Federalist #10 & The Constitution:The Rules of the Game

James Madison

Agenda:

1.What is a faction?

2.What are the causes of faction: the nature of man revisited.

3.How do we control factions? The Constitution and the relationship between business and government.

4.Can we apply Madison’s lessons to our organizations?

Some Historical Context…

“Complaints are everywhere heard…that our governments are too unstable, that the public good is disregarded in the conflicts of rival parties, and that measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority…prevailing and increasing distrust of public engagements, and alarm for private rights, which are echoed from one end of the continent to the other.”

1774Continental Congress

1776Declaration of Independence

1777 –approved February 1781Articles of Confederation

1785“Ohio Company” Compact

1783Peace Treaty with Britain

1785Jay-Gardoqui Treaty

(not ratified)

1786-7Shay’s Rebellion

1787Constitutional Convention

17891st National Elections

The Federalist Papers

What is a Faction?“By a faction, I understand a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens or to the permanent and aggregate interests of the community.”

Who decides who teaches what, where and when?

What is the Cause of Faction?

1.“Liberty is to faction what air is to fire.”

2.“As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed…The diversity in the faculties of men from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests.”

“The latent causes of faction are thus sown in the nature of man.”

“There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.”

http://great-philosophers.suite101.com/article.cfm/hobbes_locke_and_rousseauJ

What is the nature of man?

An Essay Concerning Human Understanding (1690)“tabula rasa”: “No man’s knowledge here, can go beyond his experience.”http://oregonstate.edu/instruct/phl302/texts/locke/locke1/Essay_contents.html

John Locke

Jean Jacques Rousseau

“I was benevolent and good; misery made me a fiend.” -- Frankenstein

The Social Contract (1762)“Man is born free; and everywhere he is in chains.”

Thomas Hobbbes

Leviathan (1651)In the state of nature life is “solitary, poor, nasty, brutish and short.”

Jensen & Meckling (1994) “The Nature of Man”http://papers.ssrn.com/sol3/papers.cfm?abstract_id=5471

Michael C. Jensen

Economic: Money maximizing modelPsychological: Hierarchy of needs modelSociological: Social victim modelPolitical: Perfect agent model

REMM: Resourceful, evaluative, maximizing model

“Whether they are politicians, managers, academics, professionals, philanthropists, or factory workers, individuals are resourceful, evaluative maximizers. They respond creatively to the opportunities the environment presents, and they work to loosen constraints that prevent them from doing what they wish. They care about not only money, but about almost everything – respect, honor, power, love and the welfare of others. The challenge for our society, and for all organizations in it, is to establish rules of the game that tap and direct human energy in ways that increase rather than reduce the effective use of our scarce resources.”

“If men were angels, no government would be necessary.”Madison, Federalist #51

“It has been said that Democracy is the worst form of government, except for all those other forms that have been tried…”Winston Churchill, House of Commons, 1947http://richardlangworth.com/2009/06/democracy-is-the-worst-form-of-government/

Management of Factions“The inference to which we are brought is, that the causes of faction cannot be removed, and that relief is only to be sought in the means

of controlling its effects.” (emphasis in the original)

Does Madison’s inference hold for mangers?

1.Can managers extinguish “liberty”?

2.Can managers assure “a uniformity of interests”?

“…a core goal (of business) should be to facilitate the development of institutions that bring out the best in humans.”Elinor Ostrom. “Beyond Markets and States: Polycentric Governance of Complex Economic Systems,” American Economic Review June 2010, 100(3): 641 – 672.

“A republic, by which I mean a government in which the scheme of representation takes place, opens a different prospect (than pure democracy), and promises a cure for which we are seeking.”

“The Preamble”

“3-Ring Circus”

“I’m Just A Bill…”

http://en.wikipedia.org/wiki/Legal_Systems_of_the_World

Common Law Civil Law

Civil Law & Figh (Islamic) Law – You must have authority to do something. Regulatory, Administrative and Religious Systems

Common Law – You can do things unless prohibited as long as you take “reasonable” care.

Judicial systems, precedent

Is Italy Too Italian?http://www.nytimes.com/2010/08/01/business/global/01italy.html?pagewanted=1

“Roughly one-quarter of Italy’s G.D.P. is off the books… people say that most Italians have little sense of national identity, an obstacle to a system of national taxation…The suspicion of Italians when it comes to extra-familial institutions explains why many here care more about protecting what they have than enhancing their wealth…The prevailing management style in this country is built around loyalty, not performance.”

WICKARD v. FILBURN, 317 U.S. 111 (1942)

The Commerce Clause: Article 1 Section 8:“The Congress shall have Power…To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes…”

US v. LOPEZ, 514 U.S. 549 (1995)

http://www.martindale.com/health-care-law/article_King-Spalding-LLP_1127080.htm http://en.wikipedia.org/wiki/Patient_Protection_and_Affordable_Care_Act#Legal_challenges

"while this case raises a host of complex constitutional issues, all seem to distill to the single question of whether or not Congress has the power to regulate — and tax — a citizen's decision not to participate in interstate commerce."

-- U.S. District Judge Henry Hudson

Madison’s Solution: GridlockSlow, costly decision making process

Market Solution: Price Private goods,

information asymmetry, externalities

Management of Factions

What’s a manager to do?

Management of Factions

“Outside the firm, price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator, who directs production.” (R.H. Coase. 1937. “The Nature of the Firm.” Economica 4(16): 386 – 405.)

Co-ordination is the Management of Factions!

Factions in Society:The Relationship Between Business,Government & Other Stakeholders

Factions in the Market

Mission & Strategy of the firm

Factions within the firm

“…the permanent and aggregate interests of the community.”

Factions and ManagementLinking it all together…