square4 Posted February 1, 2015 Posted February 1, 2015 Under full socialism / communism, there are no market prices, and for that reason it is difficult to know how the means of production can best be allocated. This is called the economic calculation problem. My question is this: Have large businesses the same problem internally? Supply of products and services from one part to another part of the the same company are not traded internally using a market price. As a company would grow larger, their internal economic calculation problem would get bigger. So this would be a factor favoring smaller companies. Is this true?
afterzir Posted February 1, 2015 Posted February 1, 2015 Although internal, you still have market dynamics (somewhat). Each dept. head wants to show good stats to management, so they will try to buy low if they are receiving products or try to sell high if they are forking over products (just like the firm/consumer relation).
Sal9000 Posted February 1, 2015 Posted February 1, 2015 Supply of products and services from one part to another part of the the same company are not traded internally using a market price. Oh, but they are for tax reasons! In addition, single factories within a company compete against each other when it comes to manufacturing new products in the future.
shirgall Posted February 1, 2015 Posted February 1, 2015 In large companies procurement of materials and services must be governed by a coherent strategy and measurement lest you "leave money on the table". When I worked for IBM there was the concept of "blue dollars" versus "green dollars" and a definite bias towards procuring, and selling, with other departments lest costs be realized in "real money". There was also a very real analysis of opportunity costs and selecting the most reasonable alternative. Yes, there are tax reasons, but also efficiency reasons.
Alan C. Posted February 1, 2015 Posted February 1, 2015 As firms grow, internal transaction costs become increasingly dissociated from market prices. This is precisely why firms cannot enjoy limitless growth and why the notion of a single firm encompassing the globe is a myth (but people think it can happen because of movies).
WasatchMan Posted February 1, 2015 Posted February 1, 2015 Have large businesses the same problem internally? I think you are missing an important part of the equation to the the economic calculation problem, and that is failure and success. The reason why communism and robot mommy overlords fail at economic calculations is because they are insulated from failure and success. They are receiving no feedback. In a free market, no matter how big your business was, you would not be insulated from failure or success. So if "big" ended up being a problem in a free market, "big" would cease to exist.
Jack Posted February 1, 2015 Posted February 1, 2015 There's lots of tools to decide where to allocate resources in a company, mainly economic returns analysis. When deciding what to spend money on, a company will estimate where they will get the most bang for their buck. For keeping track of assets, prices are still used to estimate resource allocation. This is the whole purpose of accounting practices like GAAP which can be used to track inter-company transactions as well as outside purchases and costs. You're correct about smaller companies having a competitive advantage through quick decision making. Some larger companies try to emulate the smaller company advantage by making different business units as autonomous as possible. Gore (makers of Gore-tex) is a prime example of a diffuse corporate model.
Pepin Posted February 2, 2015 Posted February 2, 2015 Not quite because there decisions are based on market information, such as competitor data, consumer data, and the price of all other goods. A large company is not an economy in itself, but is rather part of a much larger economy. It is the interface to the economy which is important. The calculation problem in a company is more a problem of being able to respond to guesses and the required resources to make a guess. To put it this way, it takes a lot longer for a larger company to discover the optimal price for anything, and this leads to a longer period of loss. Another somewhat connected problem is the top down approach corporate models often have. They fail for many reasons government programs do.
andkon Posted February 2, 2015 Posted February 2, 2015 Under full socialism / communism, there are no market prices, and for that reason it is difficult to know how the means of production can best be allocated. This is called the economic calculation problem. My question is this: Have large businesses the same problem internally? Supply of products and services from one part to another part of the the same company are not traded internally using a market price. As a company would grow larger, their internal economic calculation problem would get bigger. So this would be a factor favoring smaller companies. Is this true? Murray Rothbard considered this in his essay, "Ludwig von Mises and Economic Calculation Under Socialism": http://www.econlib.org/library/NPDBooks/Moss/mslLvM5.html (The relevant sections start at 5.25) If a large firm started to experience the diseconomies of scale (inefficiency due to its large size), smaller companies would indeed be able to take advantage and offer similar products at a lower price or higher quality.
Daniel Unplugged Posted February 2, 2015 Posted February 2, 2015 I agree with the OP. If a company commits to purchasing from itself, it is forgoing the option of purchasing at the best price available from other companies.
MrCapitalism Posted February 8, 2015 Posted February 8, 2015 As a company would grow larger, their internal economic calculation problem would get bigger. So this would be a factor favoring smaller companies. Is this true? I finally found the video which exactly describes this problem! I can't get the link to work, but your question is answered at 23:25
MrCapitalism Posted February 9, 2015 Posted February 9, 2015 Oops my bad, didn't even see Alan had beat me to it... 1
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