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ISNIE Newsletter Fall 1999 1

Newsletter INTERNATIONAL SOCIETY FOR NEW INSTITUTIONAL ECONOMICS

Fall 1999 Volume 2, Number 2

Contents

Ronald Coase:Conference Address 1

Oliver Williamson:Conference Address 9

1999 Washington, D.C.Conference Highlights 2

Call for Papers 2000 7ISNIE, ISNIE-Europe

Activities 8Other Meetings 8Upcoming Tübingen

Conference 2000 21Join/ Renew Your

Membership 22

The Task of the SocietyOpening Address to the Annual Conference, September 17, l999Ronald Coase

Ronald CoaseFounding President of ISNIE, 1996-97

(continued on page 3)

It is a great pleasure for me totake part in the Third AnnualMeeting of the International So-ciety for New Institutional Eco-nomics. It is a great occasion forall of us, and for economics.What I have decided to talk aboutis the task of our Society. WhatI will be giving you are my per-sonal views. They may not com-mend themselves always to otherofficers of the Society. Indeed,I’m fairly sure they won’t. Butthere are two distinctive featuresof our Society about which noone will dispute.

First of all, we are a societywith a mission and that missionis to transform economics. WhenI speak of economics, I have inmind mainstream economics asexpounded in countries in theWest and particularly what iscalled microeconomics or pricetheory. Our mission is to replacethe current analysis withsomething better, the NewInstitutional Economics as it hasbeen termed by our President-elect, Oliver Williamson. I haveno doubt that we will accomplishour mission. But there is still thequestion of how we are going to

do it. This I will discuss later.The second distinctive

feature of our Society is that itis an international society. It isnot an American society thatforeigners can join. Our Societyis truly international as is madeclear by the countries of originof presenters of papers at thismeeting as well as their subjects,and of course, by thecomposition of our membership.I have no doubt that ourinternational character will proveto be a great source of strength.

We will be able to draw on theexperience and the talent incountries all over the world.This is particularly important forthe New Institutional Economicssince if we are to understand theeffect of different institutionalarrangements on the working ofthe economic system, the obviousway to do this is to enlarge ourstudies beyond a single country


International Society forNew Institutional EconomicsPresidentOliver E. Williamson

Past PresidentsRonald Coase, 1996-1997Douglass C. North, 1997-1999

Executive CommitteeLee Benham, Washington University, USAJohn N. Drobak, Washington University, USAClaude Ménard, University of Paris, FranceDouglass C. North, Washington University, USAMary M. Shirley, World Bank, USAOliver E. Williamson, University of California,

Berkeley, USA

Board of DirectorsBenito Arruñada, University Pompeu Fabra, SpainLee Benham, Washington University, USARonald Coase, University of Chicago, USAHarold Demsetz, University of California,

Los Angeles, USAJohn N. Drobak, Washington University, USAScott E. Masten, University of Michigan, USAClaude Ménard, University of Paris, FranceDouglass C. North, Washington University, USARudolf Richter, University of Saarland, GermanyMary M. Shirley, World Bank, USABarry R. Weingast, Stanford University, USA Oliver E. Williamson, University of California,

Berkeley, USA

Administrative AssistantAmanda McMichael

Newsletter EditorAlexandra Benham

World Wide Web sitehttp://www.isnie.orgMichael Sykuta

This newsletter is published by the InternationalSociety for New Institutional Economics. Subscriptionis provided with paid membership in the Society.

International Society for New Institutional EconomicsDepartment of Economics, Campus Box 1208Washington UniversityOne Brookings DriveSt. Louis, MO 63130-4899 USA

Tel: (314) 935-8571Fax: (314) 935-4156E-mail: [email protected]

(continued on page 20)

ISNIE Conference 1999in Washington, D.C.Mary ShirleyThe third annual conference of the International Societyfor New Institutional Economics was held in Washington,D.C. on September 16-18, 1999. Participants had to con-tend with Hurricane Floyd, which cancelled flights all overthe United States just when most of them were scheduledto fly. Nevertheless, the majority of registrants managedto arrive, telling tales of sleeping in the airport, flying westto get a connection east, and three-hour trips turned intotwelve- and twenty-four-hour adventures in airport land.One presenter gave his paper over a speaker phone, andkeynote speaker Avner Greif arrived about five minutesbefore his talk after a hellish journey. There was someattrition, of course, and that led to smaller panels, missingdiscussants, and less continuity in some panels when pa-pers had to be reshuffled to fill gaps. Participants tookthese inconveniences in good humor, especially when thesun reappeared and lively discussions got underway.

The conference opened with a panel discussion,“Fighting Poverty Through Institutions,” chaired by RaviKanbur, who is on leave from Cornell University to leadthe team writing the World Bank’s next World Develop-ment Report on Poverty. Panelists Douglass North, Jean-Philippe Platteau and Emmanuel Jimenez talked about thecritical role institutions play in poverty reduction beforean overflow crowd of more than 500 people. Besides theISNIE participants, the audience included staff of the WorldBank, the International Monetary Fund, the Inter-Ameri-can Development Bank and other multinational agencies,members of the IRIS Center of the University of Mary-land, people from different policy think tanks and non-governmental organizations, staff of U.S. government agen-cies dealing with poverty, and the media. Highlights of themeetings over the next two days included speeches by our


and to compare what happens in different countrieswith differing arrangements.

It is a great pleasure to me that, through thegenerosity of the Earhart Foundation, so many fromcountries in transition from a command to a marketeconomy have been able to attend this meeting. Theirsis an unenviable task but one which merits oursupport. I am reminded of a tale told to me by FrankPaish, a colleague at the London School ofEconomics. He was once walking in the country inEngland and he asked a countryman how he couldget to a certain place. The countryman replied, afterconsiderable thought, “If I were going there, Iwouldn’t start from here.” That’s how I feel aboutthe plight of our members in the countries in transitionto a market economy. We are certainly going to learna great deal from their experience about what therequisites are for an efficient market system. And Ihope that in some way our discussions will be of helpto those in countries in transition who have to tacklethis formidable task.

Let us return to our mission. Economics, overthe years, has become more and more abstract anddivorced from events in the real world. Economists,by and large, do not study the workings of the actualeconomic system. They theorize about it. As ElyDevons, an English economist, once said at a meeting,“If economists wished to study the horse, theywouldn’t go and look at horses. They’d sit in theirstudies and say to themselves, ‘What would I do if Iwere a horse?’” And they would soon discover thatthey would maximize their utilities. What hashappened, as Harold Demsetz explained, is thateconomists have been fascinated by Adam Smith’sgreat insight — that the economic system could becoordinated by a system of prices without the needfor the existence of a plan. And it is fascinating. AsHayek has said, it mobilizes that diffused knowledgethat exists throughout the world. If people inSingapore learn something about a commodity thatcauses them to want to use more of it than they havein the past, they enter the market, the additionaldemand drives up the price, and consumers in Sweden,Spain, and other places reduce their consumption sothat consumers in Singapore, of whom they arecompletely unaware, may consume more.

But this is not the end of the story. The higherprice which emerges for this commodity makes itprofitable for resources previously engaged in theproduction of quite different commodities to be usedto increase its supply. This decrease in the supply ofthese quite different commodities increases their price,and consumers of these commodities in Germany, theUnited States and Burkina Faso reduce theirconsumption of them, which moderates the price riseexperienced by consumers in Sweden and Spain andmakes possible a smaller reduction in theirconsumption than would otherwise be the case. It’s

If we are to understand the effect ofdifferent institutional arrangements onthe working of the economic system,the obvious way to do this is tocompare what happens in differentcountries with differing arrangements.

a wonderful system. Roy Harrod, who attendedEdgeworth’s lectures, used to tell how Edgeworth,when he reached the point in his lectures at whichprice equated supply and demand, would pause sothat he and the class could savour this magic moment.But by stopping their analysis at this point,economists fail to answer one fundamental question:what determines what goods and services are tradedon markets and therefore priced? What determinesthe flow of real goods and services and therefore thestandard of living?

We can start to answer this question by goingback to Adam Smith. He explained that theproductivity of an economic system depends onspecialization (he called it the division of labour) butas is obvious there can only be specialization if thereis exchange, and whether exchange is possibledepends on the costs of exchange (transaction costsas they have come to be called). Here we have toleave Adam Smith since, apart from his discussionof why the use of money is better than barter, he does

Coase: The Task of the Society (continued from page 1)


not, if my memory serves me, discuss the subject.However, we know that the costs of exchange dependon the institutions of a country — the legal system(property rights and their enforcement), the politicalsystem, the educational system, the culture. Theseinstitutions in effect govern the performance of theeconomic system. This is the basic reason why theNew Institutional Economics is so important and why,if we are to achieve our objective, we have to enlistthe help of lawyers, political scientists, sociologists,anthropologists and other social scientists. This, ofcourse, is what we are going to do in our Society.The entry of economic analysis into the other socialsciences has been termed economic imperialism. Weare engaged in a completely different enterprise —enlisting the help of those in the other social sciencesto enable us to understand better how the economicsystem works.

The need for a shakeup in economics isdemonstrated, so far as I am concerned, by its staticcharacter. It is still the subject that Adam Smith

Economists fail to answer onefundamental question: Whatdetermines what goods and servicesare traded on markets and thereforepriced? What determines the flow ofreal goods and services and thereforethe standard of living?

created. We have formalized it, elaborated it,corrected errors, changed its emphasis, but essentiallyit is the same subject. Physics has been completelytransformed since Newton and chemistry sinceLavoisier, but not economics since Smith.

The static character of economics can be madecrystal clear by comparing economics and biology.Economists take pride in the fact that Darwin wasinfluenced by Malthus — and he was influenced also,as I learned from Stephen Jay Gould, by Adam Smith.But contrast what has happened in biology sinceDarwin with what has happened in economics since

Adam Smith or Malthus. Biology has beentransformed. In The Economist earlier this month(the issue of September 4th) it was stated: “Biologyis rapidly becoming as ‘hard’ a science — in all senses— as physics.” Biologists have not rejected Darwin— evolution is still the core of the subject — butthey look at biological processes in a completelydifferent way. Similarly, I am not rejecting AdamSmith. We should not abandon his great insights. ButI do advocate changes that will ultimately transformeconomics from a “soft” science into a “hard” scienceand in bringing this about I expect our Society toplay a major role. It may seem strange that I amhoping to transform a soft science into a hard scienceby linking it with subjects which by repute are evensofter than economics. But there is no other way.We have to take account of the effects of the legalsystem, the political system, etc. And if myimpression is correct, their theories often have astronger empirical base than is usual in economics.Of course, one would also hope that those socialscientists attracted to the New InstitutionalEconomics would be those who believed in rigour.To those who may feel offended by what I have saidabout the other social sciences, I would like to quoteto you what I said about law in the Simons lecture on“Law and Economics at Chicago” in 1992. “ErnestRutherford said that science is either physics or stampcollecting, by which he meant, I take it, that it iseither engaged in analysis or in operating a filingsystem. Much, perhaps most, legal scholarship hasbeen stamp collecting. Law and economics is likelyto change all that….”

The great triumph of modern biology was thediscovery by Watson and Crick of the structure ofDNA. But to think of its discovery simply in termsof their work is to ignore that it was the culminationof the work of many people over many years. HoraceJudson at the end of his survey of the history ofmodern biology has this to say: “Biology hasproceeded not by great set-piece battles, but bymultiple small-scale encounters — guerrilla actions— across the landscape. In biology, no large-scale,closely interlocking, fully worked out, ruling set ofideas has ever been overthrown…. Revolution inbiology, from the beginnings of biochemistry and thestudy of cells, and surely in the rise of molecular

Coase: The Task of the Society (continued )


biology and on to the present day, has taken placenot by overturnings but by openings-up.”1

I think this resembles exactly what I believe willhappen in economics. The influence of the NewInstitutional Economics will be exerted in the vari-ous sub-disciplines of economics. Guerrilla actionswill take place, which will result in the New Institu-tional Economics dominating first one and then an-other of these sub-disciplines, as indeed is beginningto happen. When this process has gone on for sometime, the leaders of our profession will find them-selves Kings without a Kingdom. There will be nooverturning, but in Judson’s words, an opening-up.We will not replace price theory (supply and de-mand and all that) but will put it in a setting thatwill make it vastly more fruitful.

I think we can take heart from what FrancisCrick has said about developments in modern biologyin his book What Mad Pursuit. I will quote some ofthe things he has said. They seem to me very relevantto any discussion of our plans and projects becausewe are dealing with a subject which has beenextraordinarily successful in modern times, in con-trast to economics, where the performance has, inmy view anyway, been somewhat dismal. I like whatCrick says because he stresses the pitfalls in theo-retical approaches and the need for empirical work.

As you probably know, progress in biology wasgreatly helped by the movement of physicists intomolecular biology. This is what he says: “In nature,hybrid species are usually sterile, but in science the

In economics our choice of theorieswill only be fruitful if guided byempirical work.

reverse is often true. Hybrid subjects are often as-tonishingly fertile, whereas if a scientific disciplineremains too pure it usually wilts.”2 This bodes wellfor us since the New Institutional Economics is ahybrid subject if ever there was one. So this shouldgive us a lot of encouragement. Certainly the entryof economists into the study of law has had a very

beneficial effect. And I would expect that the inter-mingling of these other social sciences with econom-ics would exert a powerful, and beneficial, influenceon the development of economics.

Crick also says, “In research the frontline isalmost always in a fog.”3 This is inevitable since thefrontline is always dealing with unsolved problems,

We do not know, for the most part,what is true or what is false, what issignificant and what is not, nor thecharacter of the interrelations ofvarious parts of the institutionalstructure of the economy. It is ouraim to find out.

with the data either unavailable or seeminglyinconsistent. So we shouldn’t feel discouraged if weare in a fog. The job, after all, of the frontline is todispel it. Of course, to be in a fog is not necessarilya sign that you are in the frontline.

Then again Crick says: “[I]t is virtuallyimpossible for a theorist, by thought alone, to arriveat the correct solution to a set of biologicalproblems…. The best a theorist can hope to do is topoint an experimentalist in the right direction....”4

This is, for example, what the concept of transactioncosts does. It does not of itself solve any problemsbut it does suggest what should be looked at to findthe solutions.

Crick also says this: “It is all too easy to makesome plausible simplifying assumptions, do someelaborate mathematics that appear to give a roughfit with at least some experimental data, and thinkone has achieved something. The chance of such anapproach doing anything useful, apart from soothingthe theorist’s ego, is rather small....”5 I think youknow why I like this quotation.

Finally: “The basic trouble is that nature is socomplex that many quite different theories can gosome way to explaining the results....[W]hatconstraints can be used as a guide through the jungle

Coase: The Task of the Society (continued )


Coase: The Task of the Society (concluded )

of possible theories? It seems to me that the onlyuseful constraints are contained in the experimentalevidence.”6 What this comes down to in economicsis that our choice of theories will only be fruitful ifguided by empirical work.

What does all this mean for our Society? Howare we to find our way through the mass of infor-mation such as is revealed by the papers presentedat this meeting? How are we to emulate the triumphsof modern biology? How are we to convert the NewInstitutional Economics into a hard science?

To discover even roughly how theinstitutional structure of productionand exchange works will take along time — but it will be a mostinteresting journey.

My answer to these questions is essentiallyHayekian. I do not think that as a society we shouldattempt to plan what members should do. We donot know, for the most part, what is true or what isfalse, what is significant and what is not, nor thecharacter of the interrelations of various parts ofthe institutional structure of the economy. It is ouraim to find out. We can make suggestions. We canhelp. But to reach our goal, it is better that mem-bers should be free to choose the problems they workon. And because of this we should be tolerant ofopposing views. Sidney Webb, a founder of theLondon School of Economics, a socialist and latersomeone who was taken in by Joseph Stalin (inwhich he had a large company), said, and he was agood scholar, that research consisted of shootingarrows into the air to find out where the targets were.This means that we should leave people free to shoottheir arrows into the air, and those arrows that findno targets are nonetheless extremely useful.

Of course, to discover even roughly how the in-stitutional structure of production and exchangeworks will take a long time — but it will be a mostinteresting journey. But we do need to create an

Editor’s note: This speech was the opening address tothe annual conference of the International Society forNew Institutional Economics, delivered in Washington,D.C. on September 17, 1999. Ronald Coase, the found-ing president of the Society, is currently Clifton R. MusserProfessor Emeritus of Economics at the University ofChicago Law School. He was editor of the Journal ofLaw and Economics 1964-1982. In 1991 he was awardedthe Alfred Nobel Memorial Prize in Economic Sciences.

Footnotes1 Horace Freeland Judson, The Eighth Day of Creation:Makers of the Revolution in Biology, New York: Simonand Schuster (1979), p. 612.2 Francis Crick, What Mad Pursuit: A Personal View ofScientific Discovery, New York: Basic Books (1988),p. 150.3 Ibid., p. 35.4 Ibid., pp. 109-110.5 Ibid., pp. 113-114.6 Ibid., p. 141.

esprit de corps to sustain us on the journey. In mytalk at the first meeting of our Society, I quotedTolstoy’s description in War and Peace of Kutuzov,who led the Russian troops in battle againstNapoleon’s invading army. I will do so again:

From long years of military experience he hadlearned, and with the wisdom of old age hehad recognized that one man cannot guide hun-dreds of thousands of men struggling withdeath, that the fate of battles is not decided bythe orders given by the commander-in-chief,nor the place in which the troops are stationed,nor the number of cannons, nor of killed, butby that intangible force called the spirit of thearmy, and he followed that force and led it asfar as it lay in his power.

Our success does not depend on the number ofpapers written nor the number of citations nor thenumber of prizes gained by our members. It de-pends on the spirit of the Society. We have made agood start.


CALL FOR PAPERSAnnual Conference of the

International Society for New Institutional Economics (ISNIE)September 22-24, 2000

Tübingen, Germany

The Economics of Institutions in the New MillenniumThe Program Committee (chaired by President Oliver E.Williamson) invites you to submit your pro-posal to present a paper at the conference in Tübingen. Information regarding the program will beavailable on the ISNIE Web site http://www.isnie.org.

ProposalsProposals are due by March 1, 2000. They must be no longer than two pages, double spaced.Authors must also send a short (one paragraph) biosketch or curriculum vitae including telephone,fax, e-mail, postal address, and current employment. You must be a current member of ISNIE tosubmit a proposal. Please send your proposal (as a Microsoft Word document) to

[email protected] note: this e-mail address is only for submitting proposals. Send all other inquiries to theISNIE office at [email protected].

About ISNIEThe International Society for New Institutional Economics aims to bring together scholars from all overthe world who are unified by two propositions: institutions matter, and institutions are susceptible toanalysis. Both the rules of the game (of formal and informal kinds) and the play of the game (through theinstitutions of governance—of both private and public kinds) are the object of analysis. This is a com-bined theoretical, empirical, and public policy undertaking in which political scientists, sociologists,anthropologists, lawyers, and economists are joined.

Studies of the following subjects are within the scope.(1) Economic Development and Reform (10) Experimental Institutional Economics(2) Property Rights (11) Evolutionary Economics(3) Contract and Organization (12) Corporate Governance(4) Regulation and Deregulation (13) Competition Policy(5) Economic Transition (14) Economics of Corruption(6) Network Forms (15) Informal Organization(7) Positive Political Theory and Policy (16) Strategic Behavior and Organization(8) Transaction Costs: Governance (17) Law and Institutions(9) Transaction Costs: Measurement (18) Other

Please indicate the categories to which your proposal most applies.

Registration InformationRegistration for the conference will open January 1, 2000. The registration fee will beDM 225 before June 1, 2000 and DM 450 after June 1, 2000. Registrants must also be current membersof ISNIE. For additional information on membership and registration, see the forms in this newsletteror go to http://www.isnie.org.


ISNIE Officers and Directors ElectedAt its annual meeting in September 1999, the ISNIEBoard of Directors elected the following officers:President, Oliver Williamson; Vice-President, LeeBenham; Vice-President, Claude Ménard; Treasurer,Mary Shirley; and Secretary, John Drobak. The Boardalso elected the following people to two-year terms asdirectors: Lee Benham, Ronald Coase, Claude Ménard,Douglass North, Mary Shirley, and Oliver Williamson.They will make up the Board of Directors along withthose directors whose current term in office continuesuntil September 2000: Benito Arruñada, HaroldDemsetz, John Drobak, Scott Masten, Rudolf Richter,and Barry Weingast.

The Board also decided to establish a NominatingCommittee to propose nominees for a president-electand for new directors. Oliver Williamson and DouglassNorth agreed to organize and chair the committee.

Inaugural Conference in Germany forGlobal Development NetworkThe Global Development Network (GDN) hosted its in-augural global conference “Bridging Knowledge andPolicy” on December 6-8, 1999 in Bonn, Germany.Supported by the World Bank and a group of interna-tional donors, the Global Development Network is anemerging association of research institutes and thinktanks around the world whose goal is to generate andshare knowledge related to development. Topics dis-cussed at the meeting included research grant competi-tions, staff exchange programs, training opportunitiesand scholarships, networking, improving the availabil-ity and use of data, and an interactive Web site pro-gram. Many donor organizations were present.

Several members of ISNIE, including Lee Benham,Alexandra Benham, Philip Keefer, Claude Ménard, andRudolph Richter, attended the meeting on their owninitiative. A joint proposal related to the NewInstitutional Economics was submitted from the Centerfor New Institutional Social Sciences at WashingtonUniversity and ATOM at the University of Paris. LeeBenham, Claude Ménard, Rudolph Richter, and MaryShirley have been named as a committee to summarizethe conference experiences and observations for theISNIE Board. For further information about the GlobalDevelopment Network, see their Web site at

http://www.gdnet.org.

Earhart Foundation Sponsors ScholarsIn l999, as in 1998, the Society received a generousgrant from the Earhart Foundation to subsidize confer-ence attendance for a number of scholars from develop-ing nations. The awards went particularly to youngscholars who had the potential to make significant con-tributions in the field of New Institutional Economicsand who would benefit from the conference sessions andthe contacts to be made. In 1999, 25 scholars attendedthe conference on Earhart funds, and an additional fivescholars were financed by matching funds from theHigher School of Economics, Moscow. The Earhartscholars came from Brazil, Bulgaria, China, Ghana,Hong Kong, Hungary, Poland, Russia, Slovakia, andUkraine.

Ronald Coase, to whom the Earhart Foundationgrants were made, hosted a special lunch for the schol-ars during the conference. Scholars expressed enthusi-asm about meeting leading researchers in the field, dis-covering colleagues in their region with similar inter-ests, and exchanging data on related research questions.

ISNIE-Europe Activity: ConferenceVolume, Board Meeting, E-LetterA selection of the papers presented at the Second AnnualConference of ISNIE in Paris 1998 will be publishedby Edward Elgar in April 2000. The book is edited byClaude Ménard and is titled Institutions, Contracts andOrganizations: Perspectives from New InstitutionalEconomics.

The Board of ISNIE-Europe will meet April 1, 2000in Paris to structure its organization more formally.There are plans to restructure the executive branch andthe Board to achieve wider representation from moreEuropean countries. There will also be a discussion ofactivities to be organized at the European level in thefuture, including specialized workshops and a summerschool for young faculty members and doctoral students.

The e-letter (electronic letter) produced by ISNIE-Europe for all members of ISNIE will appear on amuch more regular basis. It will continue to focuson information about members’ publications, workingpapers, calls for papers and conferences of interestto members, and new programs across universities.To submit information for the e-letter, write [email protected] in care of Christophe Destais,who will be the coordinator. The e-letter will appear at

http://atom2.univ-paris1.fr/ISNIE.


R.C.O. Matthews, in his presidential address to theRoyal Economic Society in 1986, pronounced that “theeconomics of institutions has become one of the liveli-est areas in our discipline” (Matthews, 1986, p. 903).Such a pronouncement was a surprise to most of theprofession. Hadn’t institutional economics long sincebeen relegated to the history of economic thought?Whence the vitality to which Matthews made reference?

Matthews’ response was that the New InstitutionalEconomics (NIE) turned on two propositions. First,“institutions do matter”; and second, “the determinantsof institutions are susceptible to analysis by the tools ofeconomic theory” (Matthews, 1986, p. 903). The secondof these is what distinguishes the NIE, it being the casethat institutional economists of all kinds—old and new—are unanimous in the view that institutions matter.

Indeed, although both the older and newer styles ofinstitutional economics subscribe to many of the samegood ideas, a progressive research program requiresmore. Kenneth Arrow speaks to the transformation asfollows (1987, p. 734):

Why did the older institutionalist school fail somiserably, though it contained such able analystsas Thorstein Veblen, J. R. Commons, and W. C.Mitchell. I now think that…[one of the answersis in the] important specific analyses…of the NewInstitutional Economics movement. But it doesnot consist of giving new answers to the tradi-tional questions of economics—resource alloca-tion and the degree of utilization. Rather, it con-sists of answering new questions, why economicinstitutions emerged the way they did and not oth-erwise; it merges into economic history, but bringssharper [microanalytic]…reasoning to bear thanhad been customary.

There is no question that the NIE has grown in stat-ure and influence over the thirteen years since Matthews’pronouncement. Initial skepticism has gradually givenway to respect—it being the case that economists arevery pragmatic people. Tell them something differentand consequential about phenomena that are of interestto them and demonstrate that the data are corrobora-tive: that will get their attention. The NIE has progressed

not by advancing an overarching theory but by uncov-ering and explicating the microanalytic features to whichArrow refers and by piling block upon block until thecumulative value added cannot be denied.

The NIE, moreover, will not stand still. Even asinstitutional economics is being incorporated within or-thodoxy, new opportunities and challenges await. Therebeing a lot of unfinished business and new projects yetto be undertaken, the eve of the new millennium is notime to rest on our oars. Satisfying as it is to reflect onpast successes, we are assembled here today to examineresearch in progress and to celebrate the lively researchfuture that lies ahead.

I begin my remarks with a sketch of four levels ofsocial analysis, next turn to some of the good ideas outof which the NIE works, and then examine some of theapplications to which the NIE has been put. Concludingremarks follow.

1. Four Levels of Social Analysis

It will be useful for purposes of perspective to con-sider the four levels of social analysis that are distin-guished in Figure 1.1 The solid arrows that connect ahigher with a lower level signify that the higher levelimposes constraints on the level immediately below. Thereverse arrows that connect lower with higher levels aredashed and signal feedback. Although, in the fullness oftime, the system is fully interconnected, for my purposes

The New Institutional Economics: Taking Stock/Looking AheadAddress to the Annual Conference, September 17, l999

Oliver E. Williamson*© 1999 by Oliver E. Williamson

Oliver E. WilliamsonPresident of ISNIE


today these feedbacks are largely neglected. The NIE hasmainly concentrated its attention on levels 2 and 3.

The top level is the social embeddedness level. Thisis where the norms, customs, mores, traditions, etc. arelocated. Religion plays a large role at this level.Although Level 1 analysis is undertaken by someeconomic historians and other social scientists (Banfield(1958), Putnam (1993), Huntington (1996), and Nee(1977)), Level 1 is taken as given by most institutionaleconomists. Institutions at this level change veryslowly—on the order of centuries or millennia—whereupon Douglass North poses the query, “What is itabout informal constraints that gives them such apervasive influence upon the long-run character ofeconomies?” (1991, p. 111). An answer to thisperplexing question is not attempted here, but Iconjecture that the mainly spontaneous origin of thesepractices—deliberative choice of a calculative kind isminimally implicated—has been a contributing factor.Be that as it may, the resulting institutions have a lastinggrip on the way a society conducts itself. Insular societiesoften take measures to protect themselves against “alienvalues.”

The second level is referred to as the institutionalenvironment. The structures observed here are partlythe product of evolutionary processes, but design op-portunities are also posed. Going beyond the “informalconstraints (sanctions, taboos, customs, traditions, andcodes of conduct)” of a Level 1 kind, we now introduce“formal rules (constitutions, laws, property rights)”(North, 1991, p. 97). This opens up the opportunityfor first-order economizing: get the formal rules of thegame right.

Constrained by the shadow of the past, the designinstruments at Level 2 include the executive, legislative,judicial, and bureaucratic functions of government aswell as the distribution of powers across different levelsof government (federalism). The definition and enforce-ment of property rights and of contract laws are impor-tant features.

Although such first order choices are unarguablyimportant to the economic productivity of an economy(Rosenberg and Birdzell (1986), Coase (1992), North(1994), Levy and Spiller (1994), Olson (1996), Henisz(1997)), cumulative change of a progressive kind is verydifficult to orchestrate. Massive discontent—civil wars(the Glorious Revolution (North and Weingast, 1989)),or occupations (following World War II), or perceived

threats (the Meiji Revolution) or breakdowns (EasternEurope and the former Soviet Union), or a military coup(Chile), or a financial crisis (New Zealand)—will, how-ever, occasionally produce a sharp break from estab-lished procedures. Rare windows of opportunity to ef-fect broad reform are thereby opened. Such “definingmoments” are nevertheless the exception rather than therule. Given our primitive understanding, moreover, theresponse to such opportunities is often one of “failure.”Absent such a window, major changes in the rules ofthe game occur on the order of decades or centuries.The European Union, for example, has been “in progress”for 50 years and is still in early stages of development.

What is often referred to as Positive Political Theoryis concerned with working out the economic and politi-cal ramifications of Level 2 features. To be sure, suchresearch also has lessons for the normative design ofbetter polities. Like the NIE of which it is a part, how-ever, PPT is predominantly an exercise in positive analy-sis. The object is to better understand how things work—warts and all. The research product of PPT scholarshiphas been nothing less than auspicious, which has beengood for both political science and the NIE.

Much of the economics of property rights is of aLevel 2 kind, work on which flourished in the 1960s.According to Ronald Coase, “a private-enterprise sys-tem cannot function properly unless property rights arecreated in resources, and, when this is done, someonewishing to use a resource has to pay the owner to obtainit. Chaos disappears; and so does the government ex-cept that a legal system to define property rights and toarbitrate disputes is, of course, necessary” (Coase, 1959,p. 12; emphasis added).

This compact statement illustrates both the strengthand the weakness of the property rights literature. Thegreat strength of this literature is that it brings propertyrights to the forefront, where they belong, whereuponnovel property rights reasoning could be brought to bearin informative ways. The weakness is that it overplayedits hand. The claim, for example, that the legal systemwill eliminate chaos upon defining and enforcing prop-erty rights assumes that the definition and enforcementof such rights is easy (costless). Plainly, many transac-tions do not qualify. Going beyond the rules of the game(property) to include the play of the game (contract)was needed. That is the opening through which the gov-ernance of contractual relations walked in during thedecade of the 1970s.

Williamson: Taking Stock/Looking Ahead (continued)


FREQUENCY(YEARS)

102 TO 103

10 TO 102

1 TO 10

CONTINUOUS

LEVEL

EMBEDDEDNESS:L1 INFORMAL

INSTITUTIONS,TRADITIONS, NORMS,

RELIGION

^

vINSTITUTIONAL

L2 ENVIRONMENT:FORMAL RULES OFTHE GAME — ESP.

PROPERTY (POLITY,JUDICIARY,

BUREAUCRACY) ^

vGOVERNANCE:

L3 PLAY OF THE GAME— ESP. CONTRACT

(ALIGNING GOVERNANCESTRUCTURES WITH

TRANSACTIONS) ^

vRESOURCE

L4 ALLOCATION ANDEMPLOYMENT

(PRICES AND QUANTITIES; INCENTIVE ALIGNMENT)

PURPOSE

OFTEN NONCALCULATIVE;SPONTANEOUS

(CAVEAT: SEE DISCUSSIONIN TEXT)

GET THEINSTITUTIONAL

ENVIRONMENT RIGHT.1ST ORDER

ECONOMIZING

GET THEGOVERNANCE

STRUCTURE RIGHT.2ND ORDER

ECONOMIZING

GET THEMARGINAL

CONDITIONS RIGHT.3RD ORDER

ECONOMIZING

L1: SOCIAL THEORYL2: ECONOMICS OF PROPERTY RIGHTS AND PPTL3: TRANSACTION COST ECONOMICSL4: NEOCLASSICAL ECONOMICS/AGENCY THEORY

FIGURE 1

ECONOMICS OF INSTITUTIONS


This brings me to the third level, which is where theinstitutions of governance are located. Although prop-erty remains important, a perfectly functioning legalsystem for defining contract laws and enforcing con-tracts is not contemplated. Costless court ordering be-ing a fiction, much of the contract management and dis-pute settlement action is dealt with directly by the par-ties—through private ordering. The need to come toterms with contract laws (plural), rather than an all-purpose law of contract (singular) is posed (Summers,1969; Macneil, 1974). The governance of contractualrelations becomes the focus of analysis.

John R. Commons prefigured this work with hisobservation that “The ultimate unit of activity…mustcontain in itself the three principles of conflict, mutual-ity, and order. This unit is a transaction” (1934, p. 4).Not only does transaction cost economics subscribe tothe idea that the transaction is the basic unit of analysis,but governance is an effort to craft order, thereby tomitigate conflict and realize mutual gains.

So conceived, a governance structure obviously re-shapes incentives. To focus entirely, however, on ex anteincentive alignment is a truncated way by which to studyorganization—especially if all complex contracts areunavoidably incomplete and if adaptation is the centralproblem of economic organization (Barnard, 1938;Hayek, 1945). Moving beyond the agency theory tradi-tion of ex ante incentive alignment, transaction cost eco-nomics turns its attention—additionally and predomi-nantly—to the ex post stage of contract.

This entails four moves: (1) to name and explicatethe principal dimensions with respect to which transac-tions differ (thereby to uncover differential adaptiveneeds), (2) to name and explicate the principal attributesfor describing governance structures (where each is de-fined by a distinctive syndrome of related attributes,whence markets, hybrids, firms, regulation, bureaus,nonprofits, etc. differ in discrete structural ways), (3) toeffect a discriminating match, according to which trans-actions are aligned with governance structures so as topromote adaptation of autonomous and cooperativekinds, and (4) to ascertain whether the predicted align-ments are corroborated by the data.

The canonical problem for dealing with these is-sues is that of vertical integration, which is the issueposed by Coase in his classic 1937 article on “The Na-ture of the Firm.” As it turns out, a huge number ofphenomena turn out to be contractual variations on this

theme. What I refer to as second order economizing—get the governance structures right—is realized atLevel 3. The possible reorganization of transactionsamong governance structures is re-examined periodi-cally, on the order of a year to a decade, often at con-tract renewal or equipment renewal intervals.

Such discrete structural analysis of governance isto be distinguished from the fourth level, which is thelevel at which neoclassical analysis works. Optimalityapparatus, often marginal analysis, is employed and thefirm, for these purposes, is typically described as aproduction function. Adjustments to prices and outputoccur more or less continuously. Agency theory, whichemphasizes ex ante incentive alignment, rather thanex post governance, deals predominantly with theemployment relation (Holmstrom and Milgrom, 1994).

Indeed, a still earlier (zero level) of analysis warrantsremark: an evolutionary level in which the mechanismsof the mind take shape (Pinker, 1997). The applicationof these ideas to economics even now is beginning toreshape our understanding of human actors. Ourevolutionary psychologist and cognitive sciencecolleagues are vital to the exercise.

Finally, I should call attention to technology. Ascompared with technological innovation, the study oforganizational innovation has been comparatively ne-glected. The NIE has attempted to rectify that—theidea being that “Truly among man’s innovations, theuse of organization to accomplish his ends is amongboth his greatest and his earliest” (Arrow, 1971, p. 224).We cannot, however, fail to be awed by the profoundimportance of technological innovation (Fogel, 1999).Inasmuch as these two work in tandem, we need to findways to treat technical and organizational innovation ina combined manner.

2. Good Ideas

The New Institutional Economics had its origins ingood critics of orthodoxy who believed that institutionswere both important and susceptible to analysis. Feel-ing expansive, I would include six Nobel Laureatesamong the key figures: Kenneth Arrow, Friedrich Hayek,Gunnar Myrdal, Herbert Simon, Ronald Coase, andDouglass North—the last two being the first two presi-dents of ISNIE. But there are others. Armen Alchianhas been an influential figure. So too has been researchon organization theory, especially at Carnegie (some ofit prefigured by earlier work by Chester Barnard)—



where the names of Richard Cyert and James Marchjoin that of Simon. Alfred Chandler’s pioneering workin business history was also pathbreaking. Thoughtfulcontributors from the law, especially contract law, in-clude Karl Llewellyn, Stewart Macaulay, Lon Fuller,and Ian Macneil. John R. Commons also brought originaland important ideas to the study of institutional econom-ics. The German Historical School was also concernedwith related ideas (Furubotn and Richter, 1997, pp. 34-35).

Among the key good ideas that I associate with theNIE are these.

(a) Human actorsIf “Nothing is more fundamental in setting our

research agenda and informing our research methodsthan our view of the nature of the human beings whosebehavior we are studying” (Simon, 185, p. 303), thensocial scientists should be prepared to name the keyattributes of human actors. Both the condition ofcognition and self-interestedness need to be addressed.

There is virtually unanimity within the NIE withthe idea of limited cognitive competence—often referredto as bounded rationality. Mind being a scarce resource,cognitive specialization has economizing consequences.Also, given cognitive limits, the complex contracts towhich I referred earlier are unavoidably incomplete.

Contractual incompleteness poses added problemswhen paired with the condition of opportunism—whichmanifests itself as adverse selection, moral hazard, shirk-ing, subgoal pursuit, and other forms of strategic be-havior. Because human actors will not reliably disclosetrue conditions upon request or self-fulfill all promises,contract as mere promise, unsupported by credible com-mitments, will not be self-enforcing.

But for opportunism, the courts would simply askwitnesses to “tell us what you know that is germane toour decision.” That is not, however, the way that testi-mony is taken. Witnesses are required to take an oathto “tell the truth, the whole truth, and nothing but thetruth”: don’t lie; don’t conceal; don’t mislead. Inas-much, moreover, as oaths are not self-enforcing, penal-ties for perjury remind witnesses that prevarication hasconsequences.

Still a third attribute of human actors warrants re-mark, and that is the capacity for conscious foresight.Indeed, as Richard Dawkins observes, it is the “capac-ity to simulate the future in imagination…[that saves]us from the worst consequences of the blind replicators”(1976, p. 200). Parties to a contract who look ahead,

recognize potential hazards, work out the contractualramifications, and fold these into the ex ante contrac-tual agreement obviously enjoy advantages over thosewho take their chances or knock on wood. The gover-nance of contractual relations—the Commons triple ofconflict, mutuality, and order to which I referred ear-lier—is centrally implicated.

(b) FeasibilityStudents of the NIE eschew hypothetical ideals—

which work off of omniscience, benevolence, zero trans-action costs, full credibility, and the like—and deal in-stead with feasible organizational alternatives, all ofwhich are flawed. Coase (1964) and Harold Demsetz(1969) were among the first to take exception with theasymmetric standards that were once used in the “mar-ket failure” literature—according to which markets arebeset with failures whereas “omniscient, omnipotent,benevolent” governments (Dixit, 1996, p. 8) would re-liably administer efficacious remedies. As we all shouldhave recognized (but needed to be told), all feasible formsof organization—government included—are flawed.

What I have referred to as the remediableness crite-rion is intended to rectify this asymmetric state of af-fairs. This criterion holds that an extant mode of orga-nization for which no superior feasible alternative canbe described and implemented with expected net gainsis presumed to be efficient.

To be sure, public policy analysis becomes morecomplicated when analysts can no longer condemn ex-tant modes because they deviate from a hypotheticalideal, full stop. The remediableness criterion pressesthe public policy analyst to display a superior feasiblealternative. If, moreover, a proposed feasible alterna-tive cannot be costlessly implemented, then the costs ofimplementation are appropriately included in the netbenefit calculus—which has major ramifications for thepath dependency literature. Finally, grounds for rebut-ting the efficiency presumption need to be addressed—which brings in politics (Williamson, 1996, 1999).Absent rebuttal, the remediableness criterion stands asa reminder of the obvious: it is impossible to do betterthan one’s best.

(c) FirmsIn addition to the nature of the human beings to

which Simon referred, we need also to be self-consciousabout the “Nature of the Firm,” which was the title ofCoase’s classic 1937 article from which the NIE draws



much of its inspiration. Arrow speaks to the fundamen-tal importance of the theory of the firm, and to long-standing misconceptions thereof, as follows: “Any stan-dard economic theory not just neoclassical, starts fromthe existence of firms. Usually, the firm is a point or atany rate a black box…. But firms are palpably notpoints. They have internal structure. This internal struc-ture must arise for some reason” (1999, p. vii).

The need was to get beyond the analytically conve-nient (and sometimes adequate) conception of the firm-as-production function (which is a technological con-struction) to consider the firm as a governance struc-ture (which is an organizational construction) in whichinternal structure has economic purpose and effect. Moregenerally, the need was to identify and explicate the prop-erties of alternative modes of governance—markets,hybrids, firms, bureaus, etc.—which differ in discretestructural ways. Because each generic mode of gover-nance possesses distinctive strengths and weaknesses,there is a place for each yet each needs to be kept in itsplace. The logic of discriminating alignment to which Ireferred earlier applies.

In a heuristic way, the choice of governance struc-ture moves from market to public bureau through thesequence of moves shown in Figure 2 (where h denotescontractual hazards and s denotes safeguards).2 Thiscan be interpreted as a move from simple to complex,where the sequence is try markets, try hybrids, try firms,try regulation, and resort to public bureaus only whenall else fails (comparatively). Note, moreover, that thecommon practice of condemning public bureaus becausethey have lower-powered incentives, more rules andregulations, and greater job security than a counterpartfirm completely misses the point. These features havebeen deliberately crafted into the public bureau, therebyto make it better suited to govern some (especially diffi-cult) transactions. Vigilance is nonetheless needed—lest the public bureau be “overused.”

(d) OperationalizationMany good ideas are initially expressed as tautolo-

gies, which Coase has wryly defined as “a propositionthat is clearly right” (1988, p. 19). Because goodtautologies expand the mind and are hard to come by,



such deserve respect. Lest, however, we slip into thespeculations to which Wesley Mitchell once referred3—which is a fate that beset the older style institutionaleconomics as well as the American Legal Realism move-ment—we need to ask what are the mechanisms throughwhich a proposed theory operates and what are the re-futable implications.

The effort to operationalize promising ideas has boththeoretical and empirical parts. The theoretical oftentakes the form of a progression from informal intopreformal, semi-formal, and fully formal modes of analy-sis—ideally acquiring value added in the process. Suchan effort helps to sort the sheep from the goats. Nicho-las Georgescu-Roegen had a felicitous way of puttingit: although the “purpose of science is not prediction,but knowledge for its own sake,” prediction is neverthe-less “the touchstone of scientific knowledge” (1971,p. 37). Would-be theories for which predictive contentis lacking must eventually step aside (be set aside) forthose for which the hard work of formalization andempirical testing are undertaken.

(i) Theory developmentAlbeit vital to a progressive research agenda, for-

malization can also be problematic. Here, as elsewhere,there are tradeoffs. Thus although Simon once arguedthat “mathematical translation is itself a substantivecontribution to theory…because it permits clear and rig-orous reasoning about phenomena too complex to behandled in words” (1957, p. 89) and subsequently as-serted that the “poverty of mathematics is an honestpoverty that does not parade imaginary riches beforethe world” (1957, p. 90), provision also needs to be madefor the possibility that core features of the theory areleft out or obscured by the translation. There is, afterall, such a thing as prematurely formal theory. DavidKreps speaks to the issues as follows (1999, p. 122):

If Markets and Hierarchies has been translated intogame theory using notions of information econom-ics, it is a very poor translation…. In particular,mathematics-based theory still lacks the languageneeded to capture essential ideas of bounded ra-tionality, which are central to…transaction costsand contractual form. Anyone who relies on thetranslations alone misses large and valuable chunksof the original.

What is referred to as the “property rights theory ofthe firm,” which is associated especially with the workof Oliver Hart (1995), to whom we all owe a great intel-

lectual debt for his pioneering work on the formal theoryof incomplete contracts, fails to connect, I think, withkey features. Like agency theory, Hart concentrates allof the analytical action on the ex ante stage of contract.As a consequence, the ownership of assets aside, orga-nization does not matter. Indeed, the idea that marketsand hierarchies differ consequentially in organizationalrespects is actively suppressed. All of the problems ofex post maladaptation disappear under this setup. Theidea that vertical integration implies unified governance(stages A and B are managed in a coordinated waythrough hierarchy) gives way to directional integration(it matters whether A acquires the physical assets of Bor B acquires the assets of B, there being no unifiedmanagement of the combined entity). Directional inte-gration is a testable (but implausible) construction.

This state of affairs is even now undergoing changeas formal theory is finding new ways to relate. Theunpublished paper by Hart and John Moore, “On theDesign of Hierarchies” (1999), treats organization asconsequential; and the unpublished paper by PatrickBajari and Steven Tadelis, on “Incentives Versus Trans-action Costs” (1999), is expressly concerned with as-sessing discrete structural modes of contracting withreference to ex post maladaptation. This latter is theclosest effort to date to develop a fully formal (albeitreduced form) theory of transaction cost economics.

(ii) Empirical workSome scoff at prediction, evidently in the belief that

prediction is easy. Also, since everyone knows that “itis easy to lie with statistics,” what useful purpose isserved by empirical testing? My experience is differ-ent: prediction is a demanding standard, which is whyso many would-be theories remain excogitated specula-tions; and corroboration is difficult, which explains whyfew predictions are tested.

Because, however, good theories are rarely fullydeveloped at the outset, the theory and the evidence areoften interactive. As Alan Newell observes (1990, p. 14):

Theories cumulate. They are refined and refor-mulated, corrected and expanded. Thus, we arenot living in the world of Popper….[Theories arenot] shot down with a falsification bullet…. Theo-ries are more like graduate students—once admit-ted you try hard to avoid flunking them out….Theories are things to be nurtured and changedand built up.

Good but underdeveloped ideas are evidently like



good but underdeveloped minds: both are preciousthings. Because development is costly, promisingtheories, like promising graduate students, are admittedonly if they cross a threshold. Once admitted, theories(and graduate students) are progressively built up—moving from less formal to more formal stages ofdevelopment. Finally, as with promising graduatestudents, we do not hold on to cherished theoriesindefinitely: some do flunk out. Specifically, theoriesthat remain tautological or yield predictions that arecontradicted by the data must make way for theoriesthat yield predictions for which the data arecorroborative.

Empirical applications of transaction cost econom-ics got under way in the U.S. in the 1980s and havegrown exponentially since: the number of publishedstudies exceeds 400 and involves scientists in Europe,Japan, India, Mexico, South America, New Zealand, andthe list goes on. It could have been otherwise, but thetheory and evidence display a remarkable congruity(Masten, 1995, p. xi). Recent empirical surveys includeHoward Shelanski and Peter Klein (1995), Bruce Lyons(1996), Keith Crocker and Scott Masten (1996), andAric Rindfleisch and Jan Heide (1997).

Not only has this research been broadlycorroborative of the predictions of transaction costeconomics, but the importance of risk aversion tocommercial contracting has been placed in doubt (Allenand Lueck, 1999). To be sure, transaction costeconomics, like everything else, will benefit from moreand better empirical work. I have no hesitation, however,in declaring that the NIE is an empirical success story.Paul Joskow concurs: “this empirical work is in muchbetter shape than much of the empirical work in industrialorganization generally” (1991, p. 81). Those who havedone this modest, slow, molecular, definitive workdeserve enormous credit.

3. Phenomena

The NIE is predominantly concerned with Levels 2and 3 of the four levels of social analysis shown in Fig-ure 1. These are the levels of the institutional environ-ment and the institutions of governance, respectively.Between them, they cover a lot of ground.

The formal features of the institutional environ-ment—the laws, polity, judiciary, bureaucracy—arecrucial in examining the development of nation states(North and Weingast, 1989) and for making

intertemporal comparisons within and cross-nationalcomparisons between nation states. Indeed, this lasthas come to be a growth industry to which many econo-mists who are only slightly associated with the NIE havemade contributions. It is nonetheless noteworthy that theNIE has done much of the pioneering work in this area.

As it turns out, any issue that arises as or can beposed as a contractual issue can be examined to advan-tage in transaction cost economizing terms. Examplesfor which contractual issues are evident at the outsetinclude contracts for intermediate products, for labor,for finance, for final goods and services, for the rentalor lease or purchase of land, equipment, and buildings,for professional services, for marriage, and the list goeson. Even, moreover, if contractual features are not im-mediately evident from the outset, many issues can bereformulated so as to disclose their contractual quali-ties, the oligopoly problem being an example.

Many public policy issues, moreover, turn jointlyon the combined use of Level 2 and Level 3 reasoning.In the area of privatizing telecommunications, for ex-ample, Brian Levy and Pablo Spiller examine the insti-tutional environments in five countries through a com-parative contractual lens in which issues of crediblecontracting are featured (1994, 1996). The recent studyof reforming urban water systems by Claude Menardand Mary Shirley (1999) likewise makes clear that own-ership is not determinative but needs to be examined inconjunction with the support, or the lack thereof, of themechanisms of governance. Again, issues of crediblecontracting are salient.

The New Institutional Economics does not pretendto inform everything, however. Compared with someother fields, the NIE is much more aware of its limita-tions. In that sense, it represents an economics of can-dor (as compared with an economics of hubris).

The reform of economies of Eastern Europe andthe former Soviet Union is illustrative. Thus Coase inhis Nobel Prize lecture observed that (1992, p. 714):

The value of including…institutional factors in thecorpus of mainstream economics is made clear byrecent events in Eastern Europe. These ex-com-munist countries are advised to move to a marketeconomy, and their leaders wish to do so, but with-out the appropriate institutions no market economyof any significance is possible. If we knew moreabout our own economy, we would be in a betterposition to advise them.



Two years later, North, in his Nobel Prize lecture,expressed similar precautions. Thus even if we are con-fident that “polities significantly shape economic per-formance because they define and enforce the economicrules,” whereupon “an essential part of developmentpolicy is the creation of polities that will create and en-force efficient property rights,” there is the further prob-lem that “we know very little about how to create suchpolities” (North, 1994, p. 366).

These precautions notwithstanding, real time eventscannot be put on hold. Hard choices have to be made.Economic reform in Russia is an example.

The team of Maxim Boycko, Andrei Shleifer, andRobert Vishny responded to the perceived need to giveshape to the reform with the recommendation that theRussian economy should be privatized quickly and mas-sively. Considerations of both Realpolitik and economictheory were invoked in support of this recommendation.

There is little disagreement that “political influenceover economic life was the fundamental cause of eco-nomic inefficiency [in Russia]” (Boycko, Shleifer, andVishny, 1995, p. 11). Boycko, et al. thereupon declaredthat “the principal objective of reform was…todepoliticize economic life…. Privatization fostersdepoliticization because it deprives politicians of theopportunity to allocate goods…. The goal of privatizationwas to sever the links between enterprise managers andpoliticians…. There was no other way to achieve restruc-turing and efficient operation of firms” (1995, p. 11).

The two strategic actors in this reform program werethe official bureaucracy, which was viewed as “the en-emy to be fought at all costs” (Boycko, et al., 1995,p. 14), and the stakeholders—managers, employees, andlocal governments. The Boycko, et al. team “consis-tently and generously recognized stakeholders’ claims,and thus ensured their eventual support of privatization”(Boycko, et al., 1995, p. 13).

This political prescription for massive and rapidprivatization was reinforced by the economic theory ofthe firm on which the Boycko, et al. team relied. Spe-cifically, they appealed to the pathbreaking work bySanford Grossman and Oliver Hart, which viewed own-ership as a system of control rights (Boycko, et al., 1995,p. 13). As with the property rights literature in general,this property rights theory of the firm concentrates allof the relevant economic action at the ex ante invest-ment stage, it being assumed that the parties to a trans-action will costlessly bargain to an efficient result dur-

ing contract execution. Reassigning property rights tothe stakeholders is therefore the decisive move. Onceunleashed, effective restructuring by the stakeholderswas expected to follow (Boycko, et al., 1995, p. 150).The Boycko, et al. team thus confidently declared thatthe mass privatization program that was begun in theSpring of 1992 had been brought to a “triumphantcompletion” in June 1994 (Boycko, et al., 1995, p. 8),by which time two-thirds of Russian industry had beenprivately owned.

Had the Boycko, et al. team consulted the New In-stitutional Economics, a more cautious and selectiveprogram of privatization would have resulted. Considerthe literature on franchise bidding for natural monopoly,where the property rights approach and the governanceapproach reach very different conclusions.

The property rights approach to the problem of natu-ral monopoly is to conduct an ex ante bidding competi-tion and award the right to serve the market to the groupthat tenders the best bid (Demsetz, 1968; Stigler, 1968;Posner, 1972). Very much in the spirit of Boycko, etal., the future will take care of itself once the assetshave been privatized in this way.

That sanguine view does not withstand scrutiny ifserious ex post implementation problems are in pros-pect. In that event, the award of a monopoly franchiseis merely the first move. The second move is to lookahead and uncover ex post contractual hazards, there-after to work out the ramifications for alternative modesof governance (Williamson, 1976, pp. 79-91). Becausefranchise bidding works much better for some naturalmonopoly industries than others (Williamson, 1976,pp. 102-103), the use of franchise bidding will be re-served for those industries where comparative net ben-efits can be projected—but not otherwise. Privatization,it turns out, is not an all-purpose solution (Goldberg,1976; Priest, 1993).

To be sure, privatizing an entire economy is a muchmore ambitious undertaking than privatizing a naturalmonopoly industry. I submit, however, that the key les-sons carry over. Specifically, privatizing needs (1) togo beyond the ex ante award stage to include an exami-nation of possible ex post implementation problems and(2) in consideration of the differential hazards, to pro-ceed selectively.

Recall, moreover, that the NIE operates at two lev-els. Upon moving from the level of governance to thatof the institutional environment, the rules of the game



come under review. Unless the requisite laws on prop-erty, contract, corporate governance, and antitrust arein place and will be reliably enforced, it is unrealistic toexpect that the benefits of privatization that accrue withina well-working economy will be realized in a rogueeconomy as well.

As Bernard Black, Reinier Kraakman, and AnnaTarassova detail in their paper on “Russian Privatizationand Corporate Governance: What Went Wrong” (1999),the “triumphant completion” of privatization in Russiawas a premature verdict. Thus whereas privatizationwas evidently a success for small firms, it was deeplyproblematic and attended by massive corruption in oth-ers. But for truncated property rights reasoning, someof these problems could have been anticipated by look-ing ahead and examining the hazards of ex post imple-mentation. Greater appreciation for the shortfalls ofthe institutional environment in Russia would also haveled to more cautious pronouncements (Aslund, 1995).Whether added respect for the rules of the game (to in-clude an appreciation for the limited efficacy of Rus-sian law enforcement) would have resulted in rule im-provements in Russia could be disputed. Arguably,however, the effort to reform Russia would have pro-ceeded in a more modest, slow, molecular, deliberativeway.

None of this is to suggest that the NIE could havedone it all. The Boycko, et al. team made heroic efforts.My claim is much more modest: the NIE is informativeand should be included as part of the reform calculus.

4. Concluding Remarks

The New Institutional Economics is a boilingcauldron of ideas. Not only are there many institutionalresearch programs in progress, but there are competingideas within most of them. With reference to history,for example, we see North (1990) and Avner Greif (1999)pursuing complementary but separate agendas. Withintransaction cost economics we distinguish betweengovernance and measurement branches. Incompletecontracting of semi-formal and fully formal kinds differin consequential ways, although the gap has been closing.Evolutionary economics of selectionist, populationecology, and ontogenetic kinds are in progress. Pathdependency is a real and important condition, but itsinterpretation is actively disputed. The merits ofprivatization are real but are not uniform and need to beassessed with reference to governance. The firm is

variously described in technological, contractual, andcompetence/knowledge-based perspectives. How bestto describe human actors is still unsettled, althoughevolutionary psychology holds promise. Politics isjudged with reference to a hypothetical ideal by some(North, 1991) and in comparative institutional terms byothers (Williamson, 1999). Efficiency arguments havemainly prevailed over power interpretations because thelatter are tautological, but power issues refuse to goaway. Bureaucracy remains a poorly understoodcondition no matter what lens is brought to bear. Privateordering approaches to contract have made progressiveheadway, but legal rules remain important and theirrelation to private ordering is incompletely worked out.Positive political theory has made major conceptualadvances, but an overarching understanding of politiesdoes not appear imminent. And the list goes on.

The upshot is that, its many accomplishments not-withstanding, there is a vast amount of unfinished busi-ness—refinements, extensions, new applications, moregood ideas, more fully formal theory. I conclude thatthe New Institutional Economics is the little engine thatcould. Its best days lie ahead. Who could ask for more?

Footnotes*The author is Edgar F. Kaiser Professor of Business Ad-ministration, Professor of Economics, and Professor ofLaw at the University of California, Berkeley. This paperwas presented at the first plenary session of the third an-nual conference of the International Society for New Insti-tutional Economics in Washington, D.C. in September1999. Copyright © 1999 by Oliver E. Williamson. Ad-dress e-mail to [email protected] This framework was first set out in Williamson (1998).2 Figure 2 originally appeared in Williamson (1999).3 “Speculative systems can be quickly excogitated pre-cisely because they do not require the economist to collectand analyze masses of data, to test hypotheses for confor-mity to fact, to discard those which do not fit, to inventnew ones and test them until, at long last, he has estab-lished a factually valid theory” (Mitchell, 1945, p. 2).4 Of the various ways in which it can be posed, its contrac-tual nature becomes more evident when it is posed as aproblem of reaching and enforcing a cartel agreement(Williamson, 1975, Chap. 12).



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____________. 1987. “Reflections on the Essays,” in GeorgeFeiwel, ed., Arrow and the Foundations of the Theory of Eco-nomic Policy. New York: New York University Press, pp. 727-734.

____________. 1999. “Foreword” in Glenn Carroll and DavidTeece, eds. Firms, Markets and Hierarchies. New York: Ox-ford University Press, vii-viii.

Aslund, Anders. 1995. How Russia Became a Market Economy.Washington, DC: Brookings Institution.

Bajari and Steven Tadelis. 1999. “Incentives Versus TransactionCosts.” Unpublished Paper.

Banfield, E. C. 1958. The Moral Basis of a Backward Society.New York: Free Press.

Barnard, Chester. 1938. The Functions of the Executive. Cam-bridge, MA: Harvard University Press.

Black, Bernard, Reinier Kraakman, and Anna Tarassova. 1999.“Russian Privatization and Corporate Governance: What WentWrong?” Unpublished manuscript. Stanford Law School.

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Commons, John R. 1934. Institutional Economics. Madison:University of Wisconsin Press.

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Furubotn, Erik, and Rudolf Richter. 1991. “The New Institu-tional Economics: An Assessment,” in E. Furubotn and R.Richter, eds., The New Institutional Economics. College Sta-tion, TX: Texas A&M University Press.

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ISNIE Conference 1999 (continued from page 2)

first President, Ronald Coase, and an address by our Presi-dent-Elect, Oliver Williamson, keynote addresses by AvnerGreif and Elinor Ostrom, and a report by the committeeon research chaired by Douglass North. Cocktails anddinner in the soaring hall of the World Bank’s atrium wereanother high point.

Most of the conference was devoted to lively paneldiscussions covering a broad range of topics such as trust,corruption and violence; common resource management;issues of transition, development, and innovation; politi-cal economy and public management; and a host of topicsdealing with contract enforcement and management of thefirm. These papers had to be chosen from over 230 pro-posals submitted to the selection committee. In responseto the large number of excellent proposals, the organizersadded a fourth parallel session and included four papers ineach panel. Nevertheless, only about one-third could beselected, making the task of the selection committee a daunt-ing one. Organizers therefore also added an author’s ba-zaar, where more than 46 researchers displayed their pa-pers. Space constraints did not permit a poster session,but one is planned for next year’s conference.

As in St. Louis and Paris, the Washington, D.C. con-ference illustrated once again the international characterof our Society. Participants came from 34 different coun-tries. Thanks to a grant organized by Ronald Coase fromthe Earhart Foundation, more than 20 fellows from transi-tional and developing countries were able to attend.

ISNIE99 would not have been such a success withoutthe hard work of the two co-organizers, Philip Keefer andZeny Kranzer, and the help in particular of Paulina Sintim-Aboagye, Patrick Walsh, and Agnes Yaptenco. Also keywas the support of the IRIS Center at the University ofMaryland, the World Bank, and The Lynde and HarryBradley Foundation. IRIS helped in countless ways; per-haps the most evident were the discreet but persistent time-keepers who kept the panels moving along on schedule.The selection committee, Lee Alston, Benito Arruñada,Philip Keefer, Margaret Levi, Scott Masten, ClaudeMénard, John Nye, and Mary Shirley (Chair), was alsocritical in making the conference a success.

Mary Shirley, the 1999 conference organizer, is ResearchManager, Development Research Group, The World Bank.


The Economics of Institutions in the New MillenniumAnnual Conference of the

International Society for New Institutional EconomicsTübingen, Germany September 22-24, 2000

Joachim Starbatty and Rudolf Richter, Conference [email protected] (paper proposals)

[email protected] (all other inquiries)

You are cordially invited to participate in the nextannual ISNIE conference, which will be held at the Uni-versity of Tübingen, Germany under the presidency ofOliver E. Williamson. It will begin Friday, September22 with a general session starting at 5:30 p.m. Duringthe following two days there will be parallel sessions atwhich proposed papers, accepted by the Program Com-mittee, will be given. Each day will conclude with akeynote address by a distinguished speaker. The tradi-tional conference dinner will be held Saturday night.The conference will end Sunday, September 24 at 5:30 p.m.

You are invited to submit your proposal to present apaper by March 1, 2000. For further details see the Callfor Papers in this newsletter or at http://www.isnie.org.

Among the areas of interest are the New InstitutionalEconomics of:Transition Transaction (Empirical TCE)Development Informal OrganizationsOrganization Regulation and ReformContracts Experimental EconomicsProperty Rights Evolutionary EconomicsPositive Political Theory

Conference registration will start January 1, 2000. Theregistration fee will be DM 225 before June 1, 2000and DM 450 after June 1, 2000. (1 DM is approxi-mately $0.55 US.) The fee includes lunches, coffee breaks,and the conference dinner. Use the registration form inthis newsletter, or go to http://www.isnie.org for con-ference information, membership information, and somedirect links. You can download and print the forms fromthat site. To register, you must be a current memberof the Society. If you are not certain of your currentmembership status, contact the ISNIE office [email protected] about this. All past conferenceshave been oversubscribed. We expect the same to occurthis year, so the earlier you can register, the better.

We hope to see you in Tübingen!

Tübingen is romantically situated on the banks of theriver Neckar, only 30 km south of the Stuttgart airport,in an area renowned for its beautiful landscapes.Tübingen itself is famous for its University foundedin 1477. Its Faculty of Economics, begun in 1817 byFriedrich List and others, is the oldest in Germany. TheUniversity is located in and around the old town, whichhas been almost completely preserved and carefullyrestored. The omnipresent history creates a very specialatmosphere, a mixture of ease and Swabian charm. Thesurrounding region, known for its clean, highly efficientindustry, is home to firms such as Daimler-Benz andPorsche. You can explore Tübingen at the Web site

http://www.cityinfonetz.de/tue.html.

Conference participants must make their own traveland hotel arrangements. A block of rooms is beingreserved in various hotels in downtown Tübingen. Hotelprices are in the moderate range. For tourist informationand room reservations, contact the Tübingen TouristOffice at [email protected] or send in the hotelreservation form from this newsletter or fromhttp://www.isnie.org and indicate that you are attendingISNIE 2000.

To reach Tübingen, the closest airport is in Stuttgart.There are direct flights into Stuttgart from the UnitedStates (on Delta) and from most major European cities.Airport shuttles (one hour ride, about DM 9) or taxis(45-minute ride, about DM 90) provide ground trans-portation to Tübingen. For further information onStuttgart Airport see http://www.flughafen-stuttgart.deor for information in English telephone +49-711-9483753.

You can also reach Tübingen by train. From theFrankfurt (Main) Airport, the train journey to Tübingentakes 2-3 hours, requires changing trains once or twice,and costs about DM 104 second class. For details ontrain connections and timetables in English see

http://bahn.hafas.de/bin/detect.exe/bin/query.exe/e.


2000 Membership Application and RenewalInternational Society for New Institutional EconomicsMembership in the Society is open to everyone interested in the New Institutional Economics, regardless ofacademic discipline or professional employment. Membership is for the calendar year January 1 to December 31.Only current members may submit proposals and attend the annual conference. Members receive a subscriptionto the ISNIE Newsletter and will be included in the NIE Network, a Web-based directory and information service.

The annual membership fee is $40 US (FF 250) for individuals in Andorra, Australia, Austria, Bahamas, Belgium,Bermuda, Brunei, Canada, Cayman Islands, Denmark, Finland, France, French Polynesia, Germany, Hong Kong, Iceland, Iran, Ireland,Israel, Italy, Japan, Liechtenstein, Luxembourg, Monaco, Netherlands, New Caledonia, New Zealand, Norway, Qatar, San Marino,Singapore, Spain, Sweden, Switzerland, United Arab Emirates, United Kingdom, and the United States. For individuals in allother countries, the annual membership fee is $20 US (FF125). For students submitting a letter from theirdepartment verifying student status, the annual fee is $20 US (FF125). To join the Society, fill out a copy of theform below (please type or print clearly) and send the completed form, along with a check or money order, to oneof these addresses:USA EuropeSend check or money order payable to Send check or money order payable to“International Society for New Institutional Economics” to: “ISNIE-EUROPE” to:ISNIE Claude MÉNARDDepartment of Economics, Campus Box 1208 ATOM - Université de Paris IWashington University (Panthéon-Sorbonne)One Brookings Drive 106-112 bd. de L’HôpitalSt. Louis, MO 63130-4899 75013 ParisUSA FRANCE

2000 ISNIE Membership FormSurname: _____________________________________________________________________

First Name and Middle Initial: ____________________________________________________

Organization/Company: __________________________________________________________

Department:___________________________________________________________________

Address: _____________________________________________________________________

______________________________________________________________________

City, State, Postal (ZIP) Code:____________________________________________________

Country:______________________________________________________________________

Telephone: ____________________________________________________________________

Fax: _________________________________________________________________________

E-mail Address: ________________________________________________________________

Personal Homepage /Vita URL____________________________________________________

Research Interests (include JEL codes if possible):_____________________________________

_____________________________________________________________________

Recent Publications and Working Papers (please list no more than 5): _____________________

_____________________________________________________________________

ISNIE 2000 Conference RegistrationAnnual Conference of theInternational Society for New Institutional EconomicsTübingen, GermanySeptember 22-24, 2000To register, please fill out the form below and send it withyour credit card information (MasterCard or Visa) or photocopied confirmation of your bank/wire transfer.The registration fee is DM 225 before June 1, 2000, or DM 450 after June 1, 2000. Mail to:University of TübingenEconomic Faculty - V4Attn: Dr. Sonja OpperNauklerstr. 4772074 TübingenGERMANYYou must be a current member of ISNIE to register for the conference.If you have not yet joined/renewed for 2000, please send the membership formfrom this newsletter with your membership fee to the appropriate ISNIE or ISNIE-Europe address.(Membership renewals cannot be handled through the Tübingen site.)

ISNIE 2000 Conference Registration FormSurname:______________________________________________________________

First Name and Middle Initial:_________________________________________________

Organization/Company:___________________________________________________

Department:____________________________________________________________

Address:_______________________________________________________________

_______________________________________________________________

City, State, Postal (ZIP) Code:______________________________________________

Country:_______________________________________________________________

Telephone:_____________________________________________________________

Fax:__________________________________________________________________

E-mail Address: ________________________________________________________

I agree to pay DM 225 (or DM 450 after June 1, 2000) to the University of Tübingen for ISNIE 2000 registration.

Credit Card Name and Number:_______________________________________Expiration Date:_________(MasterCard or Visa only)Signature:_____________________________________________________________Date:__________________

or I enclose a photocopy of my bank/wire transfer of DM 225 (or DM 450) already paid to the University of Tübingen,Account No. 13004, Bank ID: 641 500 20 / Kreissparkasse Tübingen, designation BA 2938/ISNIE2000.

ISNIE 2000 Conference Hotel Reservation Form

Surname, First Name:

Organization/Company:

Street Address:

Postal (ZIP) Code, City:

Country:

E-mail Address:

Telephone: Fax:

I hereby request the Tourist Office Tübingen (Verkehrsverein) to make the following hotel arrangements.I would prefer if available (prices are for one night, including breakfast):

Single room Double room Category

DM 60,- to DM 80,- DM < 130,- Economy Hotel/ Pension DM 80,- to DM 100,- DM 130,- to DM 160,- Standard Hotel DM 100,- to DM 130,- DM 160,- to DM 190,- High Standard Hotel DM 130,- to DM 170,- DM 190,- to DM 250,- First Class Hotel

My date of arrival:_____________________

My date of departure:___________________

Signature:____________________________

Today’s date:__________________________Send this completed form to:Verkehrsverein TübingenPostfach 2623D-72016 TübingenGermany

Fax: +49-7071-35070E-mail: [email protected] A confirmation of your hotel reservation will be sent in return.

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