Network vs. Hierarchy as Organizing Principles in Business and the Economy

By Sam Vaknin
Author of “Malignant Self-love: Narcissism Revisited

National economies and the global arena are organized as networks of producers, suppliers, and consumers or users. Indeed, the network is one of two organizing principles in business, the other being hierarchy. Business units process flows of information, power, and economic benefits and distribute them among the various stakeholders (management, shareholders, workers, consumers, government, communities, etc.)

Within networks, timing determines priority and privileged access. First movers (pioneers) benefit the most from network effects. In hierarchies, positioning is spatial, not temporal: one’s slot in the pyramid determines one’s outcomes. But this picture is completely reversed when we consider interactions with the environment: The spatial scope and structure of the network (e.g., the number of nodes, the geographic coverage) determine its success while the storied history of the hierarchy (its longevity, in other words: its temporal aspect) is the best predictor of its reputational capital and its capacity for wealth generation.

Counterintuitively, access to information and the power it affords are not strongly correlated with accrued benefits. In networks, information and power flow horizontally: everyone is equipotent and, like a fractal or a crystal, every segment of the network is identical to the other both structurally and functionally (isomorphism). But benefits accrue vertically to the initiators of the network and are heavily dependent on tenure and mass: the number of nodes “under” the actor. Thus, the earlier participants or members enjoy an exponentially larger share of the benefits than latecomers (MLM commissions, ad revenues, etc.)

In hierarchies, benefit accrual is also closely correlated with one’s position in the organization and, less often, with one’s tenure. Power, information, and benefits are skewed and flow vertically and asymmetrically: the hierarchical organization is based on diminishing potency and heteromorphism (no functional cross-section of the structure resembles another).

Networks evolve from informal, diffuse structures to increasingly formal ones. Hierarchies go the other way: from formal to informal. The formal hierarchy ends up playing host to numerous informal networks (e.g. in the boardroom). The informal networks introduces terms of service, regulations, and etiquette that tend to render it less nimble and more focused.

Finally, hierarchies tend to concentrate their concerted efforts on problem-solving and on fending off challenges. They seek equilibrium and homeostasis and avoid creative destruction, disruptive technologies, and paradigm-altering innovation. Networks thrive on challenges and novelty. They benefit from disequilibrium and disruption. They foster technological instability as well as other forms of chaotic interaction. Consequently, they tend to attract mavericks and entrepreneurs, not managers and academics, for instance.

Both hierarchies and networks are homophilic (attract same-minded people) and, therefore, are threatened by the emergence of in-house monocultures which are susceptible to external shocks (“silos”). But networks are far better suited to leverage synergies: they are less rigid than hierarchies and, therefore, have the upper hand as far as response times and dissemination of new information go. They are also far better suited to optimize their social capital because they emphasize social, peer-to-peer interactions over top-down flows.

Author Bio

Sam Vaknin ( ) is the author of Malignant Self-love: Narcissism Revisited and After the Rain – How the West Lost the East, as well as many other books and ebooks about topics in psychology, relationships, philosophy, economics, international affairs, and award-winning short fiction.
He is the Editor-in-Chief of Global Politician and served as a columnist for Central Europe Review, PopMatters, eBookWeb , and Bellaonline, and as a United Press International (UPI) Senior Business Correspondent. He was the editor of mental health and Central East Europe categories in The Open Directory and Suite101.
Visit Sam’s Web site at