The Economic Intstitutions of Capitalism

I was searching for something about comparative organizational forms - such as how is Toyota organized differently than GM and how does this benefit them? - when I found this. After searching around, I discovered that Oliver Williamson is both one of the most prolific writers and one of the most cited. Coase's 1937 essay, "The Nature of the Firm", challenged economists to open up the black box that neoclassical economics refers to as "the firm". Williamson responded by creating a whole new tool box for analyzing a wide variety of relationships called the New Institutional Economics (NIE). This book summarizes the state of NIE as of 1985. The basic outline of NIE is easy to grasp, but shifts the focus of economics from choice to contract. Contractual man, furthermore, is not the perfect maximizer assumed in neoclassical economics. It might help if the reader knows a little about antitrust theory as it applied in the middle of the 20th century to vertical integration since much of this book is dedicated to showing why that theory overlooked the efficiency benefits. Williamson then applies it to the organization of labor (hierarchy vs. team production), unionization, corporate governance, and finally public utility franchise bidding. While I respect Professor Bainbridge's experience teaching material this difficult, I personally didn't find the writing so bad as to deduct a star. Yes, it is jargon-filled, but this is a specialist's field. Once you learn the vocabulary, it seems to move along at a good pace without suffering from some of the archaic terminology found in law texts. It contains some rather simple math (which the reader can skim without losing anything of the argument). I especially liked how Williamson diagrams the decision-making process. If you want to know more about why the business world is the way it is, this book will at least provide a new way of thinking if not the actual answers. It proposes and then offers answers to a variety of puzzles, but more importantly it shows how subtle changes in the analysis framework can yield better answers, which I think makes it worthwhile reading.

As a lecturer in law and economics I have used big chunks of this book as teaching material. Another reviewer commented on the unfortunate writing style. I agree. Williamson is not accessible without significant effort from the reader, and often unnecessarily so. But he is also extremely enlightening. His analysis on contract governance is brilliant, and I have used his schematics on contract structures in both academic and professional life. I advise lawyers who work in the corporate field, particularly in complex contractual arrangements, such as franchises or distribution agreements, to read this book. It is really an eye-opener on why sometimes contracts fail to work as expected.

EIoC is a classic work of new institutional economics. In it, Williamson works out his theories of transaction cost economics across an array of interesting economic questions. Most of the covered topics will be of interest not only to economists, but also to lawyers and policymakers. Among other examples, Williamson tackles such subjects as vertical integration, corporate governance, and industrial organizations.Williamson's core idea is the theory of transaction cost economics. We can analogize transaction costs to friction: they are dead weight losses that reduce efficiency. They make transactions more costly and less likely to occur. Among the most important sources of transaction costs is the limited cognitive power of human decisionmakers. Unlike the Chicago School of law and economics, which posits the traditional concept of rational choice, Williamson asserts that rationality is bounded. Put another way, he assumes that economic actors seek to maximize their expected utility, but also that the limitations of human cognition often result in decisions that fail to maximize utility. Decisionmakers inherently have limited memories, computational skills, and other mental tools, which in turn limit their ability to gather and process information. As he demonstrates, this phenomenon, known as bounded rationality, has pervasive implications for understanding how institutions work.At the policy level, transaction cost analysis is highly relevant to setting legal rules. Suppose a steam locomotive drives by a field of wheat. Sparks from the engine set crops on fire. Should the railroad company be liable? In a world of zero transaction costs, the initial assignment of rights is irrelevant. If the legal rule we choose is inefficient, the parties can bargain around it. In a world of transaction costs, however, the parties may not be able to bargain. This is likely to be true in our example. The railroad travels past the property of many landowners, who put their property to differing uses and put differing values on those uses. Negotiating an optimal solution will all of those owners would be, at best, time consuming and onerous. Hence, choosing the right rule-which is typically the rule the parties would have chosen if they were able to bargain (the so-called hypothetical bargain)-becomes quite important.In sum, highly recommended. If so, you might ask, of course, why did I subtract one star? Mainly because of Williamson's unfortunate writing style. Although EIoC is largely free of the recreational mathematics that plagues modern economic writing, which is useful for those of us who flunked Differential Equations, it is very jargon-intensive. Worse yet, much of the jargon is self-created. All of which makes reading Williamson an effort-intensive project. Usually the cost-benefit analysis nevertheless comes out in his favor, but sometimes one puzzles out the jargon to find a rather obvious point that could have been conveyed far more simply. (The bus

I came across this book as part of my MBA studies at the Cox School of Business. A professor recommended it for expanded understanding of vertical integration theories. In fact, my professor is cited in the book! I found it to be very valuable and plan to keep it as a reference for years to come!