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Why are firms so dysfunctional?

It's fair to say that "firms" (companies, commercial entities, multi-nationals, businesses.... call them what you will) — "firms" — when viewed from the inside, seem to be riddled with what modern economics academicians would — had they permission to use a sufficiently expressive lexicon — be termed utter-shitfuckery.

And I'm not a whistle blowing investigative journalist here, I'm not even expounding some mystical truth, i'm merely stating the obvious, the most banal facts that everyone has seen for themselves a hundred times.

(Before continuing I ought to make the obvious disclaimer that of course I'm not in particular referring to any real world company that has ever employed me personally, nor casting any aspersions on those specific companies in particular; I am talking in generalities first, and secondly from anecdata that have been given to me by anonymous others, and thirdly about publicly available facts and fourtherly in ref. to artworks concerning companies at which I have not personally worked. Hence any resemblance between etc. etc., right?)


  1. Firms exist, and

  2. seem to flourish, and

  3. this is despite that fact that many many observers have brought back endless stories of the inefficiency, the lunacy, the bureacratic hellscape, the Kafkerian chaoticum, the head-scratching oddity, the ass-covering insipiditude, the feudal fisticuffs, the territorial tantrumicides, the slow-grinding despair, the twisted top-down torpor, the green-shift incredulity, and -- might I add, a lot of sugary food being consumed at some of these places.

The point here -- the question -- and I do have one -- is in two parts, and we'll see that these two parts are in fact two snuggled kittens, a kind of yin-yang pair of counterparts, each of which implies and leads to the other, around and around. Those questions:

  • Why are firms so dysfunctional?
  • Why are firms so succesful?

Or — with their logical interlinks in place — the dot in the squiggle of the tadpoly yin-yangos — we'd ask:

  • Why are firms — despite being so dysfunctional — so successful?
  • Why are firms — despite being so successful — so dysfunctional?

Before addressing the answer we need to ensure that we are all on the same page as regards our understanding of this particular mechanical marvel: James Watts's Steam Engine Governor.

[Description, with diagrams of what James Watts's Steam Engine Governor is and how it works]

With that under our belt, we can now jump right down to answering the questions above. It is pretty simple, and in two main tranches, to wit:

  1. Firms are succesful because of very powerful economic ideas that yield gigantic leverage to firms. This will be discussed in more detail in a subheading below, “why firms succeed”
  2. Firms are dysfunctional because the natural state of the universe is chaos and confusion [citation needed], and the economic success of a firm allows room for the chaos to grow, unchecked, until either it destroys the company, or — once the chaos has grown large enough to threaten the profits of the company — a portion of the company’s profit and success will be expended to reduce or contain the chaos. A "Watts's steam governor" system thus emerges: only enough energy will be spent to ensure the chaos doesn't kill or threaten the company. Once that is assured, the unblinking eye of the economic engine will turn outward again, to increasing the power of the company. So there will always be a "slightly less than lethal" dose of chaos inside any ongoing company. And the more powerful and successful the company, the more potent this "slightly less than lethal" dose will be.


  • Coase Theory of the firm
  • Moral Mazes
  • Das Kapital
  • The Eternal Tree
  • Watts steam governor
  • Systems theory
  • Tao Te Ching
  • Art of War
  • The IT Crowd
  • The Office (UK)
  • The Office (US)
  • House of Cards
  • Office Space

See also


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