Joi Ito's Web

Joi Ito's conversation with the living web.

Comments on:

The Limits of Organization by Kenneth J. Arrow

1974, Fels Center of Government

In the book, Arrow first shows that the price system is not sufficient in mediating competition and making all things fair. He shows that organizations such as the firm and government serve to make decisions and distribute resources in everyone's best interest. He explains why organizations are more efficient. He explains that authority is necessary for organizations to exercise power and be effective, but responsibility is also necessary to prevent or minimize error. The balance between authority and responsibility being important.

He says, "There is no simple argument, and there are few economists, though perhaps many laymen, who would defend the proposition that there is a simple argument which states that the resulting distribution of income has any special claim to be called just. The price system then does not provide within itself any defensible income distribution and this is a key drawback." This is similar to the point that Mimi and I have been discussing regarding the salaries of CEO's. The price mechanism is not enough and many things are hard to value. He goes on to talk about trust by saying, "Now trust has a very important pragmatic value, if noting else. Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people's word. Unfortunately this is not a commodity which can be bought very easily." Authority and belief in organizations is a way of increasing the efficiency of a system by building trust.

This trust is similar to what the BoJ guys were calling common knowledge which in turn was the collateral for their currency. Since organizations can manage this trust and the balance between authority and responsibility is a significant factor in the effectiveness of organizations, it may be said that the balance between authority and responsibility can account for the level of trust in society which in turns become the collateral behind money.

 Arrow talks about the "codes" within organizations as a way for people to exchange information which in turn allows decisions to be made. Since organization can optimize the way information is dealt with, organizations can have more "channels" and make better decisions. People within organizations exchange information using these codes and have channels within and with the outside. Arrow talks about the method in which these channels develop, are maintained and are used for collecting information used to make decisions. He also says, "this definition of information is qualitative," and also says that, "the value of knowing whether or not A is true may be vastly greater than the value of knowing B's truth-value."

So, it would seem that a robust organization requires authority, responsibility and also a method of making good decisions, which requires maximization information, which is qualitative in nature. How does an organization attract higher value information and allow them to exchange this information effectively within the organization. Arrow talks about the capital investment and the tendency to stick to channels. This means that individuals and organization tend to fixate on specific channels. If the environment requires rapid change, some method in necessary to restructure these channels, value the information, yet retain authority.