Knowledge and the Moral Dimension in the Firm

Work within firms is in a sense always a cooperative venture thus involving a social dilemma. This paper addresses the following related questions: 1. How is the problem of aligning the motivations and actions of the agents with the goals of the organization solved within firms? 2. Which institutional mechanisms within the firm may foster its capability to mobilize knowledge and creativity? The first question is an old one and has been a central focus of the economics’ theories of the firm. The second question emerges as a crucial challenge in the knowledge-based economy. The main theoretical accounts of the firm can be interpreted in the light of the three principlesseparation, command and association – that are present in all social theoretical accounts of the problem of order. In the seminal works of Coase (1937) and Alchian and Demsetz (1972), through Transaction Cost, Agency and New Property Rights theories two of these principles are always evoked to solve the problem of the alignment of the motivations and actions of the agents with the goals of the organization. Concerning separation, mainstream economics has devoted the best of its efforts to prove that order could emerge of the separate free choices of individuals. In every description of the firm as a nexus of contracts as agency or property rights theory, the firm is described as a set of separate individuals interacting in a market-like way. Command is the principle of order called for when separation breaks down. Command comes in different forms: as the outcome of a contract or as the outcome of a power differential. In some of the new institutional theories of the firm the bottom line is command, but the efficacy of command requires that people obey. Assuming obedience at the outset as the counterpart of command, as transaction cost and new property rights do, is highly unsatisfactory. A third principle of order, until recently excluded or minimized in economics, association, is required. Association is voluntary action of individuals towards a common goal. The condition for its robustness would be a capacity for commitment without limits a moral imperative of some sort. But since such a capacity is admittedly too demanding, commitment tends to be conceived as bounded by the weakness of the will, and conditional on the behavior of others, giving rise to a behavioral pattern that is usually described as reciprocity. It is morality that may explain the commitment and trust needed for consent, as it is consent that may account for the effectiveness of the command. Any order involves a combination of the three principles referred above. The changes in institutions and technologies presently under way call for a transformation of the specific combination that historically prevailed within most firms in the 20 century. We conclude by conjecturing that in a time when work is characterized by a high intensity of knowledge, the governance rationale of firms should be grounded on elements of separation with elements of association with the element of command reduced to what Barnard (1938) called authority.