Helen Yang
Today, in my class, my smart students helped me analyze the military management puzzle. (I am proud of my students!) Why do Chinese entrepreneurs adopt military management rather than an "efficiency wage" scheme as the effective way to motivate workers? Why is there no Chinese Henry Ford who shocks the labor market by doubling workers' wages? The secret lies in the fact that most of these Chinese companies are labor-intensive and generate few technological innovations. True, they produce iPhones and iPads. But they don't create additional values to these high technologies.
Today, in my class, my smart students helped me analyze the military management puzzle. (I am proud of my students!) Why do Chinese entrepreneurs adopt military management rather than an "efficiency wage" scheme as the effective way to motivate workers? Why is there no Chinese Henry Ford who shocks the labor market by doubling workers' wages? The secret lies in the fact that most of these Chinese companies are labor-intensive and generate few technological innovations. True, they produce iPhones and iPads. But they don't create additional values to these high technologies.
The Chinese suppliers bid for orders from upstream companies. To win the orders, they have to cut their costs to the lowest level. This means using cost-saving technologies and cost-saving management. Under budget constraints, Chinese entrepreneurs discover that military management is an effective way to motivate workers at low labor costs and management costs. Chinese capitalists and Chinese Communists happen to have the same objective function: How to enhance workers' loyalty and reduce shirking at the lowest possible costs? Therefore, they have the same solution: militarize their organizations! Inspired by the Communists, Chinese capitalists send their workers to special training programs at China's most famous Communist education bases, such as Yan'an.
Why did Henry Ford used "efficiency wage" to motivate his workers? The Ford company produced the best cars in the industry. By reducing shirking problem, Henry Ford, the residual claimant of the firm, benefited from the increasing productivity. The residual claimant is the monitor of team production, thus has incentive to choose the optimal management. (Isn't this Alchian and Demsetz's idea in Production, Information Costs and Organizational Form?) Ford's optimal strategy was to raise wages, and to enjoy the additional profits as the result of reduced shirking. Chinese entrepreneurs are also residual claimants, however, they receive a fixed rent from their upstream buyers. Therefore, to maximize profits, the Chinese entrepreneurs have to use every means to lower the costs.
Military management serves as a counter-example to Alchian and Demsetz's argument. They argue that firms have no authority any different in the slightest degree from ordinary market contracting. We show that entrepreneurs do rely on authority to discipline their workers sometimes. Alchian and Demsetz don't recognize this fact perhaps because the benchmark in their mind is American firms. This shows again that studying developing countries will enrich our understanding about economic theories.
People, when you are blaming the blood-sucking Chinese capitalists, please keep in mind that all capitalists are similarly profit-driven. Perhaps what makes Chinese capitalists (down-stream suppliers) evil is precisely what makes American capitalists (upstream buyers) benevolent. Now, if I am to answer this question again: Will there be a Chinese Henry Ford who breaks the equilibrium? I would say it all depends on the upgrading of industrial structure. I believe this will happen in a few years, because this country has the smartest students! They are the hope of China's better future!
Military management serves as a counter-example to Alchian and Demsetz's argument. They argue that firms have no authority any different in the slightest degree from ordinary market contracting. We show that entrepreneurs do rely on authority to discipline their workers sometimes. Alchian and Demsetz don't recognize this fact perhaps because the benchmark in their mind is American firms. This shows again that studying developing countries will enrich our understanding about economic theories.
People, when you are blaming the blood-sucking Chinese capitalists, please keep in mind that all capitalists are similarly profit-driven. Perhaps what makes Chinese capitalists (down-stream suppliers) evil is precisely what makes American capitalists (upstream buyers) benevolent. Now, if I am to answer this question again: Will there be a Chinese Henry Ford who breaks the equilibrium? I would say it all depends on the upgrading of industrial structure. I believe this will happen in a few years, because this country has the smartest students! They are the hope of China's better future!