Assistant Professor and Records-Johnston Professor of Free Enterprise at Oklahoma State University, at the OSU School of Entrepreneurship, and Fellow at the Mises Institute – Per Bylund joins me in this episode to talk about his book on the theory of the firm:
- What was wrong with the theory of the firm before
- Firms as islands of productivity
- Capital Theory
- What happens to firms over time
Per Bylund links:
- Per Bylund Twitter:https://twitter.com/PerBylund
- The Problem of Production Book: https://www.amazon.com/Problem-Production-Routledge-Heterodox-Economics/dp/1848935293
- Per Bylund website: http://www.perbylund.com/
- Earlier episode with Per SLP38: https://stephanlivera.com/episode/38
- Kraken: http://www.kraken.com/?utm_source=podcast&utm_medium=stephanlivera
- Unchained Capital: https://www.unchained-capital.com/?utm_source=Stephan%20Livera&utm_medium=Referral&utm_campaign=Affiliate
Stephan Livera links:
- Follow me on twitter: https://twitter.com/stephanlivera
- Show notes and website: https://stephanlivera.com/
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Ministry of Nodes:
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Podcast Transcript Sponsored by GiveBitcoin.io:
Stephan Livera: Hi and welcome to the Stephan Livera podcast focused on Bitcoin and Austrian economics. Today I’ve got a great episode about Austrian economics with Per Bylund but first, let me introduce the sponsors of the podcast. Firstly, Kraken. Over my years in Bitcoin I’ve been really impressed with the way they operate. Kraken have just such a strong focus on security. They’ve really tried to act ethically in the space and they are one of the longest standing Bitcoin exchanges. They are consistently rated the best. Have got a really high quality platform. They offer some of the best liquidity in the industry, and they’ve got really high trading volume with low fees and no minimum or hidden fees.
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Stephan Livera: My guest today is Per Bylund. He is the assistant professor and records Johnston Professor of Free Enterprise at Oklahoma State University at the OSU School of entrepreneurship. He’s also a fellow at the Mises Institute. Per first joined me on episode SLP 38. This episode is more about his book, The Problem of Production. In this discussion, we talk a little bit more about the theory of the firm. Firms as islands of productivity. We discuss Austrian capital theory and what happens to some of these firms over time. It’s also an interesting one from an entrepreneurship point of view. I think you guys will really enjoy it. On to the interview.
Stephan Livera: Per, welcome back to the show. It’s a pleasure to have you back.
Per Bylund: Thanks for having me again.
Stephan Livera: Per, I really enjoyed reading your book, The Problem of Production. I read it a couple of months ago. I was thinking I’ve got to get you back on and we can talk about it because I think a lot of my listeners are essentially Bitcoiners who are interested to learn more about Austrian economics. I think this book is a really good one, because it deals with some of these different theories that they can pull together around Austrian theory of capital, and entrepreneurship. Let’s set the context. Why did you write this book?
Per Bylund: Well, I think there were plenty of different things coming together at once. In a sense, these are the ideas that I developed in my dissertation. I sort of took those ideas and I ran with them and continue to think about them. In a sense, to paraphrase Joe Salerno at the Mises Institute, your dissertation should be your worst work. What he meant by that was not that the dissertation should suck, that’s not what he meant. What he meant was that you should get better after that and continue to develop your ideas.
Per Bylund: Starting out as an Austrian and doing some organizational stuff and doing entrepreneurship, I put those things together. I was schooled in grad school in transaction costs economics and that sort of analysis. I never really found it very convincing. I realized that there must be something else there. There’s plenty of theories of the firm and what is a firm.
Per Bylund: Frankly, economists don’t know what a firm is. They just assume that it’s there and they basically start with it. Use the perfectly competitive model. It has numerous firms, that’s where all the production happens. They’re not self employed entrepreneurs, those are firms. What is a firm? Don’t really know. Those theories that exist, they all suffer from the same problems that most economic models suffer from.
Per Bylund: Namely, they start with equilibrium and then they look at a problem, how can that be fixed and how do you maximize and so forth. You can throw in the firm there that solve some type of problem. To me as an Austrian, viewing the market as a process that evolves and progresses, it wasn’t clear to me how is the firm actually formed and what is the function that it has over time? Obviously it needs to provide some value to the economy. What is that value? It can simply be saving a certain cost or solving a simple problem and then switching back and forth between a firm and not a firm depending on how the cost situation changes over time.
Per Bylund: It’s not that easy. If you want to organize something in economy, it takes time. You plan it, you see it through, you invest. It’s a long term commitment. Obviously there must be something more to it. That’s why I felt I had to write down my thoughts on this and try to explain what I think could be the reason there are firms and frankly, what firms are economically speaking.
Stephan Livera: Excellent stuff. Let’s go a little bit into Ronald Coase’s theory of the firm. I know that is probably the… If you’re an undergraduate or whatever, they teach you this is Ronald Coase’s theory of the firm and to this day, it is probably one of the most cited papers. How would you contrast your views against the Ronald Coaseian transaction cost view of the firm?
Per Bylund: Well, there are many differences. What Coase did was simply say… To give him some credit, he wrote this basically as an undergrad and he got the Nobel Prize for it so that’s pretty impressive. His problem I would say is that he didn’t really understand the economics which is a huge problem when you develop theory and economics.
Per Bylund: What he did was he learned… I had done some work on Coase himself and Coase in theory. What he did was basically learn economic theory from his friends when he was in undergraduate. He learned almost a straw man version that while the market is sufficient, the market price mechanism allocates resources perfectly so there shouldn’t be a need for hierarchies and organizations and so forth.
Per Bylund: Yet he said, “Why are there firms? There seem to be these islands of planning?” Basically, just authoritative islands where a manager directs laborers. Why is that if the market is truly efficient, how could that be?
Stephan Livera: Sorry, can we just dive into that part a little bit further, around islands of planning. What does it mean that… Now, obviously, having read Mises Economic Calculation in the Socialist Commonwealth, what does it mean to say that you cannot economically plan in the general case?
Per Bylund: Well, I mean, in a sense, you can economically plan. I think Hayek was the one who said that it’s not a matter of whether there’s planning or not, it’s a matter of who plans and who plans for who. We all plan our purchases, we plan our production, we plan our lives to the extent possible. The issue is that you cannot centrally plan a whole economy because that excludes entrepreneurship, they excludes the exercise of judgment and you can’t figure out new lines of production. You can’t figure out new ways of satisfying consumers to put it very briefly.
Stephan Livera: Precisely, yes. I was just sort of getting to that idea that you can’t centrally plan without having this price mechanism and property rights system underlying the ability that gives people an ability to calculate their profits and loss and figure out are they creating a social benefit for society? But yeah, if you could carry on and just bring that down into how the firm economically plans because I guess to an outsider they might think, Oh, well, how can the firm do planning if it doesn’t have an internal market?
Per Bylund: Right, and that was where Coase started out, saying that well, it looks like every firm is it’s a small island no central planning. How is that possible? Why is it that a market economy has all these islands because all… Basically all production happens within these islands. He identified that a firm is based off of managerial fiats basically. It is a dictator pointing and everybody needs to follow. He said, “Why is that? How could that be efficient since the market economy is supposed to be efficient?” He contrast that and mentions in some of his commentary that at this time… He published this piece in ’37.
Per Bylund: The Soviet Union was a great success and all this stuff, and you had the Great Depression in the West. There was a crisis for capitalism and socialism seemed to be working really well. All this stuff. Lennon had said that Soviet Union should be organized as one big factory, the whole country. To Coase it was obvious why cannot a country be organized as central planning? But you have all these huge corporations sometime that are centrally planned. Why is that?
Per Bylund: His solution to this was simply that, well yes, the price mechanism is efficient in allocating resources but it’s really hard to figure out the prices of everything. It’s really costly to figure out whether those prices that you get are actually the correct ones. Are those the efficient prices or are they not equilibrium prices, basically. He said, well, the market is sufficient in terms of allocation but it’s costly to use it. If you have a manager instead taking the place of the price mechanism, so the manager gets to allocate resources within the firm, you don’t have the cost of figuring out those prices.
Per Bylund: You just depend on the manager and of course the manager can be wrong too, but to the extent that the manager is sufficiently right, you save on those transaction costs. That’s why you have a firm. Different types of transactions are integrated within the firm and basically placed within the power of the manager. The better the manager, the larger the firm, because a really good manager can integrate and basically be a boss over a number of transactions whereas a pretty sucky boss can only perhaps rule a few workers and a few transactions.
Per Bylund: He said that as costs change, and depending on your situation and your position in the market, the firm’s boundaries change too. You would basically divest some transactions when the costs fall in the market, and you would invest and integrate more transactions when the costs rise. You had a mechanism there for the firm and changing the boundaries and growing and shrinking firm size basically.
Stephan Livera: It’s very much driven by this idea of transaction costs. I think a good point that you make in your book is that, Coase doesn’t necessarily explain how it is that the firm overcomes this problem of transaction costs. I think that’s partly that’s where some of your theory as well comes in. Did you want to outline some of your thoughts there?
Per Bylund: Sure. I mean, to Coase, it’s really equilibrium theorizing. You have one situation where production is already taken place. It’s organized by the price mechanism and when it gets really costly, because the transaction costs get high, or there’s too much imperfect information, whatever it is, you basically just take a little manager, you drop him there, put them into place of the price mechanism, and whoops, there’s the firm. The managers fiat is what rules instead.
Per Bylund: To me, as an Austrian, it’s about the process. How does that happen? How do you actually go from this market situation with only the price mechanism to start integrating and hiring these workers and getting an office and all of this stuff? How does this happen? When does it stop? Is it really driven by transaction costs? Or is it different driven by something else. To be blunt, transaction cost is a in Coase’s view anyway, the way he uses it,
Per Bylund: transaction costs are not really relevant. The reason I say that is that he… I started out by saying that he didn’t know economics. Harold Demsetz pointed this out a bunch of years ago that Coase sort of assumes that the price mechanism allocates resources efficiently, but then there is this additional cost on top, transaction costs. That means you might not actually get to efficiency.
Per Bylund: Well, the price mechanism allocates resources based off of opportunity costs. Opportunity cost, necessarily includes transaction costs too. You don’t have opportunity cost plus something else. Opportunity cost is where do you find most value including transaction costs. You can’t use opportunity costs on one hand, and then say, “Oh, there’s transaction costs as well.” He failed econ 101 there. There’s that problem and then there’s the problem of the emergence of firms too.
Stephan Livera: Yes, interesting stuff. I liked as well around your explanation around this idea of density in the book. You’re talking about how… I think this is coming to how the firm emerges. I think part of that is we’re thinking of, okay, this is our economy, this is our capital stock, these are the firms that we currently have, but maybe we’re not quite advanced enough around some certain area to have this sort of firm. That as the increasing density in a certain industry grows, then you might see further and further subdivision. That can be part of the driver in your view. Can you outline what you’re getting out there?
Per Bylund: Right, my theory story starts with the division of labor. That’s where productivity comes from. Division of labor, then we go way back before Coase and back to Adam Smith, who spent the first two chapters in the Wealth of Nations talking about this. Adam Smith, he talks about how when population grows, which is what you’re getting with density, the more people there are around, the more you can chop up any production process into smaller bits and pieces, and allow people to specialize in those pieces.
Per Bylund: Then, instead of you doing everything, and I’m doing everything, you can do the first half, and then I do the second half. If there are more people around, we can do maybe one fifth each, and we can really become specialists at each fifth. We might not do anything at all about the other four fifths, but together, we produce a lot of output.
Stephan Livera: Okay, great. We’ve got this increasing density, and we’ve got this division of labor occurring. Where does the role of the entrepreneur come in? As I understand, this is a Kirznerian alertness theory as well. They sense an opportunity, and then they go on from there?
Per Bylund: Well, you can put it in those terms, sure or you can say that it’s a Schumpeter, they have an idea for an innovation or any type of term you want to use, really. The thing is that I think the entrepreneur sees a new way of producing something or something new to produce. Maybe it’s an employee in an existing business who realizes that wait a minute, I can do this in a completely different way, there is so much more clever that I can save a lot of money if I just gather a lot of people around me and do this in a different way.
Per Bylund: Now, doing something in a different way means that you need to figure out exactly how to do this. You need to put people together, you need to split the production process in a new way that hasn’t been done before. You can’t simply say, “Hey, I’ll just contract this with people in the market.” Because no one is selling those services. You might need machines and other types of capital and goods that don’t exist that you need to produce yourself. You need to produce blueprints, and so forth.
Per Bylund: Now, doing this necessarily happens outside the market because those things do not exist yet. If I want to start a new type of production that no one has done before, I can talk to people who’ve done similar things maybe but what I probably will need to do is hire people who have the necessary skills, I think, and then tell them what I had in mind. We can discover together exactly how to put this together, and exactly how they’re going to produce their little piece, and then how the next guy is going to continue producing from there on.
Per Bylund: Now, obviously, these guys are not in the market, there are no market prices between those employees and this new process that didn’t exist before. They’re completely interdependent and all of us are in this new project that we’re starting. It’s obvious that if one of us fails, the whole project fails, the whole production process fails. We need to stick together. That’s one thing. We’re completely interdependent and there’s also no pricing going on between us because there are not several sellers and several buyers within the firm. That simply doesn’t happen.
Per Bylund: This happens necessarily outside of the extent of the market. Even if we hypothesize that the whole market consists of self employed people running around and just trading using the price mechanism, what we’re up to is not guided by the price mechanism. Our little production process will necessarily be treated as one sort of blob, that the whole thing will either produce a profit or a loss. Exactly who is doing the profitable thing and who is not, we can’t tell. We just know that we need to put all those pieces together, or the whole thing will fail.
Per Bylund: That’s what I call a firm because this is integrated production in a way that you cannot accomplish in any other way than being together in a joint fashion together, discover exactly how to do this, and then probably refine and improve the process as well. The first version is not going to be the best version but maybe it’s good enough to make profits. Then of course, if I make a ton of money doing this, others are going to say wait a minute I can do similar things, and maybe even do it a little bit better. Others will follow suit and try to compete with me.
Per Bylund: Of course this is the short version or the speedy version of the theory. When others follow suit and copy or imitate what I’m doing outside of the extent of the market. Obviously, other firms can start to try to poach my employees who have experience doing this stuff. I will try to get their best employees to, which means we’re basically bidding for these specialized labor services.
Per Bylund: Well, that is the creation of market prices. In a sense the firm’s dissolve into the market. What I’m doing and in a sense, is turning everything upside down because Coase and all these other guys talking about the theory of the firm, they’re saying, oh, let’s pretend there is a market and then why do people choose firms? They basically said, well, first of all, this is a process of economic development. This is the market progressing. They’re saying it happens through the firm but it’s not the case that the market goes to firm and the planning is so much better than the firm. It’s the other way around.
Per Bylund: Market is refined and the mature way of producing, because you have full information through the price system, and you have good effective allocation of resources and so forth. Then if you want to do something new, you need to do that outside of this market organism. That becomes a planned island. Necessarily planned to begin with and then you populate it with workers. When others try to do the same thing, we create prices between our firms and those prices mean that we can start outsourcing parts of our firms, which means we can benefit from the prices that we create between us through competition.
Per Bylund: The firm is a means by which the markets extent grows. The market expands and becomes more specialized through the firm.
Stephan Livera: Excellent. I like the way you explained it as well here in the book. You say it’s like this economic phenomenon that overcomes the inertia of the interrelated market order. Then later, we get into what that becomes as it becomes more commodified if you will, a more commonplace and then a bit just because… It subsumes back into the normal market.
Stephan Livera: Another really cool topic that would be awesome to touch on is capital. Obviously, as Austrians, there’s this belief of capital accumulation. That you need these various goods to help you produce the new goods. Then there’s also a very subjective part to it as well. I really like this part you quote Ludwig Lachmann and you say something is capital because the market, the consensus of entrepreneurial minds regards as capable of yielding an income. It’s like beauty is in the eye of the beholder.
Stephan Livera: There’s a bit of you have to subjectively determine this piece of capital equipment is what I need for my business. That’s why I’m willing to pay X, Y, Z dollars for it. I think the other part is, you really touch on this idea of capital structure and accumulated capital and how it’s ever shifting. Can you touch on that for first?
Per Bylund: Sure. In a sense the specialization deadlock is the fulfillment of what is possible without any innovation or entrepreneurship. There might be capital goods, and so forth machines and whatnot else. But what the entrepreneur does when establishing a new firm is figuring out a new way of doing things, and also a new way of using resources and new skill sets for workers, but also new types of machines that support this new type of process.
Per Bylund: Refined versions of old machines, and so forth. It’s really from Lachmann’s book Capital and Its Structure, where he says that the role of the entrepreneur is really in the constant adjustments to the capital structure of the economy. What he means by that is simply that what entrepreneurs do is trying to figure out the best way of satisfying consumers wants. The best way of doing that is always to use some sort of capital, because capital has one function, it makes labor more productive.
Per Bylund: Basically, we get more output per labor hour invested. But capital can, of course, be used in many different ways, but it’s not unlimited. We need to figure out the best way of using it and of course, should we be using this at all. An old type of machine maybe say it’s made out of steel or something, maybe we should just take this to smelting plant and produce something completely different out of it because it’s not very efficient, the way it’s being used now. We can use the steel in some other way.
Per Bylund: Entrepreneurs make these decisions. They’re constantly figuring out ways to better use those scarce resources that we have in the economy to satisfy consumer wants. Satisfy more wants, satisfy other wants, satisfy them in a better way all of these things, but it’s always about the adjusting of capital and of course using labor as part of the process as well.
Stephan Livera: The other component is just that, in order to have that capital, people must have forgone some kind of consumption, or they must have saved up their profits. That’s the only way in which we can, as society, can build our capital stock. I think if you look at other schools of thought, they don’t necessarily have that way of thinking about it. Can you outline a little bit around the importance thereof first foregoing consumption?
Per Bylund: Sure. Very often Austrians take the example of Robinson Crusoe. I think Rothbard talks about how he picks berries. Apparently, there they grow off on trees so they’re very high up. It’s a lot of work picking those barriers, but he needs those barriers to satisfy his hunger and stay alive and so forth. Maybe he spends his whole day picking those berries but how does he improve his production?
Per Bylund: Well, he needs to invest in something. He could say produce a stick, so he can stand on the ground instead of hit on the branches and get those berries instead. But producing that stick takes effort and time as well. He needs to release that effort and time somehow. How does he do that? Well, he can’t starve to death, he can’t just say that the next few weeks, I’m not going to eat anything. Instead… So then he’s going to starve to death because then maybe he will be able to produce more in the future.
Per Bylund: That doesn’t make any sense. Instead, if he postpones consumption a little bit, he said, well, I’m going to eat a little less every day, or I’m going to work harder now, but not consume all the berries right away. Instead, I’m going to save those berries, I can use them… Say I save up berries over a whole week, I’ve worked my ass off for a week, and I have enough berries. I lessen my consumption so I don’t consume all of it. Then I have enough berries to survive a week and during that week, I’m going to try to produce a steak that I can use.
Per Bylund: The stick, of course, is capital. The reason he can create this capital is because he saves or he foregoes consumption because if he kept on consuming 100% of the barriers that he gathered, then he wouldn’t have able to produce that stick. With the stick, he will be able to collect a whole lot of berries in much less time. There you have the role of capital, which really makes his labor much more productive.
Per Bylund: You can get a whole lot of more various in shorter time and less effort as well. That, of course also releases more time for him because then suddenly he doesn’t have to work as long hours with that stick. Instead, he can use that time to produce maybe a better stick or… This example doesn’t hold for too long, but still the point I think is clear that by not consuming everything right now or consuming less, we make more available for investment.
Per Bylund: That investment, in turn, improves our ability to produce in the future. This, of course, is exactly the opposite of Keynesian. Where Keynesianism starts with consumption. The more we spend on stuff, the more people will want to produce, which completely reverses reality in a sense because production takes time. What entrepreneurs do when teaching entrepreneurship makes this obvious that Keynes was just full of it. That entrepreneurship is trying to figure out what to do consumers want later.
Per Bylund: I mean, what I start to produce now, I might be ready to offer to consumers in six months, a year or whatever it is. I can’t know exactly what they will want so I will need to bear that uncertainty myself. I would need to make all the investments and create jobs and whatnot else, whether or not anybody will want my product, because I can’t know that until I’m done. During that time I need to have enough capital in terms of money and food and all this stuff to pay for the resources and survive myself.
Per Bylund: Then, I can offer the product, and then we’ll see if there will be spending. The whole thing that spending drives the economy is ludicrous really. What drives the economy is production, and then offering that to consumers. Consumers, they don’t choose to buy something just because it’s valuable. They choose to buy something because it’s valuable and it’s more valuable than what others are offering.
Per Bylund: There’s the competitive element as well. Since production takes time, there’s enormous uncertainty for entrepreneurs, both demand side, will consumers value what I offer and will evaluate enough then the supply side, will I have competitors offering the same thing or will I have competitors offering something that is better and cheaper? There’s no way of knowing. We need to forego consumption and cut back on our spending right now so that we have enough resources for these projects to be realized so that we can then, later on, consume what they offer.
Stephan Livera: Excellent. I love the explanation there, Per, because it’s like there’s all this uncertainty and the Austrian School and some of the contributions that the Austrian School makes around entrepreneurship, are very much around recognition of decision making under this uncertainty. Another point I really like is with capital. We don’t believe capital is homogenous, we instead believe it is heterogeneous and there are different forms of capital.
Stephan Livera: Another theory is around Bohm-Bawerk’s roundabout theory. The idea is that as you expand the timeline of production, and you can start doing more and more advanced methods of say, berry picking and so on, maybe you start making a machine that goes and automatically picks the berries and things like that. That might at first look like you’re being not productive or just wasting time, but actually, it’s that you needed that roundabout production process to be able to get you to that new level. Can you explain a little bit of your thoughts there?
Per Bylund: Yes, exactly. In a sense, the theory of the firm that I tried to flush out in the book is an application of that. How do we get to more roundabout this? If you think about it, round about this, it’s not necessarily the case that the more time it takes you to produce something, the more you get. Obviously, you can be a complete dumb ass and spend a lot of time and not produce much at all. That’s not it. It’s not a matter of, we need to spend time, we need to waste time. That’s not it.
Per Bylund: What is it, is that in order to… When we are producing something, why would we choose to wait for a longer production process? Well, because we know that it will create a whole lot more. We would say that, “Okay, we’ll wait a little bit because this production process will take a whole lot more time, but can produce a whole lot more goods when it’s done in a cheaper way.” It’s worth it, it’s worth waiting because we get so much more out of it.
Per Bylund: What Bohm-Bawerk is really saying, or Austrians in general is that we will choose these longer processes, basically with more specialized stages. We will choose those longer and longer for the simple reason that they provide us with more and more goods and a cheaper and cheaper way. It goes back to the saving bit because we have to wait for the result, we need to save first so we don’t starve to death today because obviously that will not benefit us.
Per Bylund: We will choose every longer production processes, if we can get a little more out of it. We get enough more that we are willing to wait for it. That’s what entrepreneurs are doing to. They’re extending the production processes in the economy overall so we get ever more goods in the future.
Stephan Livera: Fantastic. I love the explanation there. I think let’s now talk a little bit about how this process as you were touching on, once… Okay, we had the market at one level and then the firm emerged to try and take it beyond that level, as you were saying, and now over time, other… Let’s say other competition comes in, it starts to become more of a common service or product. Then it now subsumes back into the market. Can you articulate a little bit of the process around that?
Per Bylund: Sure. One way of thinking about it is simply, well, if someone starts a completely new firm producing something, very often they’re copycats pretty soon. I mean, if it’s a successful idea, and they’re making a lot of money, then someone else is going to try something similar, or something that they think is a little better, maybe try to produce in a little bit different way, but in the same way.
Per Bylund: Those things that are common to those competing firms, they don’t need to be done in house anymore. Very often, a business is started with… They have a whole a lot of different types of services that are needed to support the production process. They’re not really core. They’re not what the real innovation that the entrepreneurs has realized in the business. They’re all these supportive services. Those are probably the first ones to be outsourced.
Per Bylund: As soon as you start outsourcing those, maybe a couple of your employees say that, “Hey, how about I sell this to you, instead, I can start a business and produce this cheaper than you’re paying me now.” Of course, then he can probably sell it to a competitor as well. Then you start seeing basically chunks of these firms being organized in other firms in the sense.
Per Bylund: This is actually how outsourcing happens. I talked with a firm in India, to which American businesses and European businesses outsource IT departments. That’s a, I think, an illustrative example because what they said to me was that, no, we don’t just sit around and wait for our businesses say, “Hey, wait a minute. We can probably save money by outsourcing our IT departments.” No, what they do is look at businesses and basically figure out how mature they are.
Per Bylund: They say, okay these businesses are huge, they have their own IT department, they have plenty of people hired and of course, there’s plenty of costs involved with that. As any small business owner knows, if one guy is sick, then holy crap. Shit hits the fan. Everybody needs to cover for that guy. Imagine if you could buy that service in the market instead and you suddenly need a little more, need a little less and you can just adjust your purchases basically. That’s a whole lot easier.
Per Bylund: A huge firm with an IT department is very costly, but they don’t probably don’t think about it, hey you know we can outsource this. These firms in India, they contact the firms in the US and in Europe, and say, “Hey, we know that you are basically mature enough, and you have developed standardized production, and so forth. We can offer you those exact services. You don’t have to care about the HR involved with your IT department. You don’t have to care about updating software licenses, and all this crap basically. We’ll take care of it, and we’ll charge you monthly or yearly or whatnot.”
Per Bylund: This is exactly the process of dissolving the firm because if this corporation accepts. I mean, it’s cost savings to them and the IT department itself, there’s no value in having the IT department in house, if what you’re doing is not actually IT, you’re producing something else. You might as well buy it from someone and that means you can probably pick another supplier if this supplier does not do a good job. There are plenty of guarantees and much more certainty in a sense by outsourcing it.
Per Bylund: These corporations are usually very happy with signing a contract with these guys. Then of course, the firm is smaller. The corporation is smaller because it doesn’t have an IT department anymore. It buys those services, just like it rents an office. Just like it potentially buys transportation, and all this other stuff. You don’t have to integrate everything. In fact, what I argue in the book is that the entrepreneur or the owner of the business is probably happy to outsource as much as possible because it’s less of a headache and less cost as well for the entrepreneur and for the business.
Per Bylund: You would expect to see you, at least from my theory, you would expect to see firms become… Start out large and inefficient, and then start to fall apart in the sense that they’re outsourcing a chunk here, outsourcing a chunk there, and they’re refining their production process, maybe and they’re firing a few people, they’re hiring someone else, they’re replacing people with machinery. Basically, they get smaller and smaller in terms of what is being done in house. They get closer and closer to what their core contribution is.
Per Bylund: Maybe at the very end, that core contribution itself can be placed in the market by simply exchanges. More likely, probably is that you have another entrepreneur with an innovation that completely disrupts the market and the firm has no value anymore.
Stephan Livera: Then we start a whole new round of the process all over again, right?
Per Bylund: Exactly.
Stephan Livera: For example, you’re doing a service and you’re not doing IT, it matters how many IT firms are out there. Part of it is if you’re new, there might not be enough of maybe that specific IT service that you really need. That’s part of it. Then I think the other key piece is to keep in mind that you don’t outsource your key competency. For example, if you’re a bank, you might outsource your IT, fine, but you wouldn’t outsource your credit assessment and credit intermediation skills, because that’s what a bank does. I think that’s a very key point that you would probably read that in many business journals as well.
Stephan Livera: I think it’s very aligned with what your theory is, and with Austrian ways of thinking about entrepreneurship.
Per Bylund: Yes, exactly. In a sense the firm has value for one simple reason, that it offers value to consumers. That value is not in being a firm at all. That value is in producing something. It helps consumer satisfy some type of want. That is the core that you mentioned there. The bank’s IT department probably contributes to the whole picture but does it have to be in house? No. Especially the more IT departments are already being outsourced, well then why would you have it in house?
Per Bylund: You would have it in house only if it saves you a lot of money, which is probably not the case, because having stuff in house means that you probably lose money comparatively speaking. It will go down to that core which is how you satisfy consumer wants. The actual value to consumers and that’s your contribution and the economy. That’s what the firm will shrink to. Since that is very poor. That core whether that can itself be outsourced in parts or not, I don’t think that that is not really part of my theory. I also think that when you get to that point, you will have been disrupted long ago and in any way so it doesn’t really matter.
Stephan Livera: No, that’s a good point. I think another interesting question that just came to me as well is people are talking about some of these ideas like, okay, the gig economy. Like Uber and Airbnb and some of these other ideas and also this idea that more and more people can now live that independent contractor life. They don’t necessarily, like in the past where it was more like, “No, I have a job for this big company”. I suppose what you’re saying is also, in some sense, you’re explaining why it still makes sense for firms to exist.
Stephan Livera: We’re not going to move to this world where everyone’s an independent contractor because there is still an economic necessity for the firm.
Per Bylund: For as long as there is opportunities for innovation, yes, which I would expect to be always. You can always do things better and figure stuff out because if we have any quality, it is our ingenuity and our creativity as people. We will always be able to figure out new ways to do things and those ways to do things will very often mean that you need to collect resources and people and everything and create those firms to replace what exists already.
Per Bylund: Very often through to what you mentioned with Bohm-Bawerk and the longer processes. In a sense, you replace one stage of production in an already existing production process with a whole process itself because that process produces more output per labor hour and whatnot else, but it hasn’t been tried before so you need to start out outside of the extent of the economy and therefore as a firm, and then you can gradually start outsourcing and dissolve to the market.
Per Bylund: In a sense, it’s theoretically possible to have a pure gig economy. I would expect that to be a static economy where we don’t have any growth or any expansion anymore. I don’t see why that would be the case. I mean, that would be a dying economy.
Stephan Livera: We wouldn’t want to live in that world.
Per Bylund: No, definitely not.
Stephan Livera: What about now… Okay, this is a little going away from your book, but more like the size of the firm, and whether we might anticipate, let’s say, We lived under a gold standard, or some kind of hard money standard, would we anticipate any differences in the size of firms? Would we see maybe less gargantuan large firms and more smaller and medium sized firms? Do you have any thoughts there?
Per Bylund: Yes, sure, I think the size of firms and especially size of corporations is to a very big extent a result of regulation. Because there are limitations in the market, especially barriers to entry, these firms can grow large, and they can still make money, at least accounting wise. They’re still I would say, inefficient, in the sense that had there not been protective regulations, there would be a whole lot of more smaller firms. They would dissolve rather than engage in mergers and acquisitions.
Per Bylund: Because I think people in general, they trust economies of scale to explain way more than I think they actually can. These huge corporations we have, I think those are basically a… There a product of the state and states regulation and limitations placed on the market rather than the market itself. A completely free market would see lots of very small firms and local production. It would see, I think, different production technology to.
Per Bylund: I don’t know how deep you want to dig into this but I think economies of scale, they exist, of course. It’s also the case that they have been artificially enhanced in several ways. One is subsidies of transportation. You have the free highway system and all these stuff. You have international waters that are basically unregulated. All of these stuff. You can have one huge factory somewhere in China to just pump out goods cheaply, and then you can ship it all over the world.
Per Bylund: You don’t care about pollution because international waters and whatnot else and there are subsidies for putting it on trucks. Of course, China will subsidize your production in China, and all of this stuff. Whereas in a free market based off of property rights and private property, this wouldn’t make any sense whatsoever because you would actually have to…
Stephan Livera: You have to pay for it, right?
Per Bylund: Yes, right. You have to pay for all of those things yourself, which means you would probably have local or regional factories instead because they would be closer to the customer, which means you can also offer differentiation a little bit. You can offer products that fits the people better rather than the super mass production that we have today that is in a sense produced by state society, because it’s way beyond what is economically reasonable, in a sense.
Per Bylund: This has repercussions in terms of the technologies used to because when it is the case that can use economies of scale to the absurd levels, if I may call them that. It means that innovations will also focus on optimizing and maximizing technologies that produce at this gargantuan volumes. Instead of small scale production, which now appears to be hopelessly costly, which didn’t have to be the case.
Per Bylund: If you look at a regular automobile, here in the US, the highway speed limit is usually 65 or 70 miles per hour. Just so happens that automobiles are pretty efficient, though you get a lot of gas mileage at around 65, 70 miles per hour. That is not a natural law saying that internal combustion engines will be very efficient at 65 or 70 miles per hour. That’s not the case. Is because the engines have been optimized to the speed limits on the high ways.
Stephan Livera: Right, they’re tuned for that.
Per Bylund: Exactly. That’s the case in manufacturing as well that if it is the case that transportation is subsidized so that the more you can produce in one location, the better it is, manufacturing processes and manufacturing technology will be optimized and tuned for those outrageous volumes. The technology to is distorted because of this.
Stephan Livera: Yes, it’s just crazy to see how deep it all goes in terms of the massive level of government interference, that changes the way of so many different markets. Per, look, I think that’s just about all we’ve got time for but I just want to say just for my listeners, make sure if you’re not already following Per, he’s got some fantastic Twitter threads and really great insights. Per, before we let you go, make sure you tell my listeners, where can they follow you and keep up with what you’re doing.
Per Bylund: Sure. Twitter would probably be the best place because the… Sad to say I’m there daily. I post these, to mention, the threads which are an interesting phenomenon that long threads on economic insights are being retweeted a whole lot more than what I think are are clever, short, brief tweets. Twitter, it actually works for these longer conversations. My Twitter handle is basically at @PerBylund so @P-E-R-B-Y-L-U-N-D. I have a website too. It’s an academic website so it’s not all that much fun. It’s not exciting but it’s also my name, so perbylund.com.
Stephan Livera: Fantastic. Well, look, I think that’s pretty much going to do it for this one. Look, thank you very much for coming on the show.
Per Bylund: Thanks for having me.
Stephan Livera: Let me know what you guys thought of that discussion around entrepreneurship, capital theory, theory of the firm and just doing these sorts of episodes in general. You can DM me on Twitter or email me. Also, just a quick announcement. I’ve got some merchandise available now with Nick Ward, who’s running the layer one BTC store. You might have seen on Twitter, there is this awesome shirt, it is the orange coin good number go up shirts. I’ll put the link there in the show notes for that if you guys are interested to get some of that merchandise. I think there’s some shirts and also some mugs.
Stephan Livera: Also, if you want to support the show, remember you can rate and review the podcast. You can share it with your friends. Whether that’s sharing it on Twitter or just telling a friend about the show. You can follow me on twitter @StephanLivera. If you want you can also subscribe to my YouTube channel that is under the name Stefan Livera as well. If you’re interested to advertise on the show, you can email me. That’s email@example.com and that is it. Thanks guys. I’ll speak to you soon.