Chapter Content
Okay, so I was reading this really interesting chapter about, like, the core ideas behind how we understand businesses, right? And it starts with this kinda funny quote from an economist named Robert Solow, who basically said if God wanted us to use more than two things to understand how stuff is made, he would've made it easier to draw pictures of it! Haha. So basically, it dives into this model that almost every economics student learns about, the production function. The idea is that what you make, the output, comes from combining capital, like, your machines and stuff, and labor, which is, well, people doing work.
Back in the day, some people thought land should be a third thing in the equation, you know? But as farming became less important and industries grew, land kinda faded away in the econ world. Although, it's kind of weird when you think about it, because location definitely matters, right? Think about huge cities like Manhattan. All that crazy wealth tied up in… land!
Anyway, so the basic idea is that you can draw these nice and easy two-dimensional diagrams, showing capital and labor. Both, like, regular economics and Marxist ideas of business used this two-thing setup, but in totally different ways, obviously. Economists like John Bates Clark and Knut Wicksell said businesses just choose how much machines or people they want based on which is cheaper or harder to find. Marxists, though, saw it more as a battle, like the workers always getting the short end of the stick in how the money is split up. It's all about power, you know? Like, who controls the means of production.
More of both stuff, capital and labor, usually means more stuff gets made. If you double both, you double what you get, or maybe even a little more if you have economies of scale. Oh, and you can swap between 'em - use more machines or more people, but you start getting less back if you add too much of one without the other. It's like, adding a ton of fertilizer to just one plant, you know? It can only absorb so much! Economists even have a fancy name for this: the Cobb-Douglas production function.
So, if a company wants to make something as cheaply as possible, they'll figure out the best mix of machines and people based on how much each costs, like wages or interest rates, stuff like that.
And here's the big assumption: Everyone uses pretty much the same technology, so everyone's making the same stuff, roughly. And, if something's selling for more than it costs to make, then companies will want to make more, and new companies might jump in. But, if prices drop too low, then companies will shrink, or even go bankrupt.
This whole model works okay if everyone's using the same tech and that tech doesn't really change over time. It kinda fits how things were during the Industrial Revolution with factories and all that. But, like, things change, right?
Later on, economists like Robert Solow realized, hey, tech changes! So they changed the model so things get better over time with the same amount of people and machines, thanks to, like, tech progress. Sometimes it’s just “manna from heaven” like someone said - like something that just appears out of nowhere. Or maybe tech progress makes machines work better or people work better, or both! They called that "total factor productivity" going up. Basically, it explained why the economy was growing way faster than just how many machines or people we had.
Then, this economist Paul Romer was like, wait a minute, it's not just free stuff from the sky! It's because companies invest in making stuff better! And then there's a whole political thing about it… nevermind.
So, the chapter goes on to say that, this whole model kind of misses the point about businesses being, you know, social things. It just sees them as machines owned by rich people who order workers around. So, it introduces Frederick Taylor, who came up with "Scientific Management" in the early 1900s. Basically, Taylor wanted to break down every job into tiny steps that could be measured and tracked. He thought workers were kinda dumb and needed to be told exactly what to do. And, like, if they didn't do it, he fired them! It sounds awful. Like, he admitted that the, uh, less intelligent workers… eventually just had to be let go because they couldn’t adapt.
Taylor didn't want workers to think for themselves. He thought the bosses knew best and everyone should just follow orders, no questions asked. If a worker got in his way, he basically said that the boss should keep yelling louder and louder until the worker did what he was told.
The book then asks a question: What would Taylor think if he saw a modern corporation? Just people staring at screens and pressing keys. How would he know who's in charge and what everyone is supposed to be doing? So the CEO explains to Taylor that it's hard to boss people around now because things are complicated, and, like, the people at the bottom might know more than the bosses at the top!
But, the CEO says, you can still do scientific management! You just need to pay consultants to figure out how to get workers to do what the owners want. And this is called the "principal-agent problem." The solution is to give people bonuses and incentives so they'll use what they know to help the company make money. Like, Marx said, paying people "piece-wage" – by the piece – is the best way to get them to work hard!
So, in this view, everyone's selfish, only cares about money, and workers only do stuff if they're getting paid or yelled at. Even the CEOs need bonuses to do their jobs well! The book says it's no wonder people don't like capitalism if this is how it works!
Companies are focused on things like "strategy", which means making deals. They also have things like Chief Financial Officers, and if they're feeling trendy, Chief Diversity Officers or Chief Sustainability Officers. The "Chief" title is important for showing everyone what the company cares about.
But, the chapter ends by saying that this whole "everything is just about money" view of business is wrong. It doesn't explain how good businesses actually work. People do care about money, sure, but they also want to fit in and do what's expected of them. Social stuff, like how you treat your coworkers and the world around you, matters a lot for being happy and getting stuff done.