In any case, for analytical purposes we will juxtapose two rather pure models, a firm organized on an exit-based model and a firm organized on a commitment-based model.
The Modern Japanese Company
In their introduction to a book of essays by Japanese authors about the Japanese-style firm, Ronald Dore and Hugh Whittaker echo Herbert Simon at least about the Japanese case: “Most of the authors would agree that if you want to understand what goes on in Japanese boardrooms, you can throw most of the writings that go under the rubric ‘agency theory’ out of the window” (1994, 3).
In the postwar era, the large Japanese firms have perhaps gone the furthest to develop the organizational logic of commitment and to contrast it with the logic of exit. For instance, to one trained to think in terms of the logic of exit, any immobilities, rigidities, or barriers to exit would just seem inefficient and irrational. But Japanese economists have evoked the example of useful barriers to exit as in the practice of a captain being expected to go down with his ship.
The way in which underpayment of wages in the early years of service and the acquisition of firm-specific skills create barriers to exit is obvious. These exit barriers perform several important functions for the firm as an organizational entity. The first is the incentive function whereby the interests of the firm and the interests of the individual are linked. Unable easily to exit, people can only protect their interests by working to ensure that the firm prospers. . . . The interlinking of interests means that when crisis looms, efforts are redoubled. The option of leaving the sinking ship is not freely available, either to the crew or the captain. (Kagono and Kobayashi 1994, 94)
Barriers to exit can enhance identification and thus X-efficiency.14 During the last quarter century, the township-village enterprises (TVEs) have been a driving part in the remarkable Chinese transition. But their success has been something of a mystery to the orthodox economic viewpoint—lack of conventional ownership and lack of labor market flexibility. The TVEs exemplified the logic of commitment. The management identified with the staff since they had to provide jobs and related services to the people of the township or village, and the workers identified with the firm since that was their one chance for a good job (the Chinese government tried to prevent free mobility). The loss in allocative efficiency due to factor immobility seems to have been more than counterbalanced by the increase in X-efficiency since the Chinese growth episode over the last quarter century is the largest in recorded history.
A simple cooperative action game (of the prisoner’s dilemma variety) can be used to illustrate the difference between a company based on low trust with individual optimization and a company based on high trust, identification with the firm, and a cooperative corporate culture (see Leibenstein 1984 for the best treatment of this approach to the Japanese firm). The players A and B could be thought of as managers and workers (or as any two groups in the firm) who need to cooperate together to increase the X-efficiency of the firm (table 2.1).
Table 2.1 Typical Cooperative Action Game
If each player chooses the individualistic not-cooperate action, then they receive the noncooperative payoff of $A and $B. If they cooperate, then the total result increases by (say) 2 which we assume is evenly split to arrive at the cooperative payoffs of $A+1 and $B+1. But if one party opportunistically chooses the individualistic noncooperative option when the other party acts cooperatively, then the total result remains the same (no increase without cooperation of parties) and two units are shifted to the opportunistic party. The strategy pair (Not Cooperate, Not Cooperate) is the dominant equilibrium solution. No matter which strategy one player chooses, it will always pay the other player to take the noncooperative action. But that noncooperative outcome ($A, $B) is dominated by the cooperative outcome ($A+1, $B+1) which is better for both parties.
This prisoner’s dilemma-type game is a generic representation of the countless cooperative action situations that occur continuously and at every level in the complex multiperson productive operation of a firm. In each given situation, effective monitoring and enforcement might be applied at a certain cost to change the payoffs and thus assure the cooperative outcome. But this “external” neoclassical solution is hardly feasible over the countless cooperative action situations that occur in a complex team operation.
The question is not whether free riders exist—much less employees who exert something less than their maximum—but why there is anything besides free-riding. Why do many workers, perhaps most, exert more than minimally enforceable effort? Why do employees identity with organizational goals at all? (Simon 1991, 34)
That question is left unanswered in the exit-based American-style model. The Japanese-style company uses the alternative “internal” solution of developing a corporate culture of mutual commitment and cooperation that leads to a virtuous circle or high-level self-reinforcing equilibrium. This cooperative culture is feasible because the managers and workers see themselves as the members of a commitment-based community and will reap the joint fruits of their cooperative efforts.
One logic or the other ramifies through all the aspects and structures of a firm. Sometimes a firm organized on the logic of exit is stereotyped as the “American firm” and a firm organized on the logic of commitment is the “Japanese firm” or “J-firm” (Aoki 1988). But without promoting stereotypes, we can still summarize and compare in table 2.2 some of the ways that the two logics affect firm structure.15
Table 2.2 Two Firms
Ownership for Liquidity or for Enterprise?
Perhaps the last line of table 2.2 requires some explanation. We can distill this wisdom from the academic scribblings of the defunct economist, John Maynard Keynes. Keynes was much concerned with the adverse effects of the stock exchange on real investment and enterprise. Investment in productive enterprise is largely irrevocable, and the management of enterprise requires a long-term commitment and the application of “intelligence to defeat the forces of time and ignorance of the future” (Keynes 1936, 157).16 In short, it is based on the logic of loyalty and commitment. But when investment is securitized as a marketable asset on the stock exchange, then it “is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week” (Keynes 1936, 151). The stock exchange panders to the “fetish of liquidity” and thus continually undermines the bonds of long-term commitment that are so important to problem-solving and productive enterprise. Keynes, of course, wrote this long before today’s problems with stock options and short-termism. Today’s practice of the captain’s exit facilitated by a golden parachute is the opposite of the practice of the captain going down with the ship.
In addition to this continual erosive effect, the stock exchange also absorbs otherwise productive capital in the function of speculation—which Keynes defined as “the activity of forecasting the psychology of the market” (Ibid., 158). Keynes saw no problem when speculation