Oliver Williamson, 1932-2020

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Oliver Williamson, 1932-2020

The economist Oliver E. Williamson died on May 21 at the age of 87. The cause was complications from pneumonia, according to The New York Times.

For his elucidation of how firms decide whether to make goods and services or to outsource their provision, Williamson made groundbreaking contributions to the study of privatization and its limits.

Williamson shared the Nobel Prize in Economics in 2009 with the political scientist Elinor Ostrom. The Nobel Foundation recognized Williamson “for his analysis of economic governance, especially the boundaries of the firm” and Ostrom “for her analysis of economic governance, especially the commons.”

In building on the work of Ronald Coase, Williamson made clear that the transaction costs involved in outsourcing often made internalization rather than externalization of production more efficient.

Williamson's work has been especially relevant to education policy. With more and more school districts over the past 30 years outsourcing school management to educational management organizations (EMOs) and charter management organizations (CMOs), concerns about transaction costs have necessarily become central to debate. These concerns hold, as well, for decisions made at the state level regarding vouchers, tuition tax credit scholarships, and education savings accounts (ESAs).

“In more numerous respects than are commonly appreciated,” Williamson wrote in a 1971 article on the vertical integration of production published by the American Economic Review, “the substitution of internal organization for market exchange is attractive less on account of technological economies associated with production but because of what may be referred to broadly as ‘transactional failures’ in the operation of markets for intermediate goods.”

Williamson fleshed out his analysis of the advantages of the vertical integration of production in his book The Economic Institutions of Capitalism, published in 1985. Citing concerns about trust, in particular, as a key determinant of a firm’s decision to make rather than buy, Williamson pointed to General Motors’ acquisition of Fisher Body in 1926 as a classic example of a firm deeming the costs of outsourcing to be too high.

In its obituary for Williamson, The Wall Street Journal noted that Williamson made a similar argument in his Nobel acceptance speech with reference to the high costs incurred by Boeing many decades later in outsourcing a significant portion of the production of its 787 Dreamliner.

Williamson wrote in a footnote to that speech: “Applications of transaction cost economics would, however, have avoided the most serious outsourcing error made by Boeing: the decision to outsource the highly specialized fuselage to Vought Aircraft Industries. This transaction required significant investments in specific assets and would pose a series of adaptation problems during contract implementation.... Boeing subsequently rectified this condition by acquiring Vought.”

Williamson was born and raised in Superior, Wisconsin, according to the Times. He earned a bachelor's in management at MIT in 1955, a master's in business administration at Stanford in 1960, and a Ph.D. in economics at Carnegie Mellon in 1963. Williamson then taught at the University of California, Berkeley, till 1965, when he moved to the University of Pennsylvania. From 1983 to 1988, he taught at Yale, before returning to Berkeley, where he taught until 2004.

Samuel E. Abrams
Director, NCSPE

Published Monday, Jun. 8, 2020