A HIERARCHICAL THEORY OF THE FIRM*
| Date | 01 February 1980 |
| DOI | http://doi.org/10.1111/j.1467-9485.1980.tb00554.x |
| Published date | 01 February 1980 |
| Author | JON CAULEY,TODD SANDLER |
Scottish
Journal
ofPo/itica/
Economy,
Vol.
27,
No.
1,
February
1980
0
1980
Scottish
Economic
Society
0036-9292/80/00020017
$02.00
A HIERARCHICAL
THEORY
OF
THE
FIRM*
TODD
SANDLER
AND
JON
CAULEY
University
of
Wyoming
and University
of
Hawaii-Hilo
Hierarchy
is
the adaptive form for finite intelligence to assume
in the face of complexity. (Simon, 1971, p.
204)
Conventionally, economists have analysed the firm as an errorless entity that
maximizes a single goal, usually that of profit, by calculating the optimizing
values for inputs, output(s), and prices within a deterministic setting of
partial
or
general equilibrium. In economics there has been little attention
paid to both the underlying decision-making processes of the firm and the
multilevel structure of the firm within the changing realities of modern
technologies, markets, and society.1 These realities have created complex
environments both within and outside
of
the firm that must be endogenously
analysed if economics is to continue to contribute to the understanding
of
the
operation
of
private and public institutions. In a series
of
important contribu-
tions, Oliver Williamson (1967, 1971, 1973, 1975) has introduced a “market-
failure” approach wherein the structures
of
firms are investigated to account
for the
humanfactors
of bounded rationality and opportunism as well as the
environmental factors
of
uncertainty, complexity, and small-number trans-
actions? The Williamson studies have established a significant link between
organization theory, systems analysis, and economic theory.3 Furthermore,
Williamson has applied the study of transaction costs4
to
an important area
of economics and, in
so
doing, has provided a rationale for the firm based upon
*
Sandler’s research was supported by a
NATO
Postdoctoral Fellowship in Science; the
Institute of Social and Economic Research at the University of York,
U.K.;
and the Bugas
Fund of the University of Wyoming. Jon Cauley received research support from the
University
of
Hawaii Research and Training Revolving Fund. The paper profited from
the comments of Giles Burgess,
L.
C. Hunter,
Bob
King and Donna Lake. The authors
are solely responsible
for
the views and any remaining shortcomings of the paper.
Economists who have investigated the organization
of
the firm include Alchian and
Demsetz
(1972),
Arrow
(1970, 1974),
Marschak
(1954),
Simon
(1951)
and Stiglitz
(1975).
Bounded rationality (Williamson,
1975,
p.
21)
refers to an individual’s limits in
processing and understanding information. In short, any individual is limited in his
knowledge, skill and time. Opportunism occurs when economic agents pursue self-interests
with guile
(e.g.,
the
use
of strategic behaviour to hide preferences).
On
opportunism, see
Williamson
(1975,
pp.
26-30).
By examining the hierarchy of authority, the goals and decision-making processes
of
the firm, and the interface between the organization and its environment, essential features
of
organization theory, systems analysis, and economic theory surface within the trans-
actional approach
of
Williamson. Some important studies
in
organization theory have been
written by Cohen and Cyert
(1965)
and Cyert and March
(1963).
See Mesarovic and Macko
(1969)
and Simon
(1962, 1969, 1973)
for
a
systems approach to organizations.
For analyses of transaction costs, see
Arrow
(1970, 1974),
Coase
(1937)
and Hirshleifer
(1973).
Date of receipt of final manuscript:
4
October
1979.
2
17
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