Wealth Through Decentralization

by Gary North

Recently by Gary North: The U.S. Constitution: Tool of Centralization and Debt, 1788-Today

The main reason why I have been able to make a lot of money, as well as crank out 50 volumes of books and so many articles that I cannot count them, is that no one told me to do it.

Simple, isn't it? It's called laissez-faire: let us alone.

One of the best presentations I have ever seen on applying this principle in organizations is here.

One of the reasons why the commercial real estate market is not going to recover to its 2007 heights is because companies that refuse to honor this principle are not growing or hiring, while companies that do honor it are growing and hiring. When the principle of laissez-faire is honored, the size of headquarters shrinks. Thus, the demand for existing commercial real estate shrinks.

The principle of laissez faire is a free market principle. My first five full-time jobs were with organizations run by free market advocates. All five men understood how to apply this libertarian principle.

So, why don't most large organizations adopt this principle? If it's profitable, the free market should adopt it. First, because the free market is not allowed to operate. Second, because people who get to the top of today's institutional pyramids want power more than money. They sacrifice profitability for personal power. They think that centralized power is more productive. They refuse to imitate profitable firms that are more decentralized.

This provides opportunities for smaller organizations whose owners and managers are more interested in output than control. Admittedly, there are not many of these people, but this is to their advantage . . . and yours, if you work for one of them.

APPLYING PARETO'S LAW

Vilfredo Pareto was a sociologist and economist in the late 19th century. He discovered what is now known as Pareto's law or the Pareto principle: the 20-80 law. I have found that it applies to what I do. About 80% of my output comes from what I do 20% of the time.

In any organization, 80% of the profits comes from 20% of the employees.

When you identify such employees, leave them alone. Give them general objectives. Give them measurable success indicators. Then get out of their way.

The support staffers must be more predictable. They must show up on time if the firm involves walk-in customers. These people must be predictable performers. But of necessity, they are replaceable, because they are predictable.

The correct goal is to get the unpredictable people unleashed. Unpredictable customers demand this.

The story of Henry Ford and Alfred Sloan illustrates the two approaches. Ford was a meddler. He ran a centralized firm. It was very productive from 1910 to 1920. But then General Motors overcame Ford's lead and far surpassed it.

Sloan decentralized the company. He set up multiple divisions. He had them compete against each other. He had them sell to specific income segments in the economy. He cut costs by large-scale purchases of common inputs.

He hired an inventor named Charles Kettering. He left Kettering alone. He paid him to invent. Kettering got partial ownership of his inventions. His inventions could then be used by all of the car brands within the company. He was incredibly productive. He also got rich. So did Sloan.

Creative people want to be left alone to do their work. The more that a firm can find ways to free up its employees, the more it can profit from their output.

Some employees prefer direction. They should be put in positions that are repetitive and predictable. Even in these jobs, life without interference from above is better. The managers should judge output more than labor inputs. They should offer training for staffers whose jobs require interaction with customers. Customers are not predictable.

THE COLLECTIVIST MINDSET IN EDUCATION

All of this seems counter-intuitive to the person who believes in output through central planning. This person sees himself as the key to other's productivity. Smart people tend to trust their own judgment. They do not trust the free market's ability to call forth productivity on a decentralized basis – what economist F. A. Hayek called the spontaneous order.

This faith in the salaried expert is the mindset of the classroom teacher, who sees academic success in terms of formal examinations, maintaining classroom order, and rote performance by students.

The great contemporary critic of this approach to education is John Taylor Gatto. Three times he was the Teacher of the Year in the New York City school systems. He was teacher of the year for New York state. Then he quit. He wrote an article for The Wall Street Journal on why he was leaving the tax-funded school system.

This article received so much support from readers that he decided to start a new career: persuading parents and students to become more creative in their formal educations, meaning dropping out of the tax-funded schools. He wrote his book, The Underground History of American Education. It covers the economic motivation of the founders of tax-funded compulsory education in America. He has posted it for free on his site.

His book complements R. J. Rushdoony's detailed study of the religious motivation of these pioneers, The Messianic Character of American Education (1963).

Lew Rockwell has interviewed Gatto on his experiences inside the educational system. Gatto makes the case of letting students alone.

The problem is this: the system educates students until they finally leave school. This may be as late as age 30 if they go on to graduate school. Their training is geared to meeting formal criteria set by tenured bureaucrats. They take business courses from people who have never run a business. They take education courses from people who have never taught in a non-government institution.

The standard of performance is therefore bureaucratic. It is top-down. But the free market is bottom-up. The customer has the most marketable commodity: money. He is in control, because everyone wants his money. Not everyone wants specific products and services. The seller is at a disadvantage: a narrower market for what he has to sell.

So, instead of training young people to meet demand by customers, the system trains them to meet demands imposed by bureaucrats who are not dependent on customers. The result is an education that must be replaced on the job, once the graduate enters the free market.

In contrast to this is the Khan Academy. It is a free site that takes students through the basics of a growing number of courses by video. From all over the world, students come 24x7. They can access the site at any time, study the courses at their own speed, review what they do not understand, and take exams. There is no one overseeing them. There is no one handing out grades.

PURSUING OUTPUT

When you look for institutions to support, look for those that are committed to decentralization, both philosophically and operationally.

When you think about your career, consider carefully the degree of independence that your present employer offers you. Are you subject to the constraints described in the initial video that I linked to? If so, you should think through the limits placed on your productivity.

What saved me from a life of middle-class income was the Ph.D. glut that hit in 1969. I was still in graduate school. By the time I was ready for the job market, there were almost no academic jobs.

I wrote my way into my first job in 1971. My employer had been publishing my articles for four years: the Foundation for Economic Education. I wrote because I liked to write, but also because FEE paid its outside authors well. I needed the money in grad school. When a senior staff member quit at FEE to take over as president of Hillsdale College, I was available. It was the right timing for all of us.

So, in graduate school, which is bureaucratic to the core, I learned how to produce for a publishing organization that was not certified by any government agency. It was not regulated, except to this extent: it could not publish politically partisan materials. I had no interest in doing that, then or now.

That experience was my life preserver. It had been thrown to me by someone who had gotten his start in the private sector, a man with no college education: Leonard E. Read. It was that life preserver that pulled me out of the swamp of higher education.

In the 1970s, I increased my skills in marketing. By 1979, I was completely independent of any single employer. I was dependent on 22,000 paying subscribers.

We are always dependent on others. The division of labor assures this. But to be independent of any one employer is a great benefit. This is not what the system of formal education teaches. It teaches the opposite.

It is also what parents teach their children by paying them a fixed, guaranteed allowance. Stop!

When we pursue output in service of others, we master the fundamental principle of profitability. We learn that the customer is the source of our wealth. The sooner we learn this, the better.

Yet our society does not teach this principle.

Civil government in a republican political system officially teaches that employees of civil government are public servants. That has always been a myth, but systematically mythical after the implementation of Civil Service in the 1880s. That system insulates salaried bureaucrats from both the free market and the voters.

Businessmen seek regulation by government to keep out more efficient competitors.

Educators demand academic freedom: the right to teach anything, at taxpayers' expense, so long as what they teach is approved by the self-screening, self-policing academic guild. They are granted lifelong tenure, but only after their departmental superiors have determined that they stick to the Party Line.

So, the pursuit of customer-satisfying output is de-railed by the system of employment restrictions imposed by the government. Men seek this protection from competition. They surrender their liberty (and ours) in order to purchase this protection.

Businesses imitate the bureaucratic structure of government whenever government intervenes into the marketplace. When success is based on meeting government rules rather than meeting customer demand, individuals imitate the bureaucratic model, which is based on income provided by taxpayers. Ludwig von Mises called this the bureaucratic management model. He contrasted this with the profit-management model. The difference is based on funding: secure funding based on past legislation vs. funding based on future decisions of customers. Funding makes all the difference.

UNCERTAINTY AND LIBERTY

To maintain liberty, we must affirm the legitimacy of uncertainty. When we demand security at the expense of uncertainty, we surrender liberty.

Yet we never escape uncertainty. We merely change its magnitude. We may deal with the day-to-day uncertainties of the free market. We win sometimes. We lose sometimes. But we do so incrementally.

When we hand over the task of dealing with uncertainty to government bureaucrats, we create the environment for major uncertainties.

The tsunami in Japan exposed the uncertainty of a form of government-regulated, government-licensed, and government-protected nuclear power generation. Whenever a major natural disaster strikes, we hear a universal excuse: "We did everything we could to protect the public." Translation: "Don't blame us." This means: "Don't cut our budget next year."

We cannot avoid uncertainty. We can decide how the social order will deal with it, either through private property or government funding and government regulation. When we adopt private property, we get little setbacks and occasional breakthroughs that produce large profits. When we adopt government bureaucracy, we get big setbacks with huge losses – losses that are funded by taxpayers, not the people who made the bad decisions.

Think "Katrina" and "Army Corps of Engineers." Think "big bank bailout, 2008" and "big bank bonuses, 2010."

CONCLUSION

Centralization is always risky. It is much more risky that what the educators, politicians, and tenured bureaucrats tell the public, "Too big to fail" is always sustained by the taxpayers. The more protection that a civil government can extend, the larger the catastrophes are when they hit.

Decentralization is the method of liberty. It works in private industry. It works in civil government. When it comes to centralization, less is better than more in the vast majority of cases. At this late date, decentralization is a nearly universal cure-all.

For fast, fast, fast relief, decentralize.

April 6, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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