Unintended Consequences In Organizations Research Paper

Organizations are often constructed by people to make up, through the pooling of resources, for the unintended consequence of individuals being unable to act in their common interest. Yet organizations produce new second-order unintended consequences in and among themselves and for society at large.

1. History Of The Problem Within Sociology

Interest in unintended consequences started in the eighteenth century with the individualistic tradition of the Scottish moral philosophers. In accord with Bernard de Mandeville’s words, ‘private vices, public benefits,’ Adam Smith analyzed the unintended benign effects of the free market: as if moved by a hidden hand free trade transforms the self-centered motives of individual actors into a greater wealth for all. The French contract tradition provided other insights. Condorcet showed that when parties, each with consistent but different preferences on various issues, come together to collectively decide upon them, preferences on the collective level might be inconsistent, resulting in voting cycles. Rousseau described a ant la lettre what is now known as a prisoner’s dilemma, a situation in which individual and collective rationality conflict. Two persons while hunting deer fail in their objective because instead of cooperating—what they agreed upon and what is necessary to catch such a big game—one of them is tempted by the immediate gain of catching a hare. The unintended outcome is that both are collectively worse off than they could be. Thereafter, collectivist traditions prevailed. Hegel hinted at unintended consequences in his work on the long-term historical development when he spoke about the ‘cunning of reason.’ However, he did not analyze why they emerge. Marx adopted these ideas on laws in history and the notion that people make history without being aware, with one exception: under communism people can decide upon their common plan and escape from unintended consequences because they are unfettered by unjust power differences. The Durkheimian program of collectivist sociology did not encourage students to look for or analyze unintended consequences, although many of the phenomena Durkheim described can be reconstructed as being the unanticipated, unintended outcome of individual actions, for example, the solidarity that flows from ceremonial gatherings, or a rise in suicide rate after an economic boom, a so-called crise heureuse.

Merton (1949) placed the theme back on the research agenda with his analysis of manifest and latent functions, that is, consequences of individual actions that are either intended and recognized or unintended and unanticipated. He provided casestudies of self-fulfilling prophecies, such as customers beginning a run on a bank they wrongly believe to be insolvent, causing it to go bankrupt, or the Mattheus effect in science, that is, how fame begets fame.

About the same time Elias presented his general ideas on unintended consequences in an historical study on state-formation and the refinement of manners. According to him unintended consequences, for example, refined manners, will be more common in larger groups, with more complex social networks, and smaller power-differentials.

Lately, with the emergence of a rational choice sociology and organizational economics, unintended consequences become more central to research, although often under different headings.

2. Unintended Consequences In Organizations

Even a cursory review of the research literature shows that unintended consequences in organizations come in many forms and with multiple origins.

In the wake of Weber’s discussion as to why Marxism did not succeed in its revolutionary goals, Michels (1911) formulated the iron law of oligarchy, probably the most famous instance of an unintended effect. This ‘law’ states that with time and growth of the organization there will be oligarchic tendencies in every organization, also in socialist organizations with a democratic ideology and constitution. Why is it rational not to be interested in one’s own interests and not use one’s democratic rights? Over time and with growing size it becomes less practical that all participate, and even leaders have to specialize and delegate. As the social distance between members and leaders grows, the cost for members to stay informed and coordinate their actions increases. This gives discretionary power to the leaders also if they only have eyes for the interests of the members. There are, however, exceptions to the iron law, like the ITU, the union of typographers that was studied by Lipset et al. (1956).

Just before WWII, industrial sociology discovered the informal group in formal organizations. Informal relations sometimes go against the objectives of the firm as they lead to rate busting. Yet other research underlined their productive contribution. The work leader’s centrality within this informal network seems critical: employees will cooperate more readily and management can keep track of ties between employees.

Since informal networks can have negative consequences, a work leader has to keep track of and control all the possible ties between employees and, therefore, his span of control should be limited. Research showed an intricate unintended relation between span of control, levels of hierarchy within an organization, and level of pay: a smaller span of control leads to a taller hierarchy and greater wage differentials in an organization. Promotion schemes are another known source of unintended consequences. Stouffer (1949) gave the classic example of soldiers who were less satisfied and had lower morale in companies with a higher rate of promotion. To evaluate their own status as well as to estimate what actions would be in their own interest people compare themselves to similar others. They care for relative, and not for absolute status. Recent research, however, could not replicate Stouffer’s findings. Even those who are not promoted interpret high promotion rates as a sign of trustworthiness of the employer.

Lately, an important instance of unintended consequences in organizations has been discovered, that is, the performance paradox (Meyer and Gupta 1994). Where performance of a department or organization can be established, somehow measurements run down over a period of time, for of a number of reasons: (a) positive learning, that is, as performance improves, indicators become less useful, (b) perverse learning, that is, performance seems to improve without actually doing so because employees or managers adapt to the measurement system and learn how to fix the indicators, (c) selection or replacement of poor performers for better performers. Often these processes occur simultaneously.

3. A Typology Of Unintended Effects

It is not the problem as such but its manifold manifestations, their explanation, and how they can be amended that is of interest. Yet the various forms of unintended consequences have a common denominator in that they can all be subsumed under the problem of rationalization, since they affect efficient goal attainment.

A useful typology that covers the basic forms should at least have six dimensions (Boudon 1977):

(a) Number of individual actors that realize their goals,

(b) Whether the effects are positive, negative, or both,

(c) Number of actors affected by the outcomes,

(d) Whether they were anticipated or not,

(e) The time it takes for consequences to develop, and

(f) Whether a corporate actor or individual persons are the focal actor(s).

4. Explanation Sketches In Sociology And Economics

Existing theoretical knowledge on unintended consequences is not well integrated. Accounts given refer to a number of recurring elements, though: lack of or faulty information and incentives to act opportunistically. Sociologists traditionally focus on the former, and recently economists have emphasized the latter.

Until Coase explained why organizations exist, economists were silent on what happened in organizations. They exist because they are more efficient in certain situations as they save not only on production costs but also on transaction costs stemming from recurrent transactions and transaction specific investments.

Economists made clear that there are dilemma situations in which consequences emerge that are unintended but foreseen. The employment relation, for example, is fraught with anticipated, yet often inevitable unintended effects. Employer and employee are collectively better off if they trust each other and cooperate, yet each is tempted by opportunism.

Firm specific investments in human capital made by the employees can, depending on the alternatives both have, be misused by both parties against the other. An employer may cheat upon his promises just as the employees may sometimes shirk or reverse who controls whom.

What situational characteristics lead to these deficits in information and incentives to act opportunistically? The examples of unintended consequences discussed either stem from functional, cognitive, or structural interdependencies between various actors (Lindenberg 1997). People need each other to cooperate in the attainment of a common goal, to acquire or reduce information, and to get advice, gain approval, or emotional support. Moreover, persons that are functionally, interdependent, for example, in their tasks, will interact and it will also affect their mind.

Another relevant distinction is whether the unintended effects of a transaction affect only those involved in the transaction or also other third parties. Economists call the latter ‘externalities.’ Sociologists would consider them third party effects. Actors do not want to be responsible for negative externalities but they would like to internalize positive ones.

If groups grow in size, Olson (1965) showed, this logic will keep people from contributing to the common good. Many unintended effects in organizations come from the outside as external effects, for example, growing time pressure and growing wealth in society at large make people want to trade time for money resulting in many voluntary organizations nowadays being ‘check book writing organizations.’

Many unintended effects come about through path dependency of social processes, that is, effects of earlier choices feed back into the social situation under which individuals decide on their next move, augmenting original differences, as with, for example, oligarchic tendencies.

Why are there exceptions to unintended effects? From the relevant research literature one might take the following advice. To come up with explanations one could stick to a behavioral theory of action and think about who are relevant actors, what are their goals, what actions would further these goals at what costs given the situation, and what actions would constitute the unintended effect. Oligarchy, for example, is reflected by nonparticipation by members and leaders not acting upon members’ interests. In the case of the ITU, for example, the three kinds of interdependencies came together such that the difference in knowledge and political experience was far less than usual and that leaders were also part of the informal groups. These are all conditions that promote a choice for the democratic alternative. The absence of voting chains that might complicate originally democratic choices also helps (see Wippler 1988).

What can be done about negative unintended effects? It makes a difference whether there are central agencies that try to stabilize, correct, or foreclose the emergence of unintended negative outcomes. Functional interdependencies can be changed through social technology, for example, through redefinition of rights of actors. Cognitive and especially structural interdependencies are harder to manipulate. As can be learned from principal agent and transaction cost theory, many unintended effects in organizations come from the split of ownership and usage rights, or more generally the split between authority and responsibility. Organizational rules can redefine property rights and thereby align interests such that to those who have control right over a productive capacity also have an interest in employing this capacity in a productive way. A simple application of this advice is to bind salaries of managers to performance of their department or firm. Another one is to make employees not responsible for mistakes made by others, for example, in a sequential production process a system of quality control through backward policing allows employees to refuse products delivered by others (see Milgrom and Roberts 1992).

Bibliography:

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2. Lindenberg S 1997 Grounding groups in theory: Functional, cognitive and structural interdependencies. Advances in Group Processes 14: 281–331
3. Lipset S M, Trow M A, Coleman J S 1956 Union Democracy. Free Press, New York
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