By Scott Masten*
Early in my career, I attended a conference at which Oliver Williamson was the discussant for a paper that the author described as an application of Williamson’s transaction cost theory. Although the subject of the paper was an organizational arrangement of interest to TCE, and the logic of the paper wasn’t necessarily wrong, I struggled to see a connection between the analysis in the paper and what I understood to be Williamson’s framework. My vision being less keen than Williamson’s, however, I looked forward to hearing how he would reconcile the author’s analysis with a transaction cost orientation. It was mildly reassuring, then, when Williamson opened his comments by saying that he was unable to do so, after which he proceeded to recast the issues raised in the paper “viewed through the lens of transaction cost reasoning.”
As those familiar with his work know, Williamson often used this lens metaphor --- most commonly in the form “the lens of contract”--- in describing his approach to the analysis organizations and institutions.** Williamson’s optical allusion served to convey that, more than just an extension of price theory to the choice of organizational form, transaction cost reasoning represented a distinct orientation, a different perspective on governance. Williamson devoted virtually all of his efforts subsequent to Markets and Hierarchies to developing and pushing the logic of transaction costs. Among the features of the orientation that emerged from those efforts, two aspects stand out. The first is the identification of adaptation as the central problem of organization: the certainty that change will alter the best course of action. The second is the imperative for comparative analysis: Persistently asking why an outcome cannot be accomplished another way --- through renegotiation or a suitably specified contract or by assigning discretion or authority to a manager --- leads eventually and inevitably to a focus on the ultimate impediments to the realization any and all mutually advantageous trades, which we have come to call transaction costs.
Williamson’s “operationalization” of transaction cost economics, which permitted hypotheses based on transaction costs to be formulated and tested, is deservedly recognized as a major contribution. But arguably his greater gift was the broader perspective that he brought to questions of organization. Viewing governance through the Williamson lens requires some effort and a period of adjustment. Once implanted, however, it becomes difficult to view organization any other way.
*Scott E. Masten is Professor of Business Economics and Public Policy at the University of Michigan. He was one of Oliver Williamson’s early PhD students and served as President of SIOE (then called ISNIE) 2008-9.
**The quotation in the preceding paragraph, Williamson’s earliest use of the lens metaphor that I could find, appeared alongside another, arguably less felicitous medical metaphor in “The Economics of Organization: The Transaction Cost Approach,” American Journal of Sociology, 87(3), Nov. 1981, p. 572: “Inasmuch as our understanding of organizational anatomy is still primitive, since the study of anatomy logically precedes pathology, and as transaction cost economizing is central to the design and assessment of governance structures, I urge that greater attention to anatomy — viewed through the lens of transaction cost reasoning — is indicated at this juncture.” Williamson acknowledged borrowing the “lens of contract” formulation from Buchanan (1975).