Simon, H. A. (1991). Organizations and markets. The Journal of Economic Perspectives, 25-44.

The author here raises questions about why do we have firms at all? Why doesnt everybody
enter into independent contracts? Why do people enter employment? When do I decide to make
or buy? What happens to any activity when it is done by firms and when done by markets? He
uses the idea of viewing economy as an organizational one with market relations present among
the organizations. He goes in the detail how organizations are related to market relations and
consumers. What defines the boundary between a market and an organization varies in different
societies and in different time frames. He said that until and unless we know this we cannot make
any conclusions about the efficiencies of different forms of ownership and control and markets
versus hierarchy.
Three questions that concerned motivation and efficiency in organizations were considered: one,
of markets and organizations- which is more efficient? Two, what are the effects of ownership of
the organization on the profit motive? And three, results of using central planning to regulate
relations among organizations rather than markets? He makes the case of making postulates
about what motivates real people in real organizations which he derived from four organizational
phenomena on which ample literature had been reported: authority, rewards, identification and
coordination. He moves from the attention from market economies to organizational economies.
In the employment relation due to the virtue of it being an incomplete contract, transaction costs
are saved due to absence of renegotiation. But the delegation or direction comes from the owners
not from themselves and often is in the form of a desired result rather than a command, so in
order to make sure that the employees do the requisite work, controlling needs to be done which
defeats the purpose of delegating in the first place. But it is observed that employees do work for
the welfare of the organization the author asked here what motivates them to do so.
Material rewards, promotion and recognition maybe some of the reasons that motivate the
employees to work. But they are effective only when we can attribute the success to an
individual or a particular team, otherwise it fails. Though rewards play an important role in
motivating employees to take up authority, they are not very effective. There are two more potent
motivations for employees to work towards organizational goals. Organizational identification is
one of them. A docile person will be easy to train to be loyal to an organization but often that is

not enough, a cognitive element is also involved. Willingness of employees to take up

responsibility for results is associated with the organization identification of the employees. A lot
of organizational success is attributed to the managers attitude and motivations.
Organizations with the help of authority can coordinate the activities of teams to achieve a
common goal. Coordination between organizations is different from coordination observed
inside the organizations. In the first case it is motivated by economic rewards and cannot handle
any situation that is not covered by the contract but in the second case identification helps to deal
with any situation. Authority, motivational rewards, loyalty and organizational identification
combined with coordination led to the hierarchical nature of organizations that is commonly
observed in business.
The framework proposed by the author challenged the primacy of profit as the cause for
organizational efficiency and said that organizational goals with rewards, motivation and loyalty
is what causes employees to work. It raised the question whether markets or hierarchies are to be
preferred over each other. The answer would be important to both socialist and capitalist
economies. Theories need to develop and proved empirically from data gathered from the field.
The paper suggested that due to the importance of organizations in how the business is done,
economics should move its focus from markets to organizations and find out what makes them
work. Organization behavior elements like motivation, loyalty, rewards and coordination has an
influence on the efficiency of an organization. He was a major contributor to the development
and use of organizational economics in explaining the theory of the firm.
He tends to place more importance to organizations over the function of markets in deciding the
make or buy decision. In some cases, the markets would be a more efficient of doing business as
compared to the hierarchies, he over-emphasizes on the supremacy of organizations over
markets. The paper also doesnt use any empirical data to support the ideas put forward rather it
suggests that in order to have good theories, we need to gather data from the field.