2.3 An organization is a simple pyramid


    Organizations always consist of people making or doing something other people wish to pay for because paying is simpler than making or doing it yourself. Or, it is impossible to make it yourself, due to a lack of certain production tools.

    Organizations organize processes, coordinate the people and means, and communicate to make those products and services, otherwise they do not work. Organizations always have a structure and hierarchy. There is a boss or a manager. A manager knows more than his workers, or has more capabilities than someone else. That is the theory. Becoming a boss is also possible when you know people higher up in the hierarchy, or have lots of money, and thus claim ownership.

    In the early days of our industrial society, all those economic value creation activities took place at one physical location. Work was done at the factory in its offices. Learning was done at school or at the university. That was efficient (“efficient” being the key word of the industrial era), as machines, buildings, workers, managers, and teachers were close to each other. The board could thus keep an eye on them.

    Every organization knows limitations in time, people, and means: knowledge, money, factory size, production capacity, commodities, and so on. The knowledge of these limitations: scarcity connected with decision-making has become the foundation for our economic science, however, many people nowadays wonder whether “science” is the right term.

    Nobel laureate Ronald Coase, who recently passed away at the age of 102 years old, wrote about the limitations of industrial organizational structures in his 1937 book, The Nature of the Firm. The term “Coase Ceiling” is named after him: the moment at which the organization collapses under its own weight. Put differently, it is the point at which a new employee adds less value than the work his presence creates for other employees (are you thinking yet of all these overhead corporate offices? I am!). Reaching a Coase Ceiling means that additional organizational growth is costing more than the value added, causing the organization to grow itself to death.

    Related Content

    The Unintended Impact of Ronald Coase, 1910 - 2013

    The renowned economist Ronald Coase died last week at the age of 102. Among his many achievements, Coase was awarded the 1991 No