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Etymologically, the word “hierarchy” has had a narrower meaning than I am giving it here. The term has generally been used to refer to a complex system in which each of the subsystems is subordinated by an authority relation to the system it belongs to. More exactly, in a hierarchic formal organization, each system consists of a “boss” and a set of subordinate subsystems. Each of the subsystems has a “boss” who is the immediate subordinate of the boss of the system. We shall want to consider systems in which the relations among subsystems are more complex than in the formal organizational hierarchy just described. We shall want to include systems in which there is no relation of subordination among subsystems. (In fact, even in human organizations, the formal hierarchy exists only on paper; the real flesh-and-blood organization has many inter-part relations other than the lines of formal authority.) For lack of a better term, I shall use hierarchy in the broader sense introduced in the previous paragraphs, to refer to all complex systems analyzable into successive sets of subsystems, and speak of “formal hierarchy” when I want to refer to the more specialized concept.So it's more or less the way we think of it, except he is drawing a distinction to the formal hierarchy we see in an org chart where each subordinate has just one boss and the informal hierarchy that actually exists inside organizations, where subordinates interact in a variety of ways. And he points out the many complex systems we find hierarchy, including biological systems, "The hierarchical structure of biological systems is a familiar fact. Taking the cell as the building block, we find cells organized into tissues, tissues into organs, organs into systems. Moving downward from the cell, well-defined subsystems — for example, nucleus, cell membrane, microsomes, mitochondria, and so on — have been identified in animal cells." The question is why did all these systems come to be arranged this way and what can we learn from them? Here Simon turns to story:
Let me introduce the topic of evolution with a parable. There once were two watchmakers, named Hora and Tempus, who manufactured very fine watches. Both of them were highly regarded, and the phones in their workshops rang frequently — new customers were constantly calling them. However, Hora prospered, while Tempus became poorer and poorer and finally lost his shop. What was the reason? The watches the men made consisted of about 1,000 parts each. Tempus had so constructed his that if he had one partly assembled and had to put it down — to answer the phone say— it immediately fell to pieces and had to be reassembled from the elements. The better the customers liked his watches, the more they phoned him, the more difficult it became for him to find enough uninterrupted time to finish a watch. The watches that Hora made were no less complex than those of Tempus. But he had designed them so that he could put together subassemblies of about ten elements each. Ten of these subassemblies, again, could be put together into a larger subassembly; and a system of ten of the latter subassemblies constituted the whole watch. Hence, when Hora had to put down a partly assembled watch in order to answer the phone, he lost only a small part of his work, and he assembled his watches in only a fraction of the man-hours it took Tempus.Whether the complexity emerges from the hierarchy or the hierarchy from the complexity, he illustrates clearly why we see this pattern all around us and articulates the value of the approach. It's not just hierarchy, he goes on to explain, but also modularity (which he refers to as near-decomposability) that appears to be a fundamental property of complex systems. That is, each of the subsystems operates both independently and as part of the whole. As Simon puts it, "Intra-component linkages are generally stronger than intercomponent linkages" or, even more simply, "In a formal organization there will generally be more interaction, on the average, between two employees who are members of the same department than between two employees from different departments." Why is that? Well, for one, it's an efficiency thing. Just as we see inside organizations, we want to use specialized resources in a specialized way. But beyond that, as Simon outlines in the parable, it's also about resiliency: By relying on subsystems you have a defense against catastrophic failure when one piece of the whole breaks down. Just as Hora was able to quickly start building again when he put something down, any system made up of subsystems should be much more capable of dealing with changes in environment. It works in organisms, companies, and even empires, as Simon pointed out in The Sciences of the Artificial:
We have not exhausted the categories of complex systems to which the watchmaker argument can reasonably be applied. Philip assembled his Macedonian empire and gave it to his son, to be later combined with the Persian subassembly and others into Alexander's greater system. On Alexander's death his empire did not crumble to dust but fragmented into some of the major subsystems that had composed it.