Wednesday, February 4, 2009

The man on the spot

Nobel Laureate Friedrich von Hayek was a strong advocate of tacit knowledge. This is best explained by this short extract from his 1945 article The Use of Knowledge in Society:
Times have changed since Hayek wrote this and most of the centrally planned economies of which he speaks failed. However, in a sense we have swapped one kind of planned coordination for another. In the middle of the 20th century whole countries were organised using central planning. Now we have corporations acting as coordination mechanisms where most of their activity is controlled and planned by central management. Of course, central management are likely to fall foul of the same knowledge problem that central planners faced.
This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."

Central planning has failed as a way to organise economies but a central structure has not stopped corporations from getting larger and larger. If Wal-mart were a country it would be the in the top 30 economies in the world ranked by GDP, ahead of countries such as Austria, Argentina and Indonesia, and it would rank as China'a 8th largest trading partner. Central planning didn't work out too well for countries but doesn't seem to be doing too bad for companies. In 2006 Wal-mart reported profits of $12billion on sales of $350billion.

How has Wal-mart being so successful and avoided the problems of statistics that "lump together items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision." A recent post by journalist, Charles Platt on the blog provides a great insight.

Platt took a minimum wage job at Wal-mart to see if the commonly held beliefs about the company were true. He found that they were largely untrue and that the reputation was unwarranted. That is not our focus. His piece gives us this gem on tacit knowledge and "the man on the spot".
My standard equipment included a handheld bar-code scanner which revealed the in-store stock and nearest warehouse stock of every item on the shelves, and its profit margin. At the branch where I worked, all the lowest-level employees were allowed this information and were encouraged to make individual decisions about inventory. One of the secrets to Wal-Mart’s success is that it delegates many judgment calls to the sales-floor level, where employees know first-hand what sells, what doesn’t, and (most important) what customers are asking for.
That sums it up perfectly.

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