ECONOMIC ORGANIZATION: THE CASE FOR CANDOR
OLIVER E. WILLIAMSON University of California, Berkeley
Robert Michels concluded his famous book. Political Parties, with the observation that "nothing but a serene and frank examination of the oligarchical dangers of democracy will enable us to minimize these dangers" (1966: 370). Thecorresponding proposition on opportunism is this: Nothing but a serene and frank examination of the hazards of opportunism will enable us to mitigate these hazards. Sumantra Ghoshal and Peter Moran counsel otherwise, it being their belief that candid reference to opportunism (also oligarchy?) invites bad practice. To be alert to the hazards of opportunism is not, however, to condone or encourageopportunism. Rather, provided that opportunism is examined in the context of farsighted contracting, the lesson is to look ahead, perceive possible hazards, and take hazard-mitigating actions. My response to Ghoshal and Moran begins with the behavioral assumptions, and I pay special attention to opportunism. I then examine the role of efficiency in transaction cost economics. The use of toy problemsto critique social science research is then discussed. Empirical research is briefly addressed. Concluding remarks follow. Behavioral Assumptions Herbert Simon (1985: 303) advised social scientists that [n]othing is more fundamental in setting our research agenda and informing our research methods than our view of the nature of the human beings whose behavior we are studying. It makes adifference, a very large difference, to our research strategy whether we are studying the nearly omniscient Homo economicus of rational choice theory or the boundedly rational Homo psychologicus of cognitive psychology. It makes a difference to research, but it also makes a difference for the proper design of political institutions. James Madison was well aware of that, and in the pages of the FederalistPapers he opted for this view of the human condition (Federalist, No 55): As there is a degree of depravity in mankind which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence.
—a balanced and realistic view, we may concede, of bounded human rationality andits accompanying frailties of motive and reason. But for one important exception, I am broadly in agreement with this assessment. Not only am I persuaded that research strategies are significantly influenced by the choice of behavioral assumptions, but I concur that cognitive and self-interestedness assumptions are especially important. I also agree that the design of political (and. I would add,economic) institutions is influenced by the choice of behavioral assumptions. And I agree that bounded rationality—behavior that is "intendedly rational, but only limitedly so" (Simon. 1957: xxiv)-^is the appropriate cognitive assumption. Rather than limit self-interestedness to "frailties of motive and reason," however, I would make provision for opportunism, which introduces the possibility ofself-interest seeking of a more strategic kind (to include self-interest seeking with guile). Indeed, I am not at all sure that the "circumspection and distrust" to which Madison referred would arise if mere frailties of motive and reason were the only concerns. It is useful in this connection to distinguish between day-to-day routines and occasional disturbances of less familiar or nonstandardkinds. As between frailty of motive and opportunism, which applies where? I submit that frailty of motive adequately describes day-to-day activity most of the time. People usually will do what they say (and some will do more) without self-consciously asking whether the effort is justified by expected discounted net gains. If they slip, it is a normal friction and often a matter of bemusement....