Finally, we can consider the implications of thetheory for economic policy. Insofar as economic policy is directed toward influencingthe behavior of business firms, it seems reasonable that a behavioraltheory of the firm might cast some light on policy alternatives. With theappropriate cautions, we think it does. As in the case of other problemsconsidered in this chapter, the main cautions stem from the incomplete nature of our present knowledge.
Control of firms through policy action. Short-run economicpolicy can impinge on an adaptive, problem-solving business organization inthree main ways: (1) Policy decisions can change the routine inputs tostandard decision rules. Decisions can be modified more or lessautomatically by modifying the data fed into the rules. (2) Public policy can createa problem for the firm. Failure of the firm to achieve some goal canbe induced by public action. (3) Economic policy can modify theattributes of potential solutions to potential problems. New alternatives can beadded to the search list or the attributes of existing alternatives can bemodified.
Manipulating firms by changing the inputs to routine decisionrules is so common we scarcely are aware of it as a tool for policy making.Changes in accounting or tax rules, product specifications, workregulations, and some kinds of minor taxes are examples of inputs that are almost automatically coded in the organization’s language and fed intoits decision rules. So long as the resulting modifications in the behavior ofthe firm (in interaction with the behavior of the external environment) donot result in goal failure, changes are induced almost withoutawareness on the part of the organization. Such changes can be made easily becausethe organization typically has a set of goals that can be met by morethan one “solution.” Any shift from one feasible solution toanother — especially when it can be presented as a technical adjustment in low-levelclassificatory rules — is likely to pass virtually unnoticed.
Manipulating firms by forcing failure on some goal is typical ofsome major policy efforts. An external, explicit constraint on costs,prices, profits, sales, production policy, or inventory policy, forexample, would -if severe enough — clearly induce failure for an organizationhaving the general characteristics we have imputed to business firms. Thefailure would, in turn, clearly stimulate search for a new solution to theproblem. The policy problem is to induce failure in such a way as to directsearch toward a socially desirable solution.
Manipulating firms by modifying attributes of potentialsolutions to some problem that led the firm to consider capital alternatives tothe use of labor. A direct change in the cost of labor, on the other hand,would be more likely to produce a goal failure and search for an alternativesolution. If no other solution (e.g., a price increase, decrease in slack)were discovered first, the firm might turn to substitution of capital.In this specific case, and in the case of virtually any policywe can think of, the impact of the policy depends on such factors as:
The type of manipulation it attempts toaccomplish.
The extent to which the organization to be manipulateddeals routinely with the variables being modified externally.
The extent to which organizational problems can be solvedby reducing internal slack.
The standard problem-solving and search rules used by the organization.
These factors represent a set of intervening mechanismsbetween economic policy and the results of such policy.
Anti-trust policy. In a similar way, it seems clear that wecannot really deal effectively with the problems of anti-trust policywithout more explicit attention to the procedures, motivations, and conflicts ofthe modern business firm. We have argued that the business firm willattempt to avoid uncertainty in its environment by developing informationsystems that permit the exchange of information on price, product changes,and so forth. Current concepts of anti-trust policy, on the other hand,are directed toward enforcing competition by enforcing uncertainty, byrestricting the exchange of information. The resulting strains are described byHazard:
To those who labor in the system, a philosophy which makesthe good society depend upon blind competition carried on in ignorance ofmarket facts and in disregard of the profit which, and which alone, cangive the business institution permanence — such a philosophy seemsirresponsible. Such men find themselves pressed on the one hand by the dogma:Compete yourself out of profits. On the other hand, they are pressed toconserve the business, to make it grow, from peace to war, from old styles tonew styles, from obsolete technology to advanced technology. The businessmandoes not understand why his quest for certainty is wrong, why the dogmaof competition should be pressed so far as to make a guessing game ofthe system.
In principle, anti-trust policy can deal with the pressurestoward uncertainty avoidance in four different ways: (1) Make itimpossible to avoid uncertainty by creating an environment in which the bestimagination and most compelling motivations will not suffice to eliminate asignificant some problem that led the firm to consider capital alternatives tothe use of labor. A direct change in the cost of labor, on the other hand,would be more likely to produce a goal failure and search for an alternativesolution. If no other solution (e.g., a price increase, decrease in slack)were discovered first, the firm might turn to substitution of capital.In this specific case, and in the case of virtually any policywe can think of, the impact of the policy depends on such factors as:
The type of manipulation it attempts toaccomplish.
The extent to which the organization to be manipulateddeals routinely with the variables being modified externally.
The extent to which organizational problems can be solvedby reducing internal slack.
The standard problem-solving and search rules used by the organization.
These factors represent a set of intervening mechanismsbetween economic policy and the results of such policy.
Anti-trust policy. In a similar way, it seems clear that wecannot really deal effectively with the problems of anti-trust policywithout more explicit attention to the procedures, motivations, and conflicts ofthe modern business firm. We have argued that the business firm willattempt to avoid uncertainty in its environment by developing informationsystems that permit the exchange of information on price, product changes,and so forth. Current concepts of anti-trust policy, on the other hand,are directed toward enforcing competition by enforcing uncertainty, byrestricting the exchange of information. The resulting strains are described byHazard:
To those who labor in the system, a philosophy which makesthe good society depend upon blind competition carried on in ignorance ofmarket facts and in disregard of the profit which, and which alone, cangive the business institution permanence — such a philosophy seemsirresponsible. Such men find themselves pressed on the one hand by the dogma:Compete yourself out of profits. On the other hand, they are pressed toconserve the business, to make it grow, from peace to war, from old styles tonew styles, from obsolete technology to advanced technology. The businessmandoes not understand why his quest for certainty is wrong, why the dogmaof competition should be pressed so far as to make a guessing game ofthe system.
In principle, anti-trust policy can deal with the pressurestoward uncertainty avoidance in four different ways: (1) Make itimpossible to avoid uncertainty by creating an environment in which the bestimagination and most compelling motivations will not suffice to eliminate asignificant part of the uncertainty. (2) Restrict by legal fiat the use of anydevice for avoiding uncertainty. (3) Encourage the development of devicesfor avoiding uncertainty that do not involve the exchange ofinformation or collusion. (4) Change the internal structure and motivations in thefirm that lead toward avoiding uncertainty.
The first two procedures are typical of current techniques.Either we attempt to make information exchange hopelessly complicated by populating the industry with many firms or we attempt to outlaw variousforms of information systems. Quite aside from other consequences (e.g.,on productive efficiency), both procedures have some treadmillfeatures to them. The law seems to stay at most a half-step behind theingenuity of its objects. Consider, for example, what would be involved if wereally wanted to restrict interfirm information flow as it now exists. Wewould be required to force the modification of financial statements sothat only limited information on costs and performance of firms is available.We would have to prohibit trade association activity designed tostandardize accounting methods, operating procedures, and record keeping. Wewould have to outlaw the information brokerage functions of customers,and so on. As the quotation from Hazard suggests, the legal constraintsstimulate search for alternative procedures for avoiding uncertainty. Thatsearch is usually successful and the procedures discovered tend to be at mostonly slightly less objectionable than the procedures prohibited by thelaw.
Perhaps this is the best we can do. The legal system has beenpursuing the perversities and ingenuity of man for many years in manydifferent areas with only moderate success. However, we think it may bepossible to explore new alternatives as we improve our understanding ofthe decision process of the firm. Suppose, for example, that thepressure toward collusion among firms is really (as we have suggested) a pressuretoward avoiding uncertainty. Can we develop procedures that will permitthe firm substantially to avoid uncertainty without avoidingcompetition? Two possibilities suggest themselves. First, we might improvepredictive devices. We have suggested that many of the procedures adopted byfirms stem from the unreliability associated with current forecastingtechniques. A firm that had a good predictive model of pricing behavior by its competitors would hardly need to obtain additional direct informationabout that firm’s pricing intentions. Second, we might stimulate thedevelopment of uncertainty buffers of organizational slack. As B.Naslund and A. Whinston have pointed out to us, organizational slack can play an importantrole in permitting the organization to deal with uncertainty. A firm thatcan absorb the consequences of uncertainty in slack does not need otherdevices for controlling its environment. Procedures of this sort may wellhave side consequences that are unfortunate. For example, it is not clearthat we would be any better off if firms could accurately predict behavior than we are if they freely exchange information. At least they have the merit of attempting to channel a pressure from the firm into socially acceptable activities rather than simply trying to constrain the pressure by legislation.
All of these policy efforts accept as given the uncertainty avoidance motivation of the firm. As we indicated earlier, a final procedure that in principle would work is the modification of the motivation. Because we see only dimly what lies behind the characteristic behavior of the firm and understand only partly the learning processes within the firm, we cannot articulate a serious policy proposal for changing the behavior pattern. In the long run, however, improvements in anti-trust policy probably depend more on such an approach than on the others we have discussed.
Source: Skyttner Lars (2006), General Systems Theory: Problems, Perspectives, Practice, Wspc, 2nd Edition.