The ubiquity of organizations: Herbert Simon’s telescope

I’m working on a theory of the firm-related paper over the holiday break.  One of the pieces I enjoy revisiting is Herbert Simon’s (1991) article “Organizations and Markets,” Journal of Economic Perspectives.  What I like is the intriguing thought experiment in that paper (frankly, I think thought experiments are a VERY under-utilized tool in strategy and organization theory).  To illustrate the “ubiquity of organizations” Simon asks us to imagine seeing the globe from above and envisioning market exchanges as red lines and firm-related exchanges as green lines. Clearly, the green dominates.  Thus Simon never developed a comparative theory of governance (markets versus hierarchy) and focused on organizations themselves (the basis of the behavioral theory of the firm).   I tend to think that the comparative aspects are fundamental, though naturally The Behavioral Theory also has a place in the canon.

For anyone interesting, here’s the first couple paragraphs of the thought experiment:

A mythical visitor from Mars, not having been apprised of the centrality of
markets and contracts, might find the new institutional economics rather
astonishing. Suppose that it (the visitor I’ll avoid the question of its sex)
approaches the Earth from space, equipped with a telescope that reveals social
structures. The firms reveal themselves, say, as solid green areas with faint
interior contours marking out divisions and departments. Market transactions
show as red lines connecting firms, forming a network in the spaces between
them. Within firms (and perhaps even between them) the approaching visitor
also sees pale blue lines, the lines of authority connecting bosses with various
levels of workers. As our visitor looked more carefully at the scene beneath, it
might see one of the green masses divide, as a firm divested itself of one of its
divisions. Or it might see one green object gobble up another. At this distance,
the departing golden parachutes would probably not be visible.

No matter whether our visitor approached the United States or the Soviet
Union, urban China or the European Community, the greater part of the space
below it would be within the green areas, for almost all of the inhabitants would
be employees, hence inside the firm boundaries. Organizations would be the
dominant feature of the landscape. A message sent back home, describing the
scene, would speak of “large green areas interconnected by red lines.” It would
not likely speak of “a network of red lines connecting green spots.”

2 Comments on “The ubiquity of organizations: Herbert Simon’s telescope”

  1. srp says:

    I remember reading this article at the time. The thought experiment is wrong, because 1) individuals (employees) are not the proper unit of analysis for the question being asked (“how important are between-firm vs. within-firm activities?”) and 2) even at that unit of analysis Simon is forgetting about the zillions of interactions employees have with external firms (e.g. they all use lots of equipment made elsewhere, most of that is powered from outside, most of the consumables they use are produced outside, etc.). That’s not even taking into account the pervasive outsourcing of business services and the external/internal one-to-one partnerships that result.

  2. jukka says:

    Maybe thought experiments have been replaced by computer simulations which may be perceived as more scientific in the eyes of the readers. (Although still not concinving enough to some.) Perhaps that explains the under-utilization in part?

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