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Functionalism Revisited: A practice based Functionalism
Unformatted Document Text:  Functionalism Revisited 4 The Carnegie school, led by Simon (cited in Williamson, 1996; see also Auster & Choo, 1996) raised an issue of the neoclassical economics assumption – rational actors. Simon points out that in neoclassical economics economic decisions are made by rational actors, and argues that arrays of complexities involved in economic environments make such an actor impossible to exist. Rather, he argues that human actors tend to make a decision from information – whatever is available at one point – in order to achieve general goals of his business. The imperfection of cognitive processing may lead the organization to construct an organizational structure that may or may not perfectly match the environment. The works of Williamson (Williamson, 1996, 1981b) elaborate these approaches by considering additional conditions and parameters in economic behaviors and environments. He focuses on the costs involved in devising, monitoring, and carrying out transactions between or within firms, and argues that the governance structures, as the framework in which the transaction is located, are shaped by such costs. A transaction cost occurs when a good or service is transferred across a technological separable interface. Transaction cost analysis “supplants the usual preoccupation with technology and production (or distribution) expenses with an examination of the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures” (Williamson, 1981a, p.552). PAT takes a slightly different position. It examines the relationships of division of labor between the two types of economic actors (theoretically principal and agent; but applicable to most economic actors). It focuses on the asymmetric feature of information distribution (information impactedness) and occurrence of uncertain environments and contractual relations (Wigand, Picot, & Reichwald, 1995). More specifically, PAT views all economic interactions as sets of contracts. One party, the principal, selects the other party, the agent, in order to accomplish her economic goals. A problem occurs when the principal (or the agent) is not able to fully anticipate agent’s (or the principal’s) future action. To solve this problem, an explicit or implicit contract is written as a safeguard, which may provide a way to monitor the agent’s performances for the principal and a way to claim on the profits for the agents. In the PAT viewpoint, an organization is also a part of market form of which economic actors pursue their personal gains. This viewpoint can be enlarged into the interorganizational relations. That is, PAT argues that a variety of organizational types such as joint stock companies, sole proprietorships, and voluntary nonprofit organizations arise because certain circumstances demand certain types of agency costs, which in turn, results in certain types of organizational forms. TCE (and PAT) takes some of its pre-cursory works from Coase and the Carnegie School and conceptualizes its grounds with more assumptions: There generally appear to be two basic assumptions – dimensional and behavioral assumptions.

Authors: Kim, Hyo.
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Functionalism Revisited 4
The Carnegie school, led by Simon (cited in Williamson, 1996; see also Auster & Choo, 1996)
raised an issue of the neoclassical economics assumption – rational actors. Simon points out that in
neoclassical economics economic decisions are made by rational actors, and argues that arrays of
complexities involved in economic environments make such an actor impossible to exist. Rather, he
argues that human actors tend to make a decision from information – whatever is available at one point –
in order to achieve general goals of his business. The imperfection of cognitive processing may lead the
organization to construct an organizational structure that may or may not perfectly match the
environment. The works of Williamson (Williamson, 1996, 1981b) elaborate these approaches by
considering additional conditions and parameters in economic behaviors and environments. He focuses
on the costs involved in devising, monitoring, and carrying out transactions between or within firms, and
argues that the governance structures, as the framework in which the transaction is located, are shaped by
such costs. A transaction cost occurs when a good or service is transferred across a technological
separable interface. Transaction cost analysis “supplants the usual preoccupation with technology and
production (or distribution) expenses with an examination of the comparative costs of planning, adapting,
and monitoring task completion under alternative governance structures” (Williamson, 1981a, p.552).
PAT takes a slightly different position. It examines the relationships of division of labor between the two
types of economic actors (theoretically principal and agent; but applicable to most economic actors). It
focuses on the asymmetric feature of information distribution (information impactedness) and occurrence
of uncertain environments and contractual relations (Wigand, Picot, & Reichwald, 1995). More
specifically, PAT views all economic interactions as sets of contracts. One party, the principal, selects
the other party, the agent, in order to accomplish her economic goals. A problem occurs when the
principal (or the agent) is not able to fully anticipate agent’s (or the principal’s) future action. To solve
this problem, an explicit or implicit contract is written as a safeguard, which may provide a way to
monitor the agent’s performances for the principal and a way to claim on the profits for the agents. In the
PAT viewpoint, an organization is also a part of market form of which economic actors pursue their
personal gains. This viewpoint can be enlarged into the interorganizational relations. That is, PAT argues
that a variety of organizational types such as joint stock companies, sole proprietorships, and voluntary
nonprofit organizations arise because certain circumstances demand certain types of agency costs, which
in turn, results in certain types of organizational forms. TCE (and PAT) takes some of its pre-cursory
works from Coase and the Carnegie School and conceptualizes its grounds with more assumptions: There
generally appear to be two basic assumptions – dimensional and behavioral assumptions.


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