Economics Dictionary of ArgumentsHome
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| Organization: An organization is a group of people who work together to achieve a common goal. Organizations are typically structured in a way that allows them to efficiently and effectively achieve their goals. See also Institutions, Cooperation, Systems. Administration._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Armen A. Alchian on Organisation - Dictionary of Arguments
Henderson I 43 Firms/organisations/corporations/Alchian/Demsetz/Henderson/Globerman: why are some types of economic activity carried out within individual organizations, while other types of economic activity are carried out through market exchanges between independent organizations or individuals.* Solution: The obvious answer is that if it is more effcient to carry out transactions within the boundaries of a single organization it will be done that way, and when it is not, transactions will be carried out between independent economic agents. >Transaction costs. Transaction cost: (…) why are some transactions carried out more effciently within organizations than between organizations? It also raises a related question: why do organizations take different forms? For example, why are so many law firms and accounting firms organized as partnerships or limited liability companies while others are organized as corporations with publicly traded stocks? And why does organizational form matter? Alchian/Demsetz: Alchian and Demsetz (1972)(2) provided critical insights on these questions. They viewed organizations like the corporation as a vehicle to elicit specialized and cooperative production, and they identified two key demands that are placed on economic organizations: metering the productivity of inputs and rewarding those inputs. Measurements: Metering productivity means measuring the contributions that various inputs make to the organization's output. The ideal way to reward inputs is to make the rewards commensurate with their contribution to output, in other words, their productivity. >Productivity, >Econometrics. If the economic organization does these tasks poorly, with rewards and productivity only loosely correlated, the organization's productivity will be Iower than otherwise, but if the organization does it well, productivity will be higher. They then went on to describe what makes those two tasks diffcult and how organizations evolve to handle these problems. Henderson I 45 Classical Firm: In what Alchian and Demsetz called the "Classical Firm," the monitor (or leader) designated to meter the performance of team members has more authority and stronger incentives than the group leaders for the above professor's student research papers. In particular, the monitor in the classical firm is what Alchian and Demsetz refer to as a "residual claimant." Residual claimant: The "residual" is essentially the profit that remains after all members of the team are paid an amount commensurate with what the monitor deems to be each member's contribution. The right to claim the residual provides the incentive for the monitor to identify and discourage shirking.** >Free-rider problem, >Residual claimant. Henderson I 46 Teams/organization: Team members presumably wish to maximize the team's productivity, thereby increasing the payment they will collectively (and individually) receive. They therefore agree to the monitor's status as a residual claimant, as well as the monitor's right to alter team membership by, for example, dismissing shirkers. At the same time, the monitor has an incentive to reward team members commensurate with their contributions to team output, since such behaviour is consistent with maximizing productivity and the profits of the firm. Alchian and Demsetz's Classical Firm is the quintessential small business in which the senior manager is also the majority or sole owner of the business. In fact, while the majority of business organizations in developed countries are relatively small, the majority of output (as measured by revenues) is produced by large, publicly traded companies that have hundreds, if not thousands, of managers and many thousands of shareholders. This organizational form has come in for much criticism from some economists because of what is known as the "principal-agent" problem. >Principal-agent problem/Alchian. For concentrated ownership see >Organisations/Alchian/Demsetz. Henderson I 51 Cost/efficiency: The essence of the [UCLA] School's theory of the firm is similar in spirit to its description of the market system. Specifically, there are real-world costs to engaging in transactions, whether between independent transactors or within individual organizations. This means that any public policy evaluation of how effciently any set of transactions is being carried out needs to recognize that alternative arrangements will also bear such costs, and that competition combined With private ownership is a powerful process to ensure that the transactions in question are typically carried out in the least costly ways possible. * Perhaps the seminal article addressing this issue is Coase (1937)(1). ** The right of the residual claimant to sell the business at some point in the future strengthens the claimant's incentive to build a team of non-shirkers that is likely to be increasingly productive over time, thereby increasing the capitalized value of the firm. 1. Coase, Ronald (1937). The Nature of the Firm, Economica 4 (November): 386-405. 2. Alchian, Armen A., and Harold Demsetz (1972). Production, Information Costs, and Economic Organization. American Economic Review 62 (December): 777-95._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Alchian I Armen A. Alchian William R. Allen Exchange and Production: Competition, Coordination and Control Belmont, CA: Wadsworth 1977 Henderson I David R. Henderson Steven Globerman The Essential UCLA School of Economics Vancouver: Fraser Institute. 2019 |
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> Counter arguments against Alchian
> Counter arguments in relation to Organisation
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