Markets, Bureaucracies, and Clans

Ouchi’s (1980) model of organizational governance highlights the importance of markets, bureaucracies and clans. Can a greater reliance on clans achieve socially desirable outcomes in today’s fractured policy landscape?

The are different ways to organize human societal interactions. Exchange allows for a division of labor, and this specialization has been a major part of the success of humans in the ability to produce, create greater prosperity, and sustain larger populations. It’s worth considering how these societal structures function and when they don’t function, and what may work to help in a society that is fractured.

Reciprocity is a human universal, giving back and forth in a fair exchange. This is involved in all versions of societal structure. It appears to be the only thing needed in a purely market structure where the individual actors make choices based on the benefit to self. However, this is only useful in some contexts.

For instance, let’s take a restaurant as an example. If every exchange is to be worked out by a market sales process by each individual, then the complexity and inefficiency quickly compound. Let’s say the waiters process the payments from clients. Each waiter then has to pay the chef a certain amount for each meal cooked. The waiter also has to pay a certain rent to the owner of the building for the number of tables that they wait. The waiter also has to pay the greeter at the door for welcoming and seating people based on the number of people that they see. The waiter has to pay the person that clears and cleans the tables for each table served. All of the waiters have to separately track these things and properly distribute funds in accordance with these metrics according to the contracts. This is also true of all of the persons involved with working in and for the restaurant. The grass needs to be mowed. Does a waiter do it? Do they each contribute to hire it out with someone? Do they contribute evenly, or according to income percentage, or according to number of tables attended? What if one of the waiters doesn’t pay? It quickly turns into a tragedy of the commons with potential free-rider problems. Price signals communicate what is valued, but this doesn’t work in every circumstance. This is often referred to as market failure.

The goals of these individual actors are often not going to be aligned, and even at odds. Plus, it would be difficult to measure, monitor, and reward the performance of each individual. These issues make such a social structure inefficient and cause the transaction costs to increase. To solve for this a bureaucracy can be formed. This is the type of organization that we are most used to, where there are defined roles to be filled. The rules of the organization control the tendency toward incongruence in goals among the acting individuals and levels out the uncertainty of the exact contribution of each individual to the overall organizational performance. Rules communicate when, how, and what needs to be done. An important piece of this is that the workers acknowledge the formal power structure and its authority to direct their activity and to evaluate their performance. These types of social relations often fail as well.

A clan structure has people with a shared set of beliefs and values and works even when it’s hard to tell how much each person is contributing. In a bureaucratic organization that is going to succeed the people that are not contributing need to be cut from the group. In a clan even the lowliest person has something to contribute to the cause. The traditions that you learn from being in the clan are passed down over time. This pulling together of people for a mission lowers the need to keep track of each and every thing that everyone does to evaluate them, and it limits people taking advantage of opportunities that may benefit themselves at the expense of the organization.

From this it should be noticeable that the characteristics of the clan solve the points of failure in both the market and the bureaucracy. Good intentions and agreed upon goals are needed for an organization to succeed, but they are not sufficient. You can end up with a bunch of non-performers achieving nothing or even negative results.

The conclusion is that markets don’t work, bureaucracies don’t work, and clans don’t work. The only successful solution is a combination. We currently have a fractured society built out of markets and bureaucracies without shared traditions, values, and beliefs. To balance things out and improve society we need more of the clan characteristics. The difficulty is not in coming to this conclusion, the difficulty is in implementation.

For the success of a clan people have to be onboarded over an extended time to integrate into the traditions of the organizational group. Currently our schools and churches are also fractured organizations, political groups are worse, traditional civic and social groups are on a continuing decline, apprenticeship programs have declined, people change jobs more often, relationships break up more frequently, people move more and further, people communicate more often with people not close to them. The trend is exactly the opposite of what is needed.

A socialization process that incorporates good traditions and values is desirable to balance out our struggling market and bureaucratic social structures. The key is to find something, and many things across multiple categories, that is also feasible, scalable, and testable. This can and is being achieved in some schools, churches, and businesses. To what extent this may grow is to be determined.

Ouchi, William (1980) Markets, Bureaucracies, and Clans. Administrative Science Quarterly, Vol. 25, No. 1 (Mar., 1980), pp. 129-141.

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