Federalist 10 The Constitution The Rules of

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. ” 1783 Peace Treaty with Britain 1785 1776 “Ohio Company” Compact Declaration of Independence 1774 Continental Congress 1777 –approved February 1781 Articles of Confederation 1785 Jay-Gardoqui Treaty (not ratified) 1786 -7 1789 st National Elections Shay’s Rebellion 1 1787 Constitutional Convention 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?

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

What is the nature of man? Leviathan (1651) In the state of nature life is “solitary, poor, nasty, brutish and short. ” Thomas Hobbbes An Essay Concerning Human Understanding (1690) “tabula rasa”: “No man’s knowledge here, can go beyond his experience. ” http: //oregonstate. edu/instruct/phl 302/texts/locke 1/Essay_contents. html “I was benevolent and good; misery made me a fiend. ” - Frankenstein John Locke The Social Contract (1762) “Man is born free; and everywhere he is in chains. ” Jean Jacques Rousseau http: //greatphilosophers. suite 101. com/article. cfm/hobbes_locke_and_rousseau. J

Economic: Money maximizing model Psychological: Hierarchy of needs model Sociological: Social victim model Political: Perfect agent model Michael C. Jensen 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. ” Jensen & Meckling (1994) “The Nature of Man” http: //papers. ssrn. com/sol 3/papers. cfm? abstract_id=5471

“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, 1947 http: //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. ”

“I’m Just A Bill…” “The Preamble” “ 3 -Ring Circus”

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

Is Italy Too Italian? http: //www. nytimes. com/2010/08/01/business/global/01 italy. 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. ”

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…” WICKARD v. FILBURN, 317 U. S. 111 (1942) US v. LOPEZ, 514 U. S. 549 (1995)

"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 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

Management of Factions Madison’s Solution: Gridlock Slow, costly decision making process What’s a manager to do? Market Solution: Price Private goods, information asymmetry, externalities

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 and Management Linking it all together… 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. ”