Modularity in Technology, Organization, and Society

Abstract

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces--which can then communicate with one another only through standardized interfaces within a standardized architecture--one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. Such ideas are not new in the literature of technological design, even if, as some claim, modularity is becoming more important today because of the increased complexity of modern technology. What is new is the application of the idea of modularity not only to technological design but also to organizational design.

From another angle, however, the principles of modularity have an even longer pedigree in the social sciences. We can think of Adam Smith's "obvious and simple system of natural liberty" as among the earliest proposals for how a complex modern society might be made more productive through a modular design of social and economic institutions. In separating mine from thine, rights of private property modularize social interaction, which is then mediated through the interface of voluntary exchange, all under the governance of the systems architecture of common law. Despite its heavy emphasis on incentive issues, the economics of property rights that emerged from the work of Coase--in both its original form and its more formal recent incarnation--provides a good deal of material useful for understanding the nature and role of modularity in social institutions.

This paper is an attempt to raid both the literature on modular design and the literature on property rights to create the outlines of a modularity theory of the firm. This theory will look at firms, and other organizations, in terms of the partitioning of rights--understood as protected spheres of authority--among cooperating parties. And it will assert that organizations reflect nonmodular structures, that is, structures in which decision rights, rights of alienation, and residual claims to income do not all reside in the same hands. The reasons behind alternative partitions are numerous and complex, however, calling for subtlety in the application of the idea of modularity to the firm.

JEL Classification: L2, P0