What Do We Really Know About Organizations?

24 August 2006 at 9:00 am 5 comments

| Peter Klein |

Recently a prominent economist, having discovered O&M for the first time, emailed me: “So what have we learned about how organizations really, really work in the past decade?”

I was in an airport when I received the query, and didn’t have time to prepare a thoughtful, well-crafted response. Rather than ignore the question, however, I replied with a few off-the-cuff remarks. After reading my remarks, I’d like readers to respond with their own brief thoughts. I.e., if you had to answer this question, quickly, in 250 words or less, what would you have said?

Here’s what I wrote (with a few small touch-ups):

  • Organizations can have market-like features, but are inherently different from markets. I.e., authority is real — Coase and Simon got it right, Alchian and Demsetz got it wrong.
  • Hierarchy can accomplish a lot in world of incomplete contracts. But organizations are rife with agency and mechanism design problems. These can be mitigated, but not eliminated, by incentive contracts. We’re just now beginning to understand the relevant tradeoffs.
  • Organizational form is complex and we really don’t know a lot about optimal organizational structure. There is tremendous variety among organizational forms that “work.” Simple metrics — firm size, degree of diversification, reliance on debt, etc. — aren’t good predictors of performance. (E.g., look at the diversification discount literature.) Economists trained to think in terms of “representative firms” have a hard time dealing with heterogeneity.
  • Sociologists, cognitive and social psychologists, cultural anthropologists, and other specialists have lots of interesting and important things to say about firms. (See the guys at orgtheory.net, for example.) But it is often hard for economists to make sense of these insights. Many appear ad hoc.
  • Firms change a lot. Entrepreneurs experiment, fumble around, learn, and try to adjust. The study of organizational dynamics is really quite primitive, unfortunately. My mentor Oliver Williamson is great on comparative statics, but has made much less progress on dynamics. (Even Oliver Hart seems to recognize that a more dynamic analysis is needed — see http://organizationsandmarkets.wordpress.com/2006/06/13/hart-on-ex-post-governance/.)

Of course I also told my correspondent, channeling Michael Corleone, that this book is “gonna solve all your problems and answer all your questions. That’s all I can tell you now.”

Entry filed under: - Klein -, Entrepreneurship, Management Theory, Strategic Management, Theory of the Firm. Tags: .

Essays on Schumpeterian Economics Dissing Prahalad

5 Comments Add your own

  • 1. Fabio Rojas  |  24 August 2006 at 1:33 pm

    As a sociologist who studies orgs, I would add:

    - work in organizations depends on informal networks within the firm, in other words: formal hierarchy only gets you so much, stuff gets done by appeal to social ties (see Burt or Knoke’s work)

    - a lot of the structure of organizations emerges from copying or mimcking leading orgs (see the whole “new institutionalist” school, or the Haveman ASQ articles), more generally, an org’s political or social environment has a huge impact on what happens inside the org. life is more than managers sitting around and maximizing profits.

    - there is a lot of interesting organizational change that is political, or is best desribed in political terms (see Gerald Davis’ work, or, ahem, my forthcmoing coming book on universities and black power politics), it’s not merely a matter of managers considering optimal/profit maximizing work arrangements

    - an organization’s position in status hierarchies has a big effect on what manager’s think is a legitimate organizational practice (e.g., Phillips & Stewart’s AJS article on how elite firms feel more at liberty to pusue unorthodox strategy)

    In a moment of self-promotion, I suggest that you look at my forthcmoing article in the Journal of Institutional Economics (Nov 2006) that takes a critical look at what sociologists have contributed to org studies and economic sociology more generally.

  • [...] What is the most significant contribution that organizational theory has made to our understanding of organizations? Peter Klein makes a list of what he sees as the major contributions, at least from an economics perspective. In comments, Fabio Rojas offers some of his own sociological insights. I agree with Peter and Fabio on much of their lists (hey, I think sociologists have a lot to offer too!). [...]

  • 3. Lessons from Organizational Studies « PurpleSlog  |  6 September 2006 at 9:14 am

    [...] The Organizations And Markets Blog has an interesting post on “What Do We Really Know About Organizations? [...]

  • 4. Rafe Champion  |  28 November 2007 at 4:18 pm

    One of the questions to frame the answer is to establish whether you are talking about an orgnization that is operating in a more or less free market where it has to give satisfaction to customers or an organization that is operating in a situation where it can get by with political patronage almost regardless of the products.

    That distinction gives rise to two very different kinds of entrepreneurs – the market entreprenuer and the political entrepreneur.

    So compare and contrast to modus operandi of, say, Charles Koch and FDR. But then I am currently reading “The Science of Success” so I have to admit to bias!

  • 5. Rafe Champion  |  28 November 2007 at 4:36 pm

    By the way, Koch wrote (p 17) “Progress, whether in business, an economy of science, comes through experimentation and failure”. Someone tell him to put Popper’s “Conjectures and Refutations” into the bibliography:) http://www.the-rathouse.com/CRContents.html

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