12 October 2009

Coase Gets His Second Nobel

Donna this morning mentioned that she heard on NPR that some American had been awarded the Nobel for his work on the boundaries of the firm. After making the mandatory Barrack Obama joke, I said that it must be Oliver Williamson, and I was right.

As it happens, I just spent a measurable portion of my summer reading Williamson and about Williamson. (I've pulled three of his books from the shelf, The Mechanisms of Goverance, The Economic Institutions of Capitalism, and The Nature of the Firm, and I highly recommend them. Williamson is an accessible writer and if you're interested in why some functions necessary to produce a product are in the firm and others aren't (and who isn't), Williamson makes for a good read.) The old saw is that an economist is anyone who calls himself an economist, but I think of Williamson as an organizational theorist. Org theory is a name more than a discipline -- psychologists, sociologists, anthropologists and economists all write org theory -- and the line between org theory and strategy (my field) is whisper-thin. If you look at organizing, you're an org theorist, unless you look at whether different ways of organizing effect performance, in which case you're in strategy.

As Prof. Williamson would be the first to admit, his work owes much to Ronald Coase. Coase first asked why organizational boundaries exist where they do? This is a more subtle question, and a more fundamental question, that first appears. The question really is why, if the market is so great at delivering the right product at the right price, does so much economic activity take place within the firm, where decisions are made bureaucratically by a hierarchy. Why have an HR department when the market could deliver the right worker for the right price? Why did Ford try to control the entire supply chain from mining the iron ore through selling the completed car, but buy it's tires from Firestone?

Coase's answer was that it must cost less to do it that way, at least in the long run. As Williamson says, "What is one to do with a 'gift' that is patently right, eludes analysis, and upsets foundations?" Essentially what org theory (and economics) did was ignore it for 50 years until Williamson based his career on building on Coase's analysis. His first book, and in some ways his best book, is Markets and Hierarchies (1975) which does a great job of combining work on information theory, organizational innovation, transaction costs and the behavioral theory of the firm.

Overall, Williamson's work allows us to make predictions about broad trends in org theory. Recent advances in information management and the collapsing costs of communicating across distances led to a predictable (and predicted) increase in outsourcing and vertical dis-integration. In other words, we're now in a period in which we should expect to see market mechanisms substituting for hierarchical/bureaucratic command and control mechanisms. Which is just another reason that the move to nationalize healthcare is a bad idea.

In fact, the work of both of this year's economic laureates suggests that nationalizing healthcare is a bad idea. (Elinor Ostrom's work suggests that the revealed preferences of local consumers does a better job of allocating scarce resources than diktats from national hierarchies.) Predictably this will be ignored by the very people who expect us to defer to the wisdom of the Peace Prize committee.

17 comments:

Susan's Husband said...

I find it interesting that the effectively the same issue comes up in computer science, where it's called the "Class Boundary Problem". Nobody wants "spaghetti code" where all functionality is in one place (kind of like Communism) but once you start splitting the code into chunks ("classes") you have the issue of how to allocate the functionality or, equivalently, where the boundaries of the classes are.

Harry Eagar said...

Revealed preferences in health care means taxpayers would be paying chiropractors etc.

That may be democratic and popular, but it also would be stark, raving mad.

Chiropractic is one real world experiment (of many) that leads me to disbelieve that markets know better than I do.

David said...

Insurance companies pay for chiropractors because they're much cheaper than doctors for people with no real medical problems but with a need for attention.

Susan's Husband said...

And it is, of course, the market that lets you, Mr. Eagar, not pay for chiropractors. Once it's government run, you will no longer have that option.

Hey Skipper said...

Chiropractic is one real world experiment (of many) that leads me to disbelieve that markets know better than I do.

Chiropractors are quacks.

I know more than a few people who insist they feel much better after a visit to their Chiropractor.

Which makes Chiropractors a real world experiment that markets allow people to more than I do what is better for them.

Peter Burnet said...

Chiropractors are quacks.

I know more than a few people who insist they feel much better after a visit to their Chiropractor.


I'm wondering what the legal equivalent of that would be. A shyster who keeps you out of jail or saves you money? So much for the "what works" test, Skipper.

Funnily, I was just talking to an M.D. yesterday who was quite pro-chiropractor and saw them as playing an important role in healthcare. A few reservations about what they can and can't do, but far beyond the grudging "maybe for lower back pain" line of many doctors. Which of you wants to be the first to warn me off that doctor?

Hey Skipper said...

So much for the "what works" test, Skipper.

Ummm, no. Quite the opposite.

"What works" is not contained within either the statement "chiros are quacks", or that, for many people "chiros help."

That is what makes the market so effective, and what Harry so often misses. My belief that chiros are quacks does not impinge upon someone else's experience.

Priests are quacks. Many people find religion beneficial.

Same thing.

erp said...

There's another aspect of chiros between they're quacks and they help people.

They often hurt people who have conditions that are worsened by neck and back torques.

I took me almost a year to recover from one visit to ease a lower back pain and I know I'm not the only one.

Harry Eagar said...

Which market are we talking about? Not the cure market. Chiropractic cannot cure anything.

People do not pay chiropractors because they think all they need is attention, although perhaps insurance companies do.

Reminds me of what Deming said about the makers of carburetors. They made their carburetors better and better, because they thought they were in the carburetor business, and then they all went bust, because they really were in the fuel delivery business, and injectors are superior (although, as Deming did not say, injectors were on the market for a looong time before their superiority was accepted).

Many years ago, I suggested as a solution for the health care financing puzzle the creation of FBS -- Feels Bad Syndrome -- to deal with the 60% or so of doctor visits that present no organic symptom.

The physician would pull out his pad and say, 'I think you have FBS and I'm referring you to a specialist.'

The specialist would be a granny, who would work pretty cheap, who would pat your hand and give you tea and sympathy.

Anyhow, chiropractic is the poster boy for my idea that with the market, you get what the market wants, whether it makes any sense at all.

So, for once, I agree with all of you.

With David about the insurance companies.

With SH about government, although only because of Judge Manion's absurd ruling.

With erp about danger.

With Skipper about quackery.

And even, a little bit, with Peter about MDs. My medical adviser (not the physician who treats me, the physician I ask to explain how the medical profession operates) has a chiropractor on the staff at his clinic. He finds him useful, when carefully constrained.

Hey Skipper said...

Harry:

Which market are we talking about? Not the cure market. Chiropractic cannot cure anything.

The same could be said of most oncology.

I have never been to a chiropractor, but I know some people -- apparently normal in all other respects -- who have, and insist they have obtained a great deal of pain relief. Who are you, or I, to say they are wrong?

Also, it is worth noting that, as an insurance company, you would probably rather pay for a chiropractor than a surgeon.

(although, as Deming did not say, injectors were on the market for a looong time before their superiority was accepted).

Perhaps he did not say that because it was a looong time before fuel injection was economically practical. Heck, even high level racing cars didn't use fuel injection until the 70s.

Harry Eagar said...

Before you can have treatment, you have to have diagnosis. Chiropractic cannot do diagnosis, since it is based on subluxations of the spine, which do not exist.

I have no doubt that many people feel better after being seen by a chiropractor, just as they feel better after going to the movies or to church.

But they haven't been cured of anything.

As a cancer survivor, I am not so dismissive as you are of oncology treatments. No question I'd have been dead 10 years ago if I had gone to a chiropractor for that. And I was solicited to do so.

Hey Skipper said...

As a cancer survivor, I am not so dismissive as you are of oncology treatments.

I am not dismissive. However, I think it is safe to say that very few people are cured of cancer.

I have no doubt that many people feel better after being seen by a chiropractor, just as they feel better after going to the movies or to church.

Which is the beauty of the market.

erp said...

Skipper, Many people, including my father, my husband* and my brother were cured of various kinds of cancer and by cured, I mean they no longer have cancer cells in their bodies.

Unfortunately, I also know many people who died from cancer, mostly in days gone by. Modern medicine has changed the word cancer from one whispered in dark corners, to one with mostly a positive prognosis.

*bladder, prostate and melanoma

Harry Eagar said...

I was cured. Cancer all gone. Thyroid, too, but I take a pill for that.

My mom has been cured of two cancers, the more recent about 20 years ago, so I'd call those cures.

It's true that, eg, nobody gets cured of pancreatic cancer, but let's be specific.

Hey Skipper said...

Okay, to be specific, the success of cancer treatments is measured as survival rates over periods of time, where the gold standard is surviving the original cancer diagnosis for five years.

People are not cured of cancer in the same way they are cured of a broken bone.

The only way to know for certain if you are cured of a cancer is if you die of something else.

joe shropshire said...

My medical adviser (not the physician who treats me, the physician I ask to explain how the medical profession operates) has a chiropractor on the staff at his clinic. He finds him useful, when carefully constrained.


A pretty example of Coasean bargaining. The right to massage a sore back goes to the guy who values it more; and relief from having to fix a sore back goes to the guy who values that more , since an MD can't do much for a sore back anyway.

Harry Eagar said...

It's a little more complicated than that.

You anti-gummint types would have a field day with Hawaii which in effect subsidizes chiropractors by making anybody in a car crash eligible for lots of chiropractic treatment, whether he was injured or not.

However, my adviser has an industrial medicine practice, so he's dealing with more than sore backs.

Libertarians venturing into the minefields of medical business must be careful about Manion's ruling in the AMA case, although so far as I can tell, none of them even knows about it.