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The Natural Tax of Managing

TaoM July 9, 2020

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Is managing a generally good thing?  Like, is more managing better? How much managing is too much? How would we know?

This idea is not new, that management can be costly to productivity.  But why do managers never speak of it?

It was an idea that came into prominence in 1937, in the heart of the industrial age, by a young PhD student at the Oxford School of Economics, Ronald Coase.  

Back then, industrial economics looked something like, the bigger you get, the bigger you can become. The concept of “economies of scale” had become popular. As your company grew larger, it would become more efficient with its resources and become an even better competitor, with better talent, experience, financial resources and a long list of other advantages. 

“Why is there not just one firm?”, Coase asked.  

It was an interesting point: If bigger is better is true, then why are there so many firms? In fact, he pointed out (gleefully, we can only assume, for he won a Nobel Prize for this later on) that in virtually every industry, sure, there were one or two, even three very large firms, but then there were also far more merely-large firms, and once one started looking at small and very small firms, there were multitudes of them!

With that insight and a lot of good thinking that followed, Coase defined the idea of “coordination costs” which are the costs and activities involved in coordinating the resources, of most of which would be called “managing.”

Why would that be, and what does it say about managing?

In this episode, we’ll explore this first of many “hidden taxes” of managing, this one a somewhat benign but significant tax that is tied to the size of the organization, as well as other factors.

In future episodes, we’ll also cover managerial costs that Coase didn’t really hit upon: that managerial style (and its cousin, organizational structure) that also have profound impacts upon a firm’s productivity and potential size. As pervasive and invisible as the Natural Manager Tax can be, these other taxes, the Tax of Bad Managing, and the Tax of Bad Organization are far more insidious and impactful, especially in our world, the world of knowledge work

Today, the most costly aspect of managers is usually not their pay. It’s the way that they interact with the people who produce work and how that can reduce their productivity.  In this way, less actual managing by the managers can be a good thing.  

Key Insights and Your Homework:

  1. Can you see (in your organization) how managerial activity gets less effective (or more costly) as the number of managers increases?
  2. Another angle on this is that meetings can get less effective when the manager to worker ratio shifts? Do you notice this?
  3. Do you notice how having more managers creates the need for more coordination?