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Re-evaluating the battle of the Olivers based on Holmström's claim that Oliver Williamson wrote about firm as escape from the limits of the market, while Oliver Hart wrote about the market as escape from the limits of the firm. There's another Nobel paper in there somewhere.
First of all, I don't quite get the beef between two camps. They are simply writing about two different exploitation scenarios, both using the tools they perfected. Both deal with asymmetries in a Prisoners Dilemma. Williamson is longitudinal, Hart is pivotal.
Williamson is good old Carnegie engineering tradition here, while Hart adheres to the MIT modeling standard. This is all fine by itself, models are good to unearth certain facets of the world. The "my model works, so your model can't possibly unearth additional truths" is, uhh...
What is the longitudinal view of resolving the PD? In a one-shot spot (market) transaction with mutual information asymmetries and no recourse, cheating is the optimal choice for both players. Firm as open-ended iterated PD comes to the rescue here.
But firm also introduces power asymmetry, aka hierarchy. If even the less powerful actor is still barely better off, firm is a Pareto improvement over market, but a problematic one.
Hart, like most of MIT, doesn't do longitudinal, but looks at the pivotal moment when one of the players – the asset-poorer one – accepts to give up both residual decision rights and residual claims, but re Holmström he also establishes the limits under which this is possible.
So we actually have pretty complementary models using pretty complementary methodologies, instead of a turf war over a question they both don't answer particularly well. (Modern firms are mostly risk buffers between risk-taking entrepreneurs and risk-averse employees.)
But its still fun to connect the two Olivers via Douglass North and the emergence and collapse of the manorial system as nexus of coercive contracts: protection vs exploitation.
The manorial system, stable, plodding, stratified, uninnovative, the key productive unit of the feudal society, emerged as the result of the decentralization of the Carolingian empire and didn't collapse in full until 1918. Pockets like Sicilian Mafia still survive extralegally.
In the absence of central enforcement, the traditional way to settle scores was the feud. Costly, drawn out over generations, and remarkably well regulated. Trade, if at all possible, required access to trust networks.
In such a situation, the establishment of a longitudinal, asymmetric, contractual relationship between the two key agents: protector and producer, made sense for both sides, as they depended on each other for survival. Any external market interaction was essentially cheating.
So Williamson provides the rationale for the emergence of such a stratified system while Hart explains to which side the pencil tips over. Protector, wielding sword against the producer's ploughshare, was simply in a better bargaining position.
The Holmströmian reemergence of markets comes much later with the repopulation of the cities deserted since the collapse of the Roman empire. Brought back by entrepreneurial lords, cities became the nexus of bustling global trade.
As they became more widespread, the lure of the city set limits on what the protector, the landlord of the manor could do, lest their producers ventured out to become free citizens forst, honorable burghers later.
So as it turns out, there isn't really that much conflict between the two Olivers and their different perspectives on horizontal vs vertical contracting. The element of coercion and exploitation is still much underdeveloped in both fields, but that's what Nobels are for.
This thread was brought to you by the #BeigeAcademy of always having wondered what the big fuzz was about in contracting vs transaction cost economics.
@threadreaderapp unroll plz old villein...
@threadreaderapp unroll plz old villein...
