs was so great, and Steve Jobs can show us why in politics central planning, democracy, and voice-based political reforms are doomed to mediocrity or failure.

As a preliminary, let’s get out of the way the fact that it is well understood by Austrians and their fellow-travelers that central planning will always exist in a market economy. Coase’s The Nature of the Firm makes exactly this point. Firms are islands of command and control in a sea of free exchange. The exact boundaries of the firm in a market economy depend on transaction costs and the costs associated with central direction of resources. Hayek also articulates this in his most popular article, The Use of Knowledge in Society. The question is not whether planning will be done, but who is to do the planning?

Readers may be less familiar with what I will call the Hayek-Alchian view of competition. In “The Meaning of Competition,” an essay in Individualism and Economic Order, Hayek argues that “competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis” (p. 94). Armen Alchian takes this further in his 1950 article, Uncertainty, Evolution, and Economic Theory. Alchian models the economy as an environment that selects practices for survival on the basis of positive or negative profits. It’s not firms’ motivation that matters; it is results. This evolution-based account is necessarily more dynamic than the profit-maximizing (motivation-driven) model that economists usually adopt.

Framed in this way, we can now ask the important question: Is Apple successful because it was big and centrally directed, or is it big and centrally directed because it was successful? From a Hayek-Alchian perspective, the answer is clearly the latter. Having a Randian hero centrally direct a lot of resources is not, in spite of Apple’s story, a recipe for success. Instead, following a recipe for success will result in a lot of resources to direct. Finding a recipe for success, not accumulating the resources to direct, is the hard part. That is why we need competition.

And that is why Steve Jobs was great. He had a recipe for success, a vision that worked, and he fought relentlessly for it. It could have been luck; an implication of Alchian’s view is that “[e]ven in a world of stupid men there would still be profits” (p. 213). But I don’t think it was pure luck. Here’s to the crazy ones.

The fact that Steve Jobs centrally directed billions of dollars of resources well does not mean that central planning has much hope in our political context. States do not face the market test, or if they do, it is on large time scales that make evolution toward relatively efficient forms of organization too slow to be useful.

However, if states did face the market test, I think I would be happy to live under the central planning of a Steve Jobs figure. Let a thousand nations bloom, let governance firms enter and exit, let customers migrate between jurisdictions easily. I think under these conditions, central planning would “work,” not in the sense that it would be 100 percent efficient, but that it would discover the recipes for the kinds of political products we all want to buy.

This is the biggest problem, in my view, with democratic political reform. Whether it’s the Tea Party or Occupy Wall Street, most reformers think things will get better if only their voices are heard more clearly. That is a pitiful, static, zero-sum conception of progress. What we really need are institutions that subject entire governments to Hayek-Alchian competition. When we have that, I think we’ll all be happy with centrally planned politics, but central planning won’t deserve the credit; the competitive process will.