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The Right Answer — to the Wrong Century

I’ve watched, many times, a simple decision set off on its journey. The customer-service agent sees the problem clearly, even knows the solution — but isn’t allowed to decide. The matter is logged, sent to a supervisor, who takes it to their own supervisor, who puts it on the agenda of the next meeting. A week passes. The answer comes back by the same route, and by then the customer has had time to get angry, call again, or switch supplier. Every person in the chain did their job correctly. And yet the outcome was slow and clumsy.

The easy reaction is irritation. Why on earth can’t the person who sees the problem fix it? But before you condemn the pyramid, it’s worth asking something harder: why was it set up this way in the first place? Because nobody drew the triangle out of malice or stupidity. In its time it was a clever answer to a genuine problem. And if you want to understand what AI is now changing, you first have to take seriously why the pyramid shaped organisational hierarchy worked at all.

The answer to a world of slow information

The pyramid was an answer to a world in which information moved slowly, was expensive, and was scarce. When you couldn’t get information quickly to where a decision had to be made, it made sense to do the opposite: gather the information where the whole picture was — at the top — and give decision-making power to whoever saw the most.

This is not my own invention but a reasonably well-documented history. As late as the early nineteenth century, business was small and personal: the family firm, the workshop, the merchant who knew his goods and his customers. Then came the railways. The Harvard business historian Alfred Chandler described this turn in his 1977 book The Visible Hand. The railway company was something the world had never seen before: hundreds of kilometres of track, thousands of employees, trains that had to be scheduled so they wouldn’t collide — and all of this at a time when the fastest way to move information was the telegraph, and alongside it the letter. No earlier enterprise had demanded the coordination of so many different parts so precisely.

And information moved slowly in a way that’s almost impossible for us to imagine now. When a manager wanted to know what was happening at the other end of the line, the answer might take days. When an instruction had to be passed a hundred kilometres away, it travelled as fast as a letter or a telegram travelled — no faster. In a world like that, there was no sense in letting everyone make their own decisions on their own information, because no single person had the whole picture, nor could they obtain it in time. The only way to hold the machine together was to gather information at the top, make the decisions there, and send them down the staircase.

No one could run a machine like this alone, and the “invisible hand” of the market was not enough to coordinate it. So a new invention emerged: the salaried manager and the multi-level management hierarchy. Chandler called it the visible hand — the layers of management replaced the market as the internal coordinator of the firm. Middle management, which we now take for granted, was born precisely from this: from the need to relay information and orders up and down a long staircase, when nothing else could do it.

Why firms exist at all

But why do firms — these internally managed hierarchies — exist at all? Why isn’t everything handled on the market, by buying and selling? A young British economist, Ronald Coase, asked exactly this in a 1937 essay that would later win him the Nobel. His answer was that using the market is not free. Finding the right partner, negotiating a price, monitoring a contract — it all costs. Sometimes it’s simply cheaper to stop the negotiation and let someone just decide. That “someone” is a boss, and that structure is a firm. Hierarchy exists because, under certain conditions, it is a cheaper way to coordinate than continuous trading.

Think of it through everyday life. You don’t renegotiate every morning with each of your employees about what they’ll do today and at what price — you hire them, and you agree that they’ll do what you ask. That is hierarchy in miniature: you replace a thousand small negotiations with one employment relationship, because it’s cheaper and faster. Coase’s insight was that the whole firm is built on this same logic. The more expensive and awkward coordination on the market is, the more it pays to pull it inside the firm, under the authority of a manager.

Oliver Williamson took the idea further and was likewise awarded the Nobel, in 2009. He showed that the more uncertain the situation and the more easily people can take advantage of one another, the more attractive hierarchy becomes: it protects. And the organisation theorist Jay Galbraith gave this an even sharper form in the 1970s. His idea was simple: the more uncertain the task, the more information its execution demands. The structure of an organisation is, in a sense, a machine for processing information — and hierarchy is one way of managing a situation in which information is scarce and expensive. When information could not be copied or moved in an instant, gathering it into a few nodes at the top was sensible.

And the triangle gives one more thing that’s easy to underrate before it disappears: legibility. When everyone has their place in a layer and every layer has its supervisor, the organisation becomes legible — even an outsider can see at a glance who is responsible for what and to whom to turn. Responsibility is traceable. When something goes wrong, you know whose desk it belongs on. This is no small thing: without a clear division of responsibility, a large organisation turns into a fog in which everyone is a little responsible for everything and no one really for anything. The pyramid buys clarity — and clarity is genuinely valuable, not free.

The levels aren’t only power — they’re time

So far the pyramid has been defended on the cost of information. But there is a deeper and more interesting defence, one that doesn’t disappear even if information becomes cheap. It was put forward by the Canadian Elliott Jaques, who studied organisations for decades. His observation was that the levels of an organisation are not fundamentally status but time. At different levels, decisions are made whose time horizon is of a different length. Jaques called this the time-span of discretion: the longest period a person works on their own judgement before the result of the work can be assessed.

The customer-service agent’s horizon is days or weeks — a problem comes in, it’s solved, the result shows immediately. Middle management’s horizon is months or a couple of years: a budget, a project, building a team. Top management’s horizon stretches to years, sometimes decades: where the whole industry is heading, what’s worth investing in now so that it still pays off ten years from now. On the basis of over a hundred studies, Jaques found that these boundaries settle remarkably consistently at the same points — roughly the three-month, one-year, two-year, five-year, ten-year, and twenty-year horizons, regardless of organisation or country. This gives the layers something that mere power does not: a genuine, functional reason to exist. A long-horizon decision is different work from today’s decision, and there’s no sense in muddling them into the same heap.

Jaques also noticed what happens when a person and the time-span of their task don’t match. If a manager’s own horizon is shorter than their task requires, they start fiddling with their subordinates’ work and shrink the job to the size they can grasp — that is, they micromanage. If the horizon is longer than the task, the person grows bored and looks past what is asked of them. So the levels are not merely an administrative way of stacking people; they correspond to a different capacity to think ahead. And it is no accident that in Jaques’s studies the time-span predicted, remarkably accurately, the pay people felt was fair. There was, then, genuine logic in the levels — far more than a mere pecking order. In this sense the pyramid was not arbitrary. It was a way of structuring the fact that different decisions live on different timescales.

But the most important knowledge is never at the top

And yet — here is a crack that was in the pyramid from the start. At the very time business was building ever taller layers, the Austrian-born economist Friedrich Hayek wrote, in 1945, an essay that exposed the pyramid’s deepest weakness. Hayek’s point was that the most important knowledge is never at the top. It is scattered, in fragments, in the heads of thousands of people — in the particular circumstances of time and place, as he put it. That knowledge is owned by the person on the spot, not by the central management sitting far away. Hayek’s conclusion was that decisions should be left to those who actually know the circumstances.

Notice what this means. The pyramid pulls decisions up, towards the whole picture. Hayek shows that the freshest and most important knowledge is down below, at the edge. The pyramid was therefore always a compromise: it sacrificed part of local knowledge in order to gain the whole picture — and it paid this price knowingly, because carrying information from the edge to the centre was slow and expensive. The pyramid didn’t ignore Hayek out of stupidity. It paid his tax, because in its era that tax was cheaper than the alternative.

The right answer, the wrong century

This is where the whole series turns. The pyramid was not the wrong answer. It was the right answer — to a time when information moved at the speed of a horse and cart. Every one of its bricks rests on one single assumption: that moving information is slow and expensive, and that decision-making power is therefore best concentrated where the information is laboriously gathered.

But what if that very assumption fails? What if moving information becomes almost free and instantaneous — and the person on the spot suddenly has the whole picture at their disposal in the same second as the central management? Then Hayek’s crack is no longer a crack but a fissure. And that is exactly what AI is doing. More on that in the next part.

Lenni Laukkanen helps leadership teams turn AI into a competitive advantage through people. Invite me to speak at your event or to spar with your leadership team — I reply within a working day.

Next part: When One Person Stands on All Three Levels — what AI does to the foundations of the pyramid.

Sources

Durable theory

1 thought on “After the Triangle — Part 2/5, why the organisational hierarchy worked”

  1. Pingback: After the Triangle — Part 1/5, the history of the organisational pyramid - Lenni Laukkanen

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