Notes on the Theory of the Managed Firm (TFM) J.-C. Spender Working Paper Series Nonaka Centre for Knowledge and Innovation Number 1 November 2013 Colegio Universitario de Estudios Financieros (CUNEF) C/ Serano Anguita 8, 28004 Madrid (Spain) 1 Editor´s Foreword CUNEF´s Nonaka Centre for Knowledge and Innovation series publishes the work of members of CUNEF and people associated with it. Papers may be of topical interest or require presentation outside of the normal conventions of a journal article. A formal editorial process ensures that standards of quality and objectivity are maintained. This paper follows a presentation titled “Innovation: Planning the better mouse trap or responding to knowledge absences”, given at the BBVA Innovation Centre to an audience of academics and practitioners in October 2012 by Professor JC Spender, Visiting Professor at ESADE (Spain), Lund University (Sweden), Cranfield University School of Management and Open University Business School (UK). In the present working paper “Notes on the Theory of the Managed Firm (TMF)” Professor Spender addresses a critical question for management and organization researchers: What is the firm? He argues that while every theory of the firm is a reflection of the analyst´s purpose the TMF opens up dimensions of analysis that are ignored by the mainly positivist discourse around micro economics and organization and management theory. By focusing on the firm as a politically, legally and socially legitimated apparatus for creating economic value the TMF brings in the ethical and moral dimensions of managing. Spender underlines the TMF is crucial step towards better understanding economic value creation and how it hinges on the constrained, as opposed to free, exercise of human judgment. While the debate is useful for management and organization researches Spender gives some thoughts to politicians and entrepreneurship researchers who are interested in fostering the dynamics of firm formation: he reminds us that the constraint the entrepreneur must work within are often those of society – political, legal and normative – rather than those occasioned by the physical nature of the transformations the firm´s production function presumes or the personal or psychological constraints to persuading collaborators. Sylvia Rohlfer and Jorge Cruz-González 2 Notes on the Theory of the Managed Firm (TMF) J.-C. Spender Background to the Theory of the Firm The term ’theory of the firm’ is familiar to micro economists but may be less so to management and organization researchers. Yet these too must have some entity in mind as the ‘thing’ being managed. What, then, is the firm? Two concepts are always necessary and axiomatic to thinking about managing the firm; (a) the firm (or organization) as an entity in the analysis and (b) the human individual doing the managing and, perhaps, being managed along with tangible resources and intangible capabilities. Such concepts are generally brought into the analysis ‘by assumption’ and seldom made explicit. When did we last see a definition of ‘the organization’? Or ‘the individual’? We hear frequently, in critical tone, that our discourse is over-formalized in presuming a rational or, as Simon suggested, an ‘intendedly rational’ individual --‐ manager, employee, customer, supplier, etc. (Spender, 2013). Consequently the individual’s definition is often left implicit since making it explicit threatens to narrow the scope of the analysis. Likewise the assumptions about the firm as an entity are seldom spelt out or self--‐evident. Our A-‐journals presume we know what firms/organizations are. They are not problematized --‐ they merely need direction or their resources reallocated to improve their performance. They are seen as production functions or machines for transforming inputs into outputs as efficiently as possible. There are other ideas about firms, of course, splendidly laid out in Morgan’s Images of Organization (Morgan, 1997). Even when we have concepts of firms/organizations and people in place, the research literature has made little of any necessary interplay or isomorphism between them, such as the need to adopt a rational--‐man model of the firm’s individuals if the firm itself is to be rational. Note that Simon was one of the few to probe how a science of administration might work to create rational organizations from boundedly rational beings. 3 There are two questions here. One concerns the literature’s variety of models of individuals and firms and where they come from and how they can be fitted together. Another is how a particular model of the individual might limit or extend what the firm is capable of --‐ its capabilities. Those who define the firm as a bundle of tangible resources will judge this question scarcely relevant, it is all about resource allocation. Yet in the background are Coase’s unanswered questions about the nature of the firm --‐ Why do firms exist? Why are their boundaries located where they are? Why are their internal arrangements as they are? Why is their performance so varied? (Coase, 1991). Clearly there is a gap between what Coase had in mind and the institutionalized view that the firm or organization is unproblematic or self--‐evident or simply its resources. Coase’s questions have yet to be answered and some micro economists are prepared to admit this suggests an ‘academic scandal’. A post WW2 generation of micro economists, Williamson, Demsetz, Fama, Klein, Hart, Masten, among others, has generated a portfolio of possible ‘theories of the firm’ that have some potential to address Coase’s questions. Their vigor and success (and Nobel Prizes) has led some to argue that the territory of organizational theory and sociology is being ‘colonized’ by micro economics (Fine & Green, 2000). Many academic jealousies and prizes at stake but the matter is basically methodological. The micro economists achieved considerable progress into the ‘black box’ of the firm by staying with their rational model of the human being, keeping the discourse within economics. Their work is clearly not neo--‐Simonian, for in spite of Simon’s Nobel no modification of rational man is welcomed. At the same time neoclassical economics has been buttressed of late by ‘behavioral economics’. Despite the hoopla, amplified by those interested in brain science and MRIs, this development does not, in fact, abandon the core axiom of rational man. Rather it saves the assumption of a universal rationality, albeit one biased away from pure logic and homogenous information. Kahneman’s Nobel implies his work has been welcomed by the economics establishment as a new defense against the rising numbers of those attacking the axiom of rationality. The not--‐fully--‐logical--‐but--‐still--‐rational man of behavioral economics universalizes empirical evidence of our tendency to structure information systematically in ways that logicians or analytic machines do not. But behavioral economics offers no new answers to Coase’s questions. In contrast, Simon was committed to human beings’ heterogeneity, to our being different in ways that were crucial to the firm’s nature and administration. He suspected, along with others such as Coase and Barnard, that firms arose only as such individual differences were subordinated to or unified by the firm’s goals (Barnard, 1968). All involved then showed practical commitment to something ‘beyond themselves’ rather than to themselves alone --‐ rational man’s focus. They 4 were ‘with the program’. Any mechanisms adopted to make such subordination happen point to a non--‐microeconomic ‘theory of the firm’ that has yet to be fully spelt out. Organization theorists have a portfolio of tentative non--‐rational man theories. Bureaucratic theory presupposes that professionally qualified individuals volunteer to be hired into roles in a rationally designed apparatus. In contrast, political theorists see the exercise of superiors’ power as inducing the subordination. Psychological theories see the need to belong to the group overcoming individuation. Unfortunately these theories also fail to address Coase’s questions. Especially the “Why do firms exist?” one. In bureaucratic theory this question is pushed beyond the analysis; firms are simply the instruments of the owners’ goals. In political theories of the firm, such as stakeholder theory, there is no answer to why firms exist or are chosen as instrument of policy; plus the boundary between the political activity within the firm and outside it dissolves. The firm is merely a socio--‐political context in which individuals do their political thing. There is no notion of the firm. Likewise for the psychological theories of the firm; it is simply a psycho--‐social context for individuals. There is no firm. One way to address Coase’s questions lies through the notions of the individual rather than of the firm. Those who look at the firm for answers are simply looking in the wrong place. At the same time the post-WW2 micro economists are beginning to question whether any viable theory of the firm --‐ beyond the ‘black box’ of a ‘firm--‐less’ production function --‐ can stand on rational man assumptions. The attack on rational man is often mounted from notions of emotion, ethics, social duty, and so on. The weakness here is that while rational man gets soundly ‘dissed’, little is put in his place. The lack of a clear definition of the individual means the resulting discussion lacks coherence --‐ all the right words but what are they to mean in practice? What is the objective function, and how is it reached? Writers seem to say IF the firm exists, THEN it should act judiciously, ethically, or with attention to its social responsibilities. But why? Just because individuals should act this way --‐ a debate about moral philosophy --‐ why should firms? Were firms presumed to be individuals --‐ a highly contested issue --‐ then OK, it would follow. But can Coase’s questions then be rephrased as “Why th do individuals exist?” Obviously not. The 18 century Italian philosopher Giambattista Vico suggested we could certainly ask why firms existed, because they are our constructions, but that we could not ‘enter the mind of God’ to ask why we existed (Croce, 2002). A similar point was made by Simon when he argued that “Nothing is more fundamental in setting our research agenda and informing our research methods than our view of the nature of the human beings whose behavior we are studying” (Simon, 1985:303). If not Rational Man, then 5 what? Whatever the answer, the researcher’s choice delivers the resulting discussion into a particular part of the overall study of economics, management, and organizations, for any move away from rational man puts the discussion into a different sub--‐field, beyond the reach of economists and sociologists of Rational Man persuasion. The institutionalization of our publications reinforces this separation, for our journals are closely tied into particular axiom sets - micro economics presumes Rational Man, the Academy of Management Learning and Education does not. At the same time we should appreciate no discipline’s set of axioms lie beyond criticism. The history of natural science is less one of steady progression on a single axiom--‐base, more a series of ‘scientific revolutions’ as axiom sets are revised or tossed aside. In the social sciences there is less advance by revolution and more a ‘circulation of elites’ as one axiom set achieves rhetorical and disciplinary dominance in the academic journals and university appointments. Yet the irony is that there is widespread agreement about the limited practical value of socio--‐ economic theories based on rational man --‐ and a growing suspicion that the way towards more powerful theories of the firm lies through theorizing the evident failures of rationalist approaches. For instance, one route lies through ‘market failures’, wherein firms might be responses to the market’s failure to be fully rational. Unfortunately we have no theory of market failure, so it is not clear how this insight can be translated into a theory of the firm. While failures clearly occur, they are of many types and there is no general theory that can gather up all, or even several of these. Rather we see the recent activity of this generation of dissident micro economists as explorations of very narrowly specified types of market failure --‐ for instance in principal--‐agent theory --‐ that then lead on to specific but not general post--‐neoclassical theories of the firm. Likewise if firms are able to produce at a better cost than the ruling market price then there is a rationale for firms’ existence, and if the relative prices are known, the firm’s boundaries can be established rationally. Unfortunately this analysis misses Coase’s existential question because a firm must exist before it can discover its ability to out--‐price the market. Nonetheless, there has been a steady accumulation of these ‘failure--‐based’ explorations. Unfortunately they fall into axiomatically separated silos which, while clearly beyond the reach of neoclassical discourse, are not birds of a feather that come together into a coherent discussion of non--‐rational--‐man theorizing, precisely because their axiom sets or, more specifically their assumptions about markets, differ. Note that rationality is still presumed of the individual actors, just as principal and agent are both presumed to pursue their own interests. 6 Recovering an Old Route --‐ Judgment A rather different route to a post--‐positivist theory of the firm lies through theories based on models of non--‐rational--‐man individuals. There are many such models, of course, for we have not yet arrived at a compelling or coherent universal theory of ourselves or our condition. Merely mentioning this opens us to the whole of philosophy, what can be rudely collapsed into the everlasting search to answers to the existential question “What is Man?” While it seems obvious that researching firms involves people and so connects us to philosophy there is some hope that firms pose a simpler set of questions that lie on ‘our side’ of the more profound philosophical ones --‐ for the reasons Vico suggested; firms are our constructions, they are not ‘natural’ as we are. As soon as we stop presuming what firms are, our analysis turns to the task of creating them, for we determine what they are. The simplest level of answer to Coase’s question is ‘us’ --‐ we (or our failings) are why firms exist and we give them their nature. This is strategic work or entrepreneurship, and rational--‐man axioms do not illuminate it well. The task is creative, a practice not an idea and, as we know from Polanyi, real world practice always requires the application of tacit (personal) knowledge because our world is uncertain and our experience can never be fully grasped by rationalist notions alone. Instead of stepping away from rational--‐man by supplementing the model with emotions, moral scruples, or a sense of social duty, we can follow the Enlightenment philosophers and propose an alternative model of the individual as combining judgment with reason. This does more than supplement reason; it reframes what we mean by reason. It puts our capacity to reason and imagine in dialectical tension for we reason about our judgments. We do not know anything for certain so we must always begin our reasoning by making judgments. Our judgments come from us --‐ our imagination. We cannot begin by reasoning about facts as if they came to us from elsewhere. As Descartes and Kant reminded us, we have no knowledge of the world beyond us that is unmediated by our minds and judgments. Embracing judgment and making it fundamental to how we know recovers a mode of analysis that was familiar in the era before rationalism took over in the th 19 century and pushed judgment out of the academic discourse and university syllabi. Note judging is not a state that can be rationally determined, measured, or explained, as the product of experience, for instance. The term is more a ‘place holder’ for a human capability sensed but discovered as very different from our ability to reason logically. It is our capability to arrive at conclusions in situations that cannot be grasped by rational methods alone. John Locke wrote of: “the faculty which God has given Man to supply the want of clear and certain 7 knowledge, in cases where it cannot be had, is judgment. The mind sometimes exercises this out of necessity, where demonstrative proofs and certain knowledge are not to be had; and sometimes out of laziness, unskillfulness, or haste, even where demonstrative proofs are to be had” (Locke, 1928). The epistemological point is that if we posit judgment as something that cannot be defined and brought into causal models we may still be able to handle it as something we know from our own experience --‐ which is to suggest that we can know things subjectively as well as objectively. Indeed this distinction gives us some insight into tacit knowledge, what we know about ourselves but remains unknown to others except through demonstrations, for example, of bicycle riding. The shift is from objectivist rational man modes of knowing about everything beyond herself/himself a n d towards accepting a degree of personal knowledge that complements and supports our objective knowledge. This bi--‐capable model of the individual, one able to combine or synthesize objective and subjective modes of knowing to guide her/his practice, can be associated with (a) human action in the uncertain conditions Locke implied, and (b) the intuition that the firm’s essential nature may be less to do with its extra-‐individual assets than with its human--‐sourced ability to cope with uncertainty and asset--‐absences by bringing judgment to bear. Each of the market failure types explored in the proposed micro economic theories of the firm calls for a specific and corresponding type of judgment. Principal--‐agent theory presumes knowledge and/or interest differences between two parties that are engaged in shared activity. Transactions cost analysis --‐ a somewhat more complicated theory --‐ presumes knowledge differences between the firm and the market. Behind this group of theories lies the general notion of human judgment as the capability that can be marshaled to deal with the specific uncertainties real situations inevitabl y present. Likewise principal and agent overcome their knowledge differences and generate trust. Firms and markets overcome their differences by moving transactions within or outside firms. These moves turn out to be matters of entrepreneurial judgment that are not rigorously solvable. In which case a second concept of management is needed to complement the rational--‐man notion that underpins neoclassical economics and its view of management as rational resource allocation as well as organization theory with its view of the organization as a rationally designed and operated mechanism. This second notion is the management of the actor’s judgment, complementing managing the participating individuals’ reasoning. This is tricky because judgment cannot be determined and so brought into a causal model, the normal command and control approach; but it may well be shaped by others much as a gardener shapes fruit trees into espalier or a marijuana grower uses LED lights to encourage his crop. Control is displaced by 8 the notion of management as husbandry --‐ hinging on respect for those being shaped. The subtler switch implied by this new route towards a theory of the firm is from the language that works for rational man and towards one grounded in practice and skill. The causal model that lies behind command and control management is an exercise in abstraction --‐ that must then be transformed into the reality of practice as enactment. Rational--‐man based theorizing presumes a perfect relationship between the abstraction and the practice, and so excises the judgment necessary to deal with Murphy’s Law and those other unanticipated matters that always get in the way of practice. In contrast, judgment is always specific to a situation, indexical. It cannot be theorized precisely because it cannot be universalized or separated from the instant of its exercise. There is no universal notion or theory of judgment that can be meshed with the universals of causal modeling, the firm is a concept that belongs in a different epistemology, an epistemology of practice. Practice is a puzzle, of course, simply because it is indexical, not general. Polanyi’s work is interesting, as is Bourdieu’s (Bourdieu, 1990; Polanyi, 1962). Grounded theory is a not very successful attempt to prioritize practice (Glaser, 1993). It may be that a theory of practice is a contradiction in terms, that practice cannot ever be adequately seized by language and analyzed. It can only be fully understood in experiencing it. Instead we might focus more on what can be said about firms, shifting the focus from practice to the judgments that bring thoughtfulness into the realm of practice. What can be said about instances of judgment or managing --‐ since language itself is constructed with generalizations? Von Clausewitz articulated a way around this roadblock, one commonly appreciated a century ago (Sumida, 2008). At that time many writers quipped the best sign of intelligence is the ability to hold two or more contrary ideas in mind and still function. Rational Man fails this test, of course; but humans may sometimes pass it. So we can suggest the actor’s judgment lies asleep in the interstices between the contrary ideas held but wakes at the moment of action as the actor bears these ideas in mind but contrives to synthesize or balance their implications to find a ’sweet spot’ between them. A sense of appropriateness is key --‐ which is why a number of scholars are bringing the Greek notion of phronesis back into the discussion (Flyvbjerg, Landman, & Schram, 2012; Kinsella & Pitman, 2012; Nonaka & Toyama, 2007). Judgment is the essence of phronesis, implied by our need to find a balanced and appropriate way through the maze the contrary ideas or constraints even as judgment itself can never be identified as a specific thing or quality. 9 Engineers are familiar with one version of this --‐ dynamic programming. It posits a field of potential actions with several constraints. An aircraft has what engineers call an ‘operating envelope’ defined in terms of maximum altitude, maximum and minimum flying speeds, maximum carrying load, maximum distance flown, and so on. The ‘space in the middle’ between these constraints is under--‐determined. The aircraft can fly higher or lower so long as it is below its maximum, it also has some choice of airspeed, and so on. The space inside the operating envelope identifies the pilot’s options --‐ the place into which the pilot’s judgment is ‘thrown’ (Heidegger’s term) or enacted (Weick’s term), for without the pilot’s choosing the airplane cannot occupy any of the options within the operating envelope. It needs the pilot. The flight envelope limits the pilot’s choices whenever the airplane is flying, so the pilot is in a symbiotic relationship with the envelope --‐ s/he enacts or realizes one or other of the practical solutions available within the envelope. The aircraft designer shapes the envelope but leaves a finite number of options open for the pilot. In a similar manner a manager can open up a space for a subordinate’s practice but still shape it by putting constraints in place. For instance, an employee might be charged to sell so many widgets in such and such a time period but also be left free to negotiate price and delivery --‐ within certain limits --‐ and so be invited to make judgments. The operator of a machine that is not fully under the control of a computer has choices about how to work it, inviting his judgment. Business is clearly better thought of as a space of judgments among practice options than as a mechanism for executing rules and decisions. At this point it is useful to see how Coase, pondering answers to his own questions, surmised the essential nature of the firm was something to do with how employees were subordinated --‐ within certain limits (Coase, 1991:21). The bottom line here is that we cannot ever identify judgment specifically, only by the space it moves into and occupies as practice. We must speak about it indirectly for it is the evanescent and indexical creature of an instant of a specific human action, not something general and so matched with language. But we may be able to generalize about the space into which it is thrown by marking it out with persisting ideas that do not then determine the manner in which it should be occupied on any specific occasion. For instance we drive into the supermarket’s parking area. There are seldom any hard and fast rules about how cars, trucks, and individuals (some in wheel--‐chairs) are to maneuver around each other. OK, we can build a list of appropriate ideas but many of these are generally contradictory and the actual maneuvers we make are indicative of our choices about how to occupy or inhabit the precise situation. But note how the maneuvers we choose also reveal us --‐ as aggressive drivers, patient or impatient, 10 greedy for a good spot or polite, and so on. Thus action in the opportunity space -‐ in--‐the--‐world (as Heidegger might say) --‐ calls forth the manner (technically known as ‘style’) in which we occupy it. We are how we act under the uncertainties that characterize our personally lived world. When we say “So and so has good judgment” we verbalize a personal conclusion, perhaps arrived at inductively. But it is our personal conclusion nonetheless and does not identify any enduring quality of the actor observed --‐ who may well act in a quite surprisingly ‘bad judgment’ way in the next situation. The point about our agency is that it is not determined so it captures the way we can always choose differently. It is an echo of the free will and determinism debate --‐ asserting we have choices in life and these demonstrate or manifest our judgment. Since we cannot generalize judgment or seize it in language, especially scientific language, Von Clausewitz’s ‘trick’ was to identify the constraints to the exercise of judgment. There is also an interesting exploration of this approach in Goldratt’s work, well known among consultants but almost unknown to academics (Goldratt, 1990). He carried some dynamic programming ideas into the management arena; though there are problems with this. In the next section the theory of managed firm (TMF) begins to emerge --‐ as the constrained exercise of a managing individual’s judgment. The constraints are all that can be known, never the judgment that directs the practice that occupies the option space between them. The Constraints to Managerial Judgment It is unfortunate that we have become so inured to (a) treating the firm as an unproblematic ‘thing’, like a truck that needs driving, with (b) an ‘inside’ and an ‘outside’ (what follows from our giving it an object--‐like nature) that (c) must respond to external forces as if it were a billiard--‐ball (defining the driver’s role). This way of looking at firms can be labeled the external--‐internal--‐fit (EIF) paradigm and it is endemic to our literature. Managers are supposed to enact the EIF, especially so if we read mainstream strategy texts. But what are we to make of those managers, numerous in number, who strategize to change their world rather than accept it passively as it is? Henry Ford willed a brand new world into being populated with new needs and threats, as did Steve Jobs, as did Jeff Bezos, and many politicians too. The conventional positivistic assumption is that all causes are external and that managers are passive fact--‐followers and have no choice --‐ both ridiculous and insulting. It also denies the relevance of Coase’s questions. Our literature has little to say about exploring the limits to entrepreneurial choice (agency). A branch of sociology deals with the structure-‐agency relationship but it turns on how sociological structures shape social life and does not tell us much about the limits to the entrepreneur’s choices. 11 The TMF is a ‘theory of the firm’ that makes active (agentic) human judgment axiomatic, placed at its core in lieu of a rational analysis of resources, scarce, valuable, or otherwise. First, every firm exists because someone willed it. We cannot say much about Will, but we can say the firm exists because a person saw or made an opportunity space in the world that was (a) constrained to be small enough to be occupy--‐able, and then (b) occupied as a matter of practice. The question is not “Why did this entrepreneur will this firm into being?” but rather “What obstacles did this entrepreneur overcome to construct this firm?” Knightian uncertainty is a collective label for these obstacles (Knight, 2006). Note they cannot be priced. Things price--‐able, like an office for the firm or a programmer, are not obstacles of uncertainty; they are costs. The entrepreneur’s opportunity space is bounded by the limits to what s/he can do. Beyond these limits the possibility of action becomes uncertain. The entrepreneur can make something happen on his side of the boundary, but probably not beyond it. Someone can get 12 bottles of wine into the cardboard box, but probably not 15. She can get the filled case to the party 2 miles away in 15 minutes but not in 3. All human action is bounded in this way. The boundaries express the limits to our knowledge and practice. In fact we only know the world in terms of how it limits what we can translate from imagination into practice. Some constraints to entrepreneurial practice seem obvious, such as those set by ‘the science’. Engineers know the Second Law of Thermodynamics ensures no real process can avoid a degree of waste --‐ why we cannot build perpetual motion machines. Whenever an entrepreneur needs energy to enact a firm, s/he has to th confront this scientific fact; one of the reasons why 19 century spinning mills were built as close to cube--‐form as possible, minimizing the losses while transferring energy by belts and pulleys from the engine house to the looms. The adoption of electrical power, with much lower losses over distance, changed the physical shape of factories, just as outsourcing has changed the physical nature of much of business too. Similarly brewers are bound by the facts of their mixing and fermentation processes. Explosives manufacturers must accept the organic chemistry of their trade. There are many non--‐scientific constraints. Some are regulatory --‐ for instance, minimum age for workers, or the provision of health services or safety. An entrepreneur cannot build a firm without taking such constraints into account --‐ and many more besides. But the constraints the entrepreneur must consider are never given, they must be selected --‐ for the list of possible constraints is infinitely long precisely because we lack an overall theory of the socio--‐ economic universe, a theory of the ‘external’ world. To think it no more than a collection of objective facts lying around ready to be retrieved and presented 12 to the strategist as ‘facts of the situation’ is to abandon the world managers inhabit and disappear into the world imagined by uncertainty--‐denying academics. Hence the reality--‐grounded condition Simon suggested by ‘bounded rationality’. We can never grasp more than part of any real situation. But which part to attend to and which to ignore? Judgment is inescapable. First, judgment is a necessary part of selecting the constraints used to bound and engage the entrepreneur’s chosen opportunity space. Second, the possibility of saying something interesting about these constraints --‐ so instantiating a TMF --‐ lies in categorizing them, not merely identifying them but also considering their implications for the entrepreneur. We cannot say much about the acts of judgment that led the entrepreneur to select the constraints engaged. In spite of the plethora of advice about writing business plans, we have no theory of the viable firm. So any writer’s presumption of a universal check--‐list simply obscures the fundamentally judgment--‐based nature of the entrepreneurial task. The selection is driven by the entrepreneur’s intuition of possibility and grasp of the situation’s constraints and processes, not by an abstract universalist theory. But we can say something interesting about how the constraints chosen must be brought together to define an opportunity space. The challenge is to illuminate the nature of the judgments made if the firm is to exist --‐ we can look for this in the interstices between the constraints, between what is known. The next section will examine this synthesis in action and thereby suggest the TMF as a synthesizing practice --‐ not as an analytic practice driven by theory in the deterministic sense we generally think of theory. Note that before science began th its rise in the 18 century theorizing used to mean taking a thoughtful attitude to human affairs. It was more of an aesthetic than a method nor prescription. Today theorizing means something more prescriptive and is often conflated with rigorous causal modeling. But if the phenomena of interest is not amenable to such deterministic notions we have to step into an alternative epistemology. As we do that the meaning of the term theorizing changes. Thus I see theorizing from the point of view of purposive practice, thoughtful action in space/time bounded situations towards chosen goals. Weick uses the term ‘mindful’ but it underplays the significance of the tacit and moral understandings we garner by engaging the world as a lived practice, which are essential to grasping real situations (Weick, Sutcliffe, & Obstfeld, 2005). Admitting the notion of tacit understanding --‐ not original with Polanyi of course --‐ implies we can know things in several different ways. The positivist way of knowing is that all knowledge is a representation, perhaps approximate, of the objective Truth that lies beyond us, for instance, in Nature. Positivism asserts there 13 is only one way of knowing. It has reigned supreme in many areas of the social sciences for some decades but is under increasing criticism on account of its inability to address increasingly pressing questions about leadership, innovation, entrepreneurship, endogenous growth, and so on. A more workable epistemology can be developed by distinguishing three modes of human knowing --‐ as data, as meaning, and as skilled practice. The emphasis is then on how we know rather than on the nature of the thing known or the knowledge itself as another kind of thing (such as an intangible resource). When we know something as data it is because we presume the objectivity of the universe of what is known, as in the positivist approach. The object of attention can be measured. But since we know nothing for certain, everything known is actually of our construction; the measures are never entirely objective. So the resulting knowledge is a human (possibly social) construction and attribute, within and of us, not a feature of what lies beyond us. It is a matter of our opinion, meanings or cognitions that we attach to sense--‐data or to our imaginings. Meanings are subjective superimpositions onto our impressions of the world we feel lies beyond us that nonetheless stimulates our senses. In which case we also feel there is a complementary and separate inner world lying within us to which we also attach meanings. Meanings are contested because they come from within us. We have differing views because we live without (a) insight into each others’ inner worlds and (b) any certain knowledge of the world beyond us that we might use as a test of the truth of our opinions. We synthesize our data and meaning modes of knowing into ‘information’, presuming it has impact on our lives. Information inhabits our thinking and contrasts with our action in the world as we exert force, consume energy, and change the state of the world. Tacit knowledge presumes that since we are physically present in a physical world we can also act on it using a mode of knowing that lies beyond thought. Not thought--‐less action so much as action unrelated to or regulated by the presence or absence of thought. Simon explored the concept of habit, practices that became so familiar they did not require one to engage the conscious mind in the execution of the action. They offer economy of thinking work. He also presumed an unconscious mind as capable of thinking (processing habit) as the conscious mind --‐ an untestable hypothesis. Polanyi’s notions are not quite the same, though it is clear that riding a bicycle can also become habitual. He posited a third categorically distinct mode of human knowing, demonstrated as skillful practice, different unlike knowing in a thinking way, even subconscious - though the differences from Simon’s assumptions about the unconscious are unverifiable. Others argue for a form of intelligence located in the gut rather than the mind. Wittgenstein explored the relationship between modes of thinking knowing and practical knowing, concluding that all human thought is 14 grounded in our practices --‐ or rather, he prioritized practical knowing, seeing thinking knowing as a distillation or abstraction from practical knowing. Philosophers will always be pursuing better answers to these puzzles. But for the more mundane task of thinking about organizational life and entrepreneurship the three-mode epistemology o f d a t a , m e a n i n g , a n d p r a c t i c e opens up questions very different from those opened in positivist epistemology --‐ including those related to human creativity that are pushed aside in a discourse framed by positivist causal analysis. Human creativity and agency break the causal chain. If the breaks are presumed random, unexplained and unexplainable, the enquiry stops. But if the breaks are not random they can be captured as a consequence of human agency or judgment by treating that as cause. But instead of looking for what, in turn, causes judgment we can see agentic activity as an event, an irruption of judgment into the lived world. If data, meaning, and practice are categorically distinct we can make their relationship a matter of judgment in the instant of practice, suggesting judgment appears as the various modes of knowing are synthesized in thoughtful action, the synthesizing process being the application of judgment. Judgment resolves the uncertainties that lie in the interstices between what is known as the actor’s judgment is realized as thoughtful practice. Or we might say that every thoughtful practice requires the actor to resolve uncertainties as an act of judgment--‐shaped practice. To repeat; we imply three modes of human knowing. Data presumes a knowable world beyond us. Expanding this requires discovery of this world --‐ we explore, go look and record what we find. The different notion of meaning suggests that beyond looking for the things that are immediately understandable, another river or another aircraft taking off from the airport, we may do well to change our meaning inventory to include something different --‐ a geyser or a helicopter taking off. The scientific method is primarily directed at probing new meanings via the method of hypothesis and empirical test, checking whether this or that meaning seems supported. Note that it is neither a method of generating hypotheses nor devoted towards the discovery of more skillful practice for scientific practice is always subordinated to the integration of data and meaning --‐ to be fully comprehended and not left in the tacit domain. Polanyi was reacting against logical positivist philosophizing about science, noting the central place of tacit knowledge in the conduct of real experiments. Another way of putting this is that the hypothesis-‐test method writes out tacit knowledge and pushes into ceteris paribus clauses. The three different modes of advancing our knowing reflect differing natures thereby allowed to the thing known. The scheduled arrival of a specific flight is something of which one can be ignorant, but a moment’s work on the Internet 15 will reveal it a knowable, resolving ignorance of data. But Jane is not simply ignorant of what Harry is going to do when she tells him she is dating William. In bilateral human situations, such as are imagined in principal--‐agent theory, the outcome is only rarely forecast-able. Game theory explores this and, as we know, sometimes the outcome can be forecast --‐ because each player’s range of options and preferences is known, as in tic--‐tac--‐toe, but not in chess. Human situations are more serious than games. Jane is ignorant of Harry’s response because Harry does not know either --‐ she has not told him yet. The situation is indeterminate. To advance knowledge in such indeterminate situations it is sometimes possible to surface the different meanings the players attach to the situation --‐ perhaps by anticipating and discussing them in the course of negotiating an agreement to cover the various possibilities. Contracts set limits to wrongs and remedies that have not yet occurred. When it comes to advancing skilled practice there is experimentation, bricolage, or just trying something. Interesting progress has been made in modeling situations to help agents develop practical judgment --‐ flight trainers or video war--‐games. This moves the experimentation into a less threatening or consequential context. The plane crashes and you pop out of the simulator to get a coffee. To our national cost we know flight simulators work pretty well. Since the nature of anything known can differ so the nature of the constraints to judgment can differ too. Much more important, there can be specific understanding of how a particular constraint might be moved, changed, or displaced. Few constraints are as fixed as the Second Law of Thermodynamics seems to be. Most of the constraints to an entrepreneur’s judgment are malleable to a useful extent. The wages of the programmer being interviewed may turn out to be highly negotiable because he is under pressure and out of work. Practice may not make perfect but will often advance skill. All of which shows there can be no exercise of judgment in a vacuum of total knowledge--‐absence. Judgment is always with respect to something specific, indexical. It is always projected towards a specific knowledge--‐absence framed by or in the interstices between knowledge--‐ presences, things known. Thus at least three things must be known before judgment can be brought into play. In earlier empirical research I concluded the structure of most business executives’ knowings can be encompassed by around a dozen situationally specific constraints (Spender, 1989). Their knowledge of each constraint can be improved by probing the nature of knowledge, the manner in which the thing is known. Ultimately the entrepreneur has to operate in a space framed by data, meaning, and skilled practice but whose framing is amenable to action. 16 Language The outcome of the application of judgment is thoughtful or ‘mindful’ practice that draws on tacit understanding. But the private firm also captures and operationalizes the insights of Adam Smith and many others in centuries before who saw how effective collaboration across a division of labor lies at the core of wealth generation. This is very familiar to us, but in the light of the preceding sections we see a distinction between labor that can be managed through the exercise of reason --‐ in the manner of a bureaucracy --‐ and the labor of innovation and creativity that calls for managed judgment. In fact bureaucratic instruction is almost never sufficient for the practice it is supposed to determine, there are always differences between the situation the instructor/planner imagined and that which the operative meets in practice. What has been tidied away into assumptions and ceteris paribus clause pokes through into reality in the manner of Murphy’s Law --‐ that if anything can go wrong, it will. Synthesizing across the other interstices between planning, instructing, and operationalizing calls for further judgment. The TMF proposes that both the operative’s reasoning and her/his judging must be managed. Organization theory tells us a great deal about managing employees’ and others’ reasoning with instructions, performance measures, and incentives. These, together with the terms that identify the objects and practices relevant to the operative comprise a language of local rationality, or rather a language whose meaning hinges on the presupposition of the operative’s self-‐interest. The managers identifies task X --‐ which may call for some training --‐ and instructs operatives who perform it because it is their interest to do so. Their judgment is called for when the task cannot be fully and unambiguously specified, perhaps because the instructor does not know how to do it himself. Do this --‐ even though I do not know how. This is the typical consequence of the division of labor and the trend towards increasing specialization, professionalization, and productivity. New equipment calls forth new skills. In Caxton’s era type setting was very much hand--‐work. Today the columnist sits at a keyboard and the printed word arrives on the reader’s screen. Air--‐conditioning engineers and house electricians need certification. Pilots are in a symbiotic relationship with machines and when ‘flying by wire’ their interactions are completely mediated by computers. The airline’s CEO can say “take off at 8:32 am and fly this 747 to Delhi” without any idea of what that involves for pilot, ground crew, customs officials, and air--‐traffic controllers --‐ all of whom have to deal with a continuous stream of unscripted situations that call for their ‘professional judgment’. 17 But how is the flow of operative’s judgment to be ‘managed’? Training helps operatives appreciate the options available, but still their choices must be directed. Principal--‐agent theory models this situation, presuming the principal and agent differ in their knowledge of the situation. Micro economists surmise there is some mix of incentives and monitoring that can minimize the principal’s loss. But on closer examination this turns out to be a mistake. Jensen & Meckling’s proposed solution turns on the presence of perfect markets to supply the information necessary to the solution they propose (Jensen & Meckling, 1976). Yet when perfect markets pertain there is no space in the analysis for the agent, for in perfect markets all actors are principals. Jensen & Meckling mis--‐specified the principal-‐agent model. In contrast Fama’s specification is better and allows the principal and agent to experience each other as they work together, leading to ‘trust’ --‐ which is a mutuality of judgment arrived at in the shared interest of continuing the collaborative practice (Fama, 1980). But is collaborative experience the only way to manage another’s judgment? An alternative, which underpins the possibility of education, is language (Morris, 2007). Some language is narrowly rational --‐ geometry proofs, for instance. Technically such rational languages are ‘formal’. They stand on specific axioms and the universe of language then created is that of all statements that can be derived from those axioms. Yet we talk in ‘natural’ language. This is not based on rigorous derivation from known axioms. Rather it is a hodgepodge of sounds and ideas that ends up being inconsistent and inconclusive, but can illuminate the human condition and its uncertainties. One kind of natural language is discourse about our emotions or moral challenges. There are no secure axioms here, we are not sure of the relevance of our beliefs about the world or our values. Perhaps the seven virtues really do shape the quality of human life, perhaps not. Perhaps the urge to survive is written into our genes, perhaps not. Perhaps love is the supreme human experience, perhaps not. The inconsistencies here have the curious but hugely important consequence of making it possible for us to communicate thoughts and feelings that seem to go beyond any natural language’s logical limits. I can say “I have the ‘flu and feel sick”, nothing complicated about that. In contrast, poets work our language’s contradictions to project feelings that can be ‘trapped’ between the meanings we normally attach to words. Thus Blake’s lines “Tiger, tiger, burning bright, in the forests of the night …” make no logical sense, but begin one of the most powerful poems in the English language. Adept use of natural language can shape listener’s judgment as well as introduce them to moral possibilities and to the nature of love. Religious talk or the language of novels is the antithesis of formal speech. As we define the firm as comprising individuals 18 who bring their faculties of reason and judgment to bear on its practices we realize natural language can be used to shape them. While the individuals bring their capacity to make judgments with them, the management challenge is to ensure they act in the firm’s interest, towards the firm’s goals, rather than towards their own --‐ the principal--‐agent situation. Rather than presume a set of incentives and monitoring costs, and aside from relying on mutual experience, shared natural language provides a possibility of harnessing others to the firm’s objectives. Rhetoric is the study of these. While the management of others’ reasoning can veer towards the formal, presuming the self--‐ interest of the listener (employee/agent), the management of their judgment calls for skilled rhetorical practice. Fortunately a great deal is known about rhetoric (Conley, 1990). Since before the time of Ancient Greece societies have appreciated the need to educate their leaders to create social order through language. The Greeks formalized rhetoric into three basic categories that are somewhat like data, meaning, and practice in that they presume three fundamental modes of human communication or persuasion: logos, ethos, and pathos. Logos is the appeal to reason, logical if--‐then arguments. Ethos is the appeal to the social situation that links speaker and listener. Most Americans listened to Colin Powell’s 2003 speech at the UN --‐ urging war --‐ because he was a respected national figure with the Presidency in his grasp. Ethos addresses the question “Why should you listen to me?” Pathos is the appeal to the listener’s emotions, for the Greeks believed emotion was the real spur to human action. We may agree with the logic and respect the speaker, but we only act when roused emotionally --‐ to the barricades! Rhetoric indicates a mode of management complementary to instruction and incentives. In the background is the use or threat of force. Sociologists point to three modes of creating social order --‐ coercion, calculation, and acculturation. The modern firm offers little place for managers to use force. This leaves the interplay of calculation and acculturation - incentives versus persuasion. As the knowledge--‐intensity of modern work deepens, the knowledge gaps between managers and operatives expand relentlessly. So the management emphasis shifts from calculation to persuasion and they say ‘our people are our most valuable asset’. As a result many organization theorists are exploring more ‘open’ modes of managing. But few of them note the distinction at the center of the TMF which, because it adopts a bi-‐capable model of the individual, calls for two complementary modes of managing. Over the last three millennia the study of rhetoric has not produced a theory --‐ rather it has generated a set of heuristics or ‘best rhetorical practices’. These are expressed (a) in its ‘canons’ and (b) in ‘question theory’. The canons relate 19 seemingly logical sequences of speaking practice. The simplest of these is that a story has a beginning, middle, and end. More fully spelled out, a speech or story is contextualized and demands attention to subject, audience, purpose, and occasion. The formal characterization of rhetoric’s canons is of invention, arrangement, choice of style, memorization, and delivery. Every business person does well to have some knowledge of rhetorical practice precisely because business is a talking game (Leith, 2011). Question theory turns the analysis around. Instead of focusing on preparing and delivering persuasively it sees an audience listening for answers to the specific questions that concern them. Rhetoric is a practice not a theory. It is always indexical, situated in a social context and sometimes defined as the search for the best means of persuasion is a specific situation. Theory, as we now understand that term, is generalization and there are few generalizations in rhetorical practice. The canons are limited generalizations and mean little until contextualized. Invention and arrangement begin with ‘reading’ the audience and judging what it is able to hear about one’s purposes. Plus it is always specific, and with specific questions. The viability of the speech is contingent on addressing these questions. ‘Stasis theory’ is a formal characterization of these because the audience is not a blank slate awaiting inscription by the speaker (rhetor); to the contrary, it is already immersed in the social context (ethos) and fully aware of what appears problematic about it. Thus managers speaking to employees are dealing with people who already know a great deal about what is going on and they are as cynical as the rest of us. A new mission statement proposing attention to customers and respect for each other may well be greeting with sardonic laughter. Managing the judgment of others is a leader’s most fundamental challenge. It is central to the TMF and any other social activity in situations that are uncertain and incompletely understood. Summary The theory of the managed firm (TMF) presupposes the possibility of thoughtful imaginative practice in uncertain situations, and of managing the thoughtful imaginative practice of others. The human experience of uncertainty is fundamental to the possibility of using the imagination. Such practice is also the source of added value for action in certain situations cannot add value - it simply reallocates it. The TMF adopts a bi--‐capable model of the individual --‐ complementing reason with judgment. The firm comprises collaborative practice, only existing in the instants of its practice. It has no other ontology and is best modeled and analyzed as the specific language used to persuade those involved to act collaboratively towards the firm’s specific objectives. This language is always 20 specific and contextualized, the result of the entrepreneur’s strategic work. We might also call this the ‘business model’, for it invokes a world that the firm is to inhabit with its practices. It is a natural language. Formal models excise the firm’s value--‐creating capacity --‐ which may be fine for some purposes but is ironic if the researcher is trying to analyze the entrepreneur’s work and discover how firms are the ‘engines of the economy’. The TMF opens up dimensions of analysis that are ignored by the positivist discourse around micro economics and organization and management theory. Aside from bringing in uncertainty and added value, it implies the ethical and moral dimensions of managing. Reason is not subject to ethical or moral constraint, judgment is. Hence the TMF provides a basis for discussing the social control of the context of business activity, the social and political management of the boundary between the private and public sectors, lifting one of Coase’s questions to a higher level. Instead of asking “Why do firms exist?” we can ask “Why does the private sector exist?” The constraints the entrepreneur must work within are often those of society --‐ political, legal, and normative --‐ rather than those occasioned by the physical nature of the transformations the firm’s production function presumes or the personal or psychological constraints to persuading collaborators. The TMF reflects Barnard’s concept of the firm and its executives’ function as they synthesized the three social, physical, and psychological subsystems into an ‘organizational system’. Every theory of the firm is a reflection of the analyst’s purpose. The bureaucratic theory of the firm is focused on maximizing command and control. Micro economic theories of the firm probe whether firms help or hinder the most economically efficient allocation of resources in an economy. The TMF is very different; it focuses on the firm as a politically, legally and socially legitimated apparatus for creating economic value. As such it is crucial to our notions of democratic capitalism. Micro economists sometimes imply perfect markets are a viable replacement for democratic capitalism, that the less government is the better. Regrettably this shows little sensitivity to what we might learn from history or insight into how the private sector actually works. The TMF is a step towards better understanding economic value creation and how it hinges on the constrained, as opposed to free, exercise of human judgment. Bibliography Barnard, Chester I. (1968). The Functions of the Executive (30th Anniversary ed.). Cambridge MA: Harvard University Press. 21 Bourdieu, Pierre. (1990). The Logic of Practice. Stanford: Stanford University Press. Coase, Ronald H. (1991). The Nature of the Firm (1937). In Oliver E. Williamson & Sidney G. Winter (Eds.), The Nature of the Firm; Origins, Evolution and Development (pp. 18-33). New York: Oxford University Press. Conley, Thomas M. (1990). Rhetoric in the European Tradition. Chicago IL: University of Chicago Press. Croce, Benedetto. (2002). The Philosophy of Giambattista Vico. New Brunswick NJ: Transaction Publishers. Fama, Eugene F. (1980). Agency Problems and the Theory of the Firm. Journal of Political Economy, 88, 288-307. Fine, Ben, & Green, Francis. (2000). Economics, Social Capital, and the Colonization of the Social Sciences. In Stephen Baron, John Field & Tom Schuller (Eds.), Social Capital: Critical Perspectives (pp. 78-93). Oxford: Oxford University Press. Flyvbjerg, Bent, Landman, Todd, & Schram, Sanford (Eds.). (2012). Real Social Science: Applied Phronesis. Cambridge: Cambridge University Press. Glaser, Barney G. (1993). Examples of Grounded Theory: A Reader. Mill Valley CA: Sociology Press. Goldratt, Eliyahu M. (1990). What is this thing called Theory of Constraints and how should it be implemented? Great Barrington MA: North River Press. Jensen, Michael C., & Meckling, William H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 3(4), 305-360. Kinsella, Elizabeth Anne, & Pitman, Allan (Eds.). (2012). Phronesis as professional Knowledge: Practical Wisdom in the Professions. Rotterdam: Sense Publishers. Knight, Frank Hyneman. (2006). Risk, Uncertainty and Profit. Mineola NY: Dover Publications. Leith, Sam. (2011). You Talkin' to Me? Rhetoric from Aristotle to Obama. London: Profile Books. Locke, John (1928). Selections. N ew York: Scribner's. Morgan, Gareth. (1997). Images of Organization (New ed.). Thousand Oaks CA: Sage. Morris, Michael. (2007). Introduction to the Philosophy of Language. Cambridge: Cambridge University Press. Nonaka, Ikujiro, & Toyama, Ryoko. (2007). Strategic Management as Distributed Practical Wisdom (Phronesis). Industrial and Corporate Change, 16(3), 371-394. Polanyi, Michael. (1962). Personal Knowledge: Towards a Post-Critical Philosophy (Corrected ed.). Chicago IL: University of Chicago Press. Simon, Herbert A. (1985). Human Nature in Politics: The Dialogue of Psychology with Political Science. The American Political Science Review, 79(2), 293-304. Spender, J.-C. (1989). Industry Recipes: The Nature and Sources of Managerial Judgement. Oxford: Blackwell. Spender, J.-C. (2013). Herbert Alexander Simon: Philosopher of the Organizational Life-World. In Morgen Witzel & Malcolm Warner (Eds.), Oxford Handbook of Management Thinkers (pp. 297-357). Oxford: Oxford University Press. 22 Sumida, Jon Tetsuro. (2008). Decoding Clausewitz: A New Approach to On War. Lawrence KS: University Press of Kansas. Weick , Karl E, Sutcliffe, Kathleen M, & Obstfeld, David. (2005). Organizing and the Process of Sensemaking. Organization Science, 16(4), 409-421. 23