Oliver Williamson, RIP

Oliver Williamson won the Nobel in 2009 with Elinor Ostrom. My post on that event is reprinted below (no indent). See also Tyler here.

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In Adam Smith there is the pin factory and the market and from that beginning we trace the long literature in economics focused on the twin questions, What price to set?  How much to produce?  Following Coase, Williamson asks different questions, Why a pin factory?  Why are the 18 steps to make a pin performed by a single firm rather than two or more?  Why are there many firms instead of one large firm?  Why does the pin factory not vertically integrate upwards to buy the steel factory and downwards to buy the retail hardware shop?

Williamson’s answers rest on the notions of bounded rationality, contract incompleteness, asset specificity and opportunism. Start at the end, asset specificity and opportunism.  When a deal has been sealed the parties typically move from having many potential partners to being locked in.  That’s bad because it raises the possibility of opportunism–one party can exploit the other.  But it’s also good because when the lock-in is credible each party may be more willing to invest in assets which are extra-productive but specific to the relationship.

Marriage, for example, takes away some possibilities but it adds others.  With marriage, for example, comes a greater willingness to invest in children (n.b. asset specificity, the child is of extra value but only to the specific parties involved in the marriage) but that very benefit also means that one of the parties has the leverage to be opportunistic.  Knowing all of this when they enter the contract the parties bargain ex-ante, they exchange promises and make investments (the ring), they establish rules for ex-post bargaining or decide on the background rules to apply in that eventually (pre-nup, no fault divorce, covenant marriage).  The rules are never perfect and the contacts are always incomplete.

Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly individual dies or plant construction) that are specific to a given
trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms come to rely on long term contracts or vertical integration or other seemingly non-competitive solutions to enhance market productivity. Early generations of antitrust enforcers often saw these as monopolistic dealings, but scholars such as Williamson helped us understand how these are essential to the workings of the invisible hand.

Williamson’s paper, The Economics of Governance is an excellent recent summary of his views in the area.

Williamson’s work is notable for inspiring a large body of empirical and theoretical work in modern industrial organization and having influence in law, political science, and management. His work has been widely cited, and by some counts he was the most widely cited economist in the world.

I especially thank John Nye who contributed to this post.

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Link to "The Economics of Governance" is broken. Here is one that works:
https://sci-hub.tw/10.2307/4132783

He also served as an economic advisor at the Antitrust Division, where he contributed to a reassessment of vertical mergers and transactions.

"Williamson analyzes how firms come to rely on long term contracts . . ." At both ends (production and sale)? I've been fortunate to work with a citrus grower for a while. For a time if a citrus grower had no (supply) contract to sell, there were no buyers, and the grower's fruit fell from the trees and rotted. Then along came the novel coronavirus and, in an instant, citrus was/is in great demand (presumably because consumers believe citrus (vitamin C) is a defense against the virus). What I have come to realize is that the citrus market (and agriculture in general) is fertile ground for studying economics. My client's CEO (a woman) and I are opposites, opposites in the sense that she has an extraordinarily high level of risk tolerance while I, a lawyer conditioned to risk aversion, don't. In citrus (as in agriculture generally) opportunity comes and goes in an instant, requiring rapid fire decision-making. The citrus industry has been subject to a huge supply shock from a contagion. This time I'm not referring to the coronavirus, but what's called greening disease, which, so far, has no "vaccine" to get to herd (the trees) immunity. And while I push risk aversion (and capital accumulation), the CEO is off chasing her next high risk/high reward project. Will she renew the supply contract? I don't intend to ask.

He was one of the few contemporary economists who wrote articles that had both major importance -- and few equations.

I was a student of Ollie during his short time at Yale. I am not an economist, I was at the law school, and Ollie supervised my dissertation for the JSD degree, which is a kind of PhD in law. To this day I believe I might be the only holder of this degree who wrote his dissertation with a Nobel Prize winning economist.
Ollie was a true scholar, not confined by the self-imposed limitations of any discipline. Any law student could learn more from him than from most law professors. He was also tough, any hint of superficial analysis would not survive. I remember handing in a draft of a chapter that basically argued that fact pattern A showed conclusion B, to which he wrote on the margin, “Maybe to you but obscure to me.”
It had never been my intention to pursue a career in academia, my work with him had the purest of motives - intellectual curiosity. After I completed my degree, I became a corporate lawyer. Sometimes clients or colleagues comment that I have good instincts for solving the issues that arise in transactions, but I know that what I am applying is not instincts, it is what I learned from Ollie. I also teach a class on energy law as an adjunct, which is heavily influenced by transaction cost economics. Many of the structural changes that occurred in the energy industry over the last 50 years, which used to be almost completely vertically integrated, can be best understood through the lens of governance structures.
I will always be thankful for having learned from this extraordinary man.

This is very interesting! I'm a huge fan of Ostram's work and I think the analysis and comparison of how the supply chain unfolds is essential.
I take it further. There are many sectors that attract people despite the risk. These sectors, usually have different motivations than profit. While profit is essential to sustainable businesses these sectors are socially bound to other goals.

These are, Education, which has a goal to teach and educate, Journalism which has the goal to inform the truth, Law which has it's goals in justice, Art which has it's goals in expression, and Medicine which has it's goals in healthcare.

All of these systems are operated by market actors that are doing hard, expert work, that is not rewarded by the market sufficiently. This is obvious in the case of public defense and healthcare. In the US we have about half the rate of doctors compared to most modern democracies. But each one of these practitioners is providing real social value, in propping up the institutions of Law, Healthcare, Journalism, and the Arts.

This is encapsulated in the paper:
"As against simple market exchange, governance is predominantly concerned with ongoing contractual relations for which continuity of the relationship is a source of value."

It is my assertion that you can extend that value to expert social behavior as well like the Justice system the education system. ect.
This is why I call my system Valueism.

How do we account for systems of Value that benefit the quality of life of all participants? This is not some simple exchange, but has a networked effect.

The question I have is, how do we fully incentivize these institutions when from the perspective of the agent-- as there is a cost to participate  in pursuing careers in less market rewarded sectors like healthcare versus a career in finance. How do you get more Primary Care physicians when the market does not provide the correct incentives, and the relative effort versus remuneration found in finance is greater than that of medicine?

Well here is my solution-- It is long, and argued from first principles-- going heavy into a comparison on how the supply chains for complex social institutions need to different than natural resource extraction (A Fish is not a Movie), and how our economic policy effects the way supply chains are created and what can be profitable.

Tyler: "I agree if I Understand"
https://vimeo.com/313280530

But at the 15-17 minute mark, I show how we can make a new market. I call it : Behavior Finance, that is a new mechanism to incentivize expert work, that is not being incentivized by the market fully, and leaves the nation at a strategic disadvantage.

It is also my assertion that this is a massive source of real waste of real value: the effort of doctors. As currently healthcare is ~17% of GDP, and US hospitals Bill ~3.2 T and receive around 890 Billion of that bill. Now the doctors are smart, and factor the non payments into the bill-- that is why it is so high. But the value of the services is by far higher than 890 Billion and much of the of the Work US hospitals and Doctors do is at a loss.

By accounting for their behavior better, we can take the 2.3 T of losses, currently annually, and account that as REAL value. As it is real services, from real doctors.

I go into this at the 10 minute mark of my podcast.
After I rant about housing demand lost in major cities to do to covid-19

I would love any consideration as I believe it has national security goals, and it implementation would be a benefit to all.

https://soundcloud.com/pietra-system-change/system-change-ep-1-how-to-fix-the-us-health-care-system

Oliver was a great thinker, but he had a hard time communicating, both in writing and in his talks. When I first read Markets and Hierarchies, I was baffled. But then when Economic Institutions of Capitalism (fabulous title!) came out, I began to see what was so important.

About 1986, Orley Ashenfelter asked Armen Alchian to write a book review of Economic Institutions of Capitalism. Armen enlisted me. (Alchian and Woodward, JEL (1988)). Armen began writing, but I went back to reread Institutions of Capitalism. Armen gave me what he had written, and I was baffled. “Armen, this stuff isn’t in Williamson.” He asked, “Well, did he get it wrong?” I said, “No, it’s not that he got it wrong. These issues just aren’t there at all. You attribute these ideas to him, but they really come from our other paper.” And he said “Oh, well, don’t worry about that. Some historian will sort it out later. It’s a good place to promote these ideas, and they’ll get the right story eventually.” So, dear reader, now you know.

I still think the book review is one of the best roadmaps to Williamson's ideas.

http://www.jstor.org/fcgi-bin/jstor/listjournal.fcg/00220515/.21-.30
or maybe this one is better
https://edisciplinas.usp.br/pluginfile.php/1600959/mod_resource/content/1/alchian.pdf

At the time of his death, Ollie was the second most cited living economist according to Google Scholar at about 276,000, behind Andrei Shleifer at about 295,000.

Fascinating. A related thought occurs to me. Adam Smith, were he alive today, might concede that the algorithmic search engine could, in principle, become the supreme impartial spectator. At least when and where its program is not purely capitalistically oriented to buying and selling for profit. My impression tinged by optimism is that the google does non-profit searches while remaining a healthy depersonalised market place for influential ideas, a lot of the time.

Arguably Oliver Williamson's most famous book is the The Economic Institutions of Capitalism. Amazon Global returns it as the #1 search result.

For the sake of argument let us try to behave like Adam Smith and prioritise algorithmically-moral over economic considerations by leaving out the pesky word 'economics' from the google search.

I'd be disinterested to know what the google engine return is for 'institutions of capitalism' when typed on a computer in Richmond USA. In Sydney Australia — on my computer at least — Michael Heller The Institutions of Capitalism and Their Decay is #2, whereas Oliver Williamson is #4 or thereabouts. My ex-wife gets the same result in Argentina, as does my mother in London UK.

How beautifully impartial and impersonal is that result? My book did cite Andrei Shleifer and John Williamson but not Oliver Williamson. I doubt I even appear on google scholar because no one cites me! But it gladdens me to think that in that algorithmically-motivated wondrously vast impartial global market place for big ideas there may be a little impersonal place for 'institutions of capitalism' that is impartially mine and higher in the hierarchy (about which Oliver also wrote eloquently). Today, at least. In Australia, anyway, which has so far managed the Wuhan virus better than any other country.

For duckduckgo in NZ, "The economics of property rights" came up number one. Number two is the "Economic institutions of capitalism" from Amazon.
OZ continues to be lucky (this time with its climate).

bounded rationality
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This is the effect of path combinations. Within some bounded rationality, a role of heave steel wire can be used in multiple products. Hence economies of scale.

It is right in the mathematics of coloring a beach ball. In physics is appears as the Boltzmann constant. Bounded rationality is our Planck's constant. Light is the fixed number of steps needed to turn a roll of heavy steel into straight sections of steel. We Use Boltzmann but stay within a light speed of Planck.

For Prof. Williamson's specific contributions to Economics, TCE, antitrust, and Institutional Economics -

Chapter 4 of the following book has been dedicated to Prof. Williomson's contributions.

Book name - - Firms, Markets, and Hierarchies: The Transaction Cost Economics Perspective

Authors - Glenn R. Carroll and David J. Teece.

Publisher - Oxford University Press. 1999.

Chapter pages - pp 37-59

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