Frequently Asked Questions

This page is more for my benefit than yours. Rather than giving everyone personal answers to their questions I can put them here and answer them once for everyone. My rule of thumb is if I have to explain something twice, I put it here. Perhaps, Occasionally Asked Questions would be a better term, but for purely selfish reasons I don't plan to let them become frequent before they appear on this page.


Questions answered on this page are:

What kind of businesses need Constitutional Enterprise?

Almost any business could improve by adopting Constitutional Enterprise, but those with approximately 200 or more employees would probably benefit the most. Bureaucratic inefficiencies are usually easy to identify and eliminate in small businesses, even without an internal market system.

Usually, decisions about restructuring are made by management. However, because CE eliminates the need for a traditional management structure the managers of most existing businesses will be reluctant to adopt such a radical change—putting themselves out of a job. Those businesses most likely to adopt CE are ones where the stockholders are dissatisfied with the performance of the company, or possibly employee-owned businesses who simply desire more control.

Businesses with recurring labor/management problems are also good candidates for CE. Employees working within the CE structure will have far more authority than a labor union could possibly provide them from the outside. Hence, there is no need, nor desire, for a union and no potential for strikes, lockouts, etc. Here again, it will probably require dissatisfied stockholders to replace the management structure with the CE model.

What do you mean by Constitutional or Constitutionalism?

If you were to ask ten people that same question, you would probably get ten different answers; if they're scholars, twenty. So I'll describe how I'm using the term. You can also look in Constitutional Enterprise Volume 2 Number 4 for some specific features of a business constitution.

The first characteristic people usually associate with Constitutionalism is a written constitution. However, before the 1780s the term typically applied to the overall structure and arrangement of a government, not to a written document. For example, speaking about King George in the Declaration Of Independence Thomas Jefferson stated, "He has combined with others to subject us to a jurisdiction foreign to our constitution..." This was 11 years before our Constitution was drafted and more than a year before the Articles of Confederation. So they were not referring to a written constitution in this wording, but merely the traditional make-up of the government.

After declaring independence from Great Britain most of the colonies replaced their charters with written constitutions. By the time of the Constitutional Convention many delegates had experience with constitution writing. Over the years the term Constitution universally came to mean a written document which defines the structure of government.

Four other features came to be associated with constitutionalism:

  • A policy or law, superior to those created by ordinary legislation, and typically considered the founding principles of a governmental system—the supreme law of the land.

  • An organizational structure drawing its authority directly from the people.

  • A system for the protection of ownership rights; such as, rights of life, liberty, and property.

  • A separation of powers with checks and balances to prevent the inappropriate use of power or authority.

By adopting the name Constitutional Enterprise I intended to include all those features of constitutionalism in the meaning. By combining the term Enterprise I hoped to convey the free-market connotations associated with the term free-enterprise. A market-based system is efficient only in an environment where property ownership rights are protected. The constitutional system of CE creates the environment in which the internal market system can function freely. It is a blend of constitutional and free-market ideas.

How is CE different from some other new business models?

This is another case where I've had so many questions I prepared a separate page. So on this page I've only included brief statements describing the differences between CE and other business methodologies. If you want more detailed descriptions please see the other page.

  • The most important difference between CE and traditional business structures is the presence of an Internal Market System.
  • The most obvious difference to those looking at CE from the outside is that no management structure exists.
  • The most significant difference between CE and other methodologies employing internal market systems is the environment created by the Constitutional System, designed to support the market system.
  • The most appealing difference to those working within a CE structure is the degree of freedom and self-direction they have.

Can CE be implemented partially, or is it an all or nothing proposition?

I think it would be possible to implement the CE approach in a piece-meal fashion within a large company provided the smaller units are treated by the parent as separate companies. If the larger company meddles too much in the workings of the smaller units it will compromise their efficiency and defeat the purpose. There are also other aspects of the internal market and profit systems that will perform better as more divisions of the company are participating. If a single unit is involved it will be difficult to realize the benefits of market exchange. In a free market efficient units are rewarded with more business and inefficient ones are not.

It would be somewhat like a small island of capitalism in the middle of a communist state. It might work as long as the external system leaves them alone and allows them to have free commerce with the outside world. But if they interfere too much, or put restrictions on the smaller unit, it will collapse. Just the threat of interference may be enough to compromise its ability to attract good people and investment capital. We only need to look at Hong Kong to see evidence of this.

Won't the charging mechanisms for internal business units cost more than they gain?

Transaction costs are often pointed to as a disadvantage of the market approach. And for some activities it is indeed cheaper to give them away than to endure the effort and expense of charging for them. This is one reason why they don't charge for traveling over most public roads. While a good case could be made for charging on some, the transaction costs of charging for all roads would be astronomical. The cost of monitoring each trip and collecting each fee, is greater than the fee to be collected. In a business there may be areas where departments will simply pool their costs for certain services, such as photo-copier use or custodial services.

But this concern over transaction costs simply doesn't hold true for every type of product and service. If it did the market system would not exist—buying and selling could not take place. The market depends on differences in perceived value. It is because customers value items more than the asking price that buying and selling occurs. When the difference in perceived value is great enough it can bear the added cost of exchange—the transaction cost. And with new technological advances the costs of monitoring and collecting is decreasing rapidly. Someday it may even become economically feasible to charge for travel on public roads.

If each department can simply choose their own products and services, what justification is there for keeping them together inside the same firm?

How about for the common purpose of maximizing return for employees and shareholders? If the system is designed correctly it protects the environment in which the internal market system functions. Because that environment is not maintained adequately in all businesses it makes sense to remain within a firm that does. Ask yourself, what advantage is there to running a business within the borders of the United States? Why not set up a business in a totalitarian nation? Obviously, because your property rights are not protected and your business is at risk.

Additionally, what we are building is a like a mini-mall within the firm. The more individual departments participating the greater the potential for market choices. It is like the difference between opening a business in the middle of a desert wasteland versus opening it in the middle of a business park. Market processes depend on the presence of trading partners, both customers and suppliers. Having many autonomous departments in a common firm creates these opportunities.

Why is top down control incompatible with CE?

This subject is covered in more detail in Constitutional Enterprise Volume 2 Number 2.

In the CE approach, production is totally controlled by market forces. No CEOs, directors, managers, or supervisors are necessary. When designing the features of CE I didn't begin with the goal of eliminating managers, but once the design was largely complete, there was simply no need for them. I do not mean to imply that managers are merely useless or even harmless. In fact, I discovered the conflicting roles held by them work against the efficient functioning of a business—their presence is actually harmful.

A top-down authority structure is poison to a business system. It focuses the goals of employees on the desires of management, in spite of the fact the business exists for its ability to serve a customer. It is the combined roles of lawgiver, judge, and executioner that causes the problem. Why should an employee be customer focused when his orders and rewards come from a manager? Fear is the natural result when the same person issuing commands has the power to punish for non-compliance.

In a small business it is possible for a management-driven system to perceive the needs of customers and give direction to the employees that are in concert with the customer's needs. In a small business with only one department, the relationship with customers is entirely outside of the company. But the larger the business, and the greater the number of internal departments inside, the more difficult it is to perceive customer's needs. This is the very problem CE was designed to solve in large businesses by installing an internal market system. Thus, trying to blend top-down control with CE is a contradiction in terms. If top-down control exists over production it isn't a CE structure.

Why needs and desires are not motivators.

When explaining the LEO Perception/Behavior model (also in the Constitutional Enterprise Newsletter Volume 1 Number 2) I stated that desires are not motivators. This is contrary to desire and need motivation theories, such as goal-setting theory and Abraham Maslow's Hierarchy of Needs. I've had a few people ask how I can make such a claim in the face of so much evidence to the contrary. If someone is hungry, for example, they are highly motivated to find food. Since food is an essential need, they explain, needs are therefore motivators.

First I must point out that in every-day speech I have no objection to referring to needs and desires as motivators. I've done so myself in the past and will continue to do so in the future. But sometimes we need to impose a higher degree of precision to our words than we do in every-day speech. So for purposes of this analysis I need to make a distinction that separates needs and desires from true motivators.

Motivation is defined as an "intervening process or an internal state of an organism that impels or drives it to action." So the question is, what drives people to take action?

I contend that needs and desires merely define the direction of motivation. They are really the aim of taking action and determine where we apply our energies, but they do not impel us to take action. If a person is hungry, but does nothing to satisfy that hunger, a need exists, but no motivation. What would impel this person to get up and take action to satisfy the need?

First, there must be opportunity. If our person believes nothing can possibly be done to satisfy the need then why even try? Second, there must be equity. If the person believes that he or she will not reap the benefit of taking the effort, again, why try? The apparent injustice is a demotivator. Third, there must be legitimacy. This one really supports the other two. It defines the limits of equity and opportunity. It tells the person when it is appropriate to act and defines justice and injustice. These three conditions must be perceived in the environment for motivation to occur. (Their initials are the origin of the name for the LEO Perception/Behavior Model.)

Once the person perceives these conditions he or she is motivated to take action to satisfy a need, whatever that need may be. A need or a desire, therefore, merely provides direction to action, but is not the motivation of action.

You state there is nothing wicked about an employer using a centralized mode of control in business. But if an employer demands workers to spend sixteen hours a day working, isn't that wicked?

In a sense, such an abusive use of power is wicked. But, we have to remember that the employment relationship is simply a contract. The employer agrees to pay the employee a given wage provided he or she performs specific tasks as directed by the employer. As long as the employer does not ask the employee to do anything illegal or unethical, then he or she is bound to do as instructed, even if it is inefficient, unproductive, and personally unfulfilling. If the employee is not satisfied with the compensation, work environment, tasks assigned, use of resources, or anything else, the employee is free to re-negotiate the contract or leave the relationship and seek employment elsewhere.

On the surface this seems unreasonably harsh, especially when one looks at the unequal power in the relationship. But remember, when employers treat employees poorly, they are undermining the very resource needed to make their businesses successful. Market forces will eventually work out problems with poor working conditions. Employees will not be loyal to an employer who treats them unfairly. While it is a hardship on the unfortunate employees during the transition, they always have the option to leave and seek employment elsewhere. In fact, if they stay, they are implicitly confirming that their options with their current employer are better than their alternatives. They are not forced to keep undesirable jobs. Eventually, the employer must either improve conditions, or yield the labor market to another employer who treats the employees more humanely. While one could call an abusive employer wicked, I believe it is more accurate to call him foolish.

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