Our emphasis will be on for-profit firms, but much of what we cover will also apply to not-for-profit organizations, such as the university students in this class are attending. In intermediate microeconomics the student is confronted with a theory of the firm that is totally symmetric with the theory of the consumer. In that theory the firm is a decision maker whose objective is to maximize profit. The theory is meant to apply equally well to a small proprietorship (where the theory may be a good approximation of reality) and to a very large corporation (where the theory abstracts entirely from many interesting economic issues of the goings on inside the firm that will be of concern in this course).
Even in a small family run business or a modestly sized partnership, there are multiple decision makers whose preferences need not agree. How do those preferences get aggregated into a coherent preference for the entire organization? One possible way of doing this is to make one person the dictator, in which case that person’s preferences matter for the organization while none of the other organization members’ preferences matter. Recognizing that dictatorship produces coherent decision making, it certainly doesn’t accommodate the interests of other stakeholders. Arrow’s Impossibility Theorem, tells us that apart from dictatorship there is no “rule” to do this that accounts for the preferences of all organization members. Organizations must find a process to accommodate preferences of the various stakeholders, however, since their collective decision making can’t be derived from rules.
This observation is intimately tied to the next point. Each member of the organization brings talents, resources, and information that other members of the organization do not possess. The organization must motivate members to participate in a way that provides for the good of the organization as a whole and to share information in a way that is jointly profitable. Thus the organization’s duel goals are to provide coherence to the decision making and to motivate members to act on behalf of the organization. These goals are pursued in an environment that is sufficiently complex where it is far from transparent to identify the best organizational behavior, even when the evaluation is done by well-informed insiders.
The economics approach to the organization abstracts from much of the complexity, treats the distribution of preferences, production capabilities, and information as exogenous, and then identifies efficient structures and contract forms for achieving the goals within that setting. The virtue of the economics approach is in establishing a framework for thinking about what might be possible for the organization and in producing well-reasoned conclusions about what efficient structures look like. This framework is the focus of the course.
However, economists are not the only ones who think hard about organizational issues. Indeed, these questions are often thought to be what gives management its purpose and sometimes, apart from management, the same issues are addressed by the leadership of organizations members, where this means leadership from not just those at the top. Thus organization issues are part and parcel of management education and quite often are part of leadership training as well. One would like to know how these other approaches to organization compare with the economics approach. Some of the course will be devoted to addressing that.
A couple of excellent readings that bridge the different approaches are (1) Herbert Simon’s Nobel Prize Lecture and (2) George Akerlof’s paper on Labor Contracts As Partial Gift Exchange. Both pieces make an appeal to move away for the standard neoclassical model (the subject of intermediate microeconomics) and take a fundamentally interdisciplinary approach to the issues. Students are encouraged to read these papers on their own to get a better sense of why an interdisciplinary approach is needed.
In the course, however, rather than read individual articles on the subject for which the students might not have the appropriate background, we will follow a textbook that proceeds starting from the neoclassical model and then gradually moves away from it in different ways, with the first such step a discussion of “transfer pricing” that begins in chapter 3. Pedagogically, the idea is to start with ideas familiar from intermediate microeconomics and then introduce the unfamiliar new ideas in small doses. Each subsequent chapter adds a different piece to the puzzle. We will cover the textbook in its entirety except for the chapters on Finance, which are suitable to be learned in other courses.
To get exposure to other approaches we will also read another textbook that is often used in leadership training, as a way to get multiple perspectives on the organization. Students will likely find this second book “lighter fare,” far less analytical and more anecdotal in its approach, and therefore a contrast with the primary text. We will cover this other book except for its last section, which has an emphasis on leadership. Students are encouraged to read that on their own over the summer.
Tentative Class Format
This document is being written over the weekend before the first class session. There are some unusual happenings, as will be explained below. The plan is based on the current circumstance. If the circumstance changes, the plan will change accordingly.
When this course was originally set up, the idea was for it to be a lecture with enrollments in the low 60s. In particular, the Econ department told me that since there are so few courses available to fill the major, any 490 offering would fill, simply for that reason. At present, however, that prediction proved to be quite wrong. Current enrollments are fewer than 10. If by the add/drop date enrollments stay low (20 or below) we'll conduct the course in seminar format (more about that follows). If enrollments increases sufficiently, we'll move to lecture format.
Course Structure As A Model Of Organization Issues
Because some of examples and theories we develop in this class may be remote to students, we'll spend some time thinking about the course itself as an example, and to make that real students will have input into course structure. The underlying issues for that are :
- What subject matter will be covered?
- What out of class work will students do?
- How will students be assessed for out of class work?
- What about in class participation? How should that count?
Let me point out some issues that need to be addressed in answering these questions.
- Students in the class may differ in their prior preparation and understanding of microeconomics.
- The majority of those now enrolled are seniors; some of them likely will have "senioritis."
- How taking the course may benefit students in the future may very well depend on what students will be doing after they graduate. Students will differ on that.
- Students may be inexperienced in taking seminars. The lecture format affords students the option to remain passive. The seminar format requires students to take a more active role and to be more responsible for class performance. Some will adjust to the format quickly. Others will not.
- What are the organization's goals?'
- How is coherence (alignment) achieved so that members of the organization have their individual efforts come together in productive organization function?
- How are individuals motivated to deliver their best effort?
- This question is sometimes broken up into the role of extrinsic motivation (pay for employees, grades for students) and the role of intrinsic motivation (the work itself as an object of engagement and satisfaction).
A Starting Point
We'll treat the first two weeks of class as a time to learn about one another and to generate some initial experience from which we'll try to address the course design questions.
In class the process will be brief presentation, either by Professor Arvan or one of the students, followed by discussion of what has been presented where all in attendance participate. If the subject matter is a bit more involved we'll then iterate between presentation and discussion. Typically the presentation will be based on readings the class will do and in some cases materials that are prepared by the presenter.
The general model is that there will be a "base level" of performance at which students are expected to perform. If students perform at the base level, they will get a B grade for the course. Performance above the base level is required to get an A. Performance below the base level is cause for a C grade. And if the performance is truly abysmal, the student will get an F.
So one thing the class as a whole needs to define is what makes for that base level, what constitutes performance above and beyond, and what does it mean for performance to be deficient.
A second point to grapple with is that some of what students do will not typically be measured as part of their performance. They do these things well because they are "good citizens." For example, participating earnestly and vigorously in class discussion might be a matter of good citizenship, as would getting prepared for the discussion by work done out of class ahead of the session. The environment can influence whether students are good citizens or are instead apathetic. So another thing the class as a whole needs to define is what environmental factors should be set to encourage good citizenship.
One particular example here is testing. Students might very well participate in a discussion on a subject, if that topic could be on the upcoming test. However, the senioritis mentioned previously results in part because the typical way students are assessed is somewhat alienating, and students fatigue from it. So we should ask whether we can get good citizenship by intrinsic motivation instead, and if so what will it take to accomplish that. If we can achieve this result via intrinsic motivation, is testing then necessary?
A third issue to determine is what makes for a reasonable lag between when presentation material is produced and when it is discussed in class. A tentative schedule for the course is included with the syllabus. This is mostly to assist students in keeping up with the readings from the textbooks. Invariably we'll go off schedule if we get involved in a particular topic. We might also skip certain things that seem less essential. There is no obligation here to cover everything.
A fourth issue is to determine the degree of difficulty in the presentation. Part of this is how much math modeling we will do. Another part is how fast we go in covering topics. The Milgrom and Roberts textbook is somewhat encyclopedic in its coverage of the economics. If the ideas are new to students, then by speeding through them it will likely seem we are going over people's heads. Conversely, if people know the material already and we linger on it, they are likely to get bored. So we need to find a pace that works for the class.
Blogging and Privacy
Each student in the class will have a blog. Students will use the blog to write weekly reflective pieces as well as to post any presentation material they prepare (or to link to such material). As you might gather from this course site, I like to use Blogger. You are free to use that or any other commercial blogging software or you can use a blog in the class Moodle site.
If you use Blogger or most other commercial blogging software, they have a place for your profile. In your profile you get a display name. You can set that to your first name and last initial, if your first name is pretty typical, or simply first name, or just initials. Also, I can give you an alias if you'd like (typically the name of a famous economists concatenated with Econ490).
Experience suggests that students may be reluctant to have their course work viewed by potential future employers. This approach with display name should be sufficient that potential employers can't track your blog. Using Moodle offers even more privacy. It is somewhat less convenient, however. For example, individual posts don't get a permalink, so can't readily be referenced in the posts of others. It is your choice which to use.
At your earliest convenience please let me know what approach you will take. If you do use commercial blogging software, please make a test post so I can link to your site off the main class blog. Then send me the url of your site. Please also enable commenting on your blog.
Weekly Reflections
Students will write between 500 and 1000 words on a weekly basis. This will be part of the base level performance. These will be due Sunday at 10 PM. This will enable me to read them on Monday. I will typically write some comments. Students are encouraged to comment on posts made by their classmates. This will help to make the class feel more like a community.
Students are free to choose a topic for their reflections. The only obligation here is they should tie their post into what the class is discussing. For students who find it difficult to come up with a topic of their own, I will provide a prompt in the class calendar. The prompt should be available no later than the Friday before the post is due.
Attendance and Class Participation
It is the expectation that each student will come to class. Coming to class is another part of the base level performance. If you become ill and must miss class for that reason please get a note from McKinley to let me know. If you have an excused University absence, please let me know ahead of time and that will be accommodated.
When in class and it is time for class discussion, it is hoped for that each student will participate vigorously in the discussion. My recent experience in teaching a seminar suggest that some students are more comfortable in face to face discussion while others are more relaxed writing online. In both cases, we are interested as much or even more in producing substance as we are in producing volume. Note, however, that quite frequently you will be talking or writing about ideas that are new to you and hence your understanding of those ideas may still be formative and the conclusions you make based on these ideas will be tentative. That is okay. The important thing is you engage vigorously in that.
Feedback and Assessing Student Work
Let's distinguish between feedback and assessment. Feedback (a better word might be response) needs to be fairly immediate after the work was done and is aimed at getting the student to think more about the work the student has produced. How can the ideas be extended? Is there a different example that also fits the story? Those sort of questions and related issues are the heart of feedback. In the course of a regular conversation, you get feedback from the person your talking to and likewise that person gets feedback from you.
Assessment need not be immediate and sometimes it is better to assess a bunch of work as one rather than given a number to each piece separately.. One obvious reason why is that people typically get better at producing work over time as they gain experience in doing so. Another is to encourage focus on the work itself and pay less attention to the points (or the grade).
In this class you will get feedback on each of your reflections. The current plan is to provide assessment three times during the semester. A written assessment with points or grades will be provided. Then we'll arrange some time to discuss it.
Grading
For the time being this section is blank until the class as a whole determines how students should be evaluated.
Tentative Class Schedule
Jan 17 – Course Overview, student consumption experiences with different organization structures at places they buy, the Campus as an economic organization.
Jan 19 – M&R Chapter 1, historical examples of different organization structures as ways to innovate on previous structures and changes in the economic environment. B&D Chapter 1, the four frames.
Jan 24 – M&R Chapter 2, the neoclassical model on profit maximization as the goal of the firm, quasi-linear preferences, Pareto Optimality as the key efficiency concept, transaction costs. B&D Chapter 2, mistakes in real world decision making due to the inherent complexity and not understanding the situation.
Jan 26 – When doesn’t it make sense for a firm to maximize profits at given market prices? Market Failure. Review of some questions from the end of M&R Chapter 2. B&D Chapter 3, Getting Organized. Since the section of B&D entitled, “The Structural Frame” is the closest part of the book to M&R, we’ll cover it lightly to avoid too much duplication.
Jan 31 – M&R Chapters 3 and 4 on coordination with prices, on the one hand, and management, on the other. This is the beginning of the move away from the pure neoclassical theory of the firm to an economics of organizations. B&D Chapter 4, Structure and Restructuring.
Feb 2 – HW #1. End of chapter questions from M&R Chapters 3 and 4. Professor Arvan supplied discussion question about restructuring.
Feb 7 – M&R Chapter 5 on bounded rationality, adverse selection, signaling and screening. For those who haven’t seen an economic model of private information, this is a critical chapter. B&D Chapter 5, Organizing Groups and Teams
Feb 9 – HW #2. End of chapter questions from M&R Chapter 5. Professor Arvan supplied discussion question about groups and teams.
Feb 14 – M&R Chapter 6 on Moral Hazard. As with the previous chapter, this one is critical to understand as it relates incentives to behavior, a theme that is crucial in the rest of the book. B&D Chapter 6, People and Organizations. The moral hazard approach to employment relations encourages an adversarial view between employees and management. Need that be the case? M&R gets to this question a few chapters later.
Feb 16 – HW #3. End of chapter questions from M&R Chapter 6. Professor Arvan supplied discussion question about people and organizations.
Feb 21 – M&R Chapter 7 on Risk Sharing and Incentive Contracts. This is really a continuation of the issues brought up in chapter 6 but with an emphasis of performance based remuneration. B&D Chapter 7 on Improving Human Resource Management
Feb 23 – HW #4. End of chapter questions from M&R Chapter 7. Professor Arvan supplied discussion question about Human Resource Management.
Feb 28 – Practice Exam Review
Mar 1 – Midterm #1
Mar 6 – M&R Chapter 8 on Rents and Efficiency. B&D Chapter 8 on Interpersonal and Group Dynamics.
Mar 8 – HW #5. End of chapter questions from M&R Chapter 8. Professor Arvan supplied discussion question about Group Dynamics.
Mar 13 – M&R Chapter 9 on Ownership and Property Rights. B&D Chapter 9 on Power, Conflict, and Coalition.
Mar 15 – HW #6. End of chapter questions from M&R Chapter 9. Professor Arvan supplied discussion question about Conflict and Coalition.
Mar 27 – M&R Chapter 10 on Employment Policy and Human Resource Management. B&D Chapter 10 on The Manager as Politician.
Mar 29 – HW #7. End of chapter questions from M&R Chapter 10. Professor Arvan supplied discussion question about The Manager as Politician.
Apr 3 – M&R Chapters 11 and 12 on Internal Labor Markets, Compensation, and Motivation. B&D Chapter 11 on Organizations as Political Arenas and Political Agents.
Apr 5 – HW #8. End of chapter questions from M&R Chapters 11 and 12. Professor Arvan supplied discussion question about Political Arenas.
Apr 10 – Practice Exam Review
Apr 12 – Midterm #2
Apr 17 – M&R Chapter 13 on Executive and Managerial Compensation. B&D Chapter 12 on Organizations, Symbols, and Culture.
Apr 19 – HW #9. End of chapter questions from M&R Chapter 13. Professor Arvan supplied discussion question about Organizations and Culture.
Apr 24 – M&R Chapter 16 on The Boundaries of the Firm and Chapter 17 on The Evolution of Economic Systems. B&D Chapters 13 and 14 on Culture in Action and Organization as Theater.
Apr 26 – HW #10. End of chapter questions from M&R Chapter 16. Various discussion questions supplied by Professor Arvan
May 6 – Practice Exam Review
Professor Arvan
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