Theory of Large-Scale Organization: Five Principals

Quoted from "Small is beautiful" by E.F. Schumacher.

1. The Principal of Subsidiarity.   The center will gain in authority and effectiveness if the freedom and responsibility of the lower formations are carefully preserved, with the result that the organization as a whole will be happier and more prosperous.  The large organization will consist of many semi-autonomous units, which we may call quasi-firms.  Each of them will have a large amount of freedom, to give the greatest possible chance to creativity and entrepreneurship.

2. The Principal of Vindication.  Good government is always government by exception.  The exception must be sufficiently clearly defined, so that the quasi-firm is able to know without doubt whether or not it is performing satisfactorily.  In its ideal application, the Principal of Vindication would permit only one criterion for accountability in a commercial organization, namely profitability, which is modified, if need be, by rents and subsidies.  If a unit enjoys special and inescapable advantages, it must pay an appropriate rent, but if it has to cope with inescapable disadvantages, it must be granted a special credit or subsidy.  Such a system can sufficiently equalize the profitability chances of the various units, so that profit becomes a meaningful indication of achievement.

3. The Principal of Identification. Each subsidiary unit or quasi-firm must have both a profit and loss account and a balance sheet.  A unit's success should lead to greater freedom and financial scope for the unit, while failure -- in the form of losses -- should lead to restriction and disability. One wants to reinforce success and discriminate against failure.  The balance sheet describes the economic substance as augmented or diminished by  current results.  This enables all concerned to follow the effect of operations on substance. Profits and losses are carried forward and not wiped out.  Therefore, every quasi-firm should have its separate balance sheet, in which profits can appear as loans to the center and losses as loans from the center.  This is a matter of great psychological importance.

4. The Principal of Motivation.  It is a trite and obvious truism that people act in accordance with their motives.  At the top, the management has no problem of motivation, but going down the scale, the problem becomes increasingly acute.  The health of a large organization depends to an extraordinary extent on its ability to do justice to the Principle of Motivation.

5. The Principal of the Middle Axiom.  All real human problems arise from the antinomy of order and freedom.  The center can easily look after order; it is not so easy to look after freedom and creativity.  The center has the power to establish order, but no amount of power evokes the creative contribution.  What is required is something in between, a middle axiom, an order from above which is yet not quite an order.