The Political Economy of Hierarchy

Summary: Gary Miller.
Managerial Dilemmas: The Political Economy of Hierarchy.
Cambridge University Press. 1992.
Introduction, pp. 1-13.

In the Introduction to his Managerial Dilemmas, Gary Miller explains that his main aim in the book is to connect two different literatures on hierarchical organizational control: organizational economics, with its emphasis on incentivizing self-interested employee behavior, on the one hand, and political science and organizational psychology, with their emphasis on organic processes of leadership able to inspire employees to transcend self-interest, on the other.  The tools needed to build a "theoretical bridge" between these literatures, Miller maintains, are to be found in modern game theory and political economy.  

Organizational economics, rigorous as it is, generates incorrect predictions about the kinds of incentive structures we should expect to find in firms subject to competitive pressures in a free market.  This means that “Either competitive market pressures are less likely to discipline hierarchies than economists have imagined, or else there are reasons outside of current economic theory that egalitarian incentive systems are more efficient than those typically prescribed by economists." (7)  

Miller will therefore adopt an institutional approach to the political economy of hierarchies, since this has the best potential to explain outcomes produced in contexts with high transaction costs, information asymmetry, inefficient property rights, and multidimensional exchanges involving non-monetary goods like status and services.  Following Ronald Coase, institiutional theorists believe that hierarchies allow firms to avoid some of the transaction costs associated with using the price mechanism to coordinate exchange rates: under hierarchy, the employee and employer benefit by allowing the employer to have "broad discretionary authority" over the employee by means of a single contract, rather than negotiating a price for each particular service the worker provides.  

This discretionary authority as an important feature of organizational behavior.   Ultimately, Miller believes he can explain how authority is established in firms, why these firms exhibit persistent inefficiencies that weaken their ability to solve market failures, and the extent to which managers who inspire cooperation--voluntary deviations from self-interested behavior--can minimize those inefficiencies.