Few have ever written about the transformation of organizations by information technology with the clarity of Herbert Simon. Simon worked at a time when disciplines were being reconstructed and a shift was taking place. Older models of economic actors as profit maximizing agents able to find their optimal action were giving way as both practical experience and the exact sciences told a different story.
The rationality employed by firms today is not the capacity to choose the best action–what Simon calls substantive rationality. It is the capacity to engage in steps to discover better ways of acting–procedural rationality.
So we proceed step by step from the simple caricature of the firm depicted in textbooks to the complexities of real firms in the real world of business. At each step towards realism, the problem gradually changes from choosing the right course of action (substantive rationality) to finding way of calculating, very approximately, where a good course of action lies (procedural rationality). With this shift, the theory of the firm becomes a theory of estimation under uncertainty and a theory of computation.
Simon goes on to briefly describe the fields that he believes are poised to drive the strategic behavior of firms. These are Operations Research (OR) and artificial intelligence (AI). The goal of both these fields is to translate problems into mathematical specifications that can be executed by computers. There is some variation within these fields as to whether they aim at satisficing solutions or perfect answers to combinatorial problems, but for the purposes to this article they are the same–certainly the fields have cross-pollinated much since 1969.
Simon’s analysis was prescient. The impact of OR and AI on organizations simply can’t be understated. My purpose in writing this is to point to the still unsolved analytical problems of this paradigm. Simon notes that the computational techniques he refers to percolate only so far up the corporate ladder.
OR and AI have been applied mainly to business decisions at the middle levels of management. A vast range of top management decisions (e..g. strategic decisions about investment, R&D, specialization and diversification, recruitment, development, and retention of managerial talent) are still mostly handled traditionally, that is, by experienced executives’ exercise of judgment.
Simon’s proposal for how to make these kinds of decisions more scientific is the paradigm of “expert systems”, which did not, as far as I know, take off. However, these were early days, and indeed at large firms AI techniques are used to make these kinds of executive decisions. Though perhaps equally, executives defend their own prerogative for human judgment, for better or for worse.
The unsolved scientific problem that I find very motivating is based on a subtle divergence of how the intellectual fields have proceeded. Surely economic value and consequences of business activities are wrapped up not in the behavior of an individual firm, but of many firms. Even a single firm contains many agents. While in the past the need for mathematical tractability led to assumptions of perfect rationality for these agents, we are now far past that and “the theory of the firm becomes a theory of estimation under uncertainty and a theory of computation.” But the theory of decision-making under uncertainty and the theory of computation are largely poised to address problems of the solving a single agent’s specific task. The OR or AI system fulfills a specific function of middle management; it does not, by and large, oversee the interactions between departments, and so on. The complexity of what is widely called “politics” is not captured yet within the paradigms of AI, though anybody with an ounce of practical experience would note that politics is part of almost any organizational life.
How can these kinds of problems be addressed scientifically? What’s needed is a formal, computational framework for modeling the interaction of heterogeneous agents, and a systematic method of comparing the validity of these models. Interagential activity is necessarily quite complex; this is complexity that does not fit well into any available machine learning paradigm.
Simon, H. A. (1969). The sciences of the artiﬁcial. Cambridge, MA.