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Organization THeory
Organization THeory
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From the author:
My analysis of the large organization is informed by the same principles as my study of the state capitalist economy, namely: 1) that the exercise of power creates conflict of interest, within the nominally “private” corporation as well as in the larger economy;
2) hierarchy, by separating authority from knowledge, leads to the same informational problems within an organization that Hayek described at the level of political economy; and
3) by externalizing effort and reward on different actors, authority creates fundamental incentive problems. The primary function of authority is to create privilege: the wielder of power is able to externalize the costs of his decisions on others, while appropriating the benefits for himself. The result, when the costs and benefits of action are not internalized by the same actors, is that particular forms of organization are adopted beyond Pareto-optimal levels, and self-reinforcing distortions in feedback lead to a series of synergetic in-
stabilities and interventions of the sort Mises described at the level of the economy as a whole. In short: state capitalism, along with the large, pathological organizations it breeds, is unsustainable.
My analysis of the large organization is informed by the same principles as my study of the state capitalist economy, namely: 1) that the exercise of power creates conflict of interest, within the nominally “private” corporation as well as in the larger economy;
2) hierarchy, by separating authority from knowledge, leads to the same informational problems within an organization that Hayek described at the level of political economy; and
3) by externalizing effort and reward on different actors, authority creates fundamental incentive problems. The primary function of authority is to create privilege: the wielder of power is able to externalize the costs of his decisions on others, while appropriating the benefits for himself. The result, when the costs and benefits of action are not internalized by the same actors, is that particular forms of organization are adopted beyond Pareto-optimal levels, and self-reinforcing distortions in feedback lead to a series of synergetic in-
stabilities and interventions of the sort Mises described at the level of the economy as a whole. In short: state capitalism, along with the large, pathological organizations it breeds, is unsustainable.
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