Law in the Study of Institutions and Organizations

By Gillian K. Hadfield*

Oliver Williamson was a part of my intellectual journey from the beginning. I had arrived at Stanford in the fall of 1983 for a joint JD-PhD having only been recently disabused of my belief when I chose this combination of law and economics that I had invented the field based on my passion for John Rawls’s book—A Theory of Justice. From my undergraduate perch in Eastern Ontario at Queen’s University, I had certainly never heard of Aaron Director or Richard Posner. I had just been drawn to the beauty and significance of approaching the ultimate question of what it means for institutions to be fair through the use of systematic tools and methods about how people make decisions and how those decisions aggregate. That’s what I saw in Rawls.

And that’s what I learned from Oliver Williamson—the possibility of a deep and meaningful integration of the science of economics and the humanistic study of how people experience the world. Paul Milgrom pointed me to Williamson’s work as I struggled to articulate what had drawn me to study the intersection of law and economics. So much of what turned out to be the well-established field of law and economics was focused on questions I found analytically interesting but intellectually unsatisfying: what is the efficient rule for deciding tort cases? Assigning liability in corporate governance? Law in this economics was just another price. But then I read “Transaction-Cost Economics: The Governance of Contractual Relations” in the Journal of Law and Economics (1979). Williamson begins that article with a discussion of Ian Macneil’s 1974 Southern California Law Review article “The Many Futures of Contract.” Macneil introduced to the world of legal scholarship the idea that the paradigmatic discrete transaction that populated both law and economics—“sharp in by clear agreement; sharp out by clear performance”—missed much of the real world of contracting. In the real world, contracts often framed ongoing relationships; to ignore the rich context and dynamics of relationships was to miss much of what “contracting” was all about. As Williamson explained Macneil: “By contrast with the neoclassical system [of contract law], where the reference point for effecting adaptation remains the original agreement, the reference under a truly relational approach is the ‘entire relation as it has developed through time.’”

Elsewhere in that pivotal article, Williamson introduced me to the work of Stewart Macaulay, and his seminal “Noncontractual Relations in Business” in the Wisconsin Law Review (1963). Here was another rich account of what people really are doing when they are contracting with one another—a paper today known to almost every economist who studies relational contracting.

This is what Williamson introduced to the economics of organization—a concept of law that was rich and institutional and subtle. Not law as price, but law as enterprise. Understanding contract law means understanding an institution in which “the fiction of discreteness is fully displaced as the relation takes on the properties of a ‘minisociety with a vast array of norms beyond those centered on the exchange and its immediate processes.’”

When I took my first job at U.C. Berkeley, it was a great honour to finally be able to work with Olly. My job market paper on franchising was an effort to work through the complex interface between legal and economic concepts of relational contracting, guided as well by Williamson’s work on opportunism and sunk costs. Olly welcomed me as a junior professor to the University and to his seminar on law and economics. The confidence he inspired to keep focused on what was complex and interesting, even if at the expense of what was fashionable in economic theory, was essential to my ability to keep on my intellectual path.

Olly never wavered in his message about the need to pay close attention to the subtleties of the normative world. This project, of truly integrating the complexity of legal and normative infrastructure into our analysis of economic organization, is one that 40 years later is still in its early phases. The concept of transaction costs has been well absorbed and even the idea of relational contracts—but for many years at the price of ditching the relational complexity that Williamson illuminated, in favor of what could be formally modeled as price and transaction. Only now is an organization like SIOE, birthed by Williamson and co. as ISNIE, helping to usher in the emergence of formal modeling of norms and culture that tries to hew more closely to the complex.


*Gillian Hadfield is Schwartz Reisman Chair in Technology and Society, Professor of Law and Professor of Strategic Management at the University of Toronto. She currently serves as First Vice-President of SIOE.