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April 28, 2013
David Warsh, Proprietor


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… and nine books of poetry, too

For three years as a young man, I worked for a business magazine in New York.  Fortune, Business Week, Barron’s were fast cutters in relation to the mighty vessel that was The Wall Street Journal, but none in those days sailed closer to the wind than Forbes (the present-day iteration bears almost no resemblance to it). Forbes was good because it had a great editor, James W. Michaels. Its annual “Yardsticks” issue was a pretty good statistical map of US industry, but the magazine’s real franchise consisted of what Michaels called “company stories,” sharp (sometimes glib) analyses of what organizational economists now call persistent performance differences (PPDs) among seemingly similar enterprises (SSEs).  And therein lies a story.

Forbes editors, like those in other news organizations, organized themselves hierarchically around their sources and sounding boards. One of my friends talked to Bruce Henderson of the Boston Consulting Group and George Kozmetsky, a Teledyne founder and dean of the University of Texas College of Business Administration. Another was in touch with entrepreneur Craig McCaw and maverick economist Reuven Brenner. The senior editors kept tabs on investor relations managers of such companies as US Steel, General Electric and IBM. Editor Michaels himself spoke regularly with the likes of management guru Peter Drucker, Corning chief executive officer Amory Houghton, and John Loeb, of Loeb, Rhoades, a Wall Street grandee. Below decks, I read Alfred Chandler, the historian of big business, and Daniel Bell, the sociologist author of The Coming of Post Industrial Society, but my interest was turning to economics.

I might have saved myself and readers a certain amount of time, and, perhaps, money, too, had I been reading James March instead.

Or so I thought as I attended a program earlier this month celebrating the fiftieth anniversary of the publication of A Behavioral Theory of the Firm, by March and Richard Cyert. The meeting, at Stanford University, where March is an emeritus professor, was organized by the National Bureau of Economic Research. An earlier celebration of March, in Italy, in 2002, was published as a special issue of the journal Industrial and Corporate Change. Cyert was 77 when he died, in 1998.

The corporate landscape today is, of course, all but unrecognizable compared to what it was when March and Cyert wrote in 1963.  The outlines of any number of vivid company stories loomed as I listened to the panels and papers at the conference. In fact, a bountiful new field of organizational economics has grown up in the nexus of the interest in organizations that March shared with Kenneth Arrow, Ronald Coase, Oliver Williamson, Herbert Simon and Sidney Winter.

That field was an empty lot when March started, not long after finishing his PhD, at Yale. A Behavioral Theory of the Firm was a broadside aimed at standard textbook economics, especially the branch of it known as the theory of the firm.  The book begins,

The “firm” of the theory of the firm has few of the characteristics that we have come to identify with actual business firms. It has no complex organization, no problems of control, no standard operating procedures, no budget, no controller, no aspiring “middle management.”

Fifty years later, illuminating theories of all those topics, and more, are on display in a newly-published Handbook of Organizational Economics, edited by Robert Gibbons, of the Sloan School of Management of the Massachusetts Institute of Technology, and John Roberts, of Stanford University. There you can learn about complementarity in organizations (for example, GE’s decision a hundred years ago to produce a wide array of projects based on its electric motors); about transaction costs and property rights; and about what managers do (hint: they pursue PPD in SSEs). It’s not bedtime reading, but then what handbook is? It is, however, a study guide for graduate students looking for problems to understand – problem that are routinely solved in practice within firms, between them, beyond their boundaries.  It is a prospectus, too, for a sub-discipline that is only now beginning to place its specialists in university departments.

To judge from the papers at the NBER session, organizational economists do what consultants did, but they do it much more carefully, mapping their theories into all the rest of economics with much greater concern for precision.  Is there a practical value in their work? It wouldn’t be the first time that technical economics turned out to have engineering applications. Maybe that’s why former Citicorp chief executive John Reed sat in the back of the room with March throughout the day. (Reed chairs the sixty-member Corporation that governs MIT.)

So far, as someone said, the clearest sign that organizational economics is being put into practice is the growing adoption of a “balanced scorecard” approach to corporate accounting, a means of shaping strategy devised by Robert Kaplan, of the Harvard Business School. Like March, Kaplan is a product of the extraordinary intellectual efflorescence that took place in the 1950s and 1960s at Carnegie Institute of Technology, in Pittsburgh (today Carnegie Mellon University). Franco Modigliani, Merton Miller, Herbert Simon, Robert Lucas, and Edward Prescott, and Finn Kydland all began work there, much of it having to do with human cognition, for which they were later recognized with Nobel prizes. March left Pittsburgh to become founding dean of the social sciences at the new Irvine campus of the University of California, in 1965, and, since 1970, has been a professor at Stanford.

All these technical developments still require translation of the new learning about how PPDs arise among SSEs into the demotic speech (winners and losers) that we call “news.” I have no idea who among the next generation of newspaper and magazine journalists and popular academic writers will undertake the task, though I have confidence it will be undertaken, and before long. (See The Org: The  Underlying Logic of the Office, by Ray Fisman and Tim Sullivan, for beginniners.)  Much work remains to be done before we will have come to grips with all the restructuring, out-sourcing, just-in-time inventorying, yield managing, incentivizing and other personnel policies that have become standard in recent years.  .

March himself requires little translation, however, because he has quietly done a good deal of it himself. In addition to the steady stream of books, articles and projects he had produced over the years (including, most recently with Mie Augier, The Roots, Rituals and Rhetorics of Change: North American Business Schools Since World War II), he has written and appeared in two pretty good instructional films (Passion and Discipline: Don Quixote’s Lessons for Leadership, and Heroes and History: The Lessons for Leadership from Tolstoy’s War and Peace), and published nine volumes of poems as well, all of them dedicated to his wife of sixty years.  From “Wisconsin Rules,” a representative sample, of a piece with everything else, (with thanks to Josef Chytry):

Where I come from,

A man doesn’t say what he wants,

Every moment of the day,

And sometimes less at night

Even in a whisper. We walk

A comfortable path of convention,

Keeping our ambitions hidden,

Mostly, not especially because

We want to fool anyone, but because

Lives are better when dressed

In the fabric of silence.

For more lives in the workplace, stay tuned to organizational economics.

For a slightly different take on the role of the supposed limits to sovereign debt in the austerity debate, come back here next week.

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