János Kornai on centralization and decentralization. Part I

It was just a little over a year ago that I summarized an important article by János Kornai, the best known Hungarian economist, on the first ten months of the Orbán government. It was entitled "Taking Stock." In it Kornai talked about the political and economic consequences of Viktor Orbán's revolution in the voting booths. Kornai was one of the first people to call Orbán's regime an autocracy.

Now Kornai is focusing on the centralization tendencies of the current Hungarian government. More than fifty years ago Kornai began his career as an economist with a dissertation--later published as a book--on the over-centralization of the economy during the Rákosi regime. He never thought that he would have to return to this topic. But as he looks around he sees a very rapid, almost maniacal centralization that has taken place in the last twenty months.

Kornai brings up thirty-three examples. Some are more important than others but the tendency is clear. This centralization is brought about by the mistaken notion that the vertical model of organization is superior to the horizontal one. It is faster, more efficient, and therefore less expensive.

The vertical model looks like a pyramid at the apex of which stands the Supreme Boss under whom there are, let's say, ten Bosses, and finally rows and rows of Deputy Bosses until we reach the bottom of the pyramid where there are people who only receive orders.

The horizontal model is not so neat. In it no one is subordinate to anyone else. Orders cannot be given, all decisions must be arrived at by negotiation.

Of course these models are simplified extreme cases. No vertical model is always as clearly defined and no horizontal model is that egalitarian.

The state apparatus resembles, though not in such a pure form, the vertical model. The financial markets and nonprofit organizations more closely resemble the horizontal model.

At this point Kornai compares the two models. First, he examines the effectiveness of the two models. Critics of decentralization argue that the horizontal model is wasteful. There are many organizations side by side which in their activities often overlap. Supporters of the vertical model argue that their model is superior because one can save money on administrative costs. However, Kornai points out that the alleged savings of the vertical model don't always materialize because decisions are often made ad hoc and without consultation with experts.

When it comes to competitiveness, it is clear that centralization limits competitiveness. Admittedly, competition is expensive. One must advertise, one must convince the buyer about the worth of the product. But competition is the body and soul of innovation. Competition is also necessary in the intellectual sphere, in education, in science, and in the arts. Here Kornai tells the story of Paul A. Samuelson who wanted very badly to stay at Harvard after receiving his Ph.D. but didn't get a job there. So, he went to MIT and convinced them to start a department of economics. They decided to hire him. Today the two institutions have a healthy competition in the field of economics.

Kornai moves on to "adaptation and selection." Centralizers think that within the walls of their office they can plan perfect outcomes. Decentralization has a huge advantage over centralization by moving along with the flow of real life. Google and Apple did not come into being by some central decision. They just happened. The arrogant Supreme Boss believes that he is infallible. But making decisions from the top will necessarily end up being no more than experiments that need further adjustments. All that with great speed.

Kornai also takes a look at a key ingredient of decision making: information. For a centralized model to work perfectly one would be need to be able to foresee all future contingencies. But life is full of uncertainties and inaccurate information. The inaccurate information is not always accidental. It can be deliberate. For example, it might be in the interest of the subordinate to deny existing problems and misinform his superior. Or, the other way around, to create nonexistent problems. The Boss cannot correct wrong decisions because his subordinates are afraid to tell him he made a mistake. By contrast, in the horizontal model "the person who receives the information is the same person who uses this information and therefore it is in his interest to get accurate information."

Centralization works against diversity. The beauty of life is variegation. Not all students should be taught the same thing. And although it might be cheaper to produce fabric in a single color, people like to dress in clothes of many colors. 

Finally, the vertical model can be politically dangerous because of who is on top. Is a well-meaning dictator at the apex of the pyramid?  Even if he is well meaning, is he someone who often makes mistakes? Or, what if he is not so well meaning? What if he has too many faults, is dictatorial, can't stand criticism, is stubborn, and doesn't adapt easily? Perhaps this is the biggest problem with the centralized model. The more efficient the system the more it can become the instrument of dictatorial power.

Central planning interferes with self-determination and personal autonomy. Kornai brings up the case of higher education where the present government is defining the limits of tuition free enrollment. On what moral grounds can the state decide what youngsters should study? What happens to the sovereignty of individuals and families?

And finally, the more centralized a society the more the state must take over the care of every citizen. "Centralization is the twin of paternalism."  If this is true, the Orbán government is working against its own stated goals because it is fighting paternalism and is preaching self-help but at the same time is promoting centralization. The two goals are incompatible.

To be continued

Comments

[Sandor]

Kornai, all his authority notwithstanding, is missing two points, both more important then his reasons against the pyramid model. In fact his touchy-feely reasoning, although valid, is not hitting the actual mark.
The first and greatest problem of the autocratic model is that the man on the top is not bound by the principles of efficiency, not even that of economy. He can make decisions for whatever goals and wether they are practical, or not, doesn't matter, because his goals may not coincide with the goals of society. This is definitely the case with Orban, he is not working on the economy, but on his power.
The other missed point is the lack of consideration required by the quality of people necessary to make such model work. Ideally drones without any will are the ideal staff, but that is almost always in short supply. Most of the apparatchiks are either too ambitious, or too inert, both are endangering the success of the organization. This leads then to the well known ubiquity of counter-selection that eventually permeates the organization and destroys it from within.

[Ron]

After reading this article, I found an article on Caboodle.hu, which is a typical example of centralized decision and its effects. This is about a special tax implemented for cars in Budapest in the amount of HUF 10,000 to cover the costs of the public transport. What is interesting are the reactions of the people implementing this tax.

http://www.caboodle.hu/nc/news/news_archive/single_page/article/11/plans_for_ne/?cHash=8cb07f7914

[sackhoes contributor]

This discussion takes me back to 80's and 90's, when there was a great deal of discussion about organizational structures. We did not call it "vertical" or "horizontal", because we all knew that every organization was a pyramid. The real question was: how flat was an organization?

Depending on the type of organization (manufacturing, creative, etc) management gurus tried to come up with a "magic number". 7 was touted to be the average. 7 direct reports to a manager was deemed to be ideal. It gave the manager enough time to be a direct contributor, while reserved enough time to deal with the work related personal issues of 7 subordinates (who may, in turn have 7 direct reports each).

The management challenge was to find ways to "flatten the organization", i.e. have not 7 but say 10 direct reports. This meant fewer managers, less cost overhead. But it also meant less hands-on, direct contact with subordinates, less supervision, more risk.

I guess I really don't understand how a "horizontal" organization works.

[Ron]

sackhoes contributor: I guess I really don't understand how a "horizontal" organization works.

A "perfect" horizontal organisation, as far as I know does not exists. However, a matrix organization comes close.

Shell use to have a very bureaucratic structure, and they were forced to move closer to a matrix organization.

See this pfd file re. the Shell case:
http://www.blackwellpublishing.com/grant/docs/07Shell.pdf

[Ron]

Regarding my comment earlier regarding Tarlos and the car BKV charge of HUF 10,000.

Yesterday, on egyenes beszed was an interview with Tarlos, in which he claims that Rogan was undermining his position, due to the fact he want to become the next Head Mayor.

http://atv.hu/cikk/video-20120130_tarlos_istvan

Eva: The inaccurate information is not always accidental. It can be deliberate.

So besides misinforming the Boss to prevent problems, it may also be to put him/her in a bad light so that she/he will be sacked, and the person can take over.

[riviera1]

@Ron and misinformation & Hungarians..

Multiply that by 20 and you come close to the possible mutations of Hungarian betrayal--they have a genius for back-stabbing.

[Leo]

@Eva: Centralization works against diversity. The beauty of life is variegation. Not all students should be taught the same thing. And although it might be cheaper to produce fabric in a single colour, people like to dress in clothes of many colours.

Well, do they? People love fashion too. And uniforms. But it is true that this touches the heart of the problem. We are, I think, not talking here about which scheme will give us a perfect state bureaucracy, but about the question which aspects of society such an organisation should govern.

The extreme right says: all. Because it is afraid of diversity; they fear everything they do not understand or cannot control. Moreover, it is almost impossible for them to live & let live. Their idea of the truth (God, Nation) is of a higher nature and must prevail. Whatever the cost. Essentially Fidesz is not about anti-communism, but about anti-liberalism. And its weapon of choice is the authoritarian state.

Vona said it well (I quote from yesterday’s Contrarian Hungarian): Jobbik’s spiritual centre is the Holy Crown that embodies Hungarian statehood … Jobbik does not only want to feed every Hungarian person, but to exert a “binding force on politics” through this form of thinking.
That binding force is what matters here. In Jobbiks opinion people must conform to (their idea of) the Nation, otherwise they will not be fed (meaning that they will be thrown out of society in one way or another).

That is poison. And I see no real difference between Fidesz and Jobbik here. The Fidesz brand is somewhat more diluted, but essentially it is the same stuff. The problem for the outside world is to decide the importance of the difference between the soft and the hard drug. Tactically that is not easy, because even if Fidesz and Jobbik march in the same direction, there is a real power struggle between them.

B.t.w. there was more news about uniforms. Since the judges decided that para-military formations are (essentially) allowed in Hungary, it will be interesting to see what happens next. When will Orbán give Vona the one or two smacks in the face he promised them? My guess is that he will wait a bit to give the Garda some room to frighten Europe. And to chase any remaining democrats from the streets.

[Mutt Damon]

Centralization or horizontal it comes down to skills. The most important skill is to replicate the pyramid under you. In other words picking the right people who can pick the right people and so on. After a while it becomes a flying blind experience and all you can do is trusting the autopilots. The real skill on the top is building the pyramid.

The authoritative micromanaging is compensating for this team building skill. The "of course there are mistakes - I can't do everything myself" attitude is clearly for masking incompetence.

Also Orban is clearly driven by ideology. If you don't build your hierarchy on common sense but "political trustworthiness" the result is the same. A bunch of mediocre contra-selected middle managers. And when you feel you didn't choose the right people then the paranoia kicks in. The constant fear that your subordinates will screw you over.

Orban has no idea what a Prime Minister should do.

[Ron]

Yesterday, Hungary and 24 other EU members signed the German-led fiscal treaty. And again Hungary is against something. This time how to treat the youth unemployment.

http://www.euractiv.com/euro-finance/25-eu-countries-sign-german-led-fiscal-treaty-news-510489

[Odin's Lost Eye]

Ron I should not worry about that. Hungary seems to regard treaties as ‘scraps of paper’ which can be ignored at will. See the three EU complaints against Hungary and the Hungarian appeals court ruling on para-militaries wearing uniforms and doing ‘military drills’.

Hungary’s solemn pledges are worthless!

[kormos]

"Hungary’s solemn pledges are worthless!"

Odin!This problem has become the norm lately. Show me one government which keeps pledges.
You worry too much about about things you cannot control.

[Mutt Damon]

@kormos Oh, I so love this comparisons. Joe is big on these. Like Hitler and Leonardo were very similar. They were both painters.

Please show us example of other governments breaking pledges and don't forget to add why is that making the Orban government's actions totally OK.

[Paul (the original one!)]

For most of my career I was a business analyst.

During that time, I saw many fads come and go, and more theories on organisational structure, etc, than I can remember. Some had more value than others, but they all missed the most important point - people.

The one 'rule' for running an organisation well that I determined in over 30 years experience was the only thing that really matters is getting the right people. With the right people in the right places, the organisation will succeed. With the wrong people it will be dysfunctional and will struggle to survive.

If you get the right person at the top/centre of an organisation - someone with a clear vision of what they are doing, who is determined, who can communicate, who can 'handle' people, and who can find and develop the right people to work under/with them - then, despite almost anything else, that organisation will prosper.

Management techniques, organisational structures, systems theories, etc can play their part, and can produce improvements, but only marginally. It is the person at the top, and the people they employ that counts.

The centralisation/decentralisation argument is fairly irrelevant. As we say in the UK, it's 'horses for courses'. A good boss will tend to create a flatter, more decentralised organisation anyway, but sometimes a centralised approach is the better (even only) way of running a project of company.

For instance, compare the railway infrastructures of the UK with many European countries. Unlike the centrally planned systems in other countries, the UK's railway 'system' is a mess because it was built entirely in a decentralised way - lines literally competing against each other. Three different routes to the North (even three different routes to Brighton!), and bizarre situations like the Isle of Wight (pop. 140,500), where Ventnor had two different railway stations, connected by competing lines to Newport, just 8 miles away! (Both lines failed, needless to say.)

And, although Google, has a very decentralised structure, Apple was a very centrally controlled company. Steve Jobs micro-managed the entire enterprise. It will be interesting to see how well Apple does without Jobs.

This is not to argue against much of what Éva/Kornai say, the article makes many good points – especially about the tendency of authoritarian ‘bosses’ to put ineffective lackeys under/around them, so that a culture of fear, misinformation and inertia develops. But the key is still the person/people running the organisation.

For instance, imagine that Orbán was a competent, capable man, in power for the right reason and equipped with the right skills to do the job. How would Fidesz and Hungary then function? He would have a clear vision, he would create a flatter, more decentralised structure, he would be prepared to listen, he would employ capable, innovative people in key positions, he would communicate clearly and honestly – he would succeed.

Hungary’s problem is not the organisational structure of party or government, it is the person at the top, and the people he has chosen to work under him.

[kormos]

@Mutt
It is a futile discussion. You know, I could ask the same question back, using your counterargument logic. Anyway, which government's actions are totally OK?

[Mutt Damon]

@Kormos Actually you asked "show me one government which keeps pledges." so I tried "counterargument logic" ... :-)

What is futile is you guys justifying everything the FIDESZ does. let it be the most blatant attack on civil liberties, with something similar you saw in another country. About a dozen people said this already, but we "don't give a flying fook", as Johnny Boy eloquently put it once. We want hour homeland to return to the democracy. It's a quite interesting logic saying, that all government actions are controversial to a certain degree, so why bother about Orban's actions, say taking over the control over the judiciary . Are you actually serious, or just pulling my leg?

[I love Hungary]

This explains why FIDESZ should never be called a "conservative" group.

Right wing, yes but "conservative"????? Not even close.

[kormos]

@ Mutt: I addressed my remark to Odin, but it is OK that you contested my remark.
I am quite serious and a lot more cynical.Despite that I am a law-abiding citizen.
Democracy (just like beauty) is in the eye of the beholder.

[Mutt Damon]

@Kormos "Democracy (just like beauty) is in the eye of the beholder"

I take Cindy Crawford. You have fun with Rozsa Hoffmann.