Economists are more likely than most to emphasize the importance of decentralized decision-making and the way it allows dispersed knowledge to be fully utilized. But the argument doesn’t just apply to a high-level view of the economy as a whole. Decentralization isn’t just good economic policy – it’s also good business policy.
This thought crossed my mind when I came across an interesting Substack article by Ted Gioia on how the previously dying Barnes & Noble is now managing to grow at a time when seemingly invincible tech giants like Amazon and Facebook are in decline. He attributes this remarkable turnaround to a few key factors, including a new CEO who loves books and bookstores. But it takes more than a CEO who has his heart in the job, important though that may be. Shifting away from top-down decision-making and towards a bottom up, decentralized approach has been crucial.
(Full disclosure – during my college years, I also worked full-time at a Barnes & Noble. While I love books, I didn’t much care for my time working there. I’m just ill-suited for retail work.)
It’s worth noting that Gioia attributes part of the Barnes & Noble turnaround to a certain form of top-down decision making – specifically, deciding from the top that decisions shouldn’t be made from the top. As he puts it:
I’ve seen that firsthand so many times. I now have a rule of thumb: “There is no substitute for good decisions at the top—and no remedy for stupid ones.”
It’s really that simple. When the CEO makes foolish blunders, all the wisdom and hard work of everyone else in the company is insufficient to compensate.
This reflects an important line of thought also shared by the late Jeffrey Friedman and recently highlighted by David Henderson – when centralized decisions are mistaken, the mistake is imposed across the entire system. Bottom-up decisions could also be mistaken in any given instance, but they are also smaller in scope and not imposed system wide, allowing them to be weeded out through comparison and competition in a way that top-down decision making doesn’t allow.
The new CEO of Barnes & Noble, James Daunt, employed the same line of thinking he used during his time at Waterstones, a British book retailer. Previously, the decision about what books should be in stock at which stores was made in a top-down fashion, where publishers worked at “convincing a head buyer at headquarters” regarding inventory and display decisions. Daunt ended that practice. As Gioia puts it:
Leaving those decisions up to individual stores allowed local knowledge to work in favor of the company as a whole. What kind of books are in demand can vary a lot from local market to local market. Publishers and people sitting behind desks and headquarters simply are not well suited to discover this kind of information. But Gioia points out:
But Daunt used the pandemic as an opportunity to “weed out the rubbish” in the stores. He asked employees in the outlets to take every book off the shelf, and re-evaluate whether it should stay. Every section of the store needed to be refreshed and made appealing.
As this example makes clear, Daunt started giving more power to the stores. But publishers complained bitterly. They now had to make more sales calls, and convince local bookbuyers—and that’s hard work. Even worse, when a new book doesn’t live up to expectations, the local workers see this immediately. Books are expected to appeal to readers—and just convincing a head buyer at headquarters was no longer enough.
Of course, Barnes & Noble is not the only example of the importance of decentralized decision making in business. Occasionally, overly exuberant critics of the market process suggest that giant firms like Wal-Mart show that the economic calculation problem and the knowledge problem highlighted by Mises and Hayek can be overcome. Richard Fulmer has pointed out several flaws in this line of thinking already. But longtime listeners of the EconTalk podcast will also remember when Charles Platt talked with Russ Roberts about working at Wal-Mart.
Despite what the socialist writers at Jacobin imagine, Wal-Mart is far from an example of successful top-down central planning. It relies very heavily on decentralized decision making in its business structure, with decision-making authority dispersed throughout the system rather than being centrally directed. Companies sometimes forget this lesson – and they are the worse off for it. But Barnes & Noble is showing what can happens when old wisdom is rediscovered – to the benefit of themselves and book lovers as well.
READER COMMENTS
David Seltzer
Feb 22 2023 at 11:06am
No one person or group of market strategists knows enough of the individual preferences of others to plan and direct the behavior and decisions of others.
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
“The Use of Knowledge in Society”
Friedrich A. Hayek
David Seltzer
Feb 22 2023 at 11:14am
Kevin, this an excerpt from an article I wrote titled, Central Planning A Bowl of Cereal.
No one person or group of market strategists knows enough of the individual preferences of others to plan and direct the behavior and decisions of others.
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
“The Use of Knowledge in Society”
Friedrich A. Hayek
Knut P. Heen
Feb 24 2023 at 5:59am
I use Hayek’s tin mine example as an introduction to managerial accounting. My point is that the managerial accountant needs to posses a lot of information to correctly calculate the cost of the firm’s products. It is easy if the firm only produces one product, but very difficult if the firm produces 100 products due to joint costs and the information problem. My point is that access to market prices actually makes business simpler. The same is true in finance. Access to data on market returns make it pretty simple to find an appropriate discount rate for NPV calculations. Without data on market returns, an investment analysis becomes a complicated capital budgeting problem.
David Seltzer
Feb 24 2023 at 2:16pm
Knut, Good point. The same is true in finance. Access to data on market returns make it pretty simple to find an appropriate discount rate for NPV calculations. Without data on market returns, an investment analysis becomes a complicated capital budgeting problem. In my capacity as risk-manager for a hedge fund with several tickers in our portfolio, I used a version of CAPM to assess risk/return trades. The S&P 500 with a beta of one and VIX calculations and its risk adjusted market return worked well for us. Market VIX determined stochastic discount rates when using Dividend Discount Models. Often, investors wanted to understand their risk, and we used CAPM and derivatives to answer their questions.
Grand Rapids Mike
Feb 24 2023 at 12:16am
Couple of points: The bottom ups of approach or decentralized decision making also makes the local decision maker responsible. Decentralized decision making means decentralized responsibility. It is not just about local knowledge but the local B&M [?B&N–Barnes and Noble?] store manager must be willing to take the initiative, have a deep understanding of the local book market and the know how to market to the local market. The B&M store manager has now skin in the game
A little story a long long time ago I worked as a janitor (actually rose through the ranks as head janitor) for Monkey Wards (MM). The HQ at MM determined the amount of square ft and sales quota for each department ie women clothes, etc. in the store. The store I worked at was in a outer area of GR where there were a lot newer homes. The manager of the department with Home Depot type goods met his annual quota in May. He bragged how good he was in selling. The top management of MM had no clue that this store was a prime location for selling this stuff and should have more space and quota. Another problem of centralized management is the total lack of understanding the local markets along with getting locked into outdated ways of operation and thinking, which in a sense explains why Amazon destroyed Sears.
[Note: “Monkey Wards” is a slang term standing for Montgomery Ward’s, a department store chain/mail-order/catalog service active from the late 1800s through much of the 1900s, a major competitor to Sears-Roebuck, and a pioneer of the mail-order business. The term “Monkey Wards” is not necessarily derogatory. –Econlib Ed.]
Grand Rapids Mike
Feb 24 2023 at 7:01pm
Thanks for the clarification on the term used for Montgomery Wards. It was term that seemed common. Not sure where it came from, think it was one of first Big Box stores to exit.
MarkW
Feb 26 2023 at 1:27pm
Montgomery Wards was once famous (well before my time), for this historical event:
https://www.lawfareblog.com/remembering-montgomery-ward-seizure-fdr-and-war-production-powers
Comments are closed.