The great economic and political debate of the 20th century has been between central planners and free marketeers. The apparent victors have been the free marketeers. But their victory constitutes only the first item on the free marketeers agenda. The next and perhaps more substantial item is the application of market principles to the internal operations of firms.
In the prevailing model of market economies, competition operates between firms but not inside them. Firms are seen as islands of command-and-control socialism operating in oceans of free-market activity. Business-style socialism within firms has pretended to offer employees protection from competition with talk of "permanency" and "loyalty".
What is now being observed is the penetration of the internal operations of firms by markets. This paradigm shift is most apparent in the US. It is a prime creative driver within the information technology area, but the trend is not confined to the emerging glamour industries. Market-based management has a solid history in some more traditional industries as well.
Consider Koch Industries, which is ranked as the 18th-largest business in the US. It is valued at more than $US35 billion ($52.5 billion), is a debt-free and has a top-quality credit rating. Privately owned, Koch Industries operates in oil, gas, animal feed, cattle and petrochemicals. Charles Koch, the media-shy 63-year-old owner and a devotee of libertarian scholar F.A. Hayek, has practised what he preaches. He has applied market principles to the internal management of his businesses.
The management structure of Koch Industries relies on internal markets to allocate internal resources. So-called "support groups" or "profit centres" are expected to survive in the internal Koch market by offering services competitively to other such centres.
With internal markets, for example, a machinery maintenance depot will seek to service manufacturing sectors in the firm.
The manufacturing sectors are not obliged to use the internal maintenance group, which has to win its business in competition with other service providers from outside industries. Applying the market principles even further, the pay of individual workers in the maintenance group will be linked to their commercial success.
Similar internal competitive markets can be applied to other activities within the firm, such as accounts, debt control, marketing, training, recruitment, design and planning. For internal markets to work, no profit centre must be allowed any exclusive right to deal with any other profit centre.
Internal markets can have a profound effect on productivity. According to Koch Industries, introducing the price mechanism to the internal workings of the organisation encourages staff to think and act like smart purchasers. The market-based management of personnel in firms produces two results.
By exposing everyone to competitive pressures, it prevents the destructive and negative game-playing that can poison a company. More importantly, it allows human economic creativity to flourish.
Koch-style, market-based management practices have penetrated deep into US businesses thanks to the minimal labour-market regulations. What was once thought to be a technology-led growth surge in the US is proving to be based on the productive behaviour of people in firms.
Alan Greenspan has wondered why the US is experiencing sustained long-term growth and low unemployment without the expected emergence of wage-induced inflation. An answer can be found in the application of markets in firms.
When internal markets operate inside firms, the monopolistic and destructive behaviour of internal collectives cannot force the price of wages up beyond the capacity of the firm to pay. The price constraints of the external markets are directly and rapidly transmitted throughout each firm by internal markets that constantly send thousands of small price signals that impose reality tests on attempted income increases.
As this highly price-sensitive management process becomes commonplace throughout business, it challenges and changes conventional ideas about a "natural" rate of unemployment.
When the market is allowed to operate inside firms, national unemployment rates can fall way below the levels previously thought of as the natural minimum as market honesty relating to incomes directly affects every person in the firm. Individuals can benefit themselves only when the firm or firms for which they work benefit.
The true quest for nations is the release of human economic creativity. Each society and individual has two choices. As George Bernard Shaw explained: "This is the true joy in life -- being a force of nature, instead of a feverish, selfish little cod of ailments and grievances complaining that the world will not devote itself to making you happy".
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