Industrial Organization

Minds, Bodies, and Epidemics

Li Way Lee

• Publisher: Palgrave Pivot
• Year: 2019
• Print ISBN: 9783030262365
• eBook ISBN: 9783030262372
• Topic: Business
• Subtopic: Business General
• Index: Business

This book takes the reader on a new tour of the world of firms. We start with a visit to the inside of a firm. We meet the owner and the manager. We look deeply into their mindsets. Then we move outside the firm, to observe the firm's outer features. We pay particular attention to its size, its complexity, its fragility, and its similarity to other firms. In the second half of the tour, we visit communities of firms. We watch waves of mergers, chaos, and bubbles. Before returning, we witness battles between firms and creatures that act like antibodies in our blood: corporate raiders, antitrust agencies, and creative destructors. Throughout the tour, we ask how the things we see are linked. This book encourages the reader to see them as feedback loops. The book's overarching argument is the importance of the separation of ownership and control and how society must pay more attention to the concept..

© The Author(s) 2019

L. W. LeeIndustrial Organizationhttps://doi.org/10.1007/978-3-030-26237-2_1

Begin Abstract

1. Introduction

Li Way Lee¹

(1)

Department of Economics, Wayne State University, Detroit, MI, USA

Li Way Lee

Abstract

In this book I study how the separation of ownership and management changes industrial organization. I begin with an examination of the mindsets of the owner and the manager. I notice an obsession with market share, rather than profit. I explain why that comes about, in light of behavioral economics and cognitive psychology. Then I examine four bodily symptoms of the obsession: too big, too complex, too fragile, and too similar. (I call them “The 4 Toos.”) I suggest how they lead to epidemics such as waves, bubbles, and chaos. Finally, I draw the reader’s attention to countervailing forces: corporate raids, antitrust, and creative destruction. In industrial organization, I see these forces as antibodies offering shining rays of hope.

Keywords

Multiple mindsThe mind-body connectionsBehavioral economics

End Abstract

Heart Attacks on Wall Street

On September 15, 2008, the firm Lehman Brothers collapsed and passed out. Within a few hours, other firms started to sputter and pass out. There seemed to be some sort of deadly contagion going on. Caballero (2010) compared it to a contagion of “sudden financial arrest.” In any case, the government quickly stepped in and put the unconscious firms on life support. They became known as the Too-Big -to-Fails.

Going through the wreckage, Scherer (2010) conducted a forensic analysis of six of those firms: J. P. Morgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley. He found that those firms had grown by serial mergers. From 1985 to 2008, they were involved in 192 mergers.

Any firm that grows in this manner at this pace will become big and complex . Akerlof and Shiller (2015, p. 28) notice the changes as Goldman Sachs grew from $50 million to $28 billion in capital between 1970 and 2005 (I added the italics): “Whereas in the old days Goldman had been overwhelmingly about the underwriting, now it was into many, many different businesses. … Goldman Sachs has become an empire.”

Banks were not the only casualties of contagious heart attacks; General Motors and Chrysler also succumbed. That did not surprise me. General Motors and Chrysler had tried mightily to become banks by acquiring financial services and products. For at least 20 years before 2008, I had GM cars, GM auto insurances, GM mortgages, GM home insurances, GM Master Cards, and GMAC checking and saving accounts. You name it; I had it. I was a most faithful member of “The GM Family.”

Deaths at Heart Attack Grill

A few years later, I came across an article about a restaurant in Las Vegas: Heart Attack Grill. I learned that two spokespersons of the restaurant had died recently. That article hit home and provided much inspiration for the book. Here is part of the article (Polis 2013):

For the past year and a half, Alleman would stand outside of the restaurant and try to encourage people to come inside. Owner Jon Basso didn’t actually pay him for this, but would occasionally give him some free food.

“I told him if you keep eating like this, it’s going to kill ya,” Basso told the Las Vegas Sun.

The Heart Attack Grill is known for its over-the-top burger creations such as the quadruple bypass burger , which holds the Guinness World Record for “most calorific burger.”

Alleman died of a heart attack.

Multiple Minds

How do we explain those deaths on Wall Street and at Heart Attack Grill? Would it not have been in the bankers’ and the patrons’ self-interest to stay away from those bankruptcies and quadruple bypass burgers ? Yes, if we should assume that everyone has a singular, well-defined self-interest. Then we could conclude that those bankers and patrons are irrational. End of story. But I am not a fan of that story. I prefer stories that explain how their “irrational” behaviors come about in the first place. Fortunately, there are many such stories. What follows is a summary version.

A person has several selves pursuing different interests while bargaining and making compromises among themselves. As Shiller (2005, p. 169) puts it, there is “a pool of conflicting ideas coexisting in the human mind.” Things are fine when the selves stay at the bargaining table. Things go wrong when bargaining breaks down, with one self exercising dominion over the others. Take, for example, saving for old age. People don’t do it seriously (Thaler and Benartzi 2004; Akerlof and Shiller 2009, chapter 10). The “present self” says: I smoke, eat fast food, drive over speed limits, stay up late, and do not save; I have only so much energy and attention and money; I can’t worry for that “future self.”

The idea of multiple minds is not new. In The Theory of Moral Sentiments, Adam Smith saw multiple minds. The first sentence in the first paragraph of the first chapter of that book is:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.

The “principles in his nature” represent multiple selves . Later in the book, which predates The Wealth of Nations by almost two decades, he suggested that in a good society the rich are led by “an invisible hand” to share wealth with the poor. In the book he also introduced “the impartial spectator,” which suggests multiple selves as well. Therefore, it is no accident that he would reintroduce “the invisible hand” in The Wealth of Nations.

Behavioral economists today see a person’s brain as the dormitory of two or more selves. Schelling (1984) sees the Jekyll self and the Hyde self. Lynne (2006) sees the egoistic self and the empathetic self. Thaler (2015) sees the planner self and the doer self. Akerlof and Shiller (2015) see the good-taste self and the bad-taste self. (They call their bad-taste selves “monkeys on the shoulders,” who make them eat sweets and fatty food.) The list of multiple selves is long (Lee 2018).

Between Adam Smith and modern-day behavioral economists stand Berle and Means (1932). In The Modern Corporation and Private Property, they find two minds in the modern corporation (ibid., p. 300):

The owner of a private business receives any profits made and performs the functions not only of risk-taking but of ultimate management as well. … In the modern corporation, with its separation of ownership and control, these two functions of risk and control are, in the main, performed by two different groups of people.

Berle and Means saw corporate power encroaching on state power . They predicted that the day would come when corporate power would surpass state power. Has that day come? That is the question.

The Book in a Nutshell

In this book I take the reader on a custom tour of industrial organization. We start with a visit to the inside of a firm, with the agency problem at the top of our agenda. We meet the owner and the manager. We look deeply into their mindsets. They, in separate persons or not, are constantly judging each other. The owner judges the manager by the firm’s dominance . The manager is fully aware of that judgment heuristic and pursues dominance to impress the owner.

Then we move outside the firm to observe its body. Several features catch our attention: size , complexity , fragility , and its similarity to other firms.

Next we tour communities of firms and consumers, or what we call “markets.” We watch waves of mergers, chaos , and bubbles . We also witness battles between managers and creatures that act like antibodies in blood stream: raiders , trustbusters , and creative destructors.

When all told, the book is my story of how I learned to worry about industrial organization, with hope.

References

1. Akerlof, George A., and Robert J. Shiller. 2009. Animal Spirits. Princeton, NJ: Princeton University Press.
2. ———. 2015. Phishing for Phools. Princeton, NJ: Princeton University Press.Crossref
3. Berle, Adolf A., and Gardiner C. Means. ...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• Part I. The Minds of a Firm
• Part II. The Firm’s Body: The 4 Toos
• Part III. Epidemics
• Part IV. Antibodies
• Back Matter