Firming Up Hierarchy — Blair Fix

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Mike Norman
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Using Song’s data, here’s the idea that I’m going to test. I think that the recent rise in US income inequality is being driven by a redistribution of income within firms. In short, I believe that corporate hierarchies have become more despotic. Corporate elites have taken income that once went to the bottom of the hierarchy and redirected it to the top.

To test this idea, we’ll take a meandering route. First, I’ll tell you about my model of corporate hierarchy and how it explains income as a function of ‘hierarchical power’. Then I’ll give you a tour of US income inequality, and show you why it’s plausible that the recent rise in top incomes is being driven by growing ‘hierarchical despotism’. Next, I’ll break out the math and build a model of the US corporate landscape. I’ll use this model to predict the redistribution of income within US firms. Finally, I’ll compare the model’s predictions to the real-world trends reported by Song and colleagues. If all goes well, we’ll get some insight into the machinations of US corporate hierarchy.

My results? I find that to a surprising extent, the redistribution of income within US firms can be explained by a single parameter — a change in the rate that income scales with hierarchical power....

Attempting to peer into the black box of firms' proprietary structure and operations by using a data-based model to test a hypothesis.

As an aside, from the historical point of view, the hierarchical mode of organization is most ancient, having been developed very early for military use. The opposite mode of organization is consensual. 

Apparently, early political organization was a combination of consensual and hierarchical. Decision-making was based on consensual input and in some cases on consensual agreement. Elders and those who had demonstrated competence were given more weight in practice. But generally there was no chief and change of command as in later societies and militaries. This was the mode of organization or Native American tribes and nations. The title "chief" is often misunderstood as meaning the organizational leader but it was a title earned by great bravery and accomplishment in combat. There could be many chiefs and there were also a few women that were awarded this high degree of recognition.

With the rise of civilization, meaning city-dwelling in anthropology, organization structure adapted to the increase in population. Consensual organization became less practical and hierarchical organization dominated. This was especially the case with the growth of the temple and the rise of a priestly class, as well as more complex military requirements owing to the introduction of technology. The Romans proved exceptionally astute in this in their deployment of the phalanx as precursor to tank warfare.

Democracy was introduced to recapture some of the consensual organization that had been lost along way when the priestly class became entitled and was characterized by an ecclesiastical hierarchy. Similarly, the warrior class developed into a supreme leader whose reign was passed hereditarily and who had the power to created title subordinates that developed into hereditary aristocracies.

The Age of Enlightenment in 18th century Europe subsequent to the Protestant Revolution give birth to modern liberalism, which was had begun to be instantiated in England with the Magna Carta (sort of). The United States of America was the first modern liberal constitutional democracy modeled on 18th classical liberalism. The US Constitution sought to combine consensual and hierarchical organization practically for governing a populous and diverse nation that was a federation of sovereign states. It was based on a model reflecting the Roman Republic (SPQR and all that).

Conversely, the firm model developed along hierarchical lines as the most practical to the task. The corporate system is quite ancient as a legally based institutional structure.  Like militaries, firms and chartered firms ("corporations") were organized on hierarchical models. However, the joint-stock company introduced a modicum of consensual organization through the influence of the stockholders on management. 

The contemporary corporation is an iteration of this model. Arguably, the contemporary corporate model has begun to resemble the tightly held corporate models that led to the level of control (oppression) that resulted in the development of classical liberalism first as an ideal and ideal and then to its establishment institutionally through the American and French revolutions.

The rising level of inequality of wealth and power suggest that a rebalancing in called for. Blair Fix's article suggests that the reason for the growth of this imbalance lies in top-heavy hierarchical organization and maldistribution of power. The program of socialism is to reintroduce the consensual model. However, it is not clear how that could be accomplished without sacrificing too much of the practical benefits of hierarchical organization. The same challenge faces the implementation of direct democracy instead of representative "democracy" that is too easily corrupted by wealth and power imbalances.

Economics from the Top Down
Firming Up Hierarchy
Blair Fix