The purpose of this paper is to suggest ways in which the insights of the Austrian school of economics can be applied to the understanding of exactly how institutions behave. While this question has been probed somewhat by political scientists and scholars in the field of management, the results are far from adequate. Firstly, the political scientists have been afflicted with the same positivistic plague that has infected economics. This “physics envy” has them reducing everything to statistics and graphs that are just as vague and generic as those of the neo-classical economists. Just as the economic models assume full knowledge and a single product, the political scientist presumes that all governmental officials and persons working in organizations want power. All attempts to discuss the behaviors of actors by using a version of the Austrian “mind construct” methodology are termed “journalistic,” and not taken seriously. This prevents any methodological breakthroughs. Even so, this method of analysis is still fraught with the presumption that power is almost the only value of persons in their organizational roles, and it seems to pan out in the form of a revealed preferences theory.
By contrast, management scholars have made more headway in examining the behavior of individuals in organizations. The reason for this is that the management scholars deal in real case studies, and have more empirical evidence at their disposal. Nevertheless, their studies are hampered by the fact that they have no interest in developing an overall theory of behavior in organizations, if, in fact, this is possible.
A Common Error in Organizational Theory
The first problem that appears in the formulation of a theory of organizations is the tendency to see an organization as a monolith. Hayek rightly criticizes the tendency of our culture to see everything as a product of design. In point of fact, the activities of an organization are the outcome of the actions of the many individuals which compose it. While there is certainly some (even much) design in the formation of the organization and its operations, routines, and outcomes, the actual, factual activities of the organizations can never be completely predicted. This is true, not only of organizations working in the market selling a product or service, but also of the not-for-profit organizations such as churches, schools, Project Hope, etc. It may be even more true for these latter organizations simply because they are not beholden to the vicissitudes of the market.
Some Applications of Austrian Theory to the Understanding of Organizations
The first insight that Austrian theory suggests is that organizations must be seen as semi-closed systems. While organizations deal with the public at various levels, how they do that is very much a product of the internal machinations of the people in the organizations who have varying levels of the influence on policy.
Secondly, the reason for the above is very well stated by Menger himself. In the Principles, he points out that all goods can be classified either as material goods or useful human actions. The very reason that these are called goods is because they are useful to the satisfaction of human needs. People, will, then, pursue goods (in the Menger sense, and not in the limited neo-classical sense of “consumer goods”) in whatever they do. While these goods can be power, more often than not they are many other things. Abraham Maslow, for instances, argues that there is a hierarchy of needs that can be arranged in ascending order from physiological needs (such as pay), to safety and security needs (such as benefits and job security), then love and belonging-ness (such as being invited to picnics, or being asked to be on a team or committee), esteem needs (grants of autonomy, increasing responsibility, pay raises as a sign of esteem), and lastly, self-actualization and growth needs (job challenge and increasing autonomy). While pay is part of many of these levels, it is only an integral part of the lowest level. In all of these levels, the lowest unsatisfied need becomes the most powerful and significant need. The realization that there are a variety of needs that each person tries to fulfill nullifies much of the previous thinking regarding the behavior of persons in organizations.
How each employee or member of an organizations will satisfy his or her needs and what level each is on at the time are questions that lead us to the next, or third, application of Austrian insights into the theory of organizations—subjectivism. Without knowing each member of an organization intimately, it is impossible to tell what are the real goals each is seeking at any one time. The closest we can come is the use of “pattern analysis” which assumes a certain amount of regularity about certain types of employees, and that there are parameters outside of which non-psychotic employees will not venture.
Fourthly, time and ignorance have a role to play in the internal workings of an organizations. Time is important for the same reason it is in the market economy. People’s perceptions and tastes, and even family life, change with time. The age of an employee or the length of service affect his world-view. In addition, organization members have problems finding out what others are planning or doing, or how their division is seen by the higher levels of management. They way these persons carry out their tasks is determined in large part by their guesses about these subjects. A wrong guess could be disastrous or providential in the fulfilling the needs spoken of in the last section.
What about the entrepreneurism inside an organization? Actually, in the face of a more competitive market, firms that want to survive must encourage entrepreneurial behavior. This allowance for experimentation within a firm is called “intrapreneurism,” and it takes place outside of the R & D channels. To be successful, it must be allowed without reprisals for failure. Neo-classical economics have generally ignored this kind of internal change overtaking many companies today in favor of the “black box” version of firms. Here the method by which decisions are made in real companies and organizations (not to mention the government) is ignored in favor of the old assumptions. This approach is not only of no help in understanding organizations, but is actually misleading.
Lastly, what about the application of Austrian insights to the behavior of government. While this is the subject of another paper, a quick perusal of the above subtopics provides some insight into the seemingly irrational action of government actors aside from the socialist calculation ideology so effectively defeated by Mises and Hayek.
Finally, it could be said that within the level of formal verifiable constraints set by policy makers in organization, an organization is a spontaneous order just as market economy is. The reason for this is that, as Mises shows, Economics is really a universal science of human action—praxeology, and can no longer concentrate merely on the mere catalatic aspects of that science. Hence, it can be used to analyze the macrocosm of the society at large, or the microcosm of the organization.
See, for example, the analysis by Evens and Novak, The Reagan Revolution: An Inside Look at the Transformation of the U.S. Government (New York: E.P. Dutton, 1981).
See, for example, Judith Gordon, A Diagnostic Approach to Organizational Behavior, 4th ed. (Boston: Allyn and Bacon, 1993).
Carl Menger, Principles of Economics, trans. by James Dingwall and Bert F. Hoselitz (Grove City, Pennsylvania: Libertarian Press, 1994), 55.
Abraham H. Maslow, Motivation and Personality 3rd. Ed. (New York: Harper and Row, 1987).
See, G.F. Pinchot, III, Intrapreneuring (New York: Harper and Row, 1985). For an extreme version of entrepreneurship inside firms see, Tom Peters, Thriving on Chaos: Handbook for a Management Revolution (New York: Harper Perennial, 1988).
An interesting foray into this area probably not realization that he is using a loose Austrian methodology is Harold Seidman,Politics, Position and Power (New York: Oxford University Press, 1975).
Ludwig von Mises, Human Action: A Treatise on Economics (Chicago: Regnery, 1966), 3.