A Note: What Is "Management" Anyway?

As something different from hierarchical command-and-control, bureaucratic obedience-to-form-and-routine, & market higgling-haggling, that is; starting with Peter F. Drucker & ending up with Gary..

As something different from hierarchical command-and-control, bureaucratic obedience-to-form-and-routine, & market higgling-haggling, that is; starting with Peter F. Drucker & ending up with Gary J. Miller…

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Of all the young and interesting moral philosophers who brushed up against one another in early–1900s Vienna, Peter F. Drucker was one of the most interesting. But Drucker, when came to the United States, followed a very different trajectory (after getting Karl Polanyi his job at Bennington College) than any of the others. He became the U.S.’s BOSS management consultant and managerial theorist. Admittedly, he seem never to have taken himself completely seriously:

Bill Emmott: What we know, and don’t know, about the new geopolitical and geoeconomic order: ’When at some point in the 1990s we at “The Economist” described him as a “management guru”. Drucker wrote back that he had long believed that he had gained the title “guru” simply because the word “charlatan” was too long for a newspaper headline… <https://civita.no/notat/what-we-know-and-dont-know-about-the-new-geopolitical-and-geoeconomic-order/>

But he remained someone who always hunted the same game as the Polanyis, von Hayek, Schumpeter and company. 

Pinned between them all and the shadow of Karl Marx, Peter F. Drucker sought his reconciliation of the antinomies of modern industrial society in the figure of the manager, whose social role was precisely to arrange things so that society could be an “association, in which the free development of each is the condition for the free development of all”. Drucker’s manager is the trustee of civilization, a member of a Michael Polanyian-type priestly profession in which one works not so much for one’s principals as for the smooth, efficient operation of the system as a whole in a way that makes sense to and reconciles the interests of all stakeholders: freedom and community, efficiency and equity, order and disruption are then reconciled through the judgments and values of this particular honorable professional castes of managers.

“Management” is in some powerful way different from the form- and precedent-bound routines of bureaucracy. And it is certainly not the command-and-control of the state. Nor is it the higgling-haggling this-for-that of the market.

So what is it?

Drucker saw management as having multiple aspects:

The professional manager has not one job, but three:

1. Mak[ing] economic resources… productive… an entrepreneurial job, a job of moving resources from yesterday into tomorrow… not… minimizing risk, but… maximizing opportunity…

2. Making people work together… [with] their individual skills and knowledge… making strengths productive and weaknesses irrelevant… [by] organization[, which] is a machine for maximizing human strengths…

3. Then…. They are public… visible… represent… stand for something in the community… by leadership and example…. Managers are on the stage, with the spotlight on them…

Direction, harmonization, and public-ideological. From his roots Drucker drew a focus on the third. Consider his protest against Milton Friedman’s belief that businesses should maximize profits within the limits of the law and should have no other mission: “To be sure, Friedman’s argument that business is an economic institution and should stick to its economic task is well taken…. But it is also clear that social responsibility cannot be evaded. It is not only that the public demands it. It is not only that society needs it. The fact is that in modern society there is no other leadership group but managers. If the managers of our major institutions, and especially of business, do not take responsibility for the common good, no one else can or will…”

But how does one actually do that? How does one do the not-market-haggling, not-command-and-control, not-bureaucratic-routine thing?

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Sometime ago I put a note in my tickler file that Cosma Shalizi recommended Gary Miller’s Managerial Dilemmas: The Political Economy of Hierarchy. <https://archive.org/details/managerialdilemm00mill>, and I thought that I might find it congenial in the sense that it was written in what is by now my native dialect and mode of thinking—the dialect of neoclassical economics, which is a SubClass of what Cosma calls “the mysteries of the goddess Logical Rigor”, and snarks:

Initiates into the mysteries of the goddess Logical Rigor use a strange speech among themselves, and find it all but impossible to communicate their visions to the mass of ordinary, unilluminated mankind. This accounts in part for the fact that, of the three disciplines most devoted to that goddess, analytical philosophy and neo-classical economics have done next to nothing to shape thought and the culture at large, or even within the academy, while mathematics gave up all such pretensions long ago…

Be that as it may, it is largely how I think—so much so that I find it hard to think in any other way than that of objectives, constraints, derived behavioral relationships, and equilibrium conditions.

And Miller speaks that dialect!

You can say that he circles Robin Hood’s barn in putting what are largely truisms about “leadership”, “culture”, and “accountability” into the game-theoretic boxes of neoclassical economic theory, and that little actual insight is created by turning this particular crank. You would probably be right. Nevertheless I found it useful.

Where to begin?…

Miller draws upon economic theory to organize the complexities of managerial behavior and organizational structure as it works its way through three distinct but interrelated modes: hierarchical command-and-control, game-theoretic principal-agent, and charismatic “leadership”. From my perspective, Miller’s book is a success: he does manage to leverage the boxes of neoclassical economic theory as applied to these modes to shed what I see as considerable light on the enduring dilemmas managers face in fostering coöperation and efficiency in the face of self-interest and information asymmetry.

The command-and-control mode is a very traditional way of thinking about human coöperation—and indeed of trying to succeed at organizational management. There will be a hierarchical order: bosses. Bosses will attempt to gather information and then issue commands, and subordinates will then purport to obey. Decisions—hopefully informed decisions—at the top; obedience and compliance—or their simulacra—at the bottom. Clear authority and directive clarity are valuable. 

The hierarchical firm can, to a degree, correct for problems of organization generated by information asymmetries, monopoly holdups, and team production externalities. Oversight, incentive alignment, and structured communication channels can reduce the information gap between different levels of the organization. More important, they can economize on the cost of information flows in a situation of limited managerial attention. Sending just the one bit of information “we are meeting our metrics” up the organizational chain can be a very effective managerial tool if the metrics are well and properly chosen. Middle managers can act as valuable intermediaries to the extent that they do translate upper management’s strategic vision into operational tasks for lower-level employees while simultaneously conveying accurate round-level information back up the chain. 

Can act.

Command-and-control is also needed to break-up positions of monopoly-holdup within the hierarchy. Centralized control over critical resources can prevent individual departments or employees from exercising undue power. Hierarchies do enable the redistribution of resources in ways that can align with the firm’s strategic objectives, rather than the self-interest of powerful internal groups.

Plus hierarchical structures can and do effectively address team production externalities through clear delineation of roles, responsibilities, and accountability mechanisms. Performance evaluations and rewards aligned with team and organizational goals will encourage individuals to contribute positively to team output. Hierarchies ca also facilitate the pooling of skills and efforts. But, of course, the effectiveness of these mechanisms depends heavily on the firm’s ability to design and implement the right hierarchy, and accompany it with evaluation and incentive systems that accurately capture individual and team contributions.

So hierarchical command-and-control is ultimately insufficient, either as a lens for understanding or as a mode of management. Clear authority and directive clarity are valuable. Demotivated subordinates doing stupid things because they were commanded to do so, or doing lazy things because they lack incentive and their bosses lack accurate information are not. And so subordinates need to be closely, and expensively, monitored for compliance. But this can make the managerial dilemmas worse, as alienated subordinates may derive satisfaction from simply thwarting the will of the misinformed boss.

The game-theory principal-agent mode is the economist’s natural way of thinking: the boss does not issue commands, but rather sets up incentives which depend on (noisy) signal received of actions undertaken and their results. Creating situations that make subordinates offers they do not wish to refuse that align with the boss’s objectives is the key here. 

Through game theory, Miller offers a framework for understanding how interactions can be managed to foster organizational success. View the organization not as a structure of roles and responsibilities but as a complex system of interactions where individual incentives and collective goals often collide. By modeling the organization as a series of games, Miller can dissect the conditions under which coöperation is likely to emerge or falter, and illuminate the strategic considerations that individuals must navigate for actions to ever be aligned with broader organizational objectives, and for inducing truly coöperative behavior in the context of potentially conflicting personal and group incentives.

And there are useful mechanisms to deploy to mitigate the deviation between what a fully-informed principal would wish to happen and what actually does happen: performance-based incentives, contracts, many more, plus “reputational considerations”—transforming interactions into a repeated game, which greatly expands the space of possible principal-agent Nash equilibria, for good and for ill.

Repeated interactions among individuals within an organization can foster a conducive environment for coöperation—or, indeed for the opposite. Repeated games theory, with its emphasis on the long-term consequences of strategic choices, underscores the importance of future interactions as a mechanism for sustaining coöperative behavior, or for making people presume that coöperation is absolutely fruitless because the past tells us it will not be rewarded in the future. Repeated-game settings enlarge the space of Nash equilibria. They do not create a magical environment in which only good equilibria exist. And the repeated-game frameworks tell us nothing about how equilibria are selected.

Miller argues that “one of the primary purposes of Ford’s decision to impose a $5 day was to make sure that the labor market in his industry would be transformed from one that was competitive, fluid, and voluntaristic to one in which a decision to work for Ford Motor Company meant a long-term commitment to a system of political authority.”

Indeed. This strategic move was not an act of generosity—or not merely an act of generosity; few, after all, ever considered Henry Ford as a generous man. It was not an attempt to create an America in which the working class could afford to buy Ford automobiles. It was not an attempt to share the fruits of industrial success with the workforce, despite what Ford Marketing said. Instead, Miller argues, it was a calculated effort to reshape the labor market from one characterized by competitiveness, fluidity, and voluntarism into one where a decision to work for Ford signified a long-term commitment to a system of political authority within the company​​.

The $5 day wage was indeed a radical departure from the status quo. It was in part a reflection of Ford’s financial capability—only Ford could do this. It was in essence a strategic move to create a new labor market environment where Ford Motor Company could exercise greater control over its workforce. Ford made it costly for employees to leave in terms of the wage differential they would face. This was particularly impactful in a market where labor did not clear at equilibrium—workers who thought of responding to Ford’s efforts at control via exit might well find themselves not just with lower wages but, for a while at leasts, with no ages at all.

Hence the flip side of offering $5 a day is the creation of the “Ford Sociological Department” to monitor employee behavior outside of work, and the profit-sharing plan with strict eligibility requirements that governed not just work performance but personal behavior as well​​. This transformation of the employment relationship into a domain of political authority for Ford had profound implications. Ford thus purchased from its employees a broad and concentrated grant of discretionary authority over many aspects of workers’ lives, both within and outside the workplace. This shift not only cemented Ford’s control over its workforce but also set a precedent for the role of large industrial firms in the American economy and society, influencing labor relations practices and the development of corporate governance structures for decades to come​​.

Miller thinks via applying the principles of game theory he can elucidate the dynamics of coöperation, culture, trust, commitment, and—at the last—“leadership”. Traditional mechanisms of control, and of incentive provision, are often insufficient to guarantee optimal outcomes. And so there arises the issue the cultivation of a coöperative culture as a means to transcend the limitations of formal structures. Trust and commitment emerge from explicit incentives. They also emerge from repeated-game interactions. And they emerge from the establishment of norms and expectations that encourage individuals to act in the organization’s best interest.

Culture, as a shared set of values and norms, provides a backdrop against which members of the organization interpret their roles and the behaviors of others. Trust and commitment, meanwhile, are seen as critical relational assets that evolve from consistent and predictable interactions over time. 

So there is more here than principal-agent and efficiency wages. And so we get to “leadership”, which we can see either as shaping organizational “culture” and psychological “norms”—affecting who people think they are and how people think that people like them ought to act—or as the undermodeled Black Magic of somehow selecting which of the many game-theoretic Nash equilibria the system will settle into. Leadership has a “charismatic” element: not many works grounded in game-theoretic economics talk much about guiding, motivating, and inspiring subordinates in a formally hierarchical organization. And it also, of course, has commitment, credibility, informational, and “cheap talk” elements. And alongside those there is the truly Deep Magic of shaping what people decide that their objectives should be.

Leadership, in Miller’s analysis, emerges as a pivotal factor in resolving the dilemmas of management. Leaders play a crucial role in shaping the culture, building trust, and fostering commitment by modeling coöperative behavior, setting clear expectations, and ensuring that the organization’s reward systems are aligned with its long-term goals. Effective leadership involves not just the exercise of authority but the ability to inspire and mobilize individuals towards a common purpose.

Management thus becomes political. Effective leadership within firms often mirrors political leadership in broader society. Leaders must navigate and balance competing interests, ideologies, and goals within the organization, akin to political leaders managing diverse constituencies. Negotiation, coalition-building, and the strategic use of power and influence are called for. Successful leaders cannot be merely decision-makers. Successful leaders must understand the intricate web of relationships and interests within the firm.

Miller suggests that a strong, cohesive organizational culture, aligned with the firm’s strategic objectives, can be a powerful motivator and guide for employee behavior, beyond what economic incentives alone can achieve. This cultural framework can foster commitment and loyalty, enhance coöperation, and drive collective action towards common goals.

While economic incentives remain important, they are insufficient on their own. Prestige, power, job satisfaction, and the pursuit of professional or personal values also play critical roles in motivating behavior within firms. Hence leaders need two structure firms to support the political and ideological dimensions of organizational life. This might involve creating spaces for dialogue and debate, mechanisms for conflict resolution, and channels through which employees can participate in decision-making processes. Political stability and ideological alignment become key.

For what is truly needed is an organizational culture in which members do more than trust that commitments will be honored, face good incentives, and find themselves believing strongly that their long-term interest is to help choose the good win-win box in all of the Prisoners’ Dilemmas. What is needed is an organizational culture in which people value organizational success—or as pleased when the organization “wins” as they are when their local sports teams win. 

That is this particular subject’s Holy Grail. And by now we have gone far beyond the game theory of the principal-agent problem.

And, I think, Miller has arrived at a place where he can ground insights that are truly useful.

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References

• Drucker, Peter F. 1970. “The Once and Future Manager”. In Technology, Management, & Society. London: Taylor & Francis. <https://www.google.com/books/edition/Technology_Management_and_Society/oVi4Ph3fZ9wC>. PP. 7998.

• Drucker, Peter F. 1993 [1973]. Management: Tasks, Responsibilities, Practices. New York: HarperCollins. <https://www.google.com/books/?id=G3TNoUBPiasC>.

• Drucker, Peter F. 1946. The Concept of the Corporation, New York: John Day. <https://books.google.com/books?id=Zbq8AQAAQBAJ>.

• Emmott, Bill. 2022. “What We Know, & Don’t Know, About the New Geopolitical & Geoeconomic Order”. Civita. October 23. <https://civita.no/notat/what-we-know-and-dont-know-about-the-new-geopolitical-and-geoeconomic-order/>

• Miller, Gary J. 1992. Managerial Dilemmas: The Political Economy of Hierarchy. Cambridge: Cambridge University Press. <https://archive.org/details/managerialdilemm00mill>.

• Shalizi, Cosma. 1997. “Review of John E. Roemer, ‘A Future for Socialism’”. Bactra Review. March 11. <http://bactra.org/reviews/future-for-socialism/>.