The skills of the businessman

Our primary purpose in this examination of individual skills has been to establish a useful starting point for the appraisal of the corre­ sponding issues in the case of the large, complex organization. Much of the discussion of “theory and realism” in the economic theory of the firm has, however, been implicitly or explicitly concerned with the case of the single proprietorship. The question of whether or in what sense the business firm can be said to maximize profits has for the most part been treated in the literature as equivalent to a ques­ tion about the decision-making skills of the proprietor.

The contributions of Machlup to the marginalist controversy of the forties, Friedman’s methodological essay (Friedman, 1953), and Machlup’s review of the issues in his presidential address of 1967 are the major papers that set forth the defense of the orthodox theory of the firm against critics who complained of its lack of realism. Although the scope and technical sophistication of orthodox theory have vastly increased during the more than three decades since the marginalist controversy, and although a number of contributions have been made to the discussions of the broader methodological issues involved, the main arguments in defense of doing economic theory in the orthodox style remain approximately where Friedman and Machlup left them. Or perhaps, indeed, there has been a retrogression-some contemporary theorists seem to operate on the basis of a methodological creed that is little more than a caricature of Friedman’s sophisticated and carefully hedged position. We there­ fore confine our review to the classic statements.

In the course of making their methodological points about why it is not worthwhile for economists to think concretely and in detail about  a  realistic  account  of  the  sources  of  business  behavior, Friedman and Machlup managed to say or imply a great deal about what such a realistic account would be like. Much of what they said can easily be translated into and summarized in the language that we have employed in this chapter. The following attempt at such a trans­ lation reveals a high degree of convergence between their perspec­ tive and ours.

An experienced businessman acting in the pursuit of pecuniary gain is an individual exercising a complex skill . As with any such skilt the pursuit of gain is based on tacit knowledge of relevant con­ ditions and involves at most subsidiary awareness of many of the de­ tails of the procedures being followed . The economic theorist’s ab­ stract account of business decision making is not to be confused with the businessman’s skills; it serves different purposes and those pur­ poses place a high premium on articulation. Clear articulation of his methods may be valueless, or even counterproductive, for the busi­ nessman. It is therefore quite illegitimate to seek to appraise the validity of the theoretical account of business decisions by asking businessmen whether their procedures match the theoretical con­ structs. Such a method founders first on the general observation that the possibilities for articulating the basis of high skill are limited; second, even if this fact were somehow of minimal importance in the specific context of business decision, there would be no reason to ex­ pect that the language chosen by the businessman to articulate his skill would be the language of economic theory. There is, after all, no reason to expect a bicyclist to be able to explain in the language of physics how he remains upright, but this does not imply that he usually falls over.

That the foregoing is a plausible encapsulation of many of the Friedman-Machlup points may be corroborated by the following specific references. In the context of his famous analogy between the businessman and the expert billiard player, Friedman remarked as follows: liThe billiard player, if asked how he decides where to hit the ball, may say that he ‘just figures it out’ but then also rubs a rabbit’s foot j ust to make sure; and the busin essman may well say that he prices at average cost, with of course some minor deviations when the market makes it necessary. The one statement is about as helpful as the other, and neither is a relevant test of the associated hypothesisll (Friedman, 1953, p. 22). Even more explicitly, Machlup wrote in 1946:  “Businessmen do not always ‘calculate’ before they make decisions, and they do not always I decide’ before they act. For they think that they know their business well enough without having to make repeated calculations; and their actions are frequently routine. But routine is based on principles which were once consid­ ered and decided upon and have then been frequently applied with decreasing need for conscious choices. The feeling that calculations are not always necessary is usually based upon an ability to size up a situation without reducing its dimensions to definite numerical val­ ues” (Machlup, 1946, pp. 524-525). Since driving an automobile has been prominent among our own examples of the exercise of individ­ ual skill, we acknowledge Machlup’s earlier treatment of the topic by quoting at some length from his well-known analogy between the theory of the maximizing firm and the II theory of overtaking” :

What sort of considerations are behind th e routine decision of the driver of an automobile to overtake a truck proceeding ahead of him at slower speed? What factors influence his decision? Assume that he is faced with the alter­ native of either slowing down and staying behind the truck or of passing it before a car which is approaching from the opposite direction will have reached the spot. As an experienced driver he somehow takes into account (a) the speed at which the truck is going, (b) the remaining distance between himself and the truck, (c) the speed at which he is proceeding, (d) the pos­ sible acceleration of his speed, (e) the distance between him and the car ap­ proaching from the opposite direction, (f) the speed at which that car is ap­ proaching, and p robably also the condition of the road (concrete or dirt, wet or dry, straight or winding, level or uphill), the degree of visibility (light or dark, clear or foggy), and the condition of the tires and brakes of his car, and- let us hope-his own condition (fresh or tired , sober or alcoholized) permitting him to judge the enumerated factors . Clearly, the driver of the au­ tomobile will not “measure” the variables; he will not “calculate” the time needed for the vehicles to cover the estimated distances at the estimated rates of speed; and, of course, none of the “estimates” will be expressed in numerical values. Even so, without measurements, numerical estimates or calculations,  he will in a routine way do the indicated “sizing-up” of the total situation. He will not break it down into its elements . Yet a “theory of overtaking” would have to include all these elements (and perhaps others besides) and would have to state how changes in any of the factors were likely to affect the  decisions or actions of the  driver.  The “extreme difficulty of calculating,” the fact that flit would be utterly i mpractical” to attempt to work out and ascertain the exact magnitudes of the variables which the theorist alleges to be significant, show merely that the explanation of an ac- . tion must often include steps of reasoning which  the  acting individual himself does not consciously perform (because the action has become ro utine) and which perhaps he would never be able to perform in scientific exactness (because  such  exactness  is  not necessary in everyday life) .

The  businessman  who  equates  marginal net revenue  productivity and marginal factor cost when he decides how many to employ need not engage in higher mathematics, geometry, or clairvoyance. Ordinarily he would not even consult with his accountant or efficiency expert in order to arrive at his decision; he would not make any tests or formal calculationsi he would sim-ply rely on his sense or his “feel” of the situation. There is nothing very exact about this sort of estimate. On the basis of hundreds of previous experiences of a si milar natu re the businessman would “just know,” in a vague and rough way, whether or not it would pay him to hi re m ore m en. (Machlup,1946, pp. 534-535)

It appears that it might be difficult for a disinterested judge to dis­ tinguish between the Friedman- Machlup perspective on the re­ alities of business decision making and our own. Some greater di­ vergence will appear as we develop our own argument further, but the paradox that has arisen here will by no means be resolved by that development alone. On the same stylized fact-“business decision making is the exercise of a skill comparable to other skills, such as driving a car or playing billiards” Friedman and Machlup built a defense for orthodox theory and we propose to build an alternative to that theory.

What is one to make of this? At a superficial level, the paradox is easily dealt with. The disagreement is not, indeed, about the stylized fact; it is about the arguments that link the fact to conclusions about the relative merits of its interpretation in orthodox or evolutionary theory. A full analysis and comparison of these linking arguments, as between orthodoxy and evolutionary theory, would be a major task. Much of this book is concerned with it, directly or indirectly. How­ ever, merely noting that the central problem is how to model skilled behavior opens the way for a substantial clarification of the issues. Orthodoxy treats the skillful behavior of the businessman as maxi­ mizing choice, and “choice” carries connotations of “deliberation.”

We, on the other hand, emphasize the automaticity of skillful behav­ior and the suppression of choice that this involves. In skillful behav­ ior, behavioral options are selected, but they are not deliberately chosen. This observation directs attention to the processes by which skills are learned, the preconditions for the effective exercise of skill, and the possibilities for gross error through automatic selection of the wrong option.

To identify skillful behavior with maximizing choice is an even larger step from the realities of skill. Skills are attributed to individu­ als largely on the basis of comparisons with other individuals who are less skilled or unskilled. Formal orthodox theory, on the other hand, does not rate solutions as maximizing because they are better than some other observed solutions, but because they are the best feasible solutions. It thus premises a standard of performance that is independent of the characteristics of performers; the attribution “skilled driver” involves no such premise. This observation points us toward the deeper problems involving the definition of the fea-sible set. What are the p ossibilities that a skillful performance makes the best of? Are the tacit skills of the d river overtaking a truck such as to make no-passing zones unnecessary or counterproductive? Do they warrant the practice of giving American drivers licenses to drive in England without a driving test? Are we entitled to doubt-as Machlup seems momentarily to doubt-that the typ ical driver ade­ quately assesses possible impairments of his own capacities?

Such questions have their parallels in the numerous policy issues that involve, in one way or another, the scope and quality of busi­ ness decision making. To assess business decision making as (merely) skillful is to recognize the potential significance of a number of questions that orthodoxy tends to ignore. Are market conditions the same as they have been? Is the range of technological options the same? If conditions have changed, are businessmen aware of that? Even if conditions have not changed, have businessmen experi­ mented enough with the available options? If the answers to such questions are in the negative, the observation that business decision making involves the exercise of skill is not entirely reassuring as to its likely quality. One may legitimately be concerned about problems analogous to the possibility that the American driver in England will seek to avoid the oncoming traffic by steering his car to the right.

Source: Nelson Richard R., Winter Sidney G. (1985), An Evolutionary Theory of Economic Change, Belknap Press: An Imprint of Harvard University Press.

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