Prolegomena to a theory of organization. U.S. Air Force Project RAND report RM-734.

Santa Monica, CA: The RAND Corporation, 10 December 1951.

First edition of this very rare report which presents a framework within which to make descriptive analyses of centrally-directed organizations. Morgenstern is best known for his seminal book with John von Neumann, The Theory of Games and Economic Behavior (1944), and he sees a future theory of organization as an extension of the theory of games (see below). “This is the first two parts of the proposed manuscript. The ultimate form of a theory of organization will undoubtedly be highly mathematical, but the ground-work must be laid in careful description, which, since it precedes the theory, is qualitative and approximate in nature. A framework is discussed within which to make these initial descriptive analyses of organizations. The framework deals solely with the centrally directed organizations. This is analyzed in terms of inner and outer activities, the delegation and arrangement of competences (a neutral word introduced to avoid such terms as organs), and the systems of signaling. Game-theoretic ideas are drawn upon considerably. There is also some discussion within the proposed framework of the concepts of learning, input-output, costs and size of organizations” (from the Summary of the report). The promised second part never appeared. “In the 1951 paper, ‘Prolegomena to a Theory of Organization,’ [Morgenstern] introduces Nature’s benevolence when discussing the signaling system of an organization. For a signaling system of an organization there is no distinction between event and signal: An event becomes only known through a signal, so for an organization they are inseparable. Morgenstern classified the events relevant to an organization into ‘events of the organization’ and ‘other events,’ which are either ‘physical, i.e., produced by Nature,’ or ‘other organizations’ choices.’ ‘Events of Nature’ are determinable if their probability distributions are known. But even if their probabilities cannot be estimated, Morgenstern emphasizes that ‘Nature is never malevolent, i.e., bent on impeding the organization in the pursuit of its aim’” (Boumans). In his 1998 reprint of the report, Michael D. Godfrey states that “anyone with an interest in how things are, are not, or might be, organized will enjoy and benefit from this report” and that “the original report has long been unavailable and the only known remaining copy was Morgenstern’s personal copy.” No copies in auction records.

“Lately a great deal of interest has been aroused in problems of military logistics. This is the science or science-to-be that announces the principles, and helps to develop the methods, for determining the needs in personnel and material in order to provide for a campaign, a whole war, or merely for the equipment of a single ship or company … These tasks are very similar to, if not identical with, those occurring in business where usually continuous production and sales are to be performed. The dissimilarity lies at least in the vastly greater scope of military operations. This may indeed produce a qualitative difference and require new methods for description and analysis. Besides, there exists no theory whatever describing the infinitely simpler problems of business logistics.

“Whether it be a strictly economic or a military logistics phenomenon, there is for both the common need to organize men and to assemble material in order to carry out operations with them in some determined order. There are also objective, technical factors involved which impose restraints upon these operations. Among these may be some unalterable rules of a purely social nature; they shall be counted among the technical factors when they are not standards of behavior (as understood in the theory of games) that arise from the acts of men within a given framework. The practical infinity of variations of organizational set-ups which is encountered in the social world requires that particular stress be placed upon the descriptive approach to the problem, before formulating a theory of organization. Economics, logistics, sociology would all be greatly helped if the simplest principles of organization were well understood and could be consciously applied to concrete tasks …

“In looking for a theory of a field for which none exists, or which is to replace an inadequate one, it is necessary to form some ideas about the properties of the theory-to-be. The main feature is that a theory of organization must be quantitative since any organization allows for variations in its set-up and also in its results … The success or failure of an organization, its superiority or inferiority to others of the same type, the identical purpose, or conflict with those who attempt something similar, calls for description of its various states by means of numbers … Work in the field of the theory of organization will for a long time have to be essentially phenomenological … But even the phenomenological theory will ultimately have to be mathematical; but it is not to be foreseen before the theory actually is established, what its mathematical character will be like. An idea of this can be formed by looking at the mathematical structure of the theory of games, which deals with many aspects of organizations and their properties. The interaction of individual organizations will, as a rule, correspond to games of strategy. But there is a need to investigate phenomena within individual, centrally controlled organizations that are, as yet, not dealt with explicitly by the theory of games. In other respects that theory has gone further; e.g., in showing how and when persons—or equivalent individual organizations—may act in cooperation with each other and to indicate when and why the bonds tying them together may sometimes be stronger or weaker. It also shows the extraordinary delicacy and complication of the set-ups in which society may arrange its affairs.

“The study of ‘organization’ in economics—apart from the theory of games—has developed in three directions: (a) the discussion of economic ‘systems’ or ‘orders,’ meaning the economic organization of society through ‘free enterprise,’ ‘socialism,’ ‘corporationism,’ etc.; (b) the investigation of the operation of individual firms or conglomerations of firms imbedded in systems of the type (a); and (c) central authorities and ‘institutions,’ such as Central Banks, Treasuries, etc. Discussions of organizations of the type (a) have in the absence of guidance by rigorous theory tended to be historical, mixed with philosophical interpretation and evaluation … Analyses according to (b) attempt to show: (1) what happens to an organization (e.g., a firm) as a whole in various situations of particular markets under different behavior vis-a-vis other economic forces and units, and (2) what the input-output relations are for such an organization if variations in inputs or outputs are made, and the efficiency of the set-up is measured thereby. But neither gives any indications for determining the inner workings of an economic organization as a firm; e.g., in the sense of showing the distribution of authority, the memory of the institution, the recruiting of the leaders, etc. … Economics thus far has therefore only discussed some of the alleged summary properties of these organizations and of the factors determining their success, and there is a decided interest in studying the wider range of questions

“The mathematical character of the future theory may be indiscernible at present—before very much more information about the structure and the behavior of organizations is available. It may very well happen, as stated in the Theory of Games and Economic Behavior (which after all is a theory of the interaction of social structures) that fundamentally new mathematical discoveries comparable to the creation of calculus may have to be made in this field. Until such an event occurs, combinational procedures will probably play a major role as in the theory of games” (from the Introduction).

Oskar Morgenstern (1902-77) was groomed in the Austrian tradition, but was considerably less dogmatic in his tastes. Succeeding Hayek in 1931 as director of the Austrian Institute for Business Cycle research, Morgenstern’s research interests were not in the Hayekian monetary overinvestment theory, but rather in speculation and economic prediction (the subject of his 1928 habilitation thesis). A professor at the University of Vienna in 1935, Morgenstern was also an active participant in Karl Menger’s Vienna Colloquium and employed Abraham Wald in his institute. He was also one of the great critics of the Austrian theory of capital, helping to bury the notion of the “average period of production.”

His 1935 article on the difficulties of perfect foresight, which stemmed partly from his Austrian training, and the greater generality of “strategic behavior” over “Robinson-Crusoe” price-taking behavior, led the mathematician Edward Čech to put him in touch with John von Neumann’s 1928 article on game theory. After Morgenstern was dismissed by the Nazis in 1938, he moved on to Princeton, where he finally met von Neumann. Together, Morgenstern and von Neumann wrote their famous treatise on the theory of games, which not only launched game theory but also the theory of choice under uncertainty. Morgenstern provided much of the economic analysis in that book.

Boumans, ‘Observations in a Hostile Environment: Morgenstern on the Accuracy of Economic Observations,’ History of Political Economy 44 (2011), pp. 27.

Large 4to (283 x 218 mm), offset typescript, ff. [3], 122. Original printed wrappers.

Item #3317

Price: $1,500.00

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