Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 1 Lecture II The Problem of Economic...

Lecture 2 – ECON.S-1620Prof. Charles MoranCopyright 2015

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Lecture II

The Problem of Economic Organization


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Economies

• Efficient use of resources– Best use

• Action Driven by efficiency

• Decisions: Rational Boundaries or Passion?

• Transaction Costs– Coordination Costs– Motivation Costs


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Coase

Background: Theory is an organizing principle for thought, research, discussion, common language…

Theory need be not “Correct or Incorrect”Note Demsetz for Class 3

GROUP DISCUSSION OF COASE ARTICLE• Group 1-This article is interesting only as part of

the history of Organizational Theory


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Coase Discussion• Group 2-This article was important in its

‘time’, but is largely irrelevant today.

• Group 3-This article is ‘cutting edge’ thinking with major implications and applications to management theory & practice today.

• Group 4-This article provides an intellectual framework & explains how that framework might frame our discussions in this course.


COASE

• Professor-By not considering the concepts in this article, the theory and practice of management cannot be effectively undertaken.

• Group 5-This article is misleading and express a contrary view that would be more appropriate for our discussions

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Coase (continued)

Outside The Firm – Price movements direct production – coordinated through a series of exchange transacti0ons on the “Market” (Explain sales at a financial loss)

Inside the Firm – The entrepreneur “coordinator” directs production by bringing into being a system of relationships (Efficient v. Market)

• Essential for tolerance of complexity?• Focus on “Efficiency” as a motivating force• A firm as a conglomerate of contracts

– Continuity – reduce complexity

• Impact of volatility and pace of change?


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A Conceptual Framework(Insight Into Markets and Organizations?)

Division of Labor

Specialization

Coordination

OrganizationMarket

Information


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A Conceptual Framework (Continued)

Issues:

• Price mechanism not sufficient to perform coordination function

• Organizations are formed to resolve information problems

• Technology facilities transparency of information – but individuals and organizations tend to hoard information for power and as a store of economic value (short life)

• Can we understand outsourcing in this context – Has information flow given us new control options?


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Efficient market is expected to allocate scarce resources

But: Do we need a more complex framework to understand valuation of and allocation of knowledge/information resources? (Intellectual Property, Communication and Analytical Tools, and Human Resources)

Any insights from behavioral finance?Any insights from financial crisis?

Markets


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Not a pure economic problem – Sociology, Psychology, Management, Political Science, Anthropology and other disciplines provide insights and analytical tools.

Qualitative and Quantitative Analysis

Data v. Implicit Insight re. Decisions

Markets (Continued)


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• Stagnation accelerated after 1950’s• Has technology reversed this?• Have we broken organizational gridlock?• Consider rise of small & fall of large organizations• Is group-work a solution? (anti-specialization)• Has outsourcing moved the organizational gridlock

to geographic areas willing to accept the problems?• Where is productivity headed?

The Pursuit of Productivity


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Consider:

1. The industrial age, specialization and labor unions put restrictions on individual choice as they facilitated higher performance (output). Note: Unions look to regain ‘power’

2. The service economy offers opportunities for individual skills and initiative

• Opportunity for controlling individual satisfaction (i.e. individual defines job/work)

The Pursuit of Productivity (Continued)


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3. Does this put the control of when and at what price goods and services will be exchanged in the hands of the knowledge worker? (Not unlike the historical craftsman)

4. Does the coordination problem take a primary significance?• Is industry responding with mass customization?• Does this lead to customer designed products and

services?- Dell - Unix -……(Autos, UPS.Parts, Amazon

The Pursuit of Productivity (Continued)


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• ORGANIZATIONS have used authority as a coordinating mechanism -- This becomes fuzzy as organization “stars” and “rain makers” are not the holders of authority on the organizational chart

• MARKETS have used a price mechanism – This becomes fuzzy with emotional or other ‘motivational’ decisions - Entrepreneurs?

Organizations


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• Dealer Markets – inventory• Auction Markets – match buyer/seller• Specialist/Market Maker – Hybrid• Electronic (Black Box Markets)

All serve purpose of moving asset from willing seller to willing buyer at an agreed price(value)

Multiple models (and Customized Modeling)

Can be practical and efficient

- Facilitated by technology

Financial Markets as an Example of Complexity


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What is Efficient Price for MBA?

Position

Financial Analyst at Consulting Firm

Fuzzy Job at .com with IPO Target -2 to 3 years

Your own business model to deliver service value to new MBA’s (Social Enterprise)

Compensation

$100,000+

$50,000 + Options

- 0 -

Must raise capital

Control

Ownership

Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 1 Lecture II The Problem of Economic...

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