Book Review

Gordon Walker

Organizational Economics, by Jay B. Barney and William G. Ouchi (Editors). San Francisco, CA: Jossey-Bass, Publishers, 495 pp., $32.95, 1986.

What do economists know about organizations? Your answer to this question indicates much about your current research interests, your colleague network, your training, and, perhaps, whether you’ve read Organizational Economics, edited by Jay Barney and Bill Ouchi. This book of articles by economists and commentary by the editors portends a new paradigm to guide the study of organizations, or at least proposes a candidate for such a paradigm. I would be presump- tuous as well as hypocritical to deny that this proposal has value, since much of my current research flows from ideas the book con- tains. Furthermore, I would be somewhat foolish, since many of my colleagues are economically oriented organization theorists or organi- zationally oriented economists. But as an adherent of large sample empiricism, I am a dah-driven skeptic. The contribution of eco- nomics to the study of organizations can only be assessed by the analysis of observations. My expectation is that the results will be exciting and more theory-generating than theory-conf”Kming.

The fifteen essays Barney and &chi compile cover a range of topics partitioned into six sections. These are: basic concepts (infor- mation, opportunism, and economic exchange), transaction cost economics, the economics of organizational structure, agency theory, evolutionary theory, and the economics of business strategy. The editors introduce each section and open and close the book with chapters motivating the reader to appreciate broadly the future of organizational research governed by the economic perspectives the articles contain.

The economic models are not those of price theory. (How could they be?) Rather, the editors have chosen authors who challenge the assumptions of the received microeconomic model (Chamberlin, Schumpeter, Coase, Williamson, Klein, h o u r , Teece, Crawford) or authors who at least broaden those assumptions (Alchian, Demsetz, Jensen, Meckling, Fama, Hirshleifer, Akerlof, Porter). Furthermore, the articles are not dominated by formal analysis and therefore are accessible to readers without extensive training in mathematics.

Are the articles the best choices for the purposes they are intended to serve? Many readers will have preferences different from the

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editors. For example, Sidney Winter’s (1 977) attack on positive eco- nomics would contribute to the section on evolutionary theory; and Caves and Porter’s (1 977) essay on strategic groups is clearly seminal in integrating the concepts of industry structure and firm (business) strategy. But re-editing the book in this fashion is fruitless, with the exception of one general complaint which the editors themselves raise in the book’s conclusion: only one of the articles (Armour and Teece’s study of the adoption of the multidivisional form in the oil industry) contains a large enough sample of observations to test hypotheses. The editors clearly chose conceptual breadth over data. The benefit of this choice is that the range of content nicely meets their goal of presenting the non-economist with multiple and par- tially interlocked economic perspectives on organizations. The cost is that the reader is not informed about the empirical validity of the perspectives or how one might go about establishing their empirical validity.

Are there areas of convergence between economics and organiza- tion theory that are not highlighted in the book? The editors men- tion four possible areas in the last section of the book that might have been included but were not: property rights economics; Albert Hirschman’s models of exit, voice, and loyalty; market signalling; and contestable markets. The editors summarize these theories quite briefly. Although Hirschman’s framework and the theory of contest- able markets are reasonably separable from the theories the editors chose to include in the book, property rights and market signalling are clearly not so separable. Transaction cost economics, as pre- sented by the editors, draws from the property rights literature; and agency theory, as a collection of concepts and applications some- what more extensive than the collection the editors have chosen, draws on both property rights and market signalling. Market signal- ling is also an important aspect of in te r fm strategic behavior, as the editors point out.

The difficulty of the enterprise the editors have undertaken begins to appear: they must not only tie the areas of economic research they have selected to areas of organization studies (as they do in the introduction to the book) but at the same time convince the reader that their selections are the most appropriate, given the structure of the subfields in economics, for the task at hand. To maintain order, both the too abstract and the too specific need to be excluded. The inclusion of a section on game theoretic models, for example, would clearly have created some confusion because of their applicability to a wide variety of problems; on the other hand, a section on a specific intermediate contracting mode such as franchising could have included articles based on both agency theory (in its incarnation as an approach to solving problems of incentive structures in bilateral contracting) and the transaction cost perspective. I’m not trying to

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second guess the editors’ strategy here; but it’s important to under- stand just what constraints the goal of the prokct may have placed on the product.

What can noneconomists glean from the book? Perhaps a great deal, especially if the reader has heard about but not read the theo- ries and approaches the editors include. The book is a useful intro- duction to the burgeoning literature applying new fonns of economic analysis to organizational problems. Furthermore, the editors’ at- tempts to summarize the rationale of each section are generally helpful in orienting the reader to the articles. The editors wisely decided on a composite reference list at the end of the book so that interested readers can search the literature that underlies the articles more efficiently.

The conclusion attempts to move the interests that motivated the book forward. This section will be most stimulating to readers who have some knowledge of the material contained in the book and want to know what the editors think about the future of research guided by its general precepts. The editors make two important points: 1) when the transaction is the unit of analysis, traditional organization theory conceptualizations of the organization and its environment become problematic; and 2) transaction based research has not yet come up with solutions to the problems. A number of organizational sociologists (Perrow, Eccles, White, Granovetter, Stinchcombe) have taken the “transaction costs” program of re- search to task because of the non-modal character of markets or hierarchies. One can find hierarchical behavior in markets and market behavior in organizations.

But if the organization is not a modal variable, what have we been studying? “his problem is one of the most promising research direc- tions the book presents (or participates in). I believe this line of re- search will inevitably link up 1) with experimental market studies and therefore the mixed field connecting psychology and economics, but adding an explicit institutional framework to guide the research; and 2) with network studies, although dimensionalizing relationships and bounding feasible populations of actors to capture the duality between market and organizational behavior will be difficult.

Barney and Ouchi claim that organization theorists are the main contributors to the empirical literature in organizational economics. This is simply not the case. Williamson (1985, Chapter 5) discusses a host of studies on the transaction costs approach to vertical integra- tion, and more have been published recently. Furthermore, financial economists and accountants have begun an aggressive program of testing the implications of agency theory for measures of organiza- tional performance, governance structure, compensation schemes, managerial contracts, and the behavior of the capital markets regard- ing the fm (see the April, 1985 issue of the Joumd ofAccounting

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and Economics). Last, the economic theory of business strategy has stimulated numerous empirical studies, notably those using the FTC line of business data and the PIMS data.

Organizational economics is an expanding mixed field of research with a wide range of theoretical approaches and applications to practical managerial problems. Barney and Ouchi’s book will be a useful pedagogical tool for those who want to learn in a general way the field’s basic content.

Gordon Walker is the Stanley R. Jaffee Term Associate Professor of Management at the University ofPennsylvania’s Wharton School.

REFERENCES

Caves, R. E., and Porter, M. E. From entry barriers to mobility barriers: Conjec- tural decisions and contrived deterrence to new competition. Quarterly Jour- nal ofEconomics, 1977,91,241-262.

Williamson, 0. E. The economic institutions of capitalism. New York: The Free Press, 1985.

Winter, S. G. Optimization and evolution in the theory of the firm, in R. H. Day and T. Graves (Eds.), Adaptive Economic Models. Orlando, Florida: Aca- demic Press, 1975.

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