Gregor Cuzak

on marketing, business and philosophy

Markets and hierarchies


I abide by principles. They help me in recognising patterns. The brain is essentialy a pattern recognition machine. With principles in place I know what to look for, I look for what feels natural.
I could count tens of various principles, however only a few achieve universality. This mean that they are essentially everywhere. For me using such principles is a shortcut to understanding the world around me.

One of the most striking principles I am observing is “markets & hierarchies”. The principle was introduced in 1981 by Oliver Williamson, a Nobel laureate in economics. In a simple form the principle says that all systems organize in such a way that its constituents occupy positions that make them best fit for survival. Survival is a balance act between opportunities for growth and risk involved. This balance most often presents itself in favour of either growth or security. Nevertheless, a growth oriented system will inevitably require some elements of stability. And vice versa.

Here growth alludes to markets and stability alludes to hierarchies. In growth oriented systems power comes from the markets. Members of such market oriented system compete, merit of success is sales and profit, innovation is fast, the circumstances are unpredictable. The cost is represented by the risk of being beaten in the market, and hence by energy used to compete. Sometimes these costs become very high.

When situation stabilizes such high costs don’t make sense. In such cases of stability hierarchies are better. Its member live and cooperate by a code of conduct, be it legal enforcement or a set of unwritten rules. The power comes from following the leaders, by playing according to the rules. In hierarchies one moves ahead by compliance. Merit of success is status. Innovation is not welcome, status quo is an ideal. Hierarchies thrive in periods of stability. The cost of hierarchic systems is its risk of becoming obsolete due to environment changes. Rigidity of such systems does not allow them to adapt quickly enough.

The point here is that these two systems always (!) go hand in hand. When there is one, look better, for you will find the other one too. The other one might be hidden, or it might be in a different place, but it is there somewhere. In case you haven’t found it, look better.

Now let’s pick an example. Capitalism means markets, while socialism means hierarchies. Still, there is a lot of hierarchies within capitalism. The state itself is a set of hierarchies. Corporations are hierarchies on the inside.

Socialism, on the other hand, is not all hierarchies. Science is markets in socialism. Sports is markets. Traffic is pure markets. Export is markets.

At its core the principle is a modification of the Yin-Yang principle. Itself is a light&shade principle, the most basic form of what we experience every day and every night. It is also a chaos&order demarcation. Whenever there’s chaos, look better, for there must be order somewhere. And vice versa.

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