Organizational Capital

Organizational Capital:
The Path to Higher Productivity and Well-Being
John F. Tomer
Praeger 1987

From the Introduction

Organization is being increasingly appreciated as an important influence on both the productivity of economic enterprises and the workers’ ability to satisfy their individual needs. Not only do we suspect organization to be a key factor in the successes of Japanese companies like Toyota, Sony, and Matsushita, but it seems related to the successes of U. S. institutions like 3M, IBM, Hewlett-Packard and even top sports teams. Nevertheless, this factor has seemed to defy scholarly analysis, especially for economists. Internal organizational relationships simply don’t fit into the orthodox theory of the firm; and in explanations of the sources of economic growth, the organization factor has at best been lumped unceremoniously with the rest of the residual, the unexplained and the unmeasured part of the growth rate.

Therefore, this book proposes a new economic concept, organizational capital, which holds great promise as: 1) an explanation of a neglected source of economic growth; 2) an explanation for the behavior and productivity of the firm; 3) an explanation of how productivity is related to inter-organizational behavior; 4) a guide to formulating better governmental policies with respect to economic growth and development; and 5) a vehicle for achieving overall a better appreciation of how institutional arrangements contribute to economic as well as social outcomes.

The book’s analysis is explicitly part of the emerging field of behavioral economics. That is, it borrows from noneconomic behavioral disciplines, in this case organizational behavior, and integrates these insights with economic theory. The book is also humanistic in that it views organizing efforts as well as all other economic activities as the means by which people achieve their ultimate ends, becoming all that they are capable of becoming. To the extent that organizational investment enables people to obtain greater satisfaction of their higher needs, it enables greater human well-being. Thus, the organizational capital analysis is suggestive of an alternative approach to orthodox welfare analysis.

Investment in organizational capital refers to the using up of resources in order to bring about lasting improvement in productivity as well as worker well-being through changes in the functioning of the organization. Organizational capital formation could involve 1) changing the formal and informal social relationships and patterns of activity within the enterprise, 2) changing individual attributes important to organizational functioning, or 3) the accumulation of information useful in matching workers with organization situations. Organizational capital is human capital in which the attribute is embodied in either the organizational relationships, particular organization members, the organization’s repositories of information, or some combination of the above in order to improve the functioning of the organization.

The key organizational behavior insight is that the behavior, personality, and motivation of an individual in an organization cannot be explained simply by personal attributes. For a firm with given tangible capital goods and technology, individual behavior, and thus organizational productivity, is the result of an interaction between the characteristics of the organization and the individual. Individual behavior and productivity will be determined by the organizational climate, the structure for the organization, and the organization’s socialization process as well as by individual attributes. In the case of an investment in “pure” organizational capital such as a change in organizational structure or climate, organizational functioning and productivity improve because the changed organization evokes new and better worker behavior. For completeness, two “hybrid” types of organizational capital should be mentioned; these types contribute to the functioning of the organization but may be embodied in employees in the form of information or behavioral attributes inculcated, perhaps, as a result of the organization’s socialization process. Information relevant to matching employees with other employees and organization positions may also be embodied in the organization’s formal files in a way that makes it available to decision makers.

The vast and growing literature on organizational behavior contains many insights, case histories and empirical analyses related to the features of organizations that make for high productivity. These insights have undoubtedly been underutilized by U.S. companies, and they have been virtually ignored by economists. If organizational relationships do much to shape up and motivate the individual actions that are ultimately responsible for society’s productivity, it is incumbent upon economists to do more to incorporate these insights into their theoretical framework. Otherwise, economists’ advice to policy makers on the range of options available for increasing productivity and well-being will be woefully inadequate