A Picture Is Worth a Thousand Bullet Points

26 March 2008 at 11:17 am Peter G. Klein 4 comments

| Peter Klein |

An alert reader directs me to slide 241 of the slide pack for Dick Langlois’s Economics of Organization course. Click the image below for a look. Dick seems to be raising the point that Williamson’s TCE (as well as other theories of economic organization) pays insufficient attention to the processes by which firms reach their “optimal” organizational structures. TCE holds that firms try to minimize (or should minimize) the sum of production and transaction costs. But do firms actually do this? Do they make mistakes? Do they experiment and learn? Is the selection environment strong enough that inefficient organizational choices are quickly eliminated, or do inefficiencies persist? (The problem is particularly important for empirical literature on organizational form — see pp. 440-42 of this paper.) Or, can we assume, with Dr. Pangloss, that whatever is, is optimal?

To illustrate the point, Dick includes a photo of Williamson giving a seminar, with some additional background art — an etching from Candide — added to the frame. If you’re not paying attention you might think the etching is part of the original. I give Dick points for cleverness, but my anonymous correspondent finds the illustration a bit too subliminal. What do you think?

Entry filed under: - Klein -, Education, New Institutional Economics, Theory of the Firm.

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4 Comments Add your own

1. David Hoopes | 26 March 2008 at 12:52 pm

That’s great!
2. Joe Mahoney | 26 March 2008 at 9:30 pm

The connection to Candide seems inaccurate. Williamson (1985: 408) states: ” ‘Flawed’ modes of economic organization for which no superior feasible mode can be described are, until something better comes along, winners nontheless.”

Transaction costs theory emphasizes that organizational innovation is always possible, and that at any moment in time we have a comparative assessment of imperfect governance alternatives.

Transaction costs theory does not seem to claim that we ever can be complacent that what currently is, “is the best, in the best of all possible worlds.” In fact, transaction costs theory suggests that holding such a posture would be injudicious..
3. Dick Langlois | 27 March 2008 at 9:45 am

Well, first of all, the Candide bit is intended to raise the issue with students, not to settle it. (It is not part of the original picture but slides in later.)

I think what Peter says on pp. 440-42 of the paper he cites is quite sensible. But it does point up the equilibrium nature of comparative-institutional analysis and the (at best) ad hoc account of economic change in Williamson. (Which does not, of course, make comparative-institutional analysis invalid or inappropriate in many circumstances.) Quite a long time ago, Jon Elster (Explaining Technical Change, Cambridge, 1983) took Williamson to task for not having a real background theory of the process that makes us think observed organizational forms are even relatively more efficient than other real or imagined alternatives. As Peter suggests, Williamson’s response was in the “as-if” vein. My point in the slide, and in much of my writing in general, has been that there may be real payoff from actually looking at the evolutionary process that gives rise to, and constantly changes, organizational form.
4. stevphel | 28 March 2008 at 10:16 am

I agree with Dick. Why the reluctance to develop process models in economics?