Basis Of Exchange Relationship Economic Systems Business Essay

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The entire economic system works on the basis of an exchange relationship in which people earn money by working for organizations which indirectly or directly produce goods and services which the people need. Organizations work on the basis of these mutually beneficial goals. Hence it is of utmost importance to understand how an organization works. A lot of studies have been carried out to understand how the structure of organizations contributes to the society and improves the lives of its inhabitants. (Crowther & Green, 2004)

The study of how people act within an organization and are affected by the structure of the organization is called the organizational theory. In this essay I would talking about the theories proposed by some of the most influential writers of the 20th century namely Weber, Taylor, Fayol and Maslow how their theories conflict with the recent concepts of feminism, diversity, inequality and class conflict.

Schools of Thought

There are four schools of thought regarding the organizational theory and they are as follows:

Bureaucratic Management

Scientific Management

Administrative Management

Human Relations Management

Bureaucratic School of Thought

Max Weber

According to Max Weber the ideal form of organizational structure is the bureaucratic one in which the exercise of control is based on knowledge. The rational legal authority is the ideal form of control because it is based on a set of rules that are universally applicable and efficient. A system of graded positions can be formed based on the level of expertise required. (Hamilton, 2004) The requirements of each position are clearly documented and strictly followed in a bureaucratic form of organization. Weber believed the rules and procedure would ensure that all hiring and promotion decisions are made on the basis of equality and there was no tolerance for favoritism. (Schluchter, 1996)

Weber also stressed heavily on maintaining impersonal relationship with the employees to maintain objectivity in decision making. This form of management left no room for favoritism and prejudice. The structure supported evaluation that is free from biases. (Schluchter, 1996)

Though Weber viewed this form of organization rational and efficient according to many critics it created many complications in the organizational efficiency. Following the protocol each time created a routine that made the organization unable to respond to the changes in the environment rapidly. Similarly the rigid system created series of struggles within the organization. This is because each group tried to expand the scope of power under its discretion hence prevented others from gaining advantage. This form of inward struggles led to a slow and unresponsive system. (Gabriel, 2008)

In modern organizations the structure of organizations is decentralized. Power and information is shared. (Drucker, 1994) Though Weber believed that efficiency increased when the system of control is in place, more and more theorist believe that organizations thrive well when the lines of formalization and regulations are obliterated. (Gabriel, 2008) The division of labor creates feelings of alienation and is counterproductive because as society progresses there is need for interpersonal communication rather than estrangement. (Etzioni-Halevy, 1985)

Creation of impersonal relationship brews frustration amongst employees because they have little discretion in making decisions that were previously made by them by not become victims of red tape. (Gabriel, 2008)

Critics point out the Weber's proposition of control through rational concept of having expertise conflicts with the feminist movement which fights for equal opportunity and recognition that women too can become experts in fields dominated by men. It also stresses on the rational qualities required for leadership downplaying the importance of emotional qualities that are required by leaders during difficult times to infuse the spirit of hope and motivation. Leaders nowadays to be champions need a higher emotional intelligence to deal with the drastically changing economic and social changes (Drucker, 1994). Such qualities are mostly found in females a point Weber did not propose in his theory. (Mullins, 2008)

Similarly Weber's theory gives rise to class conflicts because the rational authority is based on knowledge acquired by the privileged few who then exert authority on the masses. The cycle of wealth perpetuates because the rich through the control over rules give opportunity for growth to those similar to them leading to inequality of opportunities (Mullins, 2008)

Employees are lead to mediocrity because the working environment creates a feeling of frustration and class conflict that only lower class employees perform the menial tasks. (Etzioni-Halevy, 1985)

Scientific Management

This approach highlighted the importance of empirical research in developing effective management solutions. It pays a lot of attention to the fact that the organization's productivity depends on the manager. (Sapru, 2004)

Frederick Winslow Taylor

Taylor's fundamental belief was that the management is superior to the average employee and due to the intellectual superiority it must be responsible for organizing the work activities of employees. He believed that such form of management would lead to drastic productivity increase. (Taylor, 2003)

This approach emphasis that the selection, training and developing of workers is the managers responsibility, who then should become involved in the employees work to make sure that goals are met effectively. (Sapru, 2004)

aylor also proposed that the compensation for employees should be based on the piece rate system which pays employees according to the number of final products produced. He proposed that this form of financial incentive would improve productivity by linking reward directly to performance. (Taylor, 2003)

However much revered during his time, Taylor's theories today are considered flawed in many regards. Firstly he failed to acknowledge the impact of technology which has made many manual processed automated hence piece rates can't be determined (Knellwolf & Norris, 2001) Also by paying on the basis of piece rates reduces the quality of the product because workers rush up to finish maximum work in the given time. (Waring, 1994)

Similarly tight supervisory control is looked down upon nowadays when employees are given a freehand to make many decisions in a decentralized form of authority (Drucker, 1994). Workers also feel exploited because they are not given a due share of increased profits which result from the fruits of their labor. (Day & Wendler, 1998)

Even from the employers point of view scientific management is costly and requires huge investment in the planning department. It is unsuitable for small firms and time consuming activity. (Waring, 1994)

Administrative Management

Henri Fayol

Fayol's administrative theories dealt with the personal duties of the management in much more detail than Weber. He believed that the management has five major functions to perform which are as follow (Wood, 2002):

Plan: Anticipating the future outcomes as a result of actions carried out today.

Organize: Acquiring resources that help advance the organization's goal.

Command: Making sure that designated tasks are carried out efficiently

Coordinate : Aligning efforts with goals

Control: Ensuring all activities carried out are within the scope of the rules and regulations laid out.

He developed 14 principles of administrative management keeping in line with the 5 functions of management (Wood, 2002). These guidelines are as follows: 

Division of Labor: Specialization is when each worker repeatedly performs a single task and becomes proficient at it. This allows the workers to produce more in a given time and raise the level of productivity. However critics point out that the monotony of work is boring for a worker and alienation from producing the entire good leads to dissatisfaction.

Authority: This is the right to command due to power and control given by the office. There is a difference between manager's official authority and personal authority. Personal authority is when the individual due to his or her intelligence, expertise and personality exudes authority from others.

Discipline: Managers apply sanctions whenever disobedience becomes evident. This form of management leads to obedience and is absolutely crucial to the functioning of any firm.

Unity of command: In order to prevent confusion amongst the lines of reporting it is essential that employees should receive instructions from only one superior.

Unity of direction: All organizational activities should flow from one central authority and one plan of action.

Subordination of individual interest to general interest: For the interests of all to be fulfilled it is very important that there be no conflict between personal and organizational goals. Goals driven my individual ambition would always be subordinated to the ones of the organization and to always ensure that close supervision is very important.

Remuneration: Salaries are paid to employees in return for the services rendered by them. It is very important that payment given be fair and be satisfactory for the employees.

Centralization: The best utilization of personnel stems from the principle of centralization.

Scalar Chain (line of authority): The reporting lines should exist between the highest organizational authorities to those in the lowest ranks. There should be direct communication lines between all levels of authority.

Order: From Fayol's point of view it is crucial to organization's success that a right balance be maintained between the organization's requirement and the resources available. In an efficient unit there is no room for favoritism, ignorance and incompetency. Talented and competent people must be employed to maintain order and prevent abuse of authority.

Equity: Equality in treatment of all workers and equity in decisions leads to an environment where productivity thrives.

Stability of tenure of personnel: When workers fear that that the organization they work for has no job security it leads to fear and inefficiency. Hence it is very important for the management to ensure that they maintain a stable workforce.

Initiative: Employees in every set up should be given the freedom to think out a plan and carry it out till its completion. This serves as a strong motivator.

Esprit de Corps: Organizations that have a lot of work done in teams thrive better than those that don't. This is because the verbal face to face communication generates ideas and strategies which are novel and profitable.

Fayol's greatest criticism stems from the fact that he proposed all his theories based on the fact that management is universal in every type of organization (Sapru, 2004). However this is not true because what may work in a cement factory would not for an insurance company.

He has been further criticized for having a pro management bias because his work did not pay adequate attention to workers who were treated like passive instruments in the organizational process. He ignored the importance of diversity in the work environment in which organization thrive by hiring people from different ethnic and racial backgrounds. (Wood, 2002)

His theories though relevant for times when the environment is stable is ineffective for today's time when the rapidly changing environment does not allow management to solely depend on formal authority to get the work done (Drucker, 1994). The importance on soft skills have increased tremendously that is why more and more women are joining the workforce and gaining important management positions because they have persuasive qualities and communication skills that allow work to be done more effectively than through the typical command and control style proposed by Fayol. (Wood, 2002)

Human Relations Management

Abraham Maslow

Maslow developed his theory of hierarchy of needs to understand the factors that serves as motivation to people. His basic study rest on three assumptions which are as follows: (Saiyadain, 2009)

Needs are never completely satisfied

Human behavior is motivated by the purpose to fulfill a need

Needs can be classified into an hierarchy depending on their level of importance

The hierarchy of needs developed by him is as follows: (Maslow,  Stephens & Heil, 2008)

Physiological needs: This includes water, food, clothes and shelter and other necessities needed for maintaining basic human well being.

Safety need: This is the desire for protection, security and freedom from fear.

Belongingness: Man is gregarious that means the there would also be an innate desire within man to strive and maintain meaningful relationships with others.

Esteem needs: This need stems from the self confidence that comes when one is competent in a certain area leading to a reputation and status that is well recognized.

Self actualization: This is highest on the pyramid of needs and defines fulfilling of the purpose that man has set out to achieve in his lifetime.

Maslow's theory is important from the point of management because it helps explains the needs employees have and how they can be motivated to achieve their own needs long with fulfilling organizational goals.

Physiological needs can be fulfilled by providing ample breaks for lunch and rest. Similarly management should ensure that the salaries given to employees are enough for them to buy the essentials. Safety needs can be provided for by creating a stable and safe working environment where job security is ensured. For fulfillment of social needs it is important for the organization to encourage team work and a feeling of acceptance and tolerance for diversity and gender differences. (Maslow,  Stephens & Heil, 2008)

By recognizing hard work and effort out in deadlines and reports the management ensures that the esteem needs are accounted for. It is important for workers self confidence that they feel valued, appreciated and recognized. Self actualization means fulfilling ones potential and this can be done in an organizational setting by proving employees with meaningful and challenging work. Assignments and projects that encourage workers to be creative and innovative help employees feel challenged and motivate them to achieve personal and organizational goals. (Maslow,  Stephens & Heil, 2008)

The management must recognize at the onset what each employees needs are so that correct motivators are put in place. Needs of employees must be leverage to achieve workplace motivation and achievement of goals. (Harmon & Mayer, 1994)

From the managerial perspective Maslow's recognition of self actualized individuals was limited to highly educate white males. This made the universal acceptability of his principles very difficult because he did not account for diversity of race, gender and ethnicity in his study. Critics believe that his work is racist, sexist and stems from classism and therefore can't be universally applicable as valid in understanding human motivation. (Maslow,  Stephens & Heil, 2008)

Maslow failed to account for cultural diversity because he didn't study those societies were social needs are more important than others. This proves to show that the hierarchy is not strictly followed in every culture or society. Similarly he failed to account for the spiritual needs of people. (Maslow,  Stephens & Heil, 2008)


Studying the work on organizational theory proposed by the writer of 20 century it is obvious that things have changed drastically since then. Modern management thinking requires that aspects of diversity, class conflict, technology and globalization be taken into account.

The emphasis of modern management is on empowering workers and encouraging team work that serves as motivation to lead to fulfillment of goals. Diversity is valued because it brings a fresh perspective into the dynamics of the workplace and with increasingly globalization a diverse workforce is a strategic advantage. Equality of opportunity in hiring and selection process is very important. (Morse & Lorch, 1970) Growing amount of law suits due to prejudices due to race, color, gender, age and disability has prompted firms to be more sensitive towards diversity.

Importance of hiring of females in organizational set up has increased. Even the inequality that existed in salary paid to women compared to men is not being taken care of. In the classical organizational theory the role of women is not studied at all whereas modern management emphasizes how hiring women leads to better organizational and financial performance. (Desvaux, Hoellinger, & Meaney, 2008)

The classic organizational theory assumes that all organizations are inherently alike whereas modern management theory advocates that all organizations are different and each requires its own strategic plan. Every organization has its own form of social relations, form of control and management therefore it is essential to take account of such differences. Modern writers on management theory like Peter Drucker increasingly emphasize the importance of learning and proactive attitude on part of organizations for better survival in these unstable times. (Drucker, 1994)