Question

ANALYZING MANAGERIAL DECISIONS: Nobel Prize–Winner F. A. Hayek on the “Miracle” of the Price System It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is significant that it does not matter— which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the entire economic system. This influences not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all things made of tin, and their substitutes, and so on. All this takes place without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members surveys the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (if conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process. Some people (e.g., Hayek) argue that decentralization of economic decisions in the economy leads to an efficient resource allocation.

What differences exist within the firm that make the link between decentralization and efficiency less clear? (

Answer 1

Decentralization:

It refers to the transfer of powers to the upper level to lower level. In other words, in any company, the decision making powers generally are in the hands of the management of higher authorities.

By adoption of decentralization, such powers are distributed to the lower level of management or the employees with due answer ability to the management.

In many firms, the process of decentralization is followed frequently. Due to such adoption, the powers of the management are bifurcated to lower level management or the employees.

Now the lower level staff will have powers regarding the utilization of resources in their way i.e. how much quantity to be ordered, or much products to be manufactured etc.

These decisions might have faced difficulty if all the powers were in the hands of the management due to some communication gap between the management and the production staff.

So in this way, the process of decentralization is a leading tool towards the effective and efficient utilization of resources of the company.

In some firms, where decentralization does not opt, then these firms face the problem of improper utilization of the available resources as well as there will be wastage of resources. In that firm, all the powers of decision making lie with the management and the lower staff will have to wait for the execution of such powers and there will be a delay in the manufacturing and it will lead to non-satisfaction of a customer of the company.