The organizational failures framework: Atmosphere

1. General

The power of economics, in relation to the other social sciences, is to be traced in no small part to its unremitting emphasis on net benefit analysis. Care must be exercised, however, lest problems be construed too narrowly. This will occur if net benefits are calculated in transaction-specific terms, when in fact there are interaction effects to be taken into account.

This situation is perfectly familiar in the context of technological non- separabilities, where failure to allow for such interaction effects, when in fact they exist, leads to suboptimization. What I wish to emphasize here is that technological separability does not imply attitudinal separability. Reference to atmosphere is intended to make allowance for attitudinal interactions and the systems consequences that are associated therewith.

2. An Example

Consider the matter of altruism as discussed by Titmuss in his study of blood donors (1971). He compares the British system, which relies entirely on voluntary donors, with the American system, a mixed voluntary- commercial effort, and concludes that the commercialization of blood has had debilitating consequences.

Arrow has reviewed the Titmuss study and observes that “economists typically take for granted that since the creation of a market increases the individual’s area of choice, it therefore leads to higher benefits” (1972, pp. 349- 350). He then asks: “why should it be that the creation of a market for blood would decrease the altruism embodied in giving blood?” (1972, p. 351).

I submit that an answer to the effect that the standard economists’ model is correct and that altruism is unaffected by the creation of markets is glib and inaccurate. The commercialization of blood need not merely expand choices in an instrumental way; it can also transform the nature of the transaction. It seems reasonable to believe that voluntary donors derive satisfaction partly from their sense of indispensability. Knowing that, were their altruism to flag, the system could adjust appropriately by increasing the price a notch impairs their sense of being essential. Also, a dual system raises the question in the mind of the voluntary donor of whether he is being generous or naive.

The standard economic model misses such considerations because it assumes that individuals regard transactions in a strictly neutral, instrumental manner. However, it may be more accurate, and sometimes even essential, to regard the exchange process itself as an object of value. Concern for atmosphere tends to raise such systems issues; supplying a satisfying exchange relation is made part of the economic problem, broadly construed.

3.Internal Organization

 The comparative institutional significance of this discussion is that alternative modes of organization sometimes differ in nontrivial atmospheric respects. Distinctions between calculative and quasimoral •‘involvements” are relevant. Market exchange tends predominantly to encourage calculative relations of a transaction-specific sort between the parties. Such transactions are carefully metered; unsettled obligations do not carry over from one contract, or related set of transactions, to the next.

Internal organization, by contrast, is often better able to make allowance for quasimoral involvements among the parties. The sociological phenomenon of reciprocity is an example (Gouldner, 1968). While this can and does appear in a market context, it is much more common among members of an internal organization.

Recognition that alternative modes of economic organization give rise to differing exchange relations, and that these relations themselves are valued, requires that organizational effectiveness be viewed more broadly than the usual efficiency calculus would dictate. Thus, modes of organization or practices which would have superior productivity consequences if implemented within, and thus would be adopted by, a group of expected pecuniary gain maximizers, may be modified or rejected by groups with different values. For one thing, favorable productivity consequences may no longer obtain — which is to say that efficiency and a sense of well-being (that includes, but transcends, equity) are intrinsically (nonseparably) joined. In addition, preferences for atmosphere may induce individuals to forego material gains for nonpecuniary satisfactions if the modes or practices are regarded as oppressive or otherwise repugnant.

A full discussion of atmosphere and its ramifications raises a wider set of sociopolitical issues than can be addressed here.19 Suffice it to observe that (1) the analysis in subsequent chapters relies principally on the human and environmental factors discussed in the preceding sections; (2) atmosphere is reserved for those transactions for which attitudinal spillovers are thought to be especially strong; and (3) assessing the intensity with which transactions are metered (either between or within modes of organization) is the main occasion to make reference to atmosphere.

Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.

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