Econ 1620 - Lecture 2


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Econ 1620 - Lecture 2

  1. 1. Lecture II The Problem of Economic Organization
  2. 2. Economies <ul><li>Efficient use of resources </li></ul><ul><ul><li>Best use </li></ul></ul><ul><ul><ul><li>Action Driven by efficiency </li></ul></ul></ul><ul><li>Transaction Costs </li></ul><ul><ul><li>Coordination Costs </li></ul></ul><ul><ul><li>Motivation Costs </li></ul></ul>
  3. 3. Coase <ul><li>Background: Theory is an organizing principle for thought, research, discussion, common language… </li></ul><ul><li>It need be not “Correct or Incorrect” </li></ul><ul><li>Note Demsetz for Class 3 </li></ul><ul><li>GROUP DISCUSSION OF COASE ARTICLE </li></ul><ul><li>Group 1-This article is interesting only as part of the history of Organizational Theory </li></ul>
  4. 4. Coase Discussion <ul><li>Group 2-This article was important in its ‘time’, but is largely irrelevant today. </li></ul><ul><li>Group 3-This article is ‘cutting edge’ thinking with major implications and applications to management theory & practice today. </li></ul><ul><li>Group 4-This article provides an intellectual framework and explain how that framework might frame our discussions in this course. </li></ul><ul><li>Group 5-By not considering the concepts in this article, the theory and practice of management cannot be effectively undertaken. </li></ul><ul><li>Group 6-This article is misleading and express a contrary view that would be more appropriate for our discussions. </li></ul>
  5. 5. Coase (continued) <ul><li>Outside The Firm – Price movements direct production – coordinated through a series of exchange transacti0ons on the “Market” (Explain sales at a financial loss) </li></ul><ul><li>Inside the Firm – The entrepreneur “coordinator” directs production by bringing into being a system of relationships (Efficient v. Market) </li></ul><ul><li>Essential for tolerance of complexity? </li></ul><ul><li>Focus on “Efficiency” as a motivating force </li></ul><ul><li>A firm as a conglomerate of contracts </li></ul><ul><ul><li>Continuity – reduce complexity </li></ul></ul>
  6. 6. A Conceptual Framework (Insight Into Markets and Organizations?) Division of Labor Specialization Coordination Organization Market Information
  7. 7. A Conceptual Framework (Continued) <ul><li>Issues: </li></ul><ul><li>Price mechanism not sufficient to perform coordination function </li></ul><ul><li>Organizations are formed to resolve information problems </li></ul><ul><li>Technology facilities transparency of information – but individuals and organizations tend to hoard information for power and as a store of economic value (short life) </li></ul><ul><li>Can we understand outsourcing in this context – Has information flow given us new control options? </li></ul>
  8. 8. <ul><li>Efficient market is expected to allocate scarce resources </li></ul><ul><li>But: Do we need a more complex framework to understand valuation of and allocation of knowledge/information resources? (Intellectual Property, Communication and Analytical Tools, and Human Resources) </li></ul><ul><li>Any insights from behavioral finance? </li></ul>Markets
  9. 9. <ul><li>Not a pure economic problem – Sociology, Psychology, Management, Political Science, Anthropology and other disciplines provide insights and analytical tools. </li></ul><ul><li>Qualitative and Quantitative Analysis </li></ul>Markets (Continued)
  10. 10. <ul><li>Stagnation accelerated after 1950’s </li></ul><ul><li>Has technology reversed this? </li></ul><ul><li>Have we broken organizational gridlock? </li></ul><ul><li>Consider rise of small & fall of large organizations </li></ul><ul><li>Is group-work a solution? (anti-specialization) </li></ul><ul><li>Has outsourcing moved the organizational gridlock to geographic areas willing to accept the problem? </li></ul>The Pursuit of Productivity
  11. 11. <ul><li>Consider: </li></ul><ul><li>The industrial age, specialization and labor unions put restrictions on individual choice as they facilitated higher performance (output). Note: Unions look to regain ‘power’ </li></ul><ul><li>The service economy offers opportunities for individual skills and initiative </li></ul><ul><ul><li>Opportunity for controlling individual satisfaction (i.e. individual defines job/work) </li></ul></ul>The Pursuit of Productivity (Continued)
  12. 12. <ul><li>Does this put the control of when and at what price goods and services will be exchanged in the hands of the knowledge worker? (Not unlike the historical craftsman) </li></ul><ul><li>Does the coordination problem take a primary significance? </li></ul><ul><ul><li>Is industry responding with mass customization? </li></ul></ul><ul><ul><li>Does this lead to customer designed products and services? </li></ul></ul><ul><ul><ul><li>- Dell - Unix -……(Autos, UPS.Parts </li></ul></ul></ul>The Pursuit of Productivity (Continued)
  13. 13. <ul><li>ORGANIZATIONS have used authority as a coordinating mechanism -- This becomes fuzzy as organization “stars” and “rain makers” are not the holders of authority on the organizational chart </li></ul><ul><li>MARKETS have used a price mechanism – This becomes fuzzy with emotional or other ‘motivational’ decisions </li></ul>Organizations
  14. 14. <ul><li>Dealer Markets – inventory </li></ul><ul><li>Auction Markets – match buyer/seller </li></ul><ul><li>Specialist/Market Maker – Hybrid </li></ul><ul><li>All serve purpose of moving asset from willing seller to willing buyer at an agreed price (value) </li></ul><ul><li>Multiple models (and Customized Modeling) </li></ul><ul><li>Can be practical and efficient </li></ul><ul><li>- Facilitated by technology </li></ul>Financial Markets as an Example of Complexity
  15. 15. What is Efficient Price for MBA ? Position Financial Analyst at Consulting Firm Fuzzy Job at .com with IPO Target -2 to 3 years Your own business model to deliver service value to new MBA’s (Social Enterprise) Compensation $100,000+ $50,000 + Options - 0 - Must raise capital Control Ownership