Microeconomics after Keynes - Post Keynesian Economics and Public Policy III
Herbert Simon's theories of organizations
Image: detail from Family Portrait 2 1965
(Creative Commons license, Richard Rappaport)
Herbert Simon made paradigm-changing contributions to the theory of rational behavior,
including particularly his treatment of "satisficing" as an alternative to "maximizing" economic
rationality (link). It is therefore worthwhile examining his views of organizations and
organizational decision-making and action -- especially given how relevant those theories are to
my current research interest in organizational dysfunction. His highly successful
book Administrative Behavior went through four editions between 1947 and 1997 -- more than
fifty years of thinking about organizations and organizational behavior. The more recent editions
consist of the original text and "commentary" chapters that Simon wrote to incorporate more
recent thinking about the content of each of the chapters.
Here I will pull out some of the highlights of Simon's approach to organizations. There are many
features of his analysis of organizational behavior that are worth noting. But my summary
assessment is that the book is surprisingly positive about the rationality of organizations and the
processes through which they collect information and reach decisions. In the contemporary
environment where we have all too many examples of organizational failure in decision-making --
from Boeing to Purdue Pharma to the Federal Emergency Management Agency -- this confidence
seems to be fundamentally misplaced. The theorist who invented the idea of imperfect rationality
and satisficing at the individual level perhaps should have offered a somewhat more critical
analysis of organizational thinking.
The first thing that the reader will observe is that Simon thinks about organizations as systems of
decision-making and execution. His working definition of organization highlights this view:
In this book, the term organization refers to the pattern of communications and relations among a
group of human beings, including the processes for making and implementing decisions. This
pattern provides to organization members much of the information and many of the assumptions,
goals, and attitudes that enter into their decisions, and provides also a set of stable and
comprehensible expectations as to what the other members of the group are doing and how they
will react to what one says and does. (18-19).
1
,What is a scientifically relevant description of an organization? It is a description that, so far as
possible, designates for each person in the organization what decisions that person makes, and the
influences to which he is subject in making each of these decisions. (43)
The central theme around which the analysis has been developed is that organization behavior is a
complex network of decisional processes, all pointed toward their influence upon the behaviors of
the operatives -- those who do the action 'physical' work of the organization. (305)
The task of decision-making breaks down into the assimilation of relevant facts and values -- a
distinction that Simon attributes to logical positivism in the original text but makes more general
in the commentary. Answering the question, "what should we do?", requires a clear answer to two
kinds of questions: what values are we attempting to achieve? And how does the world work such
that interventions will bring about those values?
It is refreshing to see Simon's skepticism about the "rules of administration" that various
generations of organizational theorists have advanced -- "specialization," "unity of command,"
"span of control," and so forth. Simon describes these as proverbs rather than as useful empirical
discoveries about effective administration. And he finds the idea of "schools of management
theory" to be entirely unhelpful (26). Likewise, he is entirely skeptical about the value of the
economic theory of the firm, which abstracts from all of the arrangements among participants that
are crucial to the internal processes of the organization in Simon's view. He recommends an
approach to the study of organizations (and the design of organizations) that focuses on the
specific arrangements needed to bring factual and value claims into a process of deliberation
leading to decision -- incorporating the kinds of specialization and control that make sense for a
particular set of business and organizational tasks.
An organization has only two fundamental tasks: decision-making and "making things happen".
The decision-making process involves intelligently gathering facts and values and designing a
plan. Simon generally approaches this process as a reasonably rational one. He identifies three
kinds of limits on rational decision-making:
• The individual is limited by those skills, habits, and reflexes which are no longer in the
realm of the conscious...
• The individual is limited by his values and those conceptions of purpose which influence
him in making his decision...
• The individual is limited by the extent of his knowledge of things relevant to his job. (46)
And he explicitly regards these points as being part of a theory of administrative rationality:
Perhaps this triangle of limits does not completely bound the area of rationality, and other sides
need to be added to the figure. In any case, the enumeration will serve to indicate the kinds of
considerations that must go into the construction of valid and noncontradictory principles of
administration. (47)
The "making it happen" part is more complicated. This has to do with the problem the executive
faces of bringing about the efficient, effective, and loyal performance of assigned tasks by
operatives. Simon's theory essentially comes down to training, loyalty, and authority.
If this is a correct description of the administrative process, then the construction of an efficient
administrative organization is a problem in social psychology. It is a task of setting up an
operative staff and superimposing on that staff a supervisory staff capable of influencing the
operative group toward a pattern of coordinated and effective behavior. (2)
To understand how the behavior of the individual becomes a part of the system of behavior of the
organization, it is necessary to study the relation between the personal motivation of the
individual and the objectives toward which the activity of the organization is oriented. (13-14)
Simon refers to three kinds of influence that executives and supervisors can have over
"operatives": formal authority (enforced by the power to hire and fire), organizational loyalty
(cultivated through specific means within the organization), and training. Simon holds that a
2
,crucial role of administrative leadership is the task of motivating the employees of the
organization to carry out the plan efficiently and effectively.
Later he refers to five "mechanisms of organization influence" (112): specialization and division
of task; the creation of standard practices; transmission of decisions downwards through authority
and influence; channels of communication in all directions; and training and indoctrination.
Through these mechanisms the executive seeks to ensure a high level of conformance and
efficient performance of tasks.
What about the actors within an organization? How do they behave as individual actors? Simon
treats them as "boundedly rational":
To anyone who has observed organizations, it seems obvious enough that human behavior in them
is, if not wholly rational, at least in good part intendedly so. Much behavior in organizations is, or
seems to be, task-oriented--and often efficacious in attaining its goals. (88)
But this description leaves out altogether the possibility and likelihood of mixed motives, conflicts
of interest, and intra-organizational disagreement. When Simon considers the fact of multiple
agents within an organization, he acknowledges that this poses a challenge for rationalistic
organizational theory:
Complications are introduced into the picture if more than one individual is involved, for in this
case the decisions of the other individuals will be included among the conditions which each
individual must consider in reaching his decisions. (80)
This acknowledges the essential feature of organizations -- the multiplicity of actors -- but fails to
treat it with the seriousness it demands. He attempts to resolve the issue by invoking cooperation
and the language of strategic rationality: "administrative organizations are systems of cooperative
behavior. The members of the organization are expected to orient their behavior with respect to
certain goals that are taken as 'organization objectives'" (81). But this simply presupposes the
result we might want to occur, without providing a basis for expecting it to take place.
With the hindsight of half a century, I am inclined to think that Simon attributes too much
rationality and hierarchical purpose to organizations.
The rational administrator is concerned with the selection of these effective means. For the
construction of an administrative theory it is necessary to examine further the notion of rationality
and, in particular, to achieve perfect clarity as to what is meant by "the selection of effective
means." (72)
These sentences, and many others like them, present the task as one of defining the conditions of
rationality of an organization or firm; this takes for granted the notion that the relations of
communication, planning, and authority can result in a coherent implementation of a plan of
action. His model of an organization involves high-level executives who pull together factual
information (making use of specialized experts in this task) and integrating the purposes and goals
of the organization (profits, maintaining the health and safety of the public, reducing poverty) into
an actionable set of plans to be implemented by subordinates. He refers to a "hierarchy of
decisions," in which higher-level goals are broken down into intermediate-level goals and tasks,
with a coherent relationship between intermediate and higher-level goals. "Behavior is purposive
in so far as it is guided by general goals or objectives; it is rational in so far as it selects
alternatives which are conducive to the achievement of the previously selected goals" (4). And
the suggestion is that a well-designed organization succeeds in establishing this kind of coherence
of decision and action.
It is true that he also asserts that decisions are "composite" --
It should be perfectly apparent that almost no decision made in an organization is the task of a
single individual. Even though the final responsibility for taking a particular action rests with
some definite person, we shall always find, in studying the manner in which this decision was
3
, reached, that its various components can be traced through the formal and informal channels of
communication to many individuals ... (305)
But even here he fails to consider the possibility that this compositional process may involve
systematic dysfunctions that require study. Rather, he seems to presuppose that this composite
process itself proceeds logically and coherently. In commenting on a case study by Oswyn
Murray (1923) on the design of a post-WWI battleship, he writes: "The point which is so clearly
illustrated here is that the planning procedure permits expertise of every kind to be drawn into the
decision without any difficulties being imposed by the lines of authority in the organization"
(314). This conclusion is strikingly at odds with most accounts of science-military relations during
World War II in Britain -- for example, the pernicious interference of Frederick Alexander
Lindemann with Patrick Blackett over Blackett's struggles to create an operations-research basis
for anti-submarine warfare (Blackett's War: The Men Who Defeated the Nazi U-Boats and
Brought Science to the Art of Warfare). His comments about the processes of review that can be
implemented within organizations (314 ff.) are similarly excessively optimistic -- contrary to the
literature on principal-agent problems in many areas of complex collaboration.
This is surprising, given Simon's contributions to the theory of imperfect rationality in the case of
individual decision-making. Against this confidence, the sources of organizational dysfunction
that are now apparent in several literatures on organization make it more difficult to imagine that
organizations can have a high success rate in rational decision-making. If we were seeking for a
Simon-like phrase for organizational thinking to parallel the idea of satisficing, we might come up
with the notion of "bounded localistic organizational rationality": "locally rational, frequently
influenced by extraneous forces, incomplete information, incomplete communication across
divisions, rarely coherent over the whole organization".
Simon makes the point emphatically in the opening chapters of the book that administrative
science is an incremental and evolving field. And in fact, it seems apparent that his own thinking
continued to evolve. There are occasional threads of argument in Simon's work that seem to point
towards a more contingent view of organizational behavior and rationality, along the lines of
Fligstein and McAdam's theories of strategic action fields. For example, when discussing
organizational loyalty Simon raises the kind of issue that is central to the strategic action field
model of organizations: the conflicts of interest that can arise across units (11). And in the
commentary on Chapter I he points forward to the theories of strategic action fields and complex
adaptive systems:
The concepts of systems, multiple constituencies, power and politics, and organization culture all
flow quite naturally from the concept of organizations as complex interactive structures held
together by a balance of the inducements provided to various groups of participants and the
contributions received from them. (27)
The book has been a foundational contribution to organizational studies. At the same time, if
Herbert Simon were at the beginning of his career and were beginning his study of organizational
decision-making today, I suspect he might have taken a different tack. He was plainly committed
to empirical study of existing organizations and the mechanisms through which they worked. And
he was receptive to the ideas surrounding the notion of imperfect rationality. The current literature
on the sources of contention and dysfunction within organizations (Perrow, Fligstein, McAdam,
Crozier, ...) might well have led him to write a different book altogether, one that gave more
attention to the sources of failures of rational decision-making and implementation alongside the
occasional examples of organizations that seem to work at a very high level of rationality and
effectiveness.
Simon on complexity
4
Herbert Simon's theories of organizations
Image: detail from Family Portrait 2 1965
(Creative Commons license, Richard Rappaport)
Herbert Simon made paradigm-changing contributions to the theory of rational behavior,
including particularly his treatment of "satisficing" as an alternative to "maximizing" economic
rationality (link). It is therefore worthwhile examining his views of organizations and
organizational decision-making and action -- especially given how relevant those theories are to
my current research interest in organizational dysfunction. His highly successful
book Administrative Behavior went through four editions between 1947 and 1997 -- more than
fifty years of thinking about organizations and organizational behavior. The more recent editions
consist of the original text and "commentary" chapters that Simon wrote to incorporate more
recent thinking about the content of each of the chapters.
Here I will pull out some of the highlights of Simon's approach to organizations. There are many
features of his analysis of organizational behavior that are worth noting. But my summary
assessment is that the book is surprisingly positive about the rationality of organizations and the
processes through which they collect information and reach decisions. In the contemporary
environment where we have all too many examples of organizational failure in decision-making --
from Boeing to Purdue Pharma to the Federal Emergency Management Agency -- this confidence
seems to be fundamentally misplaced. The theorist who invented the idea of imperfect rationality
and satisficing at the individual level perhaps should have offered a somewhat more critical
analysis of organizational thinking.
The first thing that the reader will observe is that Simon thinks about organizations as systems of
decision-making and execution. His working definition of organization highlights this view:
In this book, the term organization refers to the pattern of communications and relations among a
group of human beings, including the processes for making and implementing decisions. This
pattern provides to organization members much of the information and many of the assumptions,
goals, and attitudes that enter into their decisions, and provides also a set of stable and
comprehensible expectations as to what the other members of the group are doing and how they
will react to what one says and does. (18-19).
1
,What is a scientifically relevant description of an organization? It is a description that, so far as
possible, designates for each person in the organization what decisions that person makes, and the
influences to which he is subject in making each of these decisions. (43)
The central theme around which the analysis has been developed is that organization behavior is a
complex network of decisional processes, all pointed toward their influence upon the behaviors of
the operatives -- those who do the action 'physical' work of the organization. (305)
The task of decision-making breaks down into the assimilation of relevant facts and values -- a
distinction that Simon attributes to logical positivism in the original text but makes more general
in the commentary. Answering the question, "what should we do?", requires a clear answer to two
kinds of questions: what values are we attempting to achieve? And how does the world work such
that interventions will bring about those values?
It is refreshing to see Simon's skepticism about the "rules of administration" that various
generations of organizational theorists have advanced -- "specialization," "unity of command,"
"span of control," and so forth. Simon describes these as proverbs rather than as useful empirical
discoveries about effective administration. And he finds the idea of "schools of management
theory" to be entirely unhelpful (26). Likewise, he is entirely skeptical about the value of the
economic theory of the firm, which abstracts from all of the arrangements among participants that
are crucial to the internal processes of the organization in Simon's view. He recommends an
approach to the study of organizations (and the design of organizations) that focuses on the
specific arrangements needed to bring factual and value claims into a process of deliberation
leading to decision -- incorporating the kinds of specialization and control that make sense for a
particular set of business and organizational tasks.
An organization has only two fundamental tasks: decision-making and "making things happen".
The decision-making process involves intelligently gathering facts and values and designing a
plan. Simon generally approaches this process as a reasonably rational one. He identifies three
kinds of limits on rational decision-making:
• The individual is limited by those skills, habits, and reflexes which are no longer in the
realm of the conscious...
• The individual is limited by his values and those conceptions of purpose which influence
him in making his decision...
• The individual is limited by the extent of his knowledge of things relevant to his job. (46)
And he explicitly regards these points as being part of a theory of administrative rationality:
Perhaps this triangle of limits does not completely bound the area of rationality, and other sides
need to be added to the figure. In any case, the enumeration will serve to indicate the kinds of
considerations that must go into the construction of valid and noncontradictory principles of
administration. (47)
The "making it happen" part is more complicated. This has to do with the problem the executive
faces of bringing about the efficient, effective, and loyal performance of assigned tasks by
operatives. Simon's theory essentially comes down to training, loyalty, and authority.
If this is a correct description of the administrative process, then the construction of an efficient
administrative organization is a problem in social psychology. It is a task of setting up an
operative staff and superimposing on that staff a supervisory staff capable of influencing the
operative group toward a pattern of coordinated and effective behavior. (2)
To understand how the behavior of the individual becomes a part of the system of behavior of the
organization, it is necessary to study the relation between the personal motivation of the
individual and the objectives toward which the activity of the organization is oriented. (13-14)
Simon refers to three kinds of influence that executives and supervisors can have over
"operatives": formal authority (enforced by the power to hire and fire), organizational loyalty
(cultivated through specific means within the organization), and training. Simon holds that a
2
,crucial role of administrative leadership is the task of motivating the employees of the
organization to carry out the plan efficiently and effectively.
Later he refers to five "mechanisms of organization influence" (112): specialization and division
of task; the creation of standard practices; transmission of decisions downwards through authority
and influence; channels of communication in all directions; and training and indoctrination.
Through these mechanisms the executive seeks to ensure a high level of conformance and
efficient performance of tasks.
What about the actors within an organization? How do they behave as individual actors? Simon
treats them as "boundedly rational":
To anyone who has observed organizations, it seems obvious enough that human behavior in them
is, if not wholly rational, at least in good part intendedly so. Much behavior in organizations is, or
seems to be, task-oriented--and often efficacious in attaining its goals. (88)
But this description leaves out altogether the possibility and likelihood of mixed motives, conflicts
of interest, and intra-organizational disagreement. When Simon considers the fact of multiple
agents within an organization, he acknowledges that this poses a challenge for rationalistic
organizational theory:
Complications are introduced into the picture if more than one individual is involved, for in this
case the decisions of the other individuals will be included among the conditions which each
individual must consider in reaching his decisions. (80)
This acknowledges the essential feature of organizations -- the multiplicity of actors -- but fails to
treat it with the seriousness it demands. He attempts to resolve the issue by invoking cooperation
and the language of strategic rationality: "administrative organizations are systems of cooperative
behavior. The members of the organization are expected to orient their behavior with respect to
certain goals that are taken as 'organization objectives'" (81). But this simply presupposes the
result we might want to occur, without providing a basis for expecting it to take place.
With the hindsight of half a century, I am inclined to think that Simon attributes too much
rationality and hierarchical purpose to organizations.
The rational administrator is concerned with the selection of these effective means. For the
construction of an administrative theory it is necessary to examine further the notion of rationality
and, in particular, to achieve perfect clarity as to what is meant by "the selection of effective
means." (72)
These sentences, and many others like them, present the task as one of defining the conditions of
rationality of an organization or firm; this takes for granted the notion that the relations of
communication, planning, and authority can result in a coherent implementation of a plan of
action. His model of an organization involves high-level executives who pull together factual
information (making use of specialized experts in this task) and integrating the purposes and goals
of the organization (profits, maintaining the health and safety of the public, reducing poverty) into
an actionable set of plans to be implemented by subordinates. He refers to a "hierarchy of
decisions," in which higher-level goals are broken down into intermediate-level goals and tasks,
with a coherent relationship between intermediate and higher-level goals. "Behavior is purposive
in so far as it is guided by general goals or objectives; it is rational in so far as it selects
alternatives which are conducive to the achievement of the previously selected goals" (4). And
the suggestion is that a well-designed organization succeeds in establishing this kind of coherence
of decision and action.
It is true that he also asserts that decisions are "composite" --
It should be perfectly apparent that almost no decision made in an organization is the task of a
single individual. Even though the final responsibility for taking a particular action rests with
some definite person, we shall always find, in studying the manner in which this decision was
3
, reached, that its various components can be traced through the formal and informal channels of
communication to many individuals ... (305)
But even here he fails to consider the possibility that this compositional process may involve
systematic dysfunctions that require study. Rather, he seems to presuppose that this composite
process itself proceeds logically and coherently. In commenting on a case study by Oswyn
Murray (1923) on the design of a post-WWI battleship, he writes: "The point which is so clearly
illustrated here is that the planning procedure permits expertise of every kind to be drawn into the
decision without any difficulties being imposed by the lines of authority in the organization"
(314). This conclusion is strikingly at odds with most accounts of science-military relations during
World War II in Britain -- for example, the pernicious interference of Frederick Alexander
Lindemann with Patrick Blackett over Blackett's struggles to create an operations-research basis
for anti-submarine warfare (Blackett's War: The Men Who Defeated the Nazi U-Boats and
Brought Science to the Art of Warfare). His comments about the processes of review that can be
implemented within organizations (314 ff.) are similarly excessively optimistic -- contrary to the
literature on principal-agent problems in many areas of complex collaboration.
This is surprising, given Simon's contributions to the theory of imperfect rationality in the case of
individual decision-making. Against this confidence, the sources of organizational dysfunction
that are now apparent in several literatures on organization make it more difficult to imagine that
organizations can have a high success rate in rational decision-making. If we were seeking for a
Simon-like phrase for organizational thinking to parallel the idea of satisficing, we might come up
with the notion of "bounded localistic organizational rationality": "locally rational, frequently
influenced by extraneous forces, incomplete information, incomplete communication across
divisions, rarely coherent over the whole organization".
Simon makes the point emphatically in the opening chapters of the book that administrative
science is an incremental and evolving field. And in fact, it seems apparent that his own thinking
continued to evolve. There are occasional threads of argument in Simon's work that seem to point
towards a more contingent view of organizational behavior and rationality, along the lines of
Fligstein and McAdam's theories of strategic action fields. For example, when discussing
organizational loyalty Simon raises the kind of issue that is central to the strategic action field
model of organizations: the conflicts of interest that can arise across units (11). And in the
commentary on Chapter I he points forward to the theories of strategic action fields and complex
adaptive systems:
The concepts of systems, multiple constituencies, power and politics, and organization culture all
flow quite naturally from the concept of organizations as complex interactive structures held
together by a balance of the inducements provided to various groups of participants and the
contributions received from them. (27)
The book has been a foundational contribution to organizational studies. At the same time, if
Herbert Simon were at the beginning of his career and were beginning his study of organizational
decision-making today, I suspect he might have taken a different tack. He was plainly committed
to empirical study of existing organizations and the mechanisms through which they worked. And
he was receptive to the ideas surrounding the notion of imperfect rationality. The current literature
on the sources of contention and dysfunction within organizations (Perrow, Fligstein, McAdam,
Crozier, ...) might well have led him to write a different book altogether, one that gave more
attention to the sources of failures of rational decision-making and implementation alongside the
occasional examples of organizations that seem to work at a very high level of rationality and
effectiveness.
Simon on complexity
4
