15 May 2006


[M]ost firms are ephemeral. It is not immediately obvious that the real business world is like this, because we notice the firms that last, such as General Motors or Ford. But most do indeed go under (or get taken over) on a relatively short timescale. Of the largest 5000 US firms operating in 1982, for example, only 35 per cent still existed as independent entitites in 1996. There is a high 'turnover' of companies, which many economic theories of the firm do not acknowledge.

So why do firms fail? In [Robert] Axtell's model there is a typical trajectory. First, a new firm grows more or less exponentially over time as increasing returns cause workers to flock to it. But at some point the firm reches its peak, after which collapse is usually sudden and catastrophic. ... This collapse is a consequence of the firm's own success. Once it grows big enough, it becomes a haven for free-riders who capitalize on the efforts of others. So the firm becomes gradually riddled with slackers, until suddenly the other workers decide they have had enough and jump ship. (Note that firms fail in this model because the workers leave for better jobs, not because the market for their products disappears or because there is a terrible warehouse fire, or for any other reason.) Critical mass: how one thing leads to another, Philip Ball (page 333).
Some firms though are not allowed to fail. It's unfortunate that these are the ones whose remit is to solve our serious social and environmental problems. I refer of course to government agencies. However many slackers they employ, and however many diligent people leave them, these agencies are notoriously difficult to kill off.

So why not hand the solution of our social and environmental problems to the private sector? I don't mean letting private companies perform one or two processes previously done by the public sector, or merely changing the ownership of existing public operations. I mean contracting out the achievement of broad social and environmental outcomes to the private corporations in such a way that their success is strictly correlated with public goals. This is what a Social Policy Bond regime would achieve. Unlike under the current system, the companies that employed slackers under a bond regime would quickly go out of business. Taxpayers would get value for money and society as a whole would benefit from a more motivated workforce striving to achieve public goals.

No comments: