by Peter G. Klein
Oliver E. Williamson, 2009 Nobel laureate and founder of “transaction cost economics,” died May 22 at age 87. His work has been extremely influential in strategy – in the last two decades, perhaps more influential there than in his home discipline of economics. He anchored the Berkeley-Haas PhD program in Business and Public Policy along with David Teece, Glenn Carroll, Pablo Spiller, and others which has produced two generations of leading strategy scholars.
Williamson’s pathbreaking analysis of alternative organizational forms — markets, hierarchies, and hybrids — defined the modern field of organizational economics. As Jacques Crémer put it, Williamson’s 1975 book Markets and Hierarchies is “at the same time a survey and a users’ manual for incentives theory, written before the theory was even developed.” Transaction costs are now central to the analysis of firms, contracts, and organizations. Williamson’s contributions to industrial organization, antitrust analysis, and the theory of the firm were recognized by the Nobel committee in 2009; his influence today may be even greater in strategy, international business, corporate governance, entrepreneurship and innovation, public administration, and law. His insight, originality, and ability to synthesize a staggeringly broad range of ideas and arguments puts him in the first rank of interdisciplinary social scientists along with his own intellectual heroes Arrow, Chandler, Coase, and Simon (to whom he dedicated his 1985 book The Economic Institutions of Capitalism).
While Williamson’s comparative analysis of alternative organizational forms was intended to explain the business practices we observe, rather than provide guidance to managers – as he famously argued, efficiency is the best strategy – the transaction cost framework has proven extremely useful for strategy research and practice. The make-or-buy decision is the most obvious application but a host of papers explore the effect of asset specificity, uncertainty, and frequency on how organizations procure inputs and distribute products, when they form alliances and join networks, how they diversify and refocus, what their boards and senior management do, how employment contracts are structured, when firms buy, sell, or license intellectual property, and more. Transaction cost reasoning illuminates the benefits and costs of various contractual and organizational alternatives, which is essential for managers seeking competitive advantage.
Indeed, Williamson is one of the most heavily cited authors in the strategy field. A bibliometric analysis of the first two decades of SMJ (1980-2000) ranked his Markets and Hierarchies (1975) as the fifth most influential work, behind only Porter’s 1980 and 1985 books, Rumelt’s Strategy, Structure, and Economic Performance (1974), and Chandler’s Strategy and Structure (1962). (Williamson’s 1985 Economic Institutions of Capitalism came in at #18 – making Williamson the only author besides Porter with two works in the top 20).
Interestingly, Williamson’s career and contributions illustrate the critique levied by Nathan Rosenberg and others against the “linear model” of technological progress in which basic science begets applied science which begets useful technology. Instead, as historians of science explain, the relationship between “science” and “technology” is messy, recursive, and complicated; applications sometimes come first, theories second. Williamson spent the 1966-67 academic year as Special Economic Assistant to the Assistant Attorney General for Antitrust, where he worked on several important antitrust cases including a one involving bicycle manufacturer Schwinn’s contractual restrictions on downstream distributors. Williamson reports that his work on Schwinn inspired the transaction cost theory of vertical integration, which he spelled out in detail in his influential 1979 article. Those of us teaching in business schools can rest assured that our job is not merely to apply theories developed by economists, sociologists, psychologists, and others to management problems; our investigations of novel phenomena may be the drivers of new theory!
I was privileged to take Williamson’s course, Economics of Institutions, at Berkeley in 1989 and then to write my dissertation under his supervision. Williamson spent much of his early academic career at Penn, where he had several outstanding students and younger colleagues including Scott Masten and David Teece. He then spent four years at Yale Law school, where he was highly productive but did not supervise Ph.D. students. It was only after his move to Berkeley in 1988, where he established his institutions graduate course and the legendary IDS 270 research seminar, that he became the leader of a Williamson School (more affectionately known as the “Berkeley mafia”). He was an inspirational figure and a great mentor. I wrote a short note on my experiences and my fellow students Nick Argyres and Jackson Nickerson have written about Williamson’s influence on strategic management at the SIOE blog. He will be greatly missed.