Issue link: http://www.e-digitaleditions.com/i/55470
Headlines Two Professors Win Nobel in Economics A business professor and a political science professor have received the ultimate recognition for their analyses of economic governance—the 2009 Nobel Prize in Economic Sciences. Oliver Williamson is the Edgar F. Kaiser Professor Emeritus of Busi- ness Administration and a professor emeritus of business and law at the Haas School of Business at the Uni- versity of California in Berkeley. He is also a professor of economics in UC Berkeley's College of Letters and Sci- ence. He shares the prize with Elinor Ostrom, Arthur F. Bentley professor of political science and professor of public and environmental affairs at Indiana University in Bloomington. Ostrom is the first woman to receive a Nobel Prize in economics. The prize committee cited Ostrom "for her analysis of economic governance, especially the commons" and Williamson "for his analysis of economic governance, especially the boundaries of the firm." In his research, Williamson has studied the problem of regulating transactions that are not covered by detailed contracts or legal rules. He has shown that markets and institu- tions have differing organizational structures and that these structures affect the ways firms and institutions engage in economic activity and resolve conflicts. His work in trans- action theory also shows how the behavior of opportunistic individu- als can influence relations between firms, particularly if these individuals renege on contracts and exploit eco- nomic weaknesses. BizEd posed five questions to Wil- liamson shortly after he was awarded 8 BizEd JANUARY/FEBRUARY 2010 the Nobel Prize. He discusses the allure of economics, the opportuni- ties the field has to offer, and the research that won him the world's highest academic prize. Can you briefly describe some of the key theories you worked on during your career? A question that had been posed by Ronald Coase in 1937 but was still unanswered 30 years later was: "When does a firm produce to its own needs and when should it out- source instead?" One reason this went unanswered for so long is that textbook economic theory viewed the firm as a "black box" for trans- forming inputs into outputs accord- ing to the laws of technology. Orga- nization theory never entered into the calculus because it had no place in the black box tradition. I knew from my interdisciplinary training at Carnegie that economics and organization theory were both relevant to an understanding of the business firm—and of complex eco- nomic organization more generally. Organization theory would become important to economists, however, only if and as it could be made sus- ceptible to economic analysis. That was the challenge. I under- took a four-part response. First, I described the firm not in technologi- cal terms, but in contractual terms. I regarded markets and hierarchies as alternative modes of contracting. Second, I made express provision for the cognitive and integrity limits of human actors. Third, I stressed that all complex contracts are incomplete, and many are subject to breakdown. Finally, I advanced the hypothesis that transactions, which differ in their attributes, are aligned with modes of governance, which differ in their adaptive strengths and weaknesses. Thus, each transaction achieves an outcome that economizes costs. The upshot was that a new explanation for the make-or-buy decision took shape—and the data were corroborative. Although transaction cost rea- soning initially was focused nar- rowly on the puzzle of what causes firms to decide whether to make or buy, it turned out to have wide application to a vast variety of con- tractual phenomena—and, again, the theories were largely corrobo- rated by the data. In the process, public policy toward business was reshaped. From a small acorn, the oak tree of transaction cost eco- nomics gradually took shape. Your theories have been credited with influ- encing fields as different as energy deregu- lation and human resource management. Can you give a concrete example of how your