Do firms plan?

When uncertainty is present and the task of deciding what to do and how to do it takes the ascendancy over that of execution, the internal organization of the productive group is no longer a matter of indifference or a mechanical detail. Centralization of this deciding and controlling function is imperative, a process of “cephalization”, such as has taken place in the evolution of organic life, is inevitable, and for the same reasons as in the case of biological evolution.

There is no reason why a polycentric order in which each element is guided only by rules and receives no orders from a centre should not be capable of bringing about as complex and apparently as “purposive” an adaptation to circumstances as could be produced in a system where a part is set aside to preform such an order on an analogue or model before it is put into execution by the larger structure. In so far as the self-organizing forces of a structure as a whole lead at once to the right kind of action (or to tentative actions which can be retracted before too much harm is done) such a single-state order need not be inferior to a hierarchic one in which the whole merely carries out what has first been tried out in a part. Such a non-hierarchic order dispenses with the necessity of first communicating all the information on which its several elements act to a common centre and conceivably may make the use of more information possible than could be transmitted to, and digested by, a centre.

Abstract

The late F. A. Hayek is remembered for the argument that the decentralized price system has enormous advantages over planned systems in the critical areas of information transmission and the use of knowledge. In many minds, the recent fall of the Soviet-style economies in Eastern Europe has decisively made that case. But not all are persuaded. The model of central planning that originally impressed Lenin—the modern business corporation—remains in many minds a formidable piece of empirical evidence in favor of the possibility and desirability of centralized administrative control. This paper argues that Hayek's theory of spontaneous order can in fact include the case of such apparently purposive and extramarket forms as the business firm. It picks up a number of suggestions in Hayek's evolutionary theory of social institutions and uses them to draw a picture of the firm that is somewhat different from what one finds on the easel of neoclassical transaction-cost analysis. In the Hayekian picture, firms and markets are both systems of rules of conduct. And both are systems for economizing on knowledge in the face of economic change, albeit quite different kinds of knowledge and change. In the end, the firm is not a model for political planning for one very simple reason: the firm does not plan.