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Organizational Economics and Management: Part B
Organizational Economics and Management: Part B
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Online Perspective 2
Evolutionary foundations
of cooperation
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behavior most often singled out are the leadership quality of specific group members and the need among group members for affiliation, security, recognition,
social status, or money. Groups such as clubs or unions form so that members can
achieve or satisfy a want that they could not satisfy as efficiently through individual
action. All these considerations are instrumental in affecting group cohesion,
which, in turn, affects the strength of the group and its ability to compete with
other groups for the same objectives. From the perspective of this theory, when people
join firms, they accept the firms objective and pursue it because everyone else wants
the same thing, leading to self-enforcing group cohesion.
The common-interest theory views the group as an organic whole, much like an
individual, as opposed to a collection of individuals whose separate actions appear
to be group action. According to the theory, the group has a life of its own that is
to a degree independent of the individuals who comprise it. Herbert Spencer, a
nineteenth-century sociologist, often described the group as a social organism or
as a superorganic entity (Spencer 1896). It was probably the social-organism view
of groups that Karl Marx had in mind when he wrote of the class struggle and
predicted that the proletariat class would bring down bourgeois capitalism and, in
its place, erect a communist society. Aristotle probably had the same view of groups
in mind when he wrote, Man is by nature a political animal.
Two major reasons are given for viewing groups as social organisms. First, a group
consists of a mass of interdependencies, which connect the individuals in the group.
Without the interdependencies, there would be only isolated individuals, and the term
group would have no meaning. Individuals in groups are like the nodes of a spiders
web. The spiders web is constructed on these nodes, and the movements in one part of
the web can be transmitted to all other parts. Similar to the process of synergism in
biology, the actions of individuals within a group combine to form a force that is
greater than the sum of the forces generated by individuals isolated from one another.
The group must, so the argument goes, be thought of as more than the sum total of its
individuals. This argument is often used to arouse support for labor unions, for
example. Union leaders argue that unions can get higher wage increases for all
workers than individual workers can obtain by acting independently. The reason is
that union leaders efficiently coordinate the efforts of all. Environmental groups
make essentially the same argument: with well-placed lobbyists, the environmental
group can have a greater political impact than all the individuals they represent could
have by writing independent letters to their representatives at different times.
Second, groups tend to emerge because they satisfy some interest shared by all the
groups members. Because all share this common interest, individuals have an
intrinsic incentive to work with others to pursue that interest, sharing the costs as
they work together. Aristotle wrote, Men journey together with a view to particular
advantage (Ethics, 1160a) and Arthur Bentley (18701957), recognized as an
Basic propositions
Using economic analysis, people are assumed to be as rational in their decision to
join a group (a firm or club) as they are toward doing anything else; they will join a
group if the benefits of doing so are greater than the costs they must bear. These
costs and benefits, like all others relevant to any other act, must be discounted by the
going interest on borrowed funds to account for any time delay in the incurrence of
the costs and receipt of any benefits and by the probability that the costs and
benefits will be realized.
There are several direct, private benefits to belonging to groups, such as companionship, security, recognition, and social status. A person also may belong to a
group for no other reason than to receive mail from it and, in that small way, to feel
important. A group may serve as an outlet for our altruistic or charitable feelings. If
by common interest we mean a collection of these types of private benefits, it is
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Small groups
Small groups are not without their problems in pursuing the common interest of
their members. They have a problem of becoming organized, holding together, and
ensuring that everyone contributes her part to the groups common interest. This
point is relevant to Fred and Harrys (or Crusoe and Fridays) problems of setting up
a social contract considered in chapter 1, and it can be understood in terms of all
those little things that we can do with friends and neighbors but that will go undone
because of the problems associated with having two or three people come together
for the common good. For example, it may be in the common interest of three
neighbors Fred, Harry, and now Judy for all to rid their yards of dandelions. If one
person does it, and the other two do not, the person who removes the dandelions may
find his yard full of them the next year because of seeds from the other two yards.
Even though Fred, Harry, and Judy may not ever agree to work out their common
problem (or interest) cooperatively, there are several things that make it more likely
that a small group will cooperate than a large group. In a small group everyone can
know everyone else. What benefits or costs may arise from an individuals action are
spread over just a few people and, therefore, the effect felt by any one person can be
significant. (Fred knows that there is a reasonably high probability that what he does
to eliminate dandelions from the border of his property affects Harrys and Judys
welfare.) If the individual providing the public good is concerned about the welfare
of those within his group and receives personal satisfaction from knowing that he
has in some way helped them, he has an incentive to contribute to the common
good; and we emphasize that before the common good can be realized, individuals
must have some motivation for contributing to it. Furthermore, so-called free riders
are easily detected in a small group. (Harry can tell with relative ease when Fred is
not working on, or has not worked on, the dandelions in his yard.) If one person tries
to let the others shoulder his share, the absence of his contribution will be detected
with a reasonably high probability. Others can then bring social pressure (accompanied by the sting of a cost) to bear to encourage (if not force) him to live up to his
end of the bargain. The enforcement costs are low because the group is small. There
are many ways to let a neighbor know you are displeased with some aspect of his
behavior.
Finally, in small groups, an individual shirking her responsibilities can sometimes be excluded from the group if she does not contribute to the common good
(although this would be difficult in the dandelion example) and joins the group
merely to free ride on the efforts of others. In larger groups, such as nations,
exclusion is usually more difficult (more costly) and, therefore, less likely.
The problem of organizing group behavior to serve the common interest has
been a problem for almost all groups, even the utopian communities that sprang up
during the nineteenth century and in the 1960s. Rosebeth Kanter, in her study of
successful nineteenth-century utopian communities, concluded:
The primary issue with which a utopian community must cope in order to have the
strength and solidarity to endure is its human organization: how people arrange to do the
work that the community needs to survive as a group, and how the group in turn manages to
satisfy and involve its members over a long period of time. The idealized version of
communal life must be meshed with the reality of the work to be done in the community,
involving difficult problems of social organization. In utopia, for instance, who takes out the
garbage? (Kanter 1973, 64)
Kanter found that the most successful communities minimized the free-rider problems by restricting entry into the community. They restricted entry by requiring
potential members to make commitments to the group. Six commitment mechanisms distinguished the successful from the unsuccessful utopias:
1 sacrifice of habits common to the outside world, such as the use of alcohol and
tobacco or, in some cases, sex
2 assignment of all worldly goods to the community
3 adoption of rules that would minimize the disruptive effects of relationships
between members and nonmembers and that would (through, for example, the
wearing of uniforms) distinguish members from nonmembers
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Large groups
In a large-group setting, the problems of having individual members contribute
toward the development of the common interest are potentially much greater. The
direct, personal interface that is present in small groups is usually lacking in larger
groups; and because of the size of large groups, the public good they produce is
spread over such a large number of people that no one sees his actions as having a
significant effect on anyone, even themselves. As a result, no one perceives either
personal benefits from his contribution, or benefits for others.
Even when an individual can detect benefits from his actions, he must weigh
those benefits against the costs he has to incur to achieve them. For a large group,
the costs of providing detectable benefits can be substantial. This can occur not only
because there are more people to be served by the good but also because large
groups are normally organized to provide public goods that are rather expensive to
begin with. Police protection, national defense, and schools are examples of very
costly public goods provided by large groups. If all people contribute to the public
good, the cost to any one person can be slight; but the question confronting the
individual is how much he will have to contribute to make his actions detectable,
given what all the others do.
In the context of a nation (a very large group indeed) suppose there are certain
common objectives to which we can all subscribe, such as a specific charitable
program. It is, in other words, in our common interest to promote this program (by
assumption, for purposes of argument). Will people be willing to voluntarily contribute to the federal treasury for the purpose of achieving this goal? Certainly some
people will, but many may not. A person may reason that although he agrees with
the national objective, or common interest, his contribution will have no detectable
effect in achieving it. This explains why compulsory taxes are necessary, and why
philanthropic contributions are an almost nonexistent source of revenues for all
governments worldwide (Olson 1971, 13).
The general tenor of the argument also applies to contributions that go to
organizations such as World Vision, a voluntary charitable organization interested
mainly in improving the diets of impoverished people around the world. Many
readers of these pages will have been disturbed by scenes of undernourished and
malnourished children shown in TV commercials for World Vision. But how many
people ever actually contribute so much as a dollar? Needless to say, many do give.
They are like Harry, who is willing to dig, voluntarily, some of the weeds from his
yard. On the other hand, a very large number of people who have been concerned
never make a contribution. There are many reasons for people not giving, and we do
not mean to understate the importance of these reasons; we mean only to emphasize
that the large-group problem is one significant reason.
True, if all members of a large group make a small contribution toward the
common interest, whatever it is, there may be sizable benefits to all within the
group. But, again, the problem that must be overcome is the potential lack of
individual incentives from which the collective behavior must emerge. In large
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groups, the Prisoners Dilemma problems we highlighted in talking about a twomember group, Fred and Harry, are ever present and magnified, again because the
larger the group, the less detectible are the consequences of individual behavior and
the less monitoring of behavior can be done.
Through appropriate organization of group members, the common interest may
be achieved, even if the membership is large. The organization of a large group can
be construed as a public good, and making the organization workable is likely to
incur costs for two reasons.
First, there are a large number of people to organize, which means that even if
group members are not resistant to being organized, there will be costs associated
with getting them together or having them work at the same time for the same
objectives.
Second, some individuals may try to free-ride on the efforts of others, which
means it will cost more to get people to become members of the group. Further, each
free-rider implies a greater burden on the active members of the group. If everyone
waits for the other guy to take the initiative, the group may never be organized.
Organizational costs often prevent students who complain about the instructional
quality of the faculty or some other aspect of university life from doing anything
about it. The same costs block people who are disgruntled with the two major
political parties from forming a party among those who share their views. The
probability of getting sufficient support is frequently very low, which is another
way of saying the expected costs are high.
The free-rider problem may emerge in the workplace as worker absenteeism for a
variety of reasons, including sickness, real or feigned (Barham and Begum 2005,
157). The Confederation of British Industry found that, in 2006, the British economy
lost 175 million days of work from absenteeism, which continued to escalate beyond
what could be attributable to understandable reasons, such as illness.2 Not surprisingly, the rate of absence for sickness was higher in the public sector than in the
private sector (perhaps attributable in part to the pressure of private firms to avoid
losses and make a profit). Consistent with the logic of collective action as developed in this chapter, another study found that the rate of absences for illness during
the survey week was 29 percent higher in private firms with 500 workers than in
firms with fewer than twenty-five workers (Barham and Begum 2005, 154).
Economist Stephen Levitt and journalist Stephen Dubner (2005) report on their
findings from the sales data collected by Paul Feldman, who sold bagels on the
honor plan for many years in Washington, DC. Feldman would leave bagels early
in the morning at gathering places for office workers. The workers were initially
2
As reported by the consulting firm of Smith & Williamson in 2008, with the report accessed
on January 7, 2009 from www.mondaq.com/article.asp?articleid=52770.
asked to leave their payments in open baskets. Because the money often was
taken from the baskets, Feldman made wooden boxes with slits in the top for
depositing payments. Initially, in the early 1980s, when he started his bagel business, Feldman suffered a 10 percent loss of bagels (that is, he received no payment
for 10 percent of the bagels he left). After 1992, his losses of bagels began a slight
but steady rise. By 2001, he reached 13 percent over all companies, only to go back
down to 11 percent during the two years following 9/11. (Levitt and Dubner
speculate that the 15 percent decline in the nonpayment rate possibly could be
attributed to the fact that many of his DC customers were connected to national
security with a heightened sense for doing what was right.) Relevant to the logic of
collective action, Feldman found that honesty measured by payments received for
bagels was marginally affected by firm size: An office with a few dozen employees
generally outpays by 3 to 5 percent an office with a few hundred employees (Levitt
and Dubner 2005 and 2006, 49). We have to suspect that the difference in the
payment rate between small and large offices might be greater were the required
payment higher than the price of a bagel.
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and other decorations as if nothing had happened. However, when oil supplies
dropped sharply in the first half of 2008, the average price of gasoline in the country
soared in the state to nearly $5 a gallon, and guess what happened? People did what
was really in their common interest; they curbed their consumption of gasoline in a
multitude of large ways (driving less and parking their large SUVs and RVs) and
small ways (reducing the frequency with which they accelerated rapidly when
stoplights turned green).
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In online Reading 2.1 for this chapter, we show how disincentives can affect, and
even limit, public benefits going to disadvantaged groups.
In online Reading 2.2, we show how rational-behavior precepts can be used to
conceptualize optimum management snooping on workers who may be using
work time to play games and shop online.
In online Reading 2.3, we explain how the varying risk aversion across people
helps explain why firms tend to be owned by capital investors, not workers.
Finally, in Reading 2.4, you will find an explanation from economists and
political scientists, specializing in public choice economics (or the application
of economic theory to politics), for why so few eligible voters vote and why many
voters are ill-informed about prominent policy issues.