Neo-Classic Organization Theory

An Introduction to Neoclassical Theory

Neoclassical theory (also referred to as human relations of thoughts) was introduced based on classical theory. It has added, modified, and in some way extended classical theory. The basic assumption of this theory is that the physiological and social aspects of a worker as an individual and his workgroup ought to be focused on. In classical theory, the organization emphasized order, structure, economic factors, formal organization, and objective rationality. Whereas neo-classical theory emphasized social factors and emotions at work.  Human relation is a general term that is frequently used to describe how a manager interacts with their employees. The importance of human relations is included in two aspects: The organization situation should be observed in social terms as well as economical and technical terms, and in terms of clinical method, it is similar to the doctor’s diagnosis of the human organisms.

What is Neo Classical Theory?

The Neoclassical approach was developed many years ago because it was believed that the classical theory did not achieve complete production efficiency and workplace harmony. Managers still observe the frustrations and difficulties because people always do not prefer to follow estimated or rational patterns of behavior.

Hence, there was a greater interest in assisting managers to deal more effectively with the “people side” of the organization. The neo-classical approach reflects a slight modification over the classical approach. 

The neoclassical approach identifies the importance of physiological and social aspects of workers as an individual and their relationships within and among the group of the organization. The Neoclassical Theory gained importance specifically in the rise of the “Hawthorne Experiment” at Western Electric Company by the father of human relation management named Elton Mayo from 1924 to 1932.

The Inception of Neo-Classical Theory

The neoclassical theory is the extensive version of the classical theory that includes behavioural science in business management. In this theory, the organization is the social system, and its performance is affected by human efforts.

The classical theory emphasized the mechanical and physiological variables and deemed them the primary factor in inferring its efficiency. However, when the efficiency was checked, it was found that the positive aspect of these factors did not evoke a positive response in work behaviour. 

Hence, the researchers tried to specify the reasons for human behaviour at a job. This eventually led to the arrangement of the neoclassical theory of economists. This mainly emphasizes human behaviour in the organization. This approach is often referred to as human relations or behavioural theory of organization. 

The neoclassical theory states that an organization is a mix of both informal and formal aspects of the organization. This aspect was ignored in classical theory. The organization’s informal structure is majorly formed due to the social interaction with workers; this affects and gets affected by an organization’s formal structure. Generally, disputes between the organization and workers often exist but this needs to be resolved immediately as the problems persist.

What are the Features of Neo-Classical Theory?

  • Business Organizations are identified as a social system.

  • Human factors are regarded as the most important elements in the organization.

  • The theory revealed the importance of social and psychological factors in determining the worker's productivity and satisfaction.

  • The management aims to develop social and leadership skills along with technical skills. It must be done for the welfare of the workers and the organization.

  • Morale and productivity work together in an organization.

Organization Structure in Neo-Classical Theory

The neoclassical writers offered the following organizational structure: 

Flat Structure: In the case of flat structure, the wide span of control in an organization helps in motivating the employees more effectively, a shorter chain of communication and it is free from hierarchical control.

Decentralization: Neo-classical theory adopted a decentralized organizational structure which is close to the flat structure due to the wider span of control. It permits autonomy and initiative at lower levels. It also encouraged people to occupy higher positions in the organization.

Informal Organizations: The neoclassical theorists emphasized the need for both formal and informal organizations. The formal organization indicates the motive of top management for interactions among the people. Informal organization is significant to promote the inadequacy of formal organization and to satisfy the social and psychological needs of people. The management uses informal organization for overcoming resistance to change on the part of workers and also for a fast communication process. Both formal and informal organizations are interdependent upon each other.

The Criticism of Neoclassical Theory

The assumptions on which neoclassical theory is formulated is sometimes not true. Thinking that there is always the possibility to find a solution that is acceptable to all is not always true. There are several conflicting interests among distinct groups that are merely structural and not physiological. This aspect is not covered in neo-classical theory. No specific organizational structure is suitable for all organizations. Various organizational formats introduced by the neoclassicists are not acceptable in all situations.

Neoclassical theory is only a modification of classical organization theory. It also suffered from similar drawbacks from which classical organization theory suffered. It lacked a unified approach to organization. This theory has been criticized by the fact it is nothing more than “ a commonplace of descriptive and empirical information as it has mainly relied on the Harthword Experiment”.

Fun Facts

  • Neoclassical theory is based on the assumption that makes its structure irrelevant for different organisation situations. 

  • This theory is a modified version of the classical theory that includes behavioural sciences in business management.


The neoclassical theory tried to overcome the drawbacks of classical organization theory. It introduced the concept of informal organization and the human behaviour approach in the study of organizational functioning. However, the neoclassical theory is also not free from several drawbacks. Like the classical theory of organization, the neo-classical theory is also suffered from incompetency, a short-sighted approach, and lack of integration among many facts of human behaviour studied by it.

FAQs on Neo-Classic Organization Theory

1. What is the difference between classical theory and neoclassical theory?

The classical theory believes that labour is the only single source of value of goods produced in the economy whereas the neoclassical theory believes that there should be a minimum of two factors of production i.e. labour and capital should be used in the production of goods. Two countries differ only in terms of their relative factor endowments. One country adopts a relatively labour-oriented approach whereas the other country adopts a relatively capital-oriented approach.

2. What are the main propositions of neoclassical theory?

The main proposition of neoclassical theory is:

  • The organization is generally a social system that includes several interacting parts.

  • Informal organizations exist within the formal organization and are affected by as well as affect each other. 

  • Being independent, the behaviour of human beings can be predicted in terms of social factors at work.

  • Teamwork is significant for higher productivity.

  • Communication is important as it carries information related to the organization's functioning and people’s feelings at work.

  • A conflict between individual and organization goals is often observed. There is a need to coordinate both the organization and individual goals.

3. Who is the father of neo-classical theory?

Alfred Marshall is regarded as the father of neo-classical theory.

4. What are the Two Movements in Neoclassical Theory and Describe any One of the Movements?

The neoclassical theory includes theories and approaches that are centralised on the human side of a company. The neoclassical theory has two prime sources: behavioural movement and the human relations movement.

The human relation movement was a result of Elton Mayo and Fritz J. Roethlisberger's Hawthorne research. It was designed to analyse ways to improve productivity at the Western Hawthorne Works factory by examining work situations related to rest periods, lighting levels, duration, or length of a working day. 

During the experiment, productivity levels increased but not due to Roethlisberger and Mayo’s situations on the workers. As they can not correlate the improved productivity with the imposed situation, new factors emerged. High morale was found in the group during the experiment. This morale developed indirectly due to the situations imposed by the researcher.