Symposium on Organizations and Economics

Most production in modern economies occurs within organizations, and this production is regulated only to a limited extent by prices. The size of some of the largest organizations, like General Motors or IBM or AT&T, exceeds that of many national economies. Moreover, many of the organizations which play an important role in resource allocation, including governmental organizations, are not profit-maximizers. These observations make it clear that if economists wish to understand how resources in modern economies are allocated, we must understand what goes on inside organizations. Even if the Arrow-Debreu model accurately depicted how market economies behave—that is, the relations between and among households and firms—it would provide insight into only a fraction of all economic activity. Herbert Simon makes this point powerfully in his contribution to this symposium. Somewhat surprisingly, most economists have traditionally relegated the study of organizations to business schools, or worse still, to sociologists. The general attitude seemed to be that while it might be important for managers, or the firm's personnel officers, to know something about organizations, the subject was not worthy of Economic Science. Many economists argued that there was no need to look carefully into the black box caiied the firm: firms maximized profits (stock market value); if managers didn't, they would be replaced; and firms that didn't maximize value wouldn't survive. Accordingly, what went on inside the black box was mere detail. The behavior of the firm could be described completely without knowledge of those details.