Wednesday, May 20, 2009

Action, Individual and Organization

I originally wrote this entry on October 9, 2004, and published it on

Scottish Philosopher and Christian thinker, John MacMurray argued in his seminal work, The Self As Agent (1957), for the centrality of action to our existence. "Action," for MacMurray, "is choice."

Time, and indeed action, of which it is the form, cannot be object for a subject. It can only be experienced in action. In such experience of time, the characteristic structure is a dinstinction between past and future. When the agent moves, his action continues. At any point in this continuing movement he is aware of the distinction between past and future. The past is what has been done; the future what has not been done but remains to do. That part of the movement which is past is already actual, the part which is future is not actual but only possible. In general, therefore, the past is the field of actuality, the future the field of possibility. The present is simply the point of action . . .

In action, then, the Agent generates a past by actualizing a possibility. This 'generation', or 'bringing into existence', is pratical determination, and the actual is the determinate. To act, therefore, is to determine; and the Agent is the determiner . . . We may therefore define acting as determining the future. The past is then that which has been determined, and is, in consequence, completely determinate . ..

The Self As Agent (pp. 133-134)

What becomes to our propensity to act, i.e. to determine the future, when it comes to our activity within large, formal organizations?

Chester Barnard (The Functions of the Executive, 1938), writing at about the same period as MacMurray's philosophical musings sees "a need of action as a primary propensity and instinct" even when we are acting within organizations. The need for action extends beyond individuals to organizations (in which they have to organize themselves because of various limitations imposed on individuals in making choices through individual action).

. . . Correlative with this is the observation that enduring social contact, even when the object is exclusively social, seems generally impossible without activity. It will be generally noted that a purely passive or bovine kind of association among men is of short duration. They seem impelled to do something . . .

. . . Where the situation affects a number of persons simultaneously they are likely to do any sort of mad thing. The necessity for action where a group of persons is involved seems to be almost overwhelming. I think this necessity underlies such proverbs as 'Idle hands make mischief,' and I have no doubt that it may be the basis for a great deal of practice within armies.

The Functions of the Executive (pp. 117-118)

Organizations die if they cannot provide for purposeful and satisfying action of individuals, while guaranteeing a sense of choice-making which can only be authentic in local groupings.

In large organizations, the possibilities of participation increase with the greater possibilities offered for association and action. Returning to a concept of choice similar to MacMurray's, Barnard notes that this greater number of possibilities and also the conflict of obligtaions they accompany, "may induce a sort of paralysis of action through inability to make choice."

In short, we have a propensity to make a choice, to determine the future, through our actions, but in large organizations, such choice-making actions are often frustrated.

Situations that frustrate such choice-making and action-determintation, degrade our personalities and lead us to a state of being lost.

The activities of individuals necessarily take place within local immediate groups. The relation of a man to a large organization . . . is necessarily through those with whom he is in immediate contact. Social activities cannot be action at a distance . . . [This] justifies a statement made to me that comradeship is much more powerful than patriotism, etc., in the behavior of soldiers. The essential need of the individual is association, and that requires local activity or immediate interaction between individuals. Without it the man is lost. The willingness of men to endure onerous routine and dangerous tasks which they could avoid is explained by this necessity for action at all costs in order to maintain the sense of social integration.

The Functions of the Executive (119)

So, what is the upshot of all this philosophizing?

Action summarizes our being, and organization is often a necessity to take particular types of action. Local, (often informal) immediate groups within organizations function to limit and make more effective our action-choices whose frustration will put us in danger of becoming lost. We take on large, dangerous tasks not because of some large ideal but to ensure comradeship and local social cohesion.

How Many Nobel Laureates Does it Take?

I originally wrote this entry on October 9, 2004, and published it on

Some say the answer lies here.

Friday, May 08, 2009

Simple vs. Complex Organizations

I originally wrote this entry on September 28, 2004, and published it on

Simple facts are often quite difficult to recognize, remember or articulate. They just are true. So, for example, why do we work in teams? We don't really know. For many of us, it is just the way it is.

Earlier, I wrote about how Chester Barnard, father of modern organizational theory, draws a distinction between effectiveness and efficiency. Here, I will add a short note on how he draws the distinction between "simple" and "complex" organizations.

Barnard was very interested in how organizations actually formed. He gives examples of spontaneous organizations, where people get organized because of some accident. Any person in an urban area who has witnessed an open source conference, a disaster, a revolution, military action or occupation knows how spontaneous, simple organizations form to handle particular tasks unachievable as an individual. Such spontaneous organizations are usually of a small size.

The largest simple organization, according to Barnard, are probably orchestras and speaking forums where the audience and the speaker form, at least, a temporary organization. These large simple organizations, according to Barnard, share a common theme. They all imply a mostly unidirectional communication from the leader (conductor, speaker) to the rest of the members. They all involve well-understood, specialized symbolism, sometimes even a specialized language (e.g. musical notes, the conductor's movements, etc.).

In his 1938 book, The Functions of the Executive (Harvard University Press), Barnard writes

The clue to the structural requirements of large complex organizations lies in the reason for the limitations of the size of simple organizations. The limitations are inherent in the necessities of intercommunication. . . . [Communication] between persons as an essential element of cooperative systems; it is also the limiting factor in the size of simple organizations and, therefore, a dominant factor in the structure of complex organizations.

The key here is that Barnard sees the large, complex oragnization as a byproduct of the smaller, simpler organizations through growth, divisions and mergers. He also sees "intercommunication" as the limiting constraint on the size of simple organizations, a limiting constraint that also plays the most significant role in determining the structure of the complex organizations such as a corporation.

I wonder what role blogs will play in complex organizations. Corporate blogs could be a centrifugal and gravitational force that help an organization to reconfigure and hold together spontaneously and continuously, but that view seems like an exaggerated one. I guess we will have to wait and see how it all unfolds.

Thursday, May 07, 2009

Puzzling on the Value of Bundles

Measuring value of a product bundle, particularly when the bundle contains non-equal or potentially complementary lots, has puzzled economists and business strategists alike. I don't claim to have solved the puzzle but I have puzzled on some other aspects of the problem in a short three page briefing I wrote a few weekends ago.

Thursday, March 26, 2009

Markets and Hierarchies, and Software

I originally wrote this entry on September 16, 2004, and published it on

Some in the open source community, who may have had a chance to glance through The Cathedral and the Bazaar, will most probably miss that the contrast between "Markets" and "Hierarchies" is nothing new, at least to the institutional and transaction-cost economists. (To be fair, Eric Raymond does briefly mention some papers based on Ronald Coase's work, including some by Harold Demsetz.)

My own understanding of the topic is based on Oliver Williamson's works on Markets and Hierarchies. [I can only say that I was extremely lucky to have a chance to learn more about his ideas in the course of an independent study with Williamson while I was at Berkeley earlier this year. It was a very rewarding experience.]

In fact, I'd very much like to see more applications of Williamson's ideas to Open Source economics and to software economics in general.

In short, there's a place for hierachies and there's a place for markets. As the economy evolves, relations of exchange could be brought into the market or into hierarchies. What matters is transaction costs. Whichever exhange relationship (market, hybrid or hierarchy) reduces transaction costs will be taken up. These ideas are also echoed by Douglass C. North in his investigation of how economic structures evolve.

Only the Resourceful Survive

I originally wrote this entry on September 15, 2004, and published it on

I drove my daughters back from El Camino Youth Symphony violin practice tonight and was wondering why we could not simply and conveniently ride a train home.

We were driving in my (still quite inefficient) compact European car, and with two additional passengers, I had the luxury of driving in the carpool lane. I don't often get to ride in the carpool lane. So, I was quite surprised when I kept passing the many, many SUVs in the non-carpool lanes, each with a single driver inside.

What an odd sight!

My immediate thought was whether we could claim to have an efficient economic organization in the Bay Area? I don't think so. (Given equal purchasing power, it still takes me less time and effort, per transaction, to buy a certain quantity of yogurt in Tehran, where I visit my grandmother, than it does in San Jose, where I live with my family.)

Note that I'm not criticizing SUV owners, drivers or buyers. People often own and use things that they believe they need. In fact, I constantly toy with the idea of owning an SUV. (It could make life much easier.) What I'm questioning is the organizational aspects that help drive and accentuate such needs at a larger level.

According to Chester Barnard, an organization has to be efficient or effective to survive. The more an organization lasts, the more efficient and effective it will have to be to continue surviving. Does Barnard's maxim hold about national or regional economies? It seems to me that it does to a very significant degree.

In the long run, only the resourceful organizations will survive. The wasteful ones are most likely to disappear, and disappear they will quite quickly.

Effectiveness vs. Efficiency--Why Organizations Persist?

I originally wrote this entry on September 13, 2004, and published it on

I've written about Chester Barnard before. His 1938 book, The Functions of the Executive (Harvard University Press), remains one of the most important business and institutional economics classics. It has been reprinted some 30 times since its initial publication.

Here's what Barnard says about the persistence of organizations.

The persistence of cooperation depends upon two conditions: (a) its effectiveness; and (b) its efficiency. Effectiveness relates to the accomplishment of the cooperative purpose, which is social and non-personal in character. Efficiency relates to the satisfaction of individual motives, and is personal in character. The test of effectiveness is the accomplishment of a common purpose or purposes; effectiveness can be measured. The test of efficiency is the eliciting of sufficient individual wills to cooperate.

As Barnard seems to imply, efficiency is harder to measure than effectiveness. Let's give an exmaple.

Say, 10 people get together to push a large spherical rock up a hill. Effectiveness of their organized activity can be determined by seeing whether the rock makes it to the top. The efficiency of their activity will depend on their optimal expenditure of energy for pushing the rock up the hill. How do we know who's pushing more, or less, optimally? A measurement of effort which does not poison cooperative relatioships is quite hard. The only way people are motivated to do what they are doing is if they are satisfied with the results as it relates to them personally. As Barnard has noted, the survival of an organization not only depends on the environment or context of its activity but also on factors "which relate to the creation or distribution of satisfactions among individuals" since such satisfactions will determine motivation and efficiency of the cooperative activity.

When Industries Explode into Revolutions

I have always wondered how technical (not scientific) revolutions come about and join with market forces to create a bonanza of activity in a particular industry.

We have seen it happen with Java in the Software and Internet industries.

Now, we are witnessing similar processes in other industries.

Take the case of flat panel displays. This is a case where consumer demand, technology, globalization and bold planning are meeting to create fantastic industrial giants.

Here are some interesting facts from a recent Wall Street Journal article by Evan Ramstad.

  • AU Optronics Corp. is the third largest producer of flat-panel, LCD screens after Samsung Electronics Co. and LG Philips LCD of South Korea. AU is pouring $2.3 billion in a factory to be built in Taiwan. To shorten the construction time for the factory by 40 days, they paid $500,000 to have a 210-ton machine delivered from its manufacturer in a Soviet-built, six-engine Antonov 225 plane. It was the only plane large enough to carry the machine to its destination. The machine was built in Germany by Applied Films Corp., a U.S. firm that specializes in glass and metal coatings.

  • Revenues in flat-panels is going to increase to $60 billion this year, 40% above last year.

  • Ordinary TVs cost manufacturers less than $5 / sq. inch of screen size. LCD's cost $20 to $30 / sq. inch of screen size. Plasma screens cost around $20 / sq. inch.

  • Most of the research and development for flat panel screens is now being done in the Asian countries where the manufacturers are based: Korea, Taiwan, China and Japan.

  • Here's a couple of very interesting paragraphs from the WSJ story:

The company [AU] has built each of its five latest plants faster than the previous one. It's now pushing its contractors to the limit: AU's new factory has 2.4 million square feet of clean room, where manufacturing takes place, compared with 500,000 square feet at Intel Corp.'s largest chip-manufacturing plant. Handed a deadline of just seven months, general contractor Fu Tsu Construction Co. began construction late last year even before the plant's architects were done. "When we are still working on the first floor, they are still designing the second floor," says Lin Chih-sheng, a Fu Tsu director.

Fu Tsu lined up three sources of steel because the project consumed 140,000 tons of it. That's nearly twice as much of it as Taipei 101, the world's tallest skyscraper that opened last year in the capital city. The plant and other flat-screen facilities being built in Taiwan began consuming so much concrete that a sand shortage arose.

Now, there's an industry exploding into a revolution ! ! !

To Share or Not to Share (II)

I originally wrote this entry on August 27, 2004, and published it on

The vastly prolific Judge Richard Posner's musings regarding a recent court decision on file-sharing ("In the Wake of Grokster") has led to a torrent of great commentary by his readers.

In their commentary, Luka, Ernest Miller and Matthew Saroff have made interesting technical points to demonstrate the serious challenges police crackdown faces as a prevention tool, and I certainly agree with Luka's critique of the ideal-world equilibrium analysis offered by James McDonnell.

McDonnell claims that if file-sharing could be stamped out, the no-file-sharing world would be possible to maintain through minimal enforcement because such a world would be one of the equilibrium worlds (that he postulates). Luka notes how the diversity and growth of file-sharing alternatives make such ideal-world analysis less than satisfactory. He gives Orkut as one of the non-trivial examples.

Referring to unsuccessful prohibition attempts in history, Raoul and Doug Munger focus on the limits of enforcement in general. ("The RIAA has only sued 4000 people out of 60,000,000," writes Raoul. "It's a joke.")

In his original blog, Judge Posner has used the "expected utility" approach of the economists to analyze the ancillary effects of a recent DoJ crackdown on a file-sharing network. (I'm coining the phrase "expected utility" for explanatory purposes.) The "expected utility" approach says, basically, that economically rational agents will look at the probabilities of outcomes (will I get punished or not if I file share) and multiply these probabilities with the value of each outcome (the pain of getting arrested vs. the gain of thousands of more free songs) and determine the "expected" utility of some action.

On the limits of such "expected utility" analysis, see Richard Thaler's The Winner's Curse: Paradoxes and Anomalies of Economic Life, Chapter 6 (Princeton University Press, 1992). The point Thaler makes is that people do not always see decisions according to the "expected utility" approach. (I will say more on this in a separate log.)

. . . Thanks to honorable Judge Richard Posner for having started the dialog on Grokster. As a bystander, I thoroughly enjoyed the conversation as it unfolded.

Earlier, I'd given a quick review of reports on the Grokster case and pointed to the DoJ crackdown on a file-sharing network that followed, almost immediately.

Housing Market, Interest and Exchange Rates

I originally wrote this entry on August 26, 2004, and published it on

Shreedhar has written regarding his surprise at the unfathomable Bay Area housing market. He has noted wages and population moving in a direction that will lead to lower prices. Things are a bit more complicated, as research has shown.

Housing prices are determined by a number of factors, including wages, population growth (as Shreedhar has noted implicitly), interest rates, inventory, "production" (new houses), etc. When interest rates are low, housing market will move faster; when production or inventory is high, prices will be lower.

Historic prices, however, need to rise somewhat to provide an incentive for buying the house and also to help avoid defaults. If prices fall too sharply and too much, borrowers will go into default. This is not good for the borrowers. It's also not good for the banks or other creditors. At the moment, loans on houses form the largest volume of "fixed-income" debt paper (i.e. bonds) out there. So, on its own, any illiquidity in housing debt (bond) markets may have more influence on interest rates in the U.S. than government treasuries.

If bonds on loans become cheap, i.e. once default rises, interest rates will rise, too. However, high interest rates are not good for a sputtering economy because they make money too "slow" to come by. The only saving grace, I've read, is for the U.S. dollar to devalue even further against other currencies.

This could be good for companies such as Sun because of its large revenue footprint abroad, but it also may mean inflation if the U.S. becomes increasing more dependent on imports of basic goods. Any devaluation steps need to be taken very gradually.

Dying Culture

I originally wrote this entry on August 23, 2004, and published it on

Richard Posner, the honorable guest at Lessig Blog, has written a short piece about the Eldred decision. He is correct that Lawrence Lessig has "from time to time" self-flagellated about losing the Eldred decision at the Supreme Court. (See chapter 13 and 14 of Lessig's Free Culture.)

Frankly, I don't see anything dishonorable in feeling shame. Particularly when something happens on your watch, and Eldred did happen on Lessig's watch, shame is a noble feeling. It may have been better not to argue the case at all, as Lessig notes himself in his most recent book. So, I applaud Lessig for flagellating himself on this, at least for a while. In any case, he has now recorded his feelings in his book and can move on to more interesting stuff.

Now, let's stick to the actual issue Posner has mentioned.

First, I don't think anyone would argue with Posner when it comes to the importance of propertization as an incentive to the owner to conserve and nurture his or her property. In fact, it has been argued by many economists, including Nobel Economics Laureate Douglass North that secure propertization is essential to economic progress. (See here.) This has been well established by him and other economists who have written since the Second World War. (North has also made some other interesting, general points about the role of technology in economic development.)

Second, Posner is right when it comes to a relativistic interpretation of the "for limited Times" term in the Progress Clause of the Constitution. However, Lessig has also realized that fact. In his book, he has noted that insisting on a reasonable interpretation of "for Limited Times" in his arguments was not a winning strategy before the Court. Lessig says that he should have argued from the "Free Culture" point of view. In other words, he should have said that extending limited terms is harmful to basic freedoms in our culture. However, I think even that argument has some flaws in it. First of all, no culture is truly free. We all live with and are rooted in our pasts. If any institution in the U.S. government knows that fact well, it should be the Supreme Court. So, emphasis on "free," instead of on "roots" might not always work with the Court.

Last but not least, copyright term extension beyond a certain point, as Lessig has analyzed so skillfully, promotes the death of culture much more efficiently than it stifles free culture. (That is why I think Lessig should have chosen a different title for his book but it could have become too dramatic. I don't know?)

Death of culture through repeated copyright extensions going well beyond three or four generations happens in several essential ways.

  • Only "cultural" products for which current economic value can be extracted are protected and nurtured into prosperity.

  • With continuing copyright term extension, many pieces of potentially valuable cultural works that are not currently and commercially active remain silent and could be lost to history because it costs more to clarify their copyright status than can be earned by making them available to public, either directly or through "mixing" in other cultural products.

  • Continuing copyright term extensions also prevent active mixing of the past into the future. If copyrights are allowed to be extended beyond a certain point, going for more than three or four generations as the case may be, it becomes increasingly more problematic to do such cross-generational mixing of cultures beyond what is made available through commercially active culture. That's the true loss.

Sunday, March 22, 2009

Oil prices at the pump (in Iran)

I originally wrote this entry on August 17, 2004 and published it on

Gas pump on the Isfahan-Saveh road. July 2004.

The price, listed on this gasoline pump, is in Iranian Rials. In July 2004, when this picture was taken on the road from Isfahan to Saveh, 8600 Rials could be exchanged for about $1. The total price, seen in this picture, is for 5.07 liters. That's about 1 + 1/4 of gals for less than 50 cents.

As you can see, in Iran gasoline is priced sharply under the world markets. The social and economic reasons are subtle. In very brief terms, this is primarily a way for the government to subsidize the national economy. Other oil derivatives which require higher-level processing are traded at world market prices and are normally produced by companies listed on the Tehran Stock Exchange.