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The Gresham’s Law of Planning Published: Sunday, December 23, 2001 By: Dr. Manuel Ángel Morales

Without any doubts, one of greatest minds of the 20th century is that of the Nobel Prize Laurate in economics 1977, Herbert A. Simon. Unfortunately, he died recently this past year leaving a vacuum in the intellectual world. Simon was the founder of organization theory, models of decision – making, boundary – rationality and artificial intelligence, among other things. He was the true father of modern management theory, and for me it was a huge pleasure having the opportunity to be his student and learning from his constantly present wisdom and generosity.

Herbert A. Simon heavily worked with three interrelated concepts: (1) Optimum Stress (2) Institutionalization of Innovation (3) The Gresham’s Law of Planning. The concept of Optimum Stress attributes the parenthood of invention primarily to necessity and secondarily to opportunity. A complementary argument is that innovation will be most rapid and vigorous when the stress on the organization is neither to high nor to low. By stress is meant the discrepancy between the level of aspiration and the level of achievement. If achievement too easily exceeds aspiration, apathy results; if aspiration is very much above achievement, frustration or desperation result. In the first case, there is no motivation for innovation, and in the second case, neurotic reaction interfere with effective innovation.

Optimal stress results when the carrot is just a little way ahead of the rabbit, when aspirations exceed achievement by a reasonable amount. This concept is central to strategies of social progress, educational diligency (determining the difficulty of successive tasks with which the learner should be confronted), and accommodating the neurotic behavior of people and groups when the execution or patterns of results are not proportional to the level of their expectations.

Simon thought that it was possible to distinguish the patterns of innovation of organizations that have institutionalized the innovation process in one way or another from those that have not. The scientific proposition is the following: Under conditions of a relatively stable market the average rate of innovation will be higher the greater the institutionalization of innovation. The greater the explicit time pressure attached to an activity, the greater the propensity to engage in it. The stimulus of deadlines tend to direct attention to some tasks rather than others. The greater the clarity of goals associated to an activity, the greater the propensity to engage in it.

This is how we arrive to the Gresham’s Law of Planning: Daily routines drive out planning and even innovation when people and organizations are faced both with highly programmed (structured) and highly unprogrammed (unstructured) tasks, the former tend to take precedence over the latter even in the absence of strong over-all time pressure.

In economic terms Lord Gresham’s Law states that bad money drives out good. In organizational terms, daily bureaucratic routines drive out planning and innovation efforts, unless there is a leadership or champion effort to overcome this strong dialectics between ideas and the “status-quo” order and routines.

Simon was a genius and an honorable man.


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