Organizational Efficiency vs. Power: An Email Interview with Professor Charles Perrow

Charles Perrow is Professor Emeritus in Department of Sociology at Yale University. In his book, ‘Organizing America: Wealth, Power, and the Origins of Corporate Capitalism’ (Princeton University Press, 2002) Professor Perrow uses historical evidence (1800-1910) to address the debate on why organizations became large and hierarchal. In this email interview with Professor Charles Perrow, he was kind enough to discusses his work in detail with me

In this quest for understanding, he traces the conditions prevailing at the time when organizations started to grow in size. Most of the attention is focused on development of the railroads, the first truly large organization in the USA. In the book, the more accepted factors for growth in organizational size like technological advances and efficiency are provocatively contrasted with factors like a weak federal state in the country, a compliant judiciary to the wishes of growing business corporations, corruption and power, factors for which extensive data exists yet rarely discussed in the mainstream management literature.

The book is an important landmark for everyone interested in developing a more robust understanding of the organizational landscape surrounding us, irrespective of the side of the debate one currently is.

Mridula: Why do you consider large economic organizations troublesome?

Charles Perrow: I consider all large organizations troublesome, including governmental and nonprofit organizations. They concentrate power in the hands of their top management; the larger the organization, the greater the power being concentrated. There are degrees of concentration of course, and some large organizations are so disorganized that they lose much of their potential power. But size is generally correlated with these kinds of power: By deciding where to locate they determine economic opportunities for some communities and deny it to others. Their hiring decisions affect the life chances of people, and can, unless checked, favor religious, ethnic, racial, and political affiliations. As consumers of resources, they can favor certain producers over others, and not necessarily on the grounds of “efficiency.” They can mobilize political resources to insure favored treatment better than small organizations.

And finally, large organizations become societies in themselves, absorbing the social functions that otherwise would reside in the family, neighborhood, and local community. These social functions are then provided on organizational terms, serving the interests of the organizations. Health care and many other social goods become conditions of employment, rather than conditions of citizenship. Here are some absorption examples:

•  personal interaction opportunities (you spend more of your time with organizational people rather than with people in your family and neighborhood or small independent social groups such as churches, clubs, and local associations)
• social support functions such as health care, day care, psychological services, educational opportunities, even travel agencies and entertainment functions are provided in the workplace. This dries up the opportunities for these services to be provided independent of the employment contract; civil society withers.
• political functions, which are made available on the employer’s terms and shaped by the employer’s political values, supplant those that reside in the community

(I have discussed these in several places. See, for example, (Perrow 1991; Perrow 1996)
Government organizations have at least some democratic check upon these powers; the heads of the government can be replaced. There are no such checks upon private, for profit economic organizations. Nonprofit organizations are not supposed to maximize profits or “shareholder values” (distributed profits), so they are less fearsome. However, in the U.S. nonprofit organizations are increasingly maximizing the wealth and political power of their top managements, and behaving more and more like for profit corporations, and enjoying large tax breaks. Corporations have the least check upon accumulating power and using it for private interests and gains. This began in the 19th Century, and most strikingly, in the U.S., as recounted in Organizing America. (Perrow 2002)

The vaunted “efficiency” of large organizations is not due to production efficiencies, which rarely require more than 1000 employees, but to market control, monopsony, and monopoly and oligarchy. Large organizations bundle together a variety of functions that could be outsourced to smaller, competitive organizations, such as R&D, accounting, human services, advertising, purchasing, legal affairs, training, food services, parking, religious facilities, recreational facilities and so on. They only do this to a limited extent now.

Q: According to the conventional wisdom, large organizations emerged because of technological advances that made them more efficient; whereas you argue that a weak federal State, compliant judiciary and corruption among other factors led to the rise of the first truly large organization in America, the rail roads. Why do you think the efficiency argument has remained the dominant and unchallenged explanation for such a long time?

A: I don’t have an elaborate answer to this excellent and challenging question. Some quick thoughts are:

The efficiency argument was challenged from the start in the late 19th century when people pointed out that what may be efficient for the owners, producing short run profits, might be inefficient for other parts of society, such as workers, local communities, environmental impacts, the class structure, and so on. This could be called “social efficiency,” a broader concern than economic efficiency.
But industry accumulated power, and this meant that in order to survive under market capitalism and in a society of wage dependent employees, the social efficiencies had to take second place. If this continues, it become accepted as “the way things are,” and the arguments for narrow economic efficiency get more repetitive and embedded in the culture. However, never completely so. We hear strong arguments today in the U.S. that corporate profits erode social efficiencies, so it is challenged.

Aiding the corporations in this case of creating a culture they favored is the rising importance of economic theories, and business schools in universities that utilize them. Corporations have a great deal of power over universities and especially their business schools, so the economists that support a “business culture” that emphasizes narrow efficiency arguments get published more, get ahead more, get consulting fees, and promote this ideology. I have addressed these issues briefly in a short article. (Perrow 1992)

Q: Wage dependency is a fact of life for many of us, yet your book points out that the number of people working for wages was zero percent in 1800 and it stands at around ninety percent today. What do you think have been the consequences?

A: I would say it was about 20 percent in 1800, and about 95 percent today. The consequences are immense. If 95 percent of the gainfully employed work for someone else, for their prestige, power, or economic gain, then these valued goods get centralized in the few that employ the many. In the 19th century it was hard to get people to work in factories owned by corporations; they called it “wage slavery” because they had little say over how they did their work, the kind of work they did, and the returns they received from their work. Once they were crowded into cities they had little opportunity to farm, hunt, or fish as an alternative to survival; they had to be wage dependent or starve.

The first employees of the first big business in the U.S. were farmer’s daughters that went to the textile mills, such as in Lowell, MA, but they had to be treated well. They were not wage dependent;they could go back to their farms and survive. When the mills had access to the victims of the Irish potato famine, who were truly wage dependent, the mills cut the wages and allowed the handsome mill towns to degenerate into slums, and their profits increased. Wage dependency in the U.S. has been mitigated quite a bit since the factories of the late 19th Century and first half of the 20th. We have unemployment insurance, laws against unjust dismissal, retirement benefits, and freedom to move from job to job (blacklisting prevented this in the 19th century), and, for about 30 years only, strong unions. But we are still a society of wage dependent employees. Over half of the gainfully employed are employed in organizations of over 500 people.

Q: Organizing America covers the origins of corporate capitalism from 1800-1910. Can you give us a glimpse of the future covering the subsequent decades?

A: Once in place, corporate capitalism became the model for the rest of the world. The success of the U.S. was not due to it, but to the abundant land, labor supply, natural wealth, protective oceans, fewer wars, and so on. No other nation had these advantages. Almost any form of economic organization that might have developed would have succeeded under these circumstances, and if the form involved large, privately owned organizations, they would amass the power I spoke of initially, and out perform Europe. (The strong states of Europe insured that private centers of wealth would not arise, and when democratic governments came along, this meant a check upon the one powerful organization, the state. So government is stronger in Europe and private organizations are smaller and weaker than in the U.S.) With this hegemony, the absorption of society by large organizations continued in the U.S. throughout the 20th century. Their power was always challenged to some degree, but it is greater today in general (not in particulars; Standard Oil and the railroads at the end of the 19th century and into the first half of the 20th were more powerful than organizations today), and I expect it to continue to grow. Wealth centralization and political power have created our culture, and cultures are hard and slow to change. The extreme rise in our wealth centralization in the last 30 years is very disturbing, and more disturbing is its spread to other industrialized nations, who, in order to compete with us, are increasingly focusing upon narrow economic efficiency.
The rise of China is the most disturbing of all, since it is unlikely that in the next half-century it will become much of a democracy, and will outdo the U.S. in wage dependency, pollution and the destruction of natural resources. Today, 20 percent of the world’s countries command 80 percent of its income. In 50 years it is not too far fetched to predict that China will be one of the 15 percent who command 85 percent of the income. Privatization, corporations, and a market economy will do the trick.

Bibliography

Perrow, Charles. 1991. “A Society of Organizations.” Theory and Society. 20 725-762.
—. 1992. “Organizational theorists in a society of organizations.” International Sociology. 7.
—. 1996. “The Bounded Career and the Demise of Civil Society.” Pp. 297 – 313 in Boundaryless Careers: Work, Mobility, and Learning in the New Organizational Era, edited by Michael B. Arthur and Denise M. Rousseau. New York: Oxford University Press.
—. 2002. Organizing America: Wealth, Power, and the Origins of Corporate Capitalism. Princeton, N.J.: Princeton University Press.