Delve podcast: Why Organizations Are Restructuring and Rethinking Control, with Bengt Holmström and Saku Mantere (Read Transcript)

Delve podcast, March 8, 2023: Why Organizations Are Restructuring and Rethinking Control, with Bengt Holmström and Saku Mantere
Robyn Fadden – host: Welcome to the Delve podcast, produced by Delve, the McGill University Desautels Faculty of Management’s thought leadership platform. In this special episode, we’re pleased to feature Nobel prize winner in economics and MIT professor Bengt Holmström in conversation with Desautels professor and Delve Editor-in-Chief Saku Mantere. Their conversation addresses some of the most vital management and leadership questions of our time.
Saku Mantere: What is a business firm for the future? Are the hierarchical bureaucracies that we all know and well… adore … going to be a thing of the past one day? My name is Saku Mantere. I am professor of strategy and organization at the Desautels Faculty of Management and Editor in Chief of Delve. Before the holidays, I had the privilege to have a chat with an old friend from my native Finland who also happens to be the recipient of the 2016 Sveriges Riksbank Price in Memory of Alfred Nobel, commonly known as the Nobel prize in economics, Bengt Holmström. Bengt is Paul A. Samuelson Professor of Economics Emeritus at MIT. He is one of the main contributors to the theory of the firm, in particular through his analysis of incentives. We start our discussion by outlining how the theory of the firm understands the nature of a business firm, and try to understand how contemporary business firms are changing this understanding. I hope you enjoy our discussion; I certainly did.
Saku Mantere: I would like to begin our discussion with a quote from an earlier Nobel laureate Herbert Simon who talks about a visitor from Mars. And suppose that the visitor approaches the Earth from space equipped with a telescope that reveals social structures. The firms revealed themselves, say as solid green areas with paint interior contours, marking out divisions and departments, market transactions shows red lines connecting firms, forming a network in the spaces between them, within firms, and perhaps even between them, the approaching visitor also sees pale blue lines, lines of authority connecting bosses with various levels of workers. As a visitor looked more carefully at the scene beneath it might see one of the green masses divide as a firm divested itself of one of its divisions, or it might see one green object gobble up another, at this distance, the departing golden parachutes would probably not be visible. A bit of a joke there at the end. We’re going to be talking about the future of the organization. And I think, this analogy from Herbert Simon is pretty elegant. We have red lines connecting green bubbles and the green bubbles are firms. Let’s start with me asking, how do you envision those green bubbles? Why is it that we see firms and transactions between the economy?
Bengt Holmström: Well, there is, of course, a long history on this. And Simon wrote his first thesis in the 50s. That analogy is apt, I think. He basically was rebelling, so to speak, against the pure economic theory of general equilibrium – basically firms are no bigger say, than humans, so to speak, or consumers. They were treated, essentially, in a similar way. And his point was that a lot of activity takes place inside firms and not through the market. And the markets don’t exist either in the way it’s sort of portrayed in general equilibrium theory. That’s, of course, an abstraction, so this is not a critique to the general equilibrium theory. But he wanted to understand what’s inside the firm. And another big figure in this context is, of course, Ronald Coase, who also pondered why there are firms, and what their role is, and how is the labor between firms and markets divided. Now that we have a lot more data, it turns out that there are estimates of how much is transacted inside the firm, at least about 45%, 50% goes between firms just across the globe – the same firm transacting with itself, this comes from trading data. So it kind of confirms the reason that Simon had. And of course, we have all the interactions like this one, we are not paying anything to each other for doing this, this is also a transaction and so on. In fact, massive transactions happen outside the market and are non-financial.
Bengt Holmström: So the question has been there are already at least three Nobel Prizes given to the question about what defines the firm and how is it divided? How are transactions placed, either through markets or through firms – the answer keeps coming back, so this is going to be a perennial question. Basically, it’s seen today as having to do with the kind of instruments that are available in markets versus firms. Let’s put it this way: between firms as opposed to within firms, and the control aspects of it, and also the information aspects of it, and so on. It’s all coming down to, today at least, to frictions in the various instruments there are between the firm and the market. It’s hard to go into detail, but roughly if you have a firm, you have a lot more control within the firm, but across the market, so to speak, if two firms transact with each other, the contracting is limited. On the other hand, everything can be in a single firm – it could be a monopoly or so on, so there’s sort of a trade-off between coordinating within the firm very well versus having stronger incentives in the market. We behave differently when we transact in the market versus within the firm. That was a fairly long answer. But you understand that this is 50 years of work.
Bengt Holmström: I would say that’s the starting point of all of what we call organizational economics. Economics assumes that people are kind of efficiency seeking or utility maximizers or something – this is applying it to firms. All the things we are doing, we are seeking to make it more efficient, is the main hypothesis. And so that divides it. And then the question is, what are the details in this story when it comes to how this is written? And it also leads to the fact that we are all the time seeing new forms of organization, or maybe not all the time, but it’s evolving. So this question is underlying it all the time. And today data and digitalization has changed the landscape considerably, so have the firms and firms’ organization has changed. So that’s the underlying premise.
Saku Mantere: Bengt Holmström has seen that the conventional boundary between firms and markets has become blurred in some instances. He mentions the Haier Corporation, a Chinese multinational home appliances and electronics company, and McKinsey Consulting as examples.
Saku Mantere: We’ve been talking about these milestones in establishing let’s call it the classical picture of the market versus the firm, and why is it that we have firms – we’ve had these different answers. And now, as you said earlier, you’ve yourself witnessed some of these things changing. For instance, you mentioned that in your work in China, you’ve seen companies which actually have a market within the firm.
Bengt Holmström: That refers to Haier, which is a really radical organization. One of the things you see when you study organizations is you see every now and then something very radical coming along – and it succeeds. There was a time when I was at Stanford, that there was an organization that just allowed people to take whatever they wanted in terms of wages, there was a kitty and everybody could go there and take. It was very successful because people were hesitant, they actually took less money than when they were on pay – until one guy took more or less everything, and that was the end of the experiment.
Bengt Holmström: Haier is a really radical organizational form, where basically, it’s the world’s largest white goods producer, that is washers, dryers, all sorts of home appliances, etc. It’s a gigantic firm in terms of scope – it bought out, for instance, the white goods part of General Electric, and it’s running also in the West, it’s not just China. The notion of how to run the firm is that every order they get is bid for within the company.
Bengt Holmström: It’s easy to think like it’s a university, that you and I decide that I have a good idea or something, so why don’t we start working on it together. There are teams that all the time, well, not all the time, but they kind of change their structure as a function of what’s being offered to the firm. And they are then bidding – I’m saying, McKinsey would be like this also somewhat. I come to you and say, “Do you want to be part of this? I want to bid on this contract and I know you’re good at these things.” So inside the formal structure, they bid for it. And there are a lot of these sort of micro enterprises inside the firm and some of them are relatively stable, just like we could be working together on some projects for a long time in academia or something like that. But other structures are looser and change shape.
Bengt Holmström: So this is already radical. I mean, it’s usually you have some sales department and so on. But his idea, this fellow who thought about it, I think he’s still the chairman but maybe he has stepped down by now. He had this notion that everybody has to face the customer – he called it “zero distance” – everybody working inside the firm should sort of feel as if they are facing the customer all the time, and therefore this bidding, and so on. And the most radical thing was that we could take somebody from outside, or somebody from outside to come and bid and say, “Well, do you want, Saku, to join me? I want to be a part of the of this bid.” It’s a little mysterious what’s happening, like all of these things, it’s very hard to get the exact notion, but the idea is that you’re also confronting challenges from outside. Somebody could come and say, “You guys all the time are working with Bengt, but I think his ideas are bad, and he’s not a good leader, and so on, so let me – I’m proposing myself as a leader and here’s my plan, and then you guys may suddenly join that.” So it’s almost like there are no boundaries.
Saku Mantere: There’s a simpler example, I guess, say a business school where you have program leads who staff courses with professors, and they get input from students on who the student likes, and they have the opportunity in some cases to hire outsiders. You might be hired as a professor in the university, but you’ll be in trouble if you don’t get picked up by the program lead. So there is an internal… Or, say, in a music school, there are instrument teachers, and then the students give feedback, and in some cases, if they find that the tenured person who’s the clarinet teacher in the music school, that there’s somebody else who’s in the market in the musical community who’s better, then the students are demanding that person, then the tenure person is going to be in trouble if that decision maker who doesn’t give them students.
Bengt Holmström: Yeah. Let me emphasize Haier has not been, like many of these extraordinary experiments, there are very few companies that have had done anything like Haier, I believe. I think it is pointing in a new direction, which has been taking place, which is that the sort of boundaries become more diffused in general. And it’s both firms looking from inside and outside it, we have talked about inverted firms today. Firms give information and access to data inside the firms to outsiders actually – they don’t even know who will pick up the bits – but outsiders can come and propose or work out solutions to the firm’s problem, innovate things for the firm and so on.
Bengt Holmström: This is what part of what we call platforms, the platform economy, and they design sort of playing fields for outsiders to play in, and then they cash in on it in various ways. And in the case of innovations, they use these innovations for themselves and so on. Amazon, for instance, is one platform for it’s very transparent assembly specs for the outsiders, and you can come there and help them if you want to, and so on.
Bengt Holmström: Haier has tried to do it in a way that was kind of traditional in some ways, but it hasn’t been emulated. When they have gone to Europe – they own companies in Germany and so on – they have run afoul of labor laws, we are talking about unions and others that protest labor laws, so they have had to modify this concept a lot. One thing, they are still pioneers in a certain sense in terms of really facing the customer, getting very close to the customer, having the firm inside, everybody inside coming for customers to some extent. Also, as I mentioned, outsiders coming in, so to speak. I don’t think the Haier organization has had a long enough time to try to manifest itself in different parts of the world, nd I don’t think it has succeeded in that. But these platforms are certainly a worthy and very significant development.
Saku Mantere: Digitalization, one of the main drivers of change in economy, also impacts on organizations at a fundamental level. The platform organization is heralded as the characteristic organizational form for the digital age.
Saku Mantere: We’re seeing that the platform organization has more diffuse boundaries with its environment in certain ways, at least. How would you define a platform organization against the classical picture that we talked about earlier with the green bubbles and the red lines?
Bengt Holmström: I would say that platforms are like an instrument or a design feature, yes, they are platform organizations. But most platforms are still run — take Apple, for instance, Apple’s App Store is a platform. The platform is defined, basically, by enabling the buyers and sellers so they’ll operate on the platform, I’m thinking a bit like a playing field –you’ll own a soccer field, and then people will come and they will play there. And they are delivering the value by playing matches with each other and so on, but you are cashing in on the fact that they are playing on your field, and you will charge a fee or whatever. That’s one way of thinking about the platform. The key feature is that buyers and sellers are sort of interacting rather independently of you.
Bengt Holmström: In the traditional conception in order to make money you had to be between the buyer and the seller, you had to connect, you were an intermediary of some sort in a chain, and you took your fee going from one to the other. In platforms, you design the interface, it’s always a digital interface, so you design the code and the rules of the game. One thing that is critical for the firm is because you own that idea, you own that platform program, you can set the rules of the game in that sense. Eventually of course – think of social platforms, like Facebook or something like that, where there’s billions of people on it – at some point, you sort of lose control of it. I mean, you can do things, but there will be a revolution or something like that, where you are not any more in charge, in that sense of the platform.
Bengt Holmström: When I worked with Alibaba, I had a big discussion once on a panel with the new CEO of Alibaba, and I asked him, could you be in the spirit of this ownership that we talked about? Take Grossman and Hart I asked, “Could you just shut down the platform? You have the right, it’s your platform.” And he adamantly refused to accept the idea that you can shut down the platform. I mean, he just thought it was crazy. He didn’t understand that he might have a legal right, but he didn’t want to concede that to be the case. And I understand him in some ways. He said, Look, it’s out of my hands in many dimensions, and I can’t just go and do whatever I want to do.
Bengt Holmström: The way our thinking in organizational economics works is that we have needs. The basic need here is obviously for people to meet with each other, find each other, transact with each other. And as I said. before it went through an intermediary, like most firms are intermediaries, inputs come in and outputs go out so they are intermediating and doing something about it. Here that need to match people with each other is sown by the platform and, because of digitalization, people have an easier time, it’s a like an old-fashioned marketplace, that was the purpose of marketplaces in the old days – you came there to the marketplace and then buyers and sellers would find each other. That’s the idea, and the reason they have become so popular is that, really several reasons, one of which is this enormous scalability. Information is an interesting good because if I use some information, that doesn’t prevent you from using the same information. Information is not like apples and oranges which you consume or I consume it, but we can’t both consume the same apple. Information is a very different good – it’s what they call a non-rival good – it can be used with everybody.
Bengt Holmström: So with this digitalization, especially the mobile internet – the mobile internet is really at the core of everything – you can reach everybody almost 24/7 everywhere in the world and with one push of a button, you can send an email to one person, you can send an email to a billion people, if you have all the addresses. So you see that the cost is very low, and the marginal cost is very low. So they have grown in popularity for this reason. Then come other features, like the data is very valuable that comes from this platform. And that’s the thing that usually the owner of the platform monetizes in some manner and provides new services on top of the platform because people are there. Platforms are not going to take over everything, but they are just, at least in my lifetime, in my view, the biggest change in organizations, the biggest new idea – it’s an old idea, but in new clothes – and it’s massively important in my view.
Saku Mantere: We talked about ethical challenges that are brought about by new organizational forms such as platforms. In particular, while many of us hate bureaucracy, the consistent governance of ethical and other policy principles in organizations might require a stable hierarchy. Bengt sees a can of worms about to be opened here.
Saku Mantere: If we look at these green bubbles and red lines, the platform organization is different, the boundary is more diffused, the colors bleed into each other. Because the platform on the one hand, it includes other organizations that operate within the platform, and it also sucks in the customers. If we think about Facebook, it’s probably the biggest publishing house in the world and they do almost no content themselves, it’s basically us the users who do all the publishing. So basically, we are Facebook. That’s also interestingly related to what you were saying that you can’t just close it down – it’s like closing down the electrical grid in the winter, people have become dependent, it’s become a part of their everyday life. This leads me to a question, because earlier you said that it’s harder under such circumstances to actually control what happens. And then there’s also a question around say, ethics, this question of sustainability, because control is often done, for instance, if you want to impose environmental standards on how we operate, we actually have to introduce processes and bureaucracy, we have to control things. And this new way of doing things, for instance, having a market within the firm, where everybody’s just bidding, it’s harder to control that kind of game. How do you think about, let’s take sustainability as an example, how do you perceive that challenge?
Bengt Holmström: This whole platform idea opens up an enormous can of worms in in terms of governance – who is responsible for things? If somebody misbehaves on the platform, is it Apple’s problem? Or is it the person who designed that particular program or that particular part of the platform and so on? We see it in self-driving cars, is it the coder who’s in charge? Or is it the driver, who is? We don’t even know what happens if self-driving cars suddenly go wrong. So we are facing a lot of new governance issues in terms of how, and I know from Alibaba, they thought a lot about governance, because they are, after all, designing the rules of the game on the platform in some ways. But then things happen also in the platform, and they can’t control everything, and they come up with new ideas and create new sort of layers on top of the platform that is outside, say, the control of Alibaba or Apple or whatever. And these are very vexing problems.
Bengt Holmström: You asked about sustainability, what happens if they sell some bad products on it – and I know from Alibaba, they are constantly and automatically, basically focusing on false goods, but also dangerous goods. And they have these screens where every day they probably catch hundreds or thousands of false products on their platform or misbehavior on their platform. There are disputes on the platform, like I claim that I was supposed to buy this from someone who didn’t pay labor and so on. By the way, 98% of those disputes are just automatically, they have a bot that checks everything and resolves it and decides in in favor because they have so many cases like this. It’s kind of a law that develops from the cases to see how to resolve these issues. So it’s very rare that they have to in person sort of start to address those issues. But the point is, this is an organism that’s growing and it’s not under the control of the firm, necessarily, that comes part and parcel from going outside the firm. By the way, Haier was sort of thinking of people coming into the firm, so to speak, but the platform is a very different philosophy, that you’re externalizing things and you are controlling it from a distance, and a certain design distance.
Bengt Holmström: But a lot of issues here are unsettled, and especially in the financial markets, as we now know, we have seen the FDA scandals and so on – that’s not particularly platform related, but the platform was an enabler, but there were other things going on. There are a lot of issues in FinTech on legally what can be done on these firms and how to regulate them and so on. A massive change is happening in an effort to deal with these problems. I’m sure the law will have to change in many ways.
Saku Mantere: Bureaucracy, which was a term that was developed by Max Weber, a sociologist, to describe the basic rules of a hierarchical organization, it’s become a dirty word in many circles. It’s kind of used to blame an organization for being inefficient. Of course, not by everybody, but it has this negative connotation. And it’s kind of funny, because it’s very, very hard to impose accountability in an organization if you don’t have some kind of a bureaucratic structure, if you don’t have what you mentioned as governance, that it’s a governance problem. But if you want to enforce certain principles or values or rules, processes, we have to have some structure of accountability. So, it is a vexing problem, as you said.
Bengt Holmström: When you say bureaucracy, I think one of the things that came out of thinking about these problems was, if you go back to the idea that we are seeking to be efficient, as soon as you say that you understand that bureaucracy is as old as the firehouse and older – it’s got to be that it has to serve a very important function, and you pointed your finger partly to the function that we need to control people, we need to govern them, and they have responsibility, but they also have power to make decisions about how things are run inside this firm. This notion that bureaucracy is some illness? Excess bureaucracy may be an illness, but just like fever is actually a defense mechanism to something, so is bureaucracy. It’s in the first instance a brilliant solution to a very complicated problem [of organization]. If you think about Neanderthals, they would have loved to have a bureaucracy.
Saku Mantere: Arguably bureaucracy arose at the same time with the agricultural surplus. So when we saw the first more complex societies emerge, when certain people were able to do other things than just grow or hunt food. So we had agricultural surplus, so we saw that. You mentioned Ancient Egypt, so it was the same time when bureaucracy was born, what we now call bureaucracy, obviously, it’s a later term, that we had mathematics and written language, because those were created to deal with the same coordination challenges – that you wanted to do something a bit more complex, like build a monument to your king, so you need people, you need me to manage them, you need to manage resources, you need to find ways of running an organization. So yeah, it is funny, but I suppose there are lots of reasons why people don’t like what they perceive as bureaucracies.
Saku Mantere: After we have defended the honor of bureaucracy as a governing mechanism, Bengt reminds us that the market also serves an important ethical role by defending freedom of choice for individuals. He calls this the “exit option.”
Bengt Holmström: Let me get back in that context, just to the boundary question which you started from. Now, maybe this is a moment to bring a little bit back to Simon’s picture. On one hand firms have, it’s not a democracy, there’s bureaucracies, there’s rules, there’s regulations, the firm has a lot of power to design itself the way it wants to. I mean, just look at Elon Musk now, what he’s doing to Twitter, he is the owner so he does all sorts of crazy things. So what is the option for people, you may say? Well, if they do those crazy things, should we protect these people? Well, there is a protection mechanism, in that Simon picture is that I step out of that green block, and go to some other green block that is nicer. So do you see that the exit option that people have – customers, suppliers, workers – they all have exit options.
Bengt Holmström: And that’s the critical thing for a competitive capitalistic system is that you have to give people exit options. If there are exit options, then that tends to be a healthier system. And whether that’s selling your share and not being part of a company more, or exiting as a worker, and going to another workplace. So you see that giving choice is really at the center of a well-functioning, capitalistic firm, and rightly therefore monopolies and those things are not just because of … We focus very much on price distortions, when we have monopolies, but it’s just as much distortion in terms of getting a chance to serve a sense of purpose in a proper way. So, this gives a much broader sense of the importance of having alternatives and not having monopolies. And that’s the dilemma, by the way, of the government.
Bengt Holmström: If you think of Iceland, these blocks are like little islands. But Iceland is an island, but not in the sense of an island as in Simon’s picture, because Icelanders can exit, they can go to some other country or something like that, but they lose it, there is no other Iceland to go to where people speak Icelandic – and so do you see? Governments are dealing with a much more complicated problem about legitimacy. They have to respect a lot of bureaucracy, and methodologies – it’s really critical. They have to give everybody the right to do what, to be fair to people. People say why can’t government just be as efficient, why not bring markets inside government? It’s because government has a much more challenging problem. I mean, firms can decide to behave like Elon Musk if they wish. You see, but they are free to do it, largely. But they pay the price by people leaving. Whereas government can’t be given those rights. They have just a hugely bigger problem in designing what we might call efficient systems. And they are bureaucratic, and they are slow, and they are this and they are that. Because people don’t have exit options.
Saku Mantere: You can’t privatize your police force because you can’t have several police forces competing, that would be somewhat problematic.
Bengt Holmström: I’m very sympathetic in that sense to the government’s dilemma. Government has a much more demanding organizational dilemma, a more complex dilemma. And besides, it also gets to things that market cannot solve. Government gets stuck with these things that markets can’t solve.
Saku Mantere: But how do new organizational forms such as platforms impact on leadership? Bengt predicts that some pretty old-school leadership practices might still be in vogue in platform organizations, however new they might otherwise be.
Saku Mantere: I’m sometimes disturbed when governments nowadays talk about strategies, when governmental organizations want to draft strategies, because the strategies are basically done by firms who can basically choose their customers, the customers can exit, they can go somewhere else if they’re not happy. But government, they have to serve each citizen exactly the same. That’s the basic principle of democracy and that’s why they have the types of organizations that they do. And people have to use voice. You had me read the Hirschman book about exit, voice, and loyalty, which talks about within this noncompetitive system, how you change an organization is through voice, rather than through exit.
Saku Mantere: I wanted to ask you one more thing before we conclude, which is about leadership. Let’s step back from government, let’s go back to the new type of an organization that we see emerging, whether it’s kind of a mix of a market and an organization, or perhaps even more, it’s a platform. And you mentioned talking to a CEO of Alibaba. So you’ve actually interacted with executives who are dealing with the emergence of this new type of an organization – how does that change the task of leadership?
Bengt Holmström: If you look at Amazon, which is the extreme case of this very successful platform, you can see that Jeff Bezos decided that they would change to a kind of a platform organization, inside as well as outside. Initially inside, that is, to make all the data communication inside the firm be based on APIs that are defining how these different computers talk to each other, and so on.
Saku Mantere: Sorry to interrupt Bengt’s flow for a moment. Just in case you are like me and did not know what an “API” is: API is an acronym for “Application Programming Interface.” In a nutshell, it is a set of rules specifying how two software programs should interact with each other. As Bengt just said, APIs are defining how subsystems of platforms interact with each other. Now that I’m done Googling, let Bengt continue.
Bengt Holmström: It made it basically possible for everybody to see how data flows inside the firm. So it made the inside of the firm very transparent, relative to what it had been. He, by the way, decided it just one day, in the famous Bezos manifesto where he said that from now on, from today on, everything has to be done through APIs. So that no, you cannot go and take a sheet of paper with data and give it to me and we would communicate. Everything has to be recorded in this network of APIs. And the whole organization in that sense became very modularized. And he finished the memo, it was an email, he said anybody who doesn’t do this will be fired. And the last sentence was “Have a nice day.”
Bengt Holmström: So do you see how he used his power? He just sent one email and changed the whole organization. That dramatically changed everything. Then he started to give these APIs to customers, and lo and behold, competitors, and lo and behold, their business just kept growing. So suddenly having your deep secret, so to speak, and giving it out, having it shown inside and giving it outside with much more transparency. It was just, I mean, it’s revolutionary – in some sense that’s what they have been doing. So it has changed a lot of organizations. Take cloud computing, the whole idea that nowadays we have sort of virtual machines, it has lowered the cost of starting small companies, for instance, because you can start a company in a week, everything, you rent time on the cloud and you have programs for handling your sales, you have programs for handling your enterprise data management systems, you can get on the cloud.
Bengt Holmström: This has changed the challenges from outside, it has streamlined what happens inside, it has made it much easier to see who is making what kind of money in the company. And in that sense, it’s kind of inventing the…. Maybe that’s the most similar thing to Haier, that they in some ways have become much more market-like, the whole system and the intermediary landscape, where there used to be intermediaries like banks and things like that. All those things are enormously challenged by this. They have to really change them.
Saku Mantere: Let’s explore that a little bit more. If we can spend five more minutes talking about leadership. You used the example of Jeff Bezos. And one thing he is known for is that he is passionately promoting customer benefits, but he’s also arguably ruthless towards his staff. There’s been a lot of discussion about the way that Amazon is governed, and in particular how Amazon staff is being governed. Also, I think, that the notion that, yes, it’s transparent, like a market, but on the other hand, we’ve seen a lot of arguments towards companies needing to have a purpose that unites the staff, which would seem to be completely opposite as a philosophy, because markets, arguably, they don’t have purpose – they’re basically a medium of exchange between people who are promoting whatever they’re promoting, but a market doesn’t have a purpose as such. There have been several books published this year, for instance, about how private firms need to have purpose.
Bengt Holmström: Yeah, it is true that people… That’s a whole different subject, in some ways – why are people seeking so much purpose right now? And I have theories for that. But I want to say first, specifically, on the point you’re talking about: ruthlessness and so on. Yes, Bezos is running his company in a rather ruthless sense, but he turns out to be even more ruthless to himself. That is, it’s part of his sort of DNA, he thinks everybody should be willing to give their 120% or something all the time. And, of course, what happens there is that there is a lot of selection. So that’s one way in which the capitalistic market works is that there is this company, but not every company certainly is going to become an Amazon type sweatshop or something like that. He has a chance to select from people that he thinks are similarly disposed, or something like that.
Bengt Holmström: Something that people like in Amazon is it’s very modularized – as long as you sort of submit to this API kind of plugs, where you where you communicate in a particular way, you are really free to innovate yourself, and you’re free to innovate, own APIs. It’s not a competitive market, necessarily, it’s a market where you’re very free to do things in your little sort of bubble of influence. And all the time thinking what is valuable also in this composite of bubbles in the whole firm. So as I said, maybe McKinsey or something like that is the closest – that people in McKinsey don’t know very much about what each other do, but they communicate with certain protocols and they have certain templates and there are sets of rules for the game, but themes that inform this sort of fluid structure inside that is somewhat similar. And universities may be another other example. Our university, as you know, we are pretty competitive. It’s not exactly, we cooperate, but we also compete. And at least here in the US, and I assume also in Canada.
Saku Mantere: But arguably, I don’t know of a university where you could send out an email, saying that it’s all going to change, “Have a good day.” We don’t play like that.
Bengt Holmström: No, that’s a difference. That’s partly maybe a difference because we also systems and so on. The purpose thing is very interesting, because I think it has a lot to do with sociology and the anxieties related to what’s happening in the world in general. Just to be provocative my sense is that we are moving to higher orders of intellectual activity in the sense that the world is more about asking the right questions and less about answering questions. I think the human race has through the 100,000 years, they haven’t had to ask questions or invent problems, so to speak, because they have all the time challenges, they have to find foods, they had to fend off enemies, they had to kill animals so they could eat them. It’s not like people in the 1800s sat there, that children said, what should I do? There was just all the time a lot to do to just survive. And so the purpose was very simple, which was to survive and get food. And we have reached the state where we don’t have to really – where we go to the store, and we get our food and so on.
Bengt Holmström: So I think it’s a shift from “What should I be doing to survive?” to asking, “What should I be trying to do?” Because everything of the first order in the Maslow’s scheme, the first order of things, has been solved. And I think, as well as an academic, what’s hard in academia is not solving problems, it’s asking the right questions. If you have a good question, it’s worth gold. We know that that is the biggest hurdle in doctoral studies, the shifting from answering exam questions to actually coming up with a question that you would research. So asking questions is a lot harder. Asking good questions is a lot harder than answering questions. Answering a good question, hundreds of people can do that. Asking a good question…
Saku Mantere: Your hypothesis is that the widespread existential anxiety that the human race is experiencing is now directed towards firms, that we want firms to give us purpose so that our anxieties would be lessened so that we wouldn’t have to do that work ourselves.
Bengt Holmström: I mean, that’s not the only… I think the sense of community and so on that existed before and the mentorships that existed before and attachment to how you were in some kind of club or whatever it was. These are obviously very important elements also. But I think this talk about freedom and “do what makes you happy,” I mean, is there a more stupid recommendation than saying, do what you feel makes you happy? If I knew what makes me happy, I would do it. I don’t know what makes me happy.
Saku Mantere: I think this is an absolutely wonderful place to end this conversation. Thank you, Bengt. Thanks so much for joining us. And I wish you a very, very good day in Boston. Thank you.
Bengt Holmström: Thanks for having me.
Robyn Fadden – host: You’ve been listening to a conversation about the future of the business firm between Nobel prize winner in economics and MIT professor Bengt Holmström and Desautels professor and Delve Editor-in-Chief Saku Mantere. Listen to more episodes of the Delve podcast and read articles based on management research at You can follow DelveMcGill on all podcasting apps, on Facebook, LinkedIn, Twitter and Instagram. Subscribe to the DelveMcGill podcast and follow us for critical thinking and insights on management today.