What Do We Really Know About Organizations?
| 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.”