August 22, 2012
Central Planning Within Markets
Reading the recent article by Yanis Varoufakis, Valve’s chief economist* concerning the internal dynamics of Valve, I also couldn’t help but wonder why such forms of organization aren’t more common. Valve is pretty unusually organized, in case you were wondering – there is no hierarchy, and employees are free to group as they wish and work on whatever they want. I’m willing to believe that this model can indeed work, but specifically that this system of organization is applicable mainly to the software realm.
I’d hypothesize that the relevant difference here is the difference in both product design and supply chain from physical goods. Varoufakis dwells on the wasteful nature of the modern corporation, and compares it to the command economies of socialist countries. This isn’t wrong – anyone who has tried to deal with modern-day equivalents State Grain Procurement Bureaus** will draw much the same comparison. However, a large part of the “command economy” within large firms doesn’t derive from pigheadedness or a general Marxist approach from production – it deals with the reality of having to marshal real physical resources.***
The Valve approach is, clearly, a viable one for software. Building software “products” requires primarily labor time, occasional licensed software modules (e.g., Valve’s Source engine), and a tool for storing code and performing version control. That’s it! The cost of “manufacturing” (i.e., duplicating finished code) and the cost of digital distribution are basically zero. On the other hand, manufacturing real physical products requires a way of weighing demands between competing production teams. And distributing goods may be more amenable to price signals…except that retailers don’t want to dynamically adjust their price paid so as to provide incentives for drivers to transport their goods. They want goods delivered at contractually-fixed prices for a contractually-fixed term.
I think, by the way, that the rise of rapid prototyping and 3D printing does have the potential to change that. As the infrastructure required to manufacture and distribute becomes lighter and lighter, this model could stand a better chance for real physical products.
The real stickler, of course, is a question Varoufakis doesn’t address at all: who takes out Valve’s trash? I have a strong suspicion it’s contracted out. The system he describes, as he admits, works much better for artisanal skilled labor than it does for, well, most labor. Valve is not going to “spontaneously order” themselves a bunch of janitors. Most laborers today, and most labor, doesn’t much resemble what Valve’s desk jockeys do. Try to consider how to translate the Valve staffing model to a retail chain, or an oil rig. I think the quasi-Soviet central planning of industrial enterprises isn’t going anywhere for a while, for very good reasons.
*: Yes, the one made famous by the Greek crisis. Also, yes, Valve has an academic economist serving as the Bernanke of a hat-centric economy.
**: In most companies we call them “Finance”.
***: However, this analytical lens is extremely Marxist.
I am a PhD student in political science at MIT, with a background in the business world. I've worked in management consulting and then the enterprise software industry. Now I study issues of political economy and quantitative political science.