Organization Theory

Abstract

Since all the social sciences deal with human organizations (families, bureaucracies, tribes, corporations, armies), the term ‘organization theory’ appears in all of them. What has distinguished the economists’ pursuit of organization theory from that of sociologists, of political scientists and of psychologists (say those psychologists working in the field called ‘organizational behaviour’)? First, the real organizations that have inspired the theorizing of economists are the economy, the market and the firm. Second, economists, with their customary taste for rigour, have sought to define formally and precisely the vague terms used in informal discourse about organizations, in such a way as to capture the users’ intent. They have sought to test plausible propositions about organizations – either by proving that they follow from simple, reasonable and precisely stated assumptions, or (rarely) by formulating the propositions as statements about observable variables on which systematic rather than anecdotal data can be collected, and then applying the normal statistical procedures of empirical economics. (Here we shall only consider testing of the first type). Third, much of the economists’ organization theory is not descriptive but normative; it concerns not what is, but what could be. It takes the viewpoint of an organization designer. The organization is to respond to a changing and uncertain environment. The designer has to balance the ‘benefits’ of these responses against the organization’s informational costs; good responses may be costly to obtain. In addition, the designer may require the responses to be incentive-compatible: each member of the organization must want to carry out his/her part of the total organizational response in just the way the designer intends.

This chapter was originally published in The New Palgrave: A Dictionary of Economics, 1st edition, 1987. Edited by John Eatwell, Murray Milgate and Peter Newman