In this post I discuss the effects and characteristics of centralization and decentralization of institutions. Let us consider a few cases that shed light on the properties displayed by institutions based on the extent of their centralisation.
I was once listening to a man in the garment industry. He said that his company was engaged in the weaving, dyeing and stitching of fabric that they finally sold to big retail brands. This was done on extremely low margins and the inflated prices that we see in the stores largely serve as profit to these retail companies.This raises two main questions. One, if the prices are really inflated, then where are the cheaper goods of the same quality in the market? Second, if these are available then why does anyone buy from this big retailers. No, I am not going to argue that the retailers market it better. Instead the answer lies not in the quality of the goods themselves, but in the assurance of quality.
Consider for instance, a marketplace that contains several small shops selling clothes. These clothes would obviously be bought from people like the man I mentioned above. Indeed, from almost the same sources that the big companies buy their goods from. However, among these suppliers, there will be some that will provide quality products and some who will cut a few corners. The smaller retailers will buy from a mixture of such suppliers and a consumer would be unable to discern, in advance, the quality of the clothes. Hence, out of several clothes that a consumer would buy, only a few might last beyond the first few months of usage. Thus the effective cost of a single cloth increases, along with the added disadvantage of unpredictability. While some shopkeepers might make a point of sourcing their materials from the right places, a consumer must experiment a great deal before finding that shop. In contrast, a known brand requires relatively little experimentation due to their smaller numbers and larger scale. Thus, they are able to provide an assurance of quality that is of critical importance to a consumer who is short of time. It is this value that the companies provide, that enables them to put a premium on their products. This is not to say that smaller shops do not have a customer base. Indeed, people fond of experimenting on clothes, people with an ability to discern the quality of clothing or people on tight budgets will form their customer base. But here, we can clearly see the advantage provided by a centralised system to the end user.
Now, consider another example from the retail business. That of their cash counters. Smaller shops, typically owned and run by the same person, do not need complicated and organised methods for their accounting. Instead, a simple system based on the cashier’s memory suffices. However, for a big retail store, the owner (or shareholders) probably never visit the shop and the cash counter is manned by an employee. Due to this impersonal and long distance relationship, a trust deficit is created, which necessitates the use of computerised accounting and cash handling. This leads to the infamous queues and the famous ‘free’ shopping experience in modern retail outlets. True, a computerised system also helps in managing logistics, but trust deficit is a larger reason for its widespread use. This centralisation enables faster expansion and efficient logistics, but it also restrains flexibility in haggling, a favourite and commendable habit of Indian customers (it is commendable because it helps determine the market price more accurately, but more on that later). Also it necessitates the use of standardised barcodes and product locations which adds additional overheads not present in the ‘small shop’ model.
But, one might say that any large organisation performing a task requiring more than a small number of people needs to be centralised. True, but its extent can vary. Highly successful examples of decentralised systems can be considered which are found to have efficiency far exceeding that of a centralised organisation. A shining example of such a system is the ‘Mumbai Dabbawalas’.
These ‘dabbawalas’ take tiffin carriers from people’s homes in the afternoon and deliver it to their earning family members. The system is so decentralised, it would probably take a very long article to describe in its entirety. But for our purposes, it suffices to say that there are no names on the boxes (only numbers), the person receiving it is not the same as the person delivering it or the person transporting it, the box always reaches on the right place at the right time and everybody gets the fair share of their money. To a ‘person in coats and suit’s, this is entirely incomprehensible, and being part of that section of society myself, I too cannot comprehend it. But the fact is that it works, and it works well.
I also recollect reading in my textbook about the water sharing system in some villages. In this system, each village takes only the required amount of water and the downstream villages take the water before the upstream villages. Such a system has been continuing for a long time based on mutual consent and fair play, and has been beneficial to all concerned. After India’s independence however, the government took over this system and needless to say, made a complete mess of it. Now, the entire canal system is dysfunct and the relationship is not as amicable as it was.
As a more recent and probably a closer example, consider the internet. It is a massive network of computers that is owned by none but run by all. With only a few, not very powerful, standard setting bodies, we have an efficient eco-system that follows the protocols perfectly and evolves them as required. While a large portion of international and intercontinental traffic flows through cables that are centrally owned, the cost of using them is decentrally paid for by all the benefactors of the internet. Newer platforms and standards are evolved as required in a very efficient and businesslike way, despite there being no all-powerful governing bodies. This decentralised and efficient system is not a utopia reminiscent of a past, but a fact of the present. It serves to give us confidence that a decentralised system can indeed exist and beat any centralised system in efficiency by a very large margin.
In these examples, we can noticing a few prevailing trends:
First, centralised systems have a governing entity that is mostly disconnected from the ground reality and tends to mould the system in a way that it can understand. For instance, Richard Feynman, a physicist and nobel laureate, pointed out inefficiencies in NASA while investigating the Columbia accident. Here, there were workers were aware of a very efficient method to perform an operation, but were constrained by a very inefficient process prescribed in the NASA guidebook. While such standards are certainly necessary to ensure quality and reliability of construction, it does lead to inefficiencies. Here, I do not mean to propose that we decentralise everything. That would be anarchy. But instead, I suggest that we understand its disadvantages and centralise only when absolutely necessary.
Second, whereas a decentralised system takes time to evolve, centralisation provides a quick fix solution that may prove to be very useful in many situations. An army can be commanded to march at a moment’s notice, but a public revolution takes time to evolve. Similarly, while it is very easy for an individual to start a tiffin carrier logistics service, it take a lot of time for a large number of people to come together to create the likes of the Mumbai dabbawala service.
Third, centralised systems tend to have a very well defined hierarchy, whereas this is not so in a decentralised system. For instance, a retail store has a very strict line of command to enforce accountability. Here, not all stakeholders are shareholders. Contrast this with the Mumbai dabbawalas, where each person has a dual role of performing the actual work and ensuring that his or her peers are also accountable to what they are doing. Such also is the case with the internet, where each user is a direct benefactor and there is very little formal ‘management’ required. Here almost all stakeholders are shareholders and hence the system is more equitable. Also management merged with working ensures a greater efficiency than can ever be expected out of a typical centralised system.
Fourth, centralised systems seem to be necessary when an entity needs to make profit that is disproportionately large profit in comparison to the labour performed by that individual. That is, an individual contributes to production more by supplying capital than by supplying labour. Decentralised systems on the other hand tend to thrive where labour is the dominating component of production and the capital required is easily supplied by the workers. In case of the internet, although a large amount of infrastructure is used, each user of the internet pays for their share of infrastructure that they use. The providers of the infrastructure, like the telecomm. companies, are centralised, which emphasises this point. This explains the difference in hierarchical organisation noted previously.
A democratic government too can be considered a form of centralisation, with accountability decreasing from the local level to state level to country level and finally ending in absolute chaos at the international level.
Thus, we can see that centralisation is very good at providing a quick fix solution and essential if one intends to make profit by the labours of many. Whereas a decentralised system takes a very long time to evolve and once forcibly broken, is not easy to revive, as it is difficult to transcend the barriers of people accustomed to be forced to do their bit or to forcing others to do their bit. A decentralised system provides greater efficiency by combining production with management and ensures equitability in distribution of profits, but only seems to work where the workers are themselves able to supply the capital required.
