Essay on Economics and California Management Review

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Williamson’s Impact on the Theory and Practice of Management

David J. Teece


lthough unknown to most CEOs, at least until his recent recognition by the Nobel Economics Prize Committee, Oliver Williamson has had a large impact on management theory and practice.
There are many organization and strategy questions where his research is highly relevant. He has spent much of his career trying to understand how things ought to be organized to promote efficiency, minimize manageable contractual risk, and achieve profitability. He developed transaction cost economics as a framework to assist in this.
Williamson has also spent considerable effort in exploring not just the private benefits associated with various organizational structures, but the social benefits as well. The latter line of inquiry has provided many insights into public policy, where they have had great impact. His insights have been employed by antitrust and regulatory agencies around the world. In some countries, his work has animated economy-wide reform efforts. The dramatic and successful economic reforms in New Zealand during the 1980s—especially in energy and telecommunications—have his “fingerprints” on them, as he was very influential with senior officials in the New Zealand Treasury. That history is described elsewhere and will not be repeated here.1

Key Management Issues
Williamson has not been writing to a management audience; but that’s not to say that he hasn’t influenced management thinking. Managers often don’t know it because his work, while accessible to practitioners (the amount of mathematical theory is minimal), is unlikely to be read by them because it is very general and may not seem to be directly applicable. Nevertheless, leading management consultants and scholars have helped propagate his ideas, often




A Tribute to Oliver Williamson—Williamson’s Impact on the Theory and Practice of Management

watered down and “translated” to make them a bit more user friendly to executive audiences unfamiliar with the scholarly literature.
Here is a thumbnail sketch of just a few of the management ideas that are part of the collective received wisdom attributable, at least in part, to Oliver E.
Williamson: the contract logic behind vertical integration, the inherent hazards of contractual relationships, and the potential benefits of transforming organizational structures.
The vertical integration of economic activity is not always best understood by reference to particular technological benefits associated with performing sideby-side activities under one roof. Rather, make-or-buy decisions can better be framed, and understood, as contracting issues. Every time an expansion of economic activity is contemplated, Williamson admonishes the analyst/executive to ask whether the task is best done internally or outsourced. In Williamson’s paradigm, the answer depends not just on capabilities and related production costs (which he recognizes but doesn’t analyze), but mainly on strategic risk management factors associated with relying on contracts versus inside-the-firm arrangements. Williamson asks us to recognize that contracts are by their very nature incomplete—one simply cannot think of everything when negotiating and writing a contract. Because of that, there is an inherent risk associated with contracts, particularly when investment in (transaction-specific) physical or human capital is involved. Unforeseen contingencies will surely arise. This matters a great deal if the parties to the contract don’t have other options available to them and could be held over a barrel (Williamson’s “hold-up” problem).
Stated differently, if one of the parties to a contract makes a relationshipspecific investment in reliance on the promises of the other party, then their investment—whether in physical capital, financial capital, or human capital—is in a situation of strategic