Resource Allocation: a Hayekian Paradigm for Maritime
Conglomerates
QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS (2003)
6(1): 3-21
lombardog@usmma.edu
Robert F. Mulligan, Ph.D.
This paper presents a synthesis between Austrian capital
theory and the organizational strategy field within management studies, which
applies economic theory to agent behavior in maritime business firms.
Hayek's theory of production is placed within the strategy literature and used
to motivate effective resource allocation decision-making within conglomerate
organizations. Decision-makers respond to interest rate changes by reallocating
resources among stages of production. A generic maritime conglomerate is
presented as an illustration. A conceptual scheme is developed where the
maritime firms engage in five stages of productive activity: (1) port
facilities, (2) shipbuilding, (3) inland, coastal and ocean shipping, (4) ship
leasing, and (5) overland shipping. The maritime conglomerate must
attempt to adjust its allocation of capital resources across the five stages to
accommodate the changing term structure of interest rates.
Introduction
Resource allocation, a ubiquitous
process in organizations, represents a curious dilemma for strategic
leaders. Although the expressed purpose
of allocating resources is to position organizational subunits for the future,
the relevant management literature recognizes that funds are given, in many
cases, based on past performance. The
implied algorithm is “past success leads to future success.” This approach may be effective during
evolutionary time periods; but can be ineffective during dramatic shifts in the
marketplace. This is especially true for
conglomerate organizations interacting with numerous task environments
representing multiple and differing industry sectors.
The resource allocation process in
a conglomerate organization is critical to the enterprise’s ability to undergo
strategic adaptation to realign the corporate mission and strategic goals
during environmental shifts. The focus
of this paper is to respond to the question, “How should a conglomerate
organization decide to allocate resources to its subunits?” The resource allocation process is embedded
in a series of events beginning with activities in the task environment and
ending with the organization’s strategic adaptation efforts (Figure 1). This conceptual scheme attempts to sequence
the activities or processes through which firms adapt to compete in a changing
task environment.
Figure 11
Events
Related to an Organization’s Resource Allocation Process
1Source: Developed by authors.
The resource allocation process is
influenced by the antecedent events of environment shifts and strategic
leadership assessment. As the
organization recognizes environmental shifts; notably, technology advances, interest
rate changes, and competitor moves, the organization’s dominant coalition is
faced with the need to assess how to allocate resources to maintain or enhance
organizational competitiveness. Given the dynamic nature of most task environments, the open system
orientation results in exogenous influences changing past resource allocation
patterns. Competitor moves and
technology advances typically influence an inherently imitative, “me-too
strategic adaptation” that results in the emulation of best industry
practices. To encourage effective entrepreneurial
efforts and offer a prescription for conglomerates to implement a “first-mover
strategic adaptation,” this investigation focuses on the influence of interest
rate changes on the resource allocation process.
The
environment confronting firms includes currently available technology,
prevailing market interest rates, and competing firm behavior. Whenever one of these components changes, or
is expected to change, firms face an environmental shift. Technological advances present the challenge
of combining existing installed capital with newer capital and other resources
to achieve a higher rate of return. As
technological improvements lower the costs of production, decision makers
discover that more and more of their contemplated investment possibilities can
be expected to yield a profit. This
occurs even if the market interest rate is constant, and in fact, might not
occur if the market interest rate rises to exactly offset the advantage offered
by the new technology. Technological
change may also facilitate a firm’s penetration of a new market sector.
Changes
in interest rates reposition the margin between profitable and unprofitable
investment projects. The market interest
rate represents the opportunity cost for any resource allocation within the
firm, or for allocating resources from outside the firm. Projects with expected returns lower than the
market rate of interest expected to prevail over the life of the project,
normally are not undertaken. An
exception occurs in the case of loss-leader activities which are undertaken
only because they are expected to lead to more profitable opportunities
later. Taken together, loss-leader and
any activities piggy-backed on a loss-leader must yield an expected return at
least as high as the market interest rate.
Firms
also respond to competitor moves.
Although “first mover” firms receive the most attention for their
entrepreneurial prowess, firms are compelled to respond to the actions of other
firms. Often the response is mere
imitation of the first mover, but significant entrepreneurial activity also
occurs when firms incorporate lessons learned in what may be termed “innovative
imitation.”
Environmental shifts occur when any of the three components of the
business environment change: technology, interest rates, or competitor
moves. Firm managers perceive and
anticipate the environment they operate in, and respond by constructing
contingency plans. Contingency planning
may be informal and vague, as for example, managers develop simple and often
unarticulated rule-of-thumb responses in advance of interest rate changes. The firm’s task environment changes as
technology improves, as interest rates are adjusted in the market or by the
central bank, or by competitor moves.
Firm managers seek to anticipate the future task environment and respond
appropriately.
Firm
management performs strategic leadership assessment in two stages: the first
stage consists of an assessment of the future task environment and the second
stage consists of formulating an appropriate response. Firms often avoid conscious consideration of
this function, maintaining the status quo by default in a mistaken effort to
avoid transactions and information costs.
Firms have an opportunity to exercise informed decisions or simply rely
on adherence to traditional behavior and practice, and traditional products and
markets. Firms face two challenges:
first, accurate assessment of the future task environment, and second, correct
formulation of a viable strategy.
Failure in either is costly.
Different firms have different approaches to strategic leadership, for
example, some firms pursue increased market share while others seek increased
profits.
Coase's
(1937, pp. 38-46; 1988, p. 7) insight that the division of labor is organized
in firms, rather than through spontaneous voluntary contracting among
individuals, in order to minimize transaction costs, implies that the
transaction costs which can be avoided through firm organization more than
offset any inefficiencies imposed by firm organization. Presumptively, the mere existence of firm
organization demonstrates that it successfully minimizes transaction costs, at
least most of the time.
Firms
operationalize their strategic thinking by allocating resources among
productive internal activities. Often a
firm’s mission statement and strategic planning documents suggest one emphasis
for the firm, but resource allocation indicates the firm’s real priorities and
true intentions. Resource allocation
cannot give misleading signals. Firms
realize strategic adaptation proactively or by default. Strategic adaptation occurs by default
through the accumulation of successive allocation decisions, unless a firm’s
leadership intentionally defines a strategic vision. Often passively managed firms attain a level
of structural maladaptation, but periodically overcome maladaptive
inefficiencies through massive reorganization.
This process can be seen as evidence of an attempt to avoid transaction
costs (Coase 1937, pp. 43-46).
This paper presents a synthesis
between Hayek’s theory of production structure and investment, and the
organizational strategy literature. The
rest of this research investigation is organized as follows: “Literature
Review” surveys the organizational strategy literature with respect to resource
allocation issues, “Exogenous Challenges:
A Prescriptive Application of Austrian Capital Theory” discusses how
Austrian capital theory can be used to guide resource allocation within firms, “Implications
for Maritime Conglomerates” illustrates an application to a particular type of
diversified business enterprise, and “Conclusion” presents concluding remarks.
Literature Review
Resource Allocation
The importance of resource
allocation activities has long been recognized by management scholars (Pondy
1970) as well as economists. The
resource allocation process is a major aspect of intraorganizational dynamics;
setting the tone for and influencing subunit success as the antecedent for
organizational evolution. The complexity
and tensions inherent in the resource allocation process are derived from the
dynamic nature of the task environment in which the organization operates. In a static environment resource allocation
patterns would be unchanging; a previous year’s allocation would be replicated
during subsequent annual cycles.
Precisely because fundamental changes in task environments occur, an
effective organization is required to adapt strategically to maintain and
ideally enhance its industry position in terms of sales and profitability. If core practices remain unchanged in this
dynamic context, lowered performance outcomes are likely (Schumpeter 1942;
Hannan & Freeman 1984; Tushman & Anderson 1986; Levinthal 1994). Exogenous challenges require that strategic
leaders change resource allocation patterns.
Five distinct streams within the
management literature argue in favor of effective resource allocation as
essential for strategic adaptation:
contingency and resource dependence literature (Thompson 1967; Pfeffer &
Salancik 1978); strategic change literature (Ginsberg 1988; Rajagopalan &
Spreitzer 1997); organizational learning and evolution literature (Nelson &
Winter 1982; Tushman & Romanelli 1985; Levinthal & March 1993);
ecologists literature (Hannan & Freeman 1984; Haveman 1992; Usher &
Evans 1996); and external institutional pressures literature (Selznick 1957;
Stinchcombe 1965; Miles & Cameron 1982; Haveman 1993; Levintahl & March
1993; Kraatz & Zajac 1996).
The resource allocation process is
recognized as crucial to organizational success. This testament to the importance of funding
subunits appropriately is constrained by the fact that all enterprises have
finite resources. Resource allocation
breeds intraorganizational competition due to this finite and scare nature of
funding. As a result, subunit managers,
recognizing that future resource availability may become less certain; find it
difficult to justify self-restraint (Kramer 1989). The priority to get as much funding as
possible, during each resource allocation cycle results in the suboptimal
communal management of a shared resource (Komorita & Parks 1994).
A Strategic Approach
The resource allocation process
should be able to develop strategic flexibility to respond to changing
environmental conditions (Hitt, Keats & DeMarie 1998). The process should inspire a level of subunit
teamwork and interpersonal dynamics that does not cast the effort in a “winners
and losers” context at the subsidiary level; but rather offers all participants
a supportive environment. The specific
allocation of resources represents the content dimension whereby organizational
performance is strengthened. The process
aims at increased market share and/or profitability, ultimately resulting in
increased resources to be allocated in subsequent cycles. Resource allocation efforts should be forward
looking, supporting the organization’s vision for its future. Thus, the process should be systematic,
rather than a series of annual episodic events devoid of continuity of
purpose.
A systematic view of the resource
allocation process emphasizes the need for strategic leaders to connect present
behavior (resource allocation) to the achievement of corporate objectives
(satisfying the organization’s mission).
This temporal integration (Jones 1988) is an essential element of the
resource allocation process. If funds
are committed to initiatives that fail to progress the organization in terms of
goal attainment, subsequent resource allocation cycles will have diminished
funds to support future strategic initiatives.
Over time, the organization will suffer as shrinking resource
availability will diminish the strategic leaders’ ability to advance the
organization’s interests in terms of gaining market share and/or
profitability. The strategic leaders’
roles are to allocate resources to maximize total return within the constraints
of the subunits’ probabilistic success (Collier 1984).
Rules versus Politics
The specific resource allocation
process used in a particular organization may be viewed along a continuum of
choices. At one end of the continuum,
the resource allocation process represents a rigid rules-based approach; at the
opposite end a pure political-based approach may be found (Figure 2).
The rules-based approach for
resource allocation can follow any number of algorithms found in various
organizations. This approach is defined
by an adherence to pre-established policies that prescribe how resources are to
be allocated to requesting sub-units within an organization. One school of thought considers that
objective criteria; e.g., subunit workload and relative contribution to
organizational goals (Baldridge 1971), internal contextual variables; e.g.,
size and technology (Daft 1978), or centrality; e.g., the degree that a
subunit’s initiatives support the organization’s mission (Hackman 1985),
dominate the decision process. The ideal
metric, capturing past performance and shifts in the task environment, will
result in adherence to an exclusively rules-based approach. The reality is that the rules-based approach
invariably uses an algorithm that is not sufficiently robust to capture the
dynamic complexities as time marches forward and tends to be inward looking at
the enterprise rather than outward looking, considering environmental shifts. The inadequacy of the rules-based approach
moves strategic leaders to substitute political considerations when allocating
the scarce resources in an attempt to address the variables of interest not
found in the rules-based algorithm.
Figure 21
Resource
Allocation Process
Rules-based Approach Mixed Approach Political-based Approach
1Source: Developed by authors.
The strategic management literature
has never recognized Austrian capital theory, as exemplified by the Hayekian
triangle, as a source for a rules-based approach to allocation. Both the management literature and the
Hayekian triangle aim at a description of behavior, not at prescription. Nevertheless, Austrian capital theory has
necessary prescriptive implications for strategic decisions by firm
decision-makers. In contrast, the
political-based approach for resource allocation is a function of the
negotiations, compromises and expediencies that result from the sub-unit
discussion sessions. Both conditions of
scare and drastically changing resources encourage the creation of coalitions
within the firm as well as rearrangement of coalition allies (Stevenson, et al
1985). The resource allocation process
is considered as an issue-selling effort to shape changes at the lower levels
of the organizational hierarchy by focusing top management attention (Dutton,
et al 2001). In effect, issue selling
represents an early stage in the change process affecting the allocation of
management attention and subsequently the flow of resources to subunits. When political factors influence the
resource allocation process, goals and decision criteria tend to be ill
defined. Thus, bargaining and compromise
influence resource allocation outcomes (Cyert & March 1963; Baldridge 1971;
Pfeffer & Salancik 1974).
Bargaining and power-based mechanisms become more salient than
problem-solving mechanisms to resolve subunit conflict and tension when dealing
with preferences by members’ identification with subunit goals (Friedkin &
Simpson 1985).
To accurately describe behavior of
firm-level decision makers, the most general construct combines the two
competing explanations. The mixed
approach for resource allocation tends to use a series of rules supplemented by
political considerations. This hybrid
process can result in the accrual of all the advantages and disadvantages of
the two pure form approaches. Hayek
(1973, p. 39) developed a sophisticated distinction between designed and grown
or spontaneous orders. Spontaneous
orders can be rules-based or politically managed. The combination of rules and political
management leads to firm order being difficult to place in Hayek’s scheme
(Khalil 1995; 1997a; 1997b).
Perceived inequity in the
allocation of resources will move subunits from accepting a rules-based
approach to introducing political considerations for the disbursement of
funds. Alternatively, leading members of
subunits who perceive injustice in the resource allocation process may decide
to resign their positions and seek employment elsewhere; possibly at a
competitor organization.
A rules-based approach to guide the
resource allocation process may be preferable if all pertinent variables of
interest are captured in the algorithm for both static and dynamic
environments. Static environments lead
to the implementation of existing strategies; dynamic environments lead to the
development of new strategies (Carpenter & Westphal 2001). As such, in effective organizations the
resource allocation process for conglomerates facing static environments is a
continuation of past efforts.
Conversely, effective organizations facing dynamic environments will
develop new strategies and, concurrently, require new resource allocation
patterns. The challenge arises for
strategic leaders to incorporate relevant variables in the rules-based resource
allocation paradigm. A given rule may be
highly appropriate in the static environment for which it was adopted, but once
the environment changes, the search for appropriate rules frequently becomes
politicized.
Figure
31
The Hayekian Triangle
Mining Refining Manufacturing Distribution Wholesaling Retailing
Production Time
1 Source: Garrison 2001, p. 47.
Exogenous Challenges:
A Prescriptive Application of Austrian Capital Theory
The Hayekian Triangle
The Hayekian triangle (Figure 3)
can be used to analyze the structure of production and capital investment, and
how each process responds to the environment embodied in prevailing market
interest rates. A prescriptive
interpretation of the triangle would imply that it should be used to guide
firms in allocating resources in accordance with prevailing interest
rates. The management literature
identifies other objective criteria useful to direct resource allocation for
most organizations facing a single, relatively static, task environment. Their value, however, weakens when the
context is a conglomerate organization facing multiple, dynamic task
environments where past performance and centrality do not combine into a series
of metrics that can be systematized into a workable paradigm that will lead to
the appropriate allocation which can advance the organization and avoid
political bickering. Conglomerate
organizations offer potential savings in transaction costs over several,
smaller firms organized over narrower, industry-specific models (Coase 1937,
pp. 45-56).
Previous researchers have analyzed
the effects of production uncertainty in one sector considering resource
allocation in a two-sector model (Batra 1974; Britto 1980; Mills 1983). Consumer preferences (demand function)
influence production (Harford & Park 1985).
Interest rates influence consumer preferences (demand function) both
through affecting households’ decision dividing disposable income between
consumption and saving, and their decision on how much, if any, consumption to
fund through borrowing. Interest rates
also influence firms’ decision of how much to borrow to finance production, and
therefore also impact supply functions.
Thus, interest rate changes in an organization’s task environment
represent a strong influencing factor in consumption patterns. The research reported in this paper expands
the analysis beyond a two-sector model and captures the influence of interest
rates.
Microeconomic Approach
The Hayekian triangle (Hayek 1931, p. 39; subsequently developed by Hayek 1941, 1966, 1967, 1969) is a model of the production process and macroeconomic resource allocation. Although the Hayekian triangle is the foundation of Austrian macroeconomics, resources are allocated at the firm level in response to prevailing interest rates. Rather than focusing on macroeconomic resource allocation, this paper examines the microeconomic process of intra-firm resource allocation. In a certain sense, prevailing market interest rates serve to coordinate the investment and production plans of diverse enterprises and assure a consistent macroeconomic production structure.
Because the triangle models production as taking place over time, the profit or value added from each stage of production must equal or exceed the interest rate available on financial assets. The interest rate functions as an economic opportunity cost. When interest rates increase, the structure of production becomes less roundabout, redistributing productive resources away from producer goods toward consumer goods. When interest rates rise, higher rates of return in production are necessary to compete with the higher yielding financial instruments. Investment spending necessarily contracts because only a smaller number of prospective investment projects can pay off at the new, higher interest rate. The Hayekian triangle and the production structure it illustrates, becomes more steeply sloped as the base shortens. Resources are shifted from early to late stages of production, reflecting consumers’ new desire for more consumption and less saving.
When interest rates fall, the structure of production becomes more roundabout, redistributing marginal resources toward productive activities with lower rates of return. The Hayekian triangle becomes flatter as the base lengthens and the slope of the hypotenuse decreases. Generally, more final output can be produced because more use is made of physical capital in the more roundabout, and more time-consuming, production process.
Business Cycles
However, Austrian capital theory distinguishes two kinds of interest rate changes: preference-induced and policy-induced. Preference-induced changes in interest rates occur infrequently, and probably only gradually. Comparative advantage accrues to firms which recognize these changes and position themselves accordingly. Policy-induced interest rate changes are only temporary and fool firms into allocating resources as if interest rates had changed permanently. Firms that take the bait find they have invested in inappropriate and unprofitable production projects when interest rates return to natural levels. Comparative advantage here accrues to firms which accurately discern temporary, policy-induced interest rate changes, and avoid allocating resources based on those misleading interest rates, while taking full advantage of temporarily low loan rates.
Bischoff’s (1970) “putty-clay”
model of investment emphasizes the distinction between highly-liquid,
uninvested financial capital and highly illiquid, installed capital
equipment. A policy-induced, unnaturally
and temporarily low interest rate entices firms to transform more of their
liquid savings or "putty" capital into illiquid "clay"
capital. The transformation is
asymmetric because it is easy to exchange cash for capital equipment when the
interest rate and the return on marginal equipment is low, but once the
interest rate increases, it becomes difficult to reverse the process by
exchanging low-yielding equipment for cash.
Policy-induced interest rate
changes lead to the business cycle (Hayek 1935, pp. 136-139; Garrison 1986, p.
440; 1988; 2001, pp. 71-73). The boom is
caused by lower than natural interest rates that lead to employment of
lower-yielding and less competitive resources, including land, labor, and
capital. Presumably this applies equally
well to entrepreneurial talent, because even the least-talented individuals may
succeed as entrepreneurs during a boom.
Recession occurs because the excessively drawn-out production process
cannot supply consumers indefinitely.
Given low yields on marginal capital, both resource employment and
consumption fall. As interest rates fall
in response to central bank injections of new money, the artificially low
interest rate drives a wedge between saving and investment. The interest rate can be described as
artificially low because it is lower than consumers' time preference. Increased saving entails an initial
contraction of consumer-good industries.
In contrast however, credit expansion lowers interest rates,
simultaneously reducing the attractiveness of saving and causing potential
savers to spend more of their income on consumer goods. During the boom caused by a policy-induced
credit expansion, the curvilinear triangle does not reflect consumers' true
time preferences. The interest rates
prevailing in, and discounting inputs from outputs of, each stage - lower in
early stages and higher in late stages - no longer reflect the natural rate of
interest. This applies to both real and
nominal interest rates, and the credit-induced curvilinear production structure
is never sustainable. The structure of
production ultimately responds to unsustainably low interest rates by
simultaneously attempting to deliver more consumer goods in the late stages and
more producer goods in the earlier stages, an impossible task.
The Hayekian Theory of Production
Structure
Firm-level
decision makers actually perform time discounting with prevailing market
nominal interest rates representing their opportunity cost, rather than
subjective rates of time preference.
These objectively observable interest rates are more likely to reflect
actual, subjective time preferences if they are not being manipulated by the
central bank. Austrian business cycle
theory posits that central bank credit expansion causes business cycles. Decision-makers are free to adjust production
plans, and do so in response to technological advances, disappointed
expectations about resource availability and cost, or about output demand and
price, and changes in interest rates.
The concept
of stages of production is subjective (Garrison 1985, p. 167; 2001, p. 46),
thus specific industries often operate simultaneously in several different
stages, and any empirical classification of industrial sectors can only be of
which stage predominates. For example,
in a maritime conglomerate, dry bulk shipping is an early-stage activity if the
freight is used in a manufacturing process, but late-stage if unprocessed
freight is delivered directly to consumers.
Crude petroleum shipping is always an earlier-stage productive activity
compared to shipping refined petroleum products, but because petroleum refining
requires little time, crude petroleum shipping can often be late-stage compared
with much dry bulk shipping.
Containerized shipping is predominantly of final manufactured output,
and thus constitutes a late stage of production, but exceptions are
inevitable. Furthermore, many resources,
including producer goods, are non-specific to a particular stage of production. Because each firm can use many resources in
multiple processes, firms often operate simultaneously in different stages of
production. This is especially true for
maritime conglomerates.
Capital
equipment; for example, ships, dock facilities, rolling stock, and ancillary
infrastructure, may substitute or complement other items of capital
equipment. Furthermore, this is a
general property of all resources; for any equipment item, labor may be either
a substitute or a complement; different kinds of labor may be substitutes or
complements for a given equipment item, or for given other kinds of labor. Different productive resources also have
various degrees of substitutability and complementarity (Garrison 1985, p. 168;
2001, p. 49). Inputs are combined at
each stage of production. Stages of
production are not instantaneous; thus time preference assures outputs from
each stage have greater expected value than the sum of inputs (Mises 1966, pp.
483-488; Rothbard 1970, pp. 323-332; Garrison 1985, p. 169; 2001, p. 46). Coordination performed by firm-level decision
makers produces surplus value, and is essential for production to take
place. In the Austrian view, the
increase of value in production over time is due exclusively to:
1) the time span
required for each stage of the production process;
2) the fact of time
preference, which discounts the inputs into each stage, compared to the
expected output from each stage;
3) the economic value
consumers confer on the final output which they use to satisfy their wants; and
4) the coordination
provided by the authors of the production plan, often described as
entrepreneurship or managerial services.
This is the mechanism through which firms minimize transaction costs
(Coase 1937, pp. 38-40).
Entrepreneurs
compete to satisfy consumer wants with the shortest possible delay, thus
earning the highest return. The interest
rate is the rate of time discount implicit in the pattern of prices of
productive resources, including capital equipment. Garrison (1985, pp. 169-170; 2001, p. 50)
cautions this is not necessarily the same as the loan rate determined in the
loanable funds market, though he also acknowledges the market process
eventually adjusts the loan rate to the broader market rate of interest. In the Austrian view, determinants of the
broader market interest rate are not exhausted by the determinants of the loan
rate in the loanable funds market (Rothbard 1970, pp. 321-323), although the
slope of the hypotenuse of the Hayekian triangle reflects the interest rate
determined in the loanable funds market (Garrison 2001, p. 50).
Since the
earlier the stage of production, the greater the period of time separating
existing capital or producer goods from the prospective consumer goods, and the
greater the difference in value due to time discounting between producer and
consumer goods. Thus the value of
capital equipment used exclusively in early stages of production is more
sensitive to interest rate changes (Garrison 1985, pp. 178-177; 2001, p. 72).
Changes in time preference are
particularly punishing to the maritime industry, which depends on an especially
long-lived capital stock. Government
intervention to support the maritime industry may be justified in at least two
ways:
1) national security considerations; and
2) most changes in interest rates, specifically those not
directly caused by an overall change in time preference, are engineered by the
central bank.
The rationale of subsidizing or
otherwise compensating a highly capital intensive industry to offset the impact
of central bank policy clearly demonstrates how government interventions tend
to proliferate. An enlightened monetary
policy should focus on price and interest rate stability, and would then
provide little justification for government support.
Figure
41
A Generic Maritime Conglomerate: Production and Capital Structure
Port Shipbuilding Shipping Ship Ground Facilities (Inland, Leasing Transportation Coastal, Ocean)
Production Time
1 Source: Developed by authors based on Garrison 2001, p. 47.
Implications for Maritime Conglomerates
Maritime firms have to respond to
environmental constraints including the term structure of interest rates
prevailing at any point in time.
Long-run comparative advantage accrues to firms which successfully
distinguish between permanent changes in time preference and transitory interest
rates fluctuations arising from monetary policy. Firms allocate resources in response to
expected consumer demand for consumable output and expected opportunity
cost. In the subjectivist theory of a
capital-using economy, decision-making planners act as the subjects of
productive activity, creating consumable output as the object (Garrison 1985,
pp. 164-168; 2001, p. 15). Consumers
confer value on consumable output because they desire it to satisfy their
wants. The value of producer goods is
derived from the consumable output they are expected to yield, and expected
consumer demand for the output. The
earlier firms intervene in productive activity, the greater the opportunity to
increase the final yield of consumable output.
Thus, the final output should be greater in value the more roundabout
the production process, or in other words, the longer the duration of the
production process. This intuition is
supported by the general observation that the more roundabout the production
process, the greater the scope for employment of capital equipment.
If time preference was sufficiently
high, no shipping could take place, and impatient consumers would be
necessarily limited to immediate consumption of locally-obtained raw
materials. Interest rates facilitate
intertemporal coordination of resource allocation in production plans by
clearing the loanable funds market (Garrison 1986, p. 440; 2001, p. 39). In this regard disequilibrium interest rates
play the same role as market prices in signaling opportunities for
entrepreneurial discovery by decision makers (Kirzner 1984a, p. 146; 1984b, pp.
160-161; 1997), and firms respond by adjusting the production structure.
Conglomerate maritime businesses
are simultaneously engaged in several business sectors. Most non-petroleum bulk shipping constitutes
an early stage of production. Most
petroleum shipping and containerized shipping constitute late stages. The resource allocation process is crucial to
continued organizational success.
Maritime firms do not produce consumable output but provide transportation
services, moving final output to consumers.
Maritime firms also transport intermediate goods-in-process from earlier
to later stages of production.
Productive activities maritime firms engage in include port facility
construction and operation, shipbuilding, cargo shipping, ship leasing, and
overland transportation. A maritime
firm constitutes a conglomerate if it engages simultaneously in two or more
different activities. Conglomerate
organization offers additional scope for minimizing transaction costs (Coase
1937, p. 45).
Port facilities must be available before the
conglomerate can potentially contemplate shipping operations. Because port facility planning and
construction requires the longest lead time, the port is the capital equipment
item which constitutes the earliest stage of production for a maritime
conglomerate. Port facility operation is
more flexible, and must occur as a stage of production in between any other two
stages, but operations can be curtailed without liquidating the capital
equipment, as dock workers can be hired and laid off as needed.
Shipbuilding is the next stage of
production for a maritime conglomerate.
Though less expensive than corresponding port facilities, and thus
requiring less time and effort to organize financing for, ships are expensive,
and extremely long-lived, capital equipment items. Few industries are as capital intensive, or
employ such a long-lived capital stock.
Shipping is certainly the main
activity of any maritime firm. The more
specialized a firm’s fleet, the more likely shipping operations will fall into
specific early, middle, or late stages of production, as discussed
earlier. However, because different
kinds of shipping, for example, ocean, coastal, or inland, can fill either earlier
or later stages, which vary dramatically across maritime firms, depending
primarily on their clients, we treat this whole, admittedly diverse process, as
primarily a late stage of production.
Two justifications for this classification are (1) the greater value of
more nearly final output, as opposed to unprocessed raw materials, and (2) the
increasingly prevalent practice of shipping clients to locate manufacturing
operations close to raw materials and labor.
Ship leasing is a class of activity almost
unique to the maritime industry, and was created in response to the low
flexibility imposed by long equipment lives and high finance costs. When shipping demand or the interest rate
climate are such that a maritime firm would otherwise let its ships be idle, it
can lease the ships to other operators.
Overland transportation is an
activity which marks a maritime firm as a true conglomerate. Because it generally moves final produced
output into a distribution network of wholesalers and retail outlets, it is
generally the last step in the production process contributed by the maritime
firm.
The resource allocation process plays out in the context of differing
subunit preferences; potentially resulting in tension and periodic conflict
that may lead to dysfunctional relationships over time. Absent clearly understood and effective
operational rules, the potential for heightened dysfunctional internal
relationships will lead a conglomerate organization to have diminished resource
bases for achieving future strategic goals.
By developing an effective resource allocation paradigm, the
organization can gain market share resulting in increased profitability and
continued success in the market place.
The Hayekian triangle presents an objective measure reflecting
environmental shifts by tracking interest rate changes that affect consumer and
production demand. Organizations can
gain “first-mover advantages” (Thomas 1985) essential to provide the
competitive advantage vis-à-vis their rivals while maintaining harmonious
relationships among the subunits.
Table 1
illustrates how a representative maritime conglomerate should adopt a
rules-based allocation paradigm.
Shipbuilding and port construction are the two longest lead-time
investment projects, and should receive increased emphasis when interest rates
are forecast to decrease for an extended period. Firms should be especially wary against
policy-induced and therefore temporary interest rate decreases; recognizing
that policy-induced interest rate cuts are likely to be transitory protects the
firm from tying up liquid “putty” capital in uncompetitive, low-yielding “clay”
investments for a protracted period. As
late stages of production, shipping, leasing, and ground transport should
receive increased emphasis when interest rates are forecast to rise for an
extended period. As
with temporary interest rate cuts, the same caveat applies about guarding
against misleading indications from policy-induced interest rate hikes.
Table 11 Representative Maritime Conglomerate |
||||
|
Subsidiary |
Stage of Production |
Interest Rate Forecast |
||
|
Early |
Late |
Increase |
Decrease |
|
|
Port Facilities |
X |
|
Decrease allocation |
Invest at higher levels |
|
Shipbuilding |
X |
|
Decrease allocation |
Invest at higher levels |
|
Shipping – Inland |
|
X |
Invest at higher levels |
Decrease allocation |
|
Shipping – Coastal |
|
X |
Invest at higher levels |
Decrease allocation |
|
Shipping – Ocean |
|
X |
Invest at higher levels |
Decrease allocation |
|
Ship Leasing |
|
X |
Invest at higher levels |
Decrease allocation |
|
Ground Transportation |
|
X |
Invest at higher levels |
Decrease allocation |
|
Government Lobbying |
|
X2 |
Intensify lobbying
initiatives |
Intensify lobbying
initiatives |
|
1 Developed by authors. 2 Though clearly government lobbying is not a productive activity, it aims at obtaining revenue from the government. Thus, it can be viewed as a revenue generating activity, by the firm, if not by taxpayers. We treat lobbying as a late-stage activity because it typically aims at acquiring revenue through subsidies or other government favors as rapidly as possible. Though firms which seek subsidies always seek to prolong them, acquiring and maintaining an ongoing revenue stream requires ongoing lobbying. |
||||
One activity maritime conglomerates engage in is government
lobbying. It appears the incentive
provided by application of this rules-based paradigm is to intensify lobbying
efforts whenever the interest rate environment is expected to change. This seems to support the view that lobbying
is an inherently pernicious, self-enforcing activity. In contrast with other behavioral rules
provided by this paradigm, there would seem to be an especially strong
incentive to lobby during periods of policy-induced, temporarily high or low
interest rates. At these times, firms
are well justified in seeking government support to compensate for any
disadvantage or expense conferred by economic policy.
Conclusion
This paper provides a new synthesis between the strategic
management literature and Austrian capital theory. The resource allocation process plays out in
the context of differing subunit preferences; potentially resulting in tension
and periodic conflict that may lead to dysfunctional relationships over
time. Absent clearly understood and
effective operational rules, the potential for heightened dysfunctional internal
relationships will lead a conglomerate organization to have a diminished
resource base for achieving its future strategic goals. This paper presents a set of resource
allocation rules based on the Hayekian theory of production. By developing an effective resource
allocation paradigm based on economic theory, the organization can gain market
share resulting in increased profitability and continued success in the market
place. The Hayekian triangle offers
firms an objective measure reflecting environmental shifts by tracking interest
rate changes that affect consumer and production demand. Organizations can gain “first-mover
advantages” essential to provide the competitive advantage vis-à-vis their
rivals while maintaining harmonious relationships among subunits. Entrepreneurial innovation can also be
exercised by “second movers” who imitate the “first movers,” perhaps taking
advantage of lessons learned. This kind
of innovative imitation may well provide the greatest scope for entrepreneurial
activity.
Acknowledgements
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