One would have expected that Oliver Williamson winning the Nobel prize for economics would have been controversial but that turned out not to be. I say this because for at least a decade I have participated at numerous lunch and dinner time debates over whether Oliver Williamson should win the Nobel prize. The most recent of these was a couple of weeks ago at Stanford in a discussion with Williamson’s colleague Steve Tadelis. Steve was currently writing an important survey chapter with Williamson and so was better placed than most to evaluate his contributions.
Before turning to these, let me explain the controversy. The issue is that to many economists much of Williamson’s writings were obscure and did not really constitute a complete economic theory. To be sure, the same could be said of Thomas Schelling and his many influential ideas but Schelling wasn’t pretending to be more. For Williamson, you had to do a lot of work to find the 10% of his writing that was more significant.
The point is that that 10 percent is very significant and influential. Indeed, as Steve pointed out to me, you can read them all in this 9 page American Economic Review paper from 1973, “Markets and Hierarchies: Some Elementary Considerations.” (It is paywalled on Jstor here). Let me summarise:
- Bounded rationality: organisational economics requires us to recognise that agents cannot process all information. The organisation exists because of that fact although others also recognise that the market also has that issue too — in particular, in terms of contracting.
- Opportunism: individuals are really self-interested and properly modelled as immoral. Indeed, it is a what would now be called ‘Dilbert’ view of organisations. There is no one nice in Williamson’s world.
- Fundamental transformation: when you join an organisation you may investments specific to a relationship. This creates relationship specific assets and means that while you might have operated in a competitive market before, now you are in a more monopolistic setting. This changes the way you have to consider the transaction.
- Hold-Up: in particular, you are vulnerable to hold-up — that is, while in a competitive market, your assets might be valuable, after the transformation, they are of more specific value and you can’t be sure you are going to get a competitive return. Of course, this is just a form of moral hazard but Williamson was the first to articulate and emphasise that this might explain alot about why organisations look the way they do.
Even after all of that, there is a ton of other stuff in that 9 pages that doesn’t seem to have stood the test of time. Nonetheless, putting contracting issues at the heart of organisational economics and tying together bounded rationality, opportunism and asset specificity have been extremely influential. That is why you award a Nobel prize for it.
In addition, Williamson was responsible for articulating the philosophical and modelling issue of ‘selective intervention’ (that is, why can’t a centralised organisation replicate anything a decentralised one can? Ergo, why don’t we just see hierarchies with markets controlled within?). He was also responsible for the anti-trust analysis of mergers illustrating the trade-off between anti-competitive consequences and potential synergies through cost savings. That remains the single most important trade-off in practical merger analysis to this day.