Neo-Classic Organization Theory

Neo-classical Theory of Management 

Neoclassical theory of management is usually linked to Elton Mayo's human relation movement. Mayo, Elton pioneered the neoclassical approach, and his subordinates performed the Hawthorne experiment to construct this theory’s foundation. This theory is the extended version of classical theory, where behavioural science gets involved in the management. As per this theory, an organisation is a social system, and an organisation’s performance purely depends on the workers and gets affected by human causes. The neoclassical theory affirms that a person is motivated by various reasons and desires to fulfil specific requirements. In this piece, you will find everything about the neoclassical theory, its weaknesses, and strengths. 

The Inception of Neoclassical Theory 

The neoclassical theory is the extensive version of the classical theory that includes behavioural science in business management. In this theory, the organisation 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. 

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Hence, the researchers tried to specify the reasons for human behaviour at a job. This finally led to the arrangement of neoclassical theory. This primarily focuses on human behaviour in the organisation. This approach is often referred to as human relations or behavioural theory of organisation. 

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

Main Propositions of the Neoclassical Theory

Here are the main propositions of neo-classical theory.

  • An organisation is a social system that includes various interacting parts.

  • Informal and formal structure affect one another and informal organisation prevails in every formal organisation.

  • Motivation is a highly complex mechanism and various social and psychological factors work together to motivate employees in an organisation.

  • Human beings tend to act irrationally sometimes and with the most irrational behaviour employees seek rewards.

  • Teamwork is the most important factor for smooth functioning and to achieve this behavioural approach is of utmost importance. 

  • Humans are interdependent and organisation can easily predict the behaviour if it looks at the psychological and social factors.

  • Organisational goals and individual goals do vary and create conflicts. It is important to reconcile the goals for proper functioning. 

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.

Solved Example

Q. What are the Weaknesses of the Neoclassical Theory of the Organisation?


  • The Neoclassical approach lacks a unified strategy. In simple words, it is a modified version of Classical Organisational theory.

  • This theory offers various structures but none of them can be applied to all situations. Moreover, a single structure does not fulfil all organisation’s objectives

  • Neoclassical theory is based on assumptions and might vary from the truth. A single solution cannot be useful for every individual and may not satisfy everyone.

FAQs (Frequently Asked Questions)

Q1. What is the Difference Between Classical and Neo-classical Theory?

Ans: Neoclassical theory is an advanced version of classical theory. The neoclassical theory includes human behaviour in management. Here are a few key differences between these two theories.

  • The classical theory only deems economic and physical requirements to satisfy employees. Whereas neoclassical theory considers factors like job satisfaction and career development along with physical and economic need.  

  • In classical theory, the organisation is in a hierarchical structure, but the organizational structure is flat in neoclassical theory. 

  • In classical theory, decision making is on a single person whereas neoclassical involves a team.

  • The classical theory is based on rewards, unlike neoclassical theory.

Q2. What are the Two Movements in Neoclassical Theory and Describe any One of the Movements?

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

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 researchers.