Innovation and AntiMarkets

We talk about capitalism as though it is one thing. The metaphor that is most often used by both its advocates and its detractors is that of the free market. A public space where buyers and sellers can trade in mutually enriching ways. And who doesn’t like freedom. It’s up there with motherhood and apple pie in the list of things that people like.

And there are some elements that do resemble that. The buying of company stocks and their derivatives are relatively transparent. When you go into a shop, you typically know how much things cost (unless its one of those backward countries where they don’t put taxes and surcharges on their price labels).

Alongside this narrative of free exchange is the narratives that the market drives innovation. If you come to market with a better or cheaper or even a completely new product then you will be justly rewarded. And that’s one of the reasons why CEO pay has gone up so much in the last 50 years. All that hard work innovating and making the world a better place should be rewarded. The annual reports and press releases are full of innovation.

On closer inspection, the narrative is less clear. Much economic activity does not occur in the public marketplace. The biggest cost to companies are typically their employees (somewhere between 40% and 80%). Yes, many of these jobs are advertised but the buying and selling of people’s time and expertise is a murky business. This is not a public marketplace. And much of what goes on in organisations is obscured with Non-Disclosure Agreements and contract terms that limit external speech. These organisations do not seem that free.

In her 2nd Tanner lecture, Elizabeth Anderson explicitly compares corporations to communist dictatorships.

The economic system of the modern workplace is communist, because the government—that is, the establishment—owns all the assets, and the top of the establishment hierarchy designs the production plan, which subordinates execute. ­There are no internal markets in the modern workplace. Indeed, the boundary of the firm is defined as the point at which markets end and authoritarian centralized planning and direction begin.

While Anderson specifically compares them to communism, these large organisations also resemble pre-modern institutions such as the Catholic Church or Imperial China or mercantile quasi-states like the British East India Company. McKinsey have been compared to the Jesuits or the Marines. Once you get past the macho bluster (exactly how useful are excel spreadsheets in a firefight?), there is validity in that comparison. Kings need Confessors in any age.

What defines the nature of an organisation is not whether it is owned by a few private individuals, a mass of stockholders, or a state. What matters is whether it can secure its survival. Once it has done so, it seeks to maintain that state of affairs for as long as it can. Organisations become self-perpetuating. James March would say that they move from Exploration to Exploitation.

A big part of that effort is in ensuring stability within and outside the organisation. Predictability is the most prized element of these organisations. Now it is fashionable to espouse innovation but the issue for the organisations is that would involve change - and that is inimical to what the organisation is now for.

Writing at the turn of the millenium, Manuel Da Landa drew on the work of historian Fernand Braudel’s notion of capitalism as a series of anti-markets.

Unlike theorists from the left and the right who believe capitalism developed through several stages, first being competitive and subservient to market forces and only later, in the twentieth century, becoming monopolistic, Braudel has shown with a wealth of historical evidence that as far back as the thirteenth century, and in all the centuries in between, capitalism has always engaged in anti-competitive practices, manipulating demand and supply in a variety of ways. Whenever large fortunes were made in foreign trade, wholesale, finance or large scale industry and agriculture, market forces were not acting on their own, and in some cases not acting at all. In short what Braudel shows is that we must sharply differentiate between the dynamics generated by many interacting small producers and traders (where automatic coordination via prices does occur), from the dynamics of a few big businesses (or oligopolies, to use the technical term), in which prices are increasingly replaced by commands as coordinating mechanisms, and spontaneous allocation by the market replaced with rigid planning by a managerial hierarchy.

Antimarkets seek monopoly and monopsony positions in their systems of exchange. Antimarkets have little interest in innovation unless they recognise that they face an existential threat. In an antimarket, the focus shifts inward to court politics and intrigue.

So what is an innovator to do? I suspect the answer must be to avoid antimarkets and to focus their efforts in places where exploration is valued more than exploitation. They definitely shouldn’t believe those annual reports and press releases.

And there is no shame in not wanting to do new things. There is no shame in wanting a predictable life. But there should be a little bit of shame in saying that you are one thing when you are something else entirely.