Thursday, March 26, 2009

Effectiveness vs. Efficiency--Why Organizations Persist?

I originally wrote this entry on September 13, 2004, and published it on

I've written about Chester Barnard before. His 1938 book, The Functions of the Executive (Harvard University Press), remains one of the most important business and institutional economics classics. It has been reprinted some 30 times since its initial publication.

Here's what Barnard says about the persistence of organizations.

The persistence of cooperation depends upon two conditions: (a) its effectiveness; and (b) its efficiency. Effectiveness relates to the accomplishment of the cooperative purpose, which is social and non-personal in character. Efficiency relates to the satisfaction of individual motives, and is personal in character. The test of effectiveness is the accomplishment of a common purpose or purposes; effectiveness can be measured. The test of efficiency is the eliciting of sufficient individual wills to cooperate.

As Barnard seems to imply, efficiency is harder to measure than effectiveness. Let's give an exmaple.

Say, 10 people get together to push a large spherical rock up a hill. Effectiveness of their organized activity can be determined by seeing whether the rock makes it to the top. The efficiency of their activity will depend on their optimal expenditure of energy for pushing the rock up the hill. How do we know who's pushing more, or less, optimally? A measurement of effort which does not poison cooperative relatioships is quite hard. The only way people are motivated to do what they are doing is if they are satisfied with the results as it relates to them personally. As Barnard has noted, the survival of an organization not only depends on the environment or context of its activity but also on factors "which relate to the creation or distribution of satisfactions among individuals" since such satisfactions will determine motivation and efficiency of the cooperative activity.

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