The Economic Intstitutions of Capitalism

Rating:
Summary: Very useful for corporate lawyers
Review: 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.

Rating:
Summary: A classic of new institutional economics
Review: 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 business about contracting nodes, pp. 32ff, is a classic example.)

Rating:
Summary: Great for expanded understanding of vertical integration
Review: 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!

Rating:
Summary: Great for expanded understanding of vertical integration
Review: 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!