MARKETS AND THE LIMITATION OF POWER. Kids, in the John Kay article that I linked to yesterday, he identifies three elements in the success of markets as compared to centralized systems: (1) allocation of resources through prices; (2) innovation; and (3) diffusing economic and political power. Kay says that points (2) and (3) are relatively neglected. I touched on (2) yesterday. With respect to (3), Kay says that market economies are better at disposing of failed ideas, pointing out that “Honest feedback is not welcome in large bureaucracies.” I will add three related points.First, two (or more) private bureaucracies give a choice. Imagine if you could go to a competing Department of Motor Vehicles (to use the standard example). Second, sometimes inefficient bureaucracies go out of business. Third, a private bureaucracy can be sued for damages.
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Fourth, managers of private bureaucracies are frequently self-serving. They tell their shareholders and boards of directors that they have to provide the best salaries and benefits to keep the best people (themselves). This race to the top is poorly correlated with corporate performance. What Kay says about “large bureaucracies” applies equally well to large private bureaucracies.
The vaunted “shareholder democracy” is not particularly effectual at assuring sound management, since the “shareholders” are themselves most often large institutions beset with the same orthodoxies as the managers they suppoedly regulate.
Dealing with a bureaucrat is much the same, whether the bureaucracy is private or public. My personal experience is that private bureaucracies are harder to deal with. I could give examples … .
Shareholder democracy is loathed by regulators and judges. Nonprofits sometimes even set up contested elections for directorships by nominating more candidates than there are vacancies. Federal securities law essentially prevents contested elections for directorships unless a sell-funded group tries for a takeover.
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