A young man heads into his university student center. He has just enough time to grab a snack and check his email. It's 2001, before the proliferation of laptops and smartphones. At an empty computer station, the student, Barak Richman, logs in. For anyone in his final year of law school at Harvard, there can be a slew of important emails. And for Richman, his academic emails don't emanate solely from Harvard. He's also working on a PhD in business administration from Berkeley. In fact, he recently sent off an early draft of his dissertation to his advisor, and he's eager for comments.
His advisor, Oliver Williamson, is a big reason why he's trading sleep and sanity for the additional degree. Williamson is a giant in economics, influential in diverse fields from law to public policy, and one of the world's most cited economists. Earning simultaneous, bi-coastal degrees is ambitious by anyone's standards, but Richman isn't about to let an opportunity to work with Williamson slip away.
Years ago, Richman worked for a short time on Capitol Hill and became fascinated with policy-making, law, and business. Torn between his interests, the answer appeared to be a degree in applied economics—that is "applying" economics to solve real-world issues. He entered Williamson's doctoral program at Berkeley. After finishing the coursework, though, he found himself still searching for his "focus as a scholar." Law beckoned, and he began studies at Harvard. Even as Richman immersed himself in studying law and public institutions, he maintained his fascination with Williamson's work on organizations. "Even though I was in a different field and a different school, I still was finding lots of wonderful research applications to Oliver's theories." And he says Williamson made it a point to remain "attentive, detailed, and insightful" despite the distance.
Richman eventually chose to study diamond merchants, an industry curiously dominated by Orthodox Jews. How, he'd wondered, did this occur, and, even more perplexing, why did it continue? He'd reasoned that ethnic ties enabled the merchants to enjoy lower transaction costs, and he'd emailed that well-reasoned analysis to his advisor.
Richman opens his email account. There it is: Williamson's response. He can't help but shake his head and smile. It's so like Williamson to comment by raising a question. The note pointedly reads: So then, why aren't other industries organized the same way? Why aren't they all dominated by a single ethnic network?
Decades before, Williamson was puzzling over his own PhD research. It was the '60s, and he'd moved to Pittsburgh with his wife, Dolores, and two small children to study at Carnegie Tech's Graduate School of Industrial Administration, better known by its acronym, GSIA. (David Tepper, the financier and 1982 alumnus for whom the school would be renamed in 2003, was still in preschool.)
A slight, soft-spoken man with a self-effacing smile, Williamson had started as an undergraduate engineer at Ripon College and then MIT. He developed an interest in economics and moved on to graduate business study at Stanford. There, Williamson shared an office in an overcrowded building with two other graduate students and a young faculty member, Charles Bonini, who'd come fresh from Carnegie Tech. The students were crammed into one side of the space, with Bonini's desk parked just across a makeshift partition. It was close enough for Williamson and Bonini to chat.
"I started to share some of my interests with him," Williamson remembers. Bonini had some interesting advice. At the time, Stanford's fledgling PhD program was still a work-in-progress. "The more I talked," says Williamson, "the more [Bonini] was persuaded that someone with my interests should be at Carnegie. He could just see me fitting right in."
Williamson looked into Carnegie Tech, exchanged correspondence with the dean, and ultimately decided Bonini was correct. "I left [California] with some reluctance," he says with a chuckle. Understandable, given that he'd formed an impression of Pittsburgh from an old history text in which it "was depicted as a city that you were lucky to see the outlines of buildings through the smoke." The family was relieved to discover a lovely place to live.
So here he was. At first glance, GSIA was anything but impressive, just a yellow-orange brick building. The outward appearance didn't matter. "My recollection of walking through the doors of Carnegie, GSIA, was that you just walked into a place that reeked of research atmosphere. It was infectious. There were just ideas that were going off continuously," says Williamson.
The young men—all men—went about their scholarly business in coats and ties, as befitted the era. It was a small group, only about 20 master's and four doctoral students admitted per year. Offices were on the second and third floors. The unassuming space belied what was going on inside—an academic revolution staged by great minds.
- Herbert Simon, Franco Modigliani, and Merton Miller: all would be honored with the Nobel Prize in Economic Sciences:
- Richard Cyert, who would be dean of the business school and, later, Carnegie Mellon president, transforming the university into one of the world's elite institutions.
- James March, a pioneer in behavioral theory of the firm, now professor emeritus at Stanford.
- Allan Meltzer, who would become a foremost expert on monetary policy, now a professor at Tepper.
- Lester Lave, who would become a top energy economist, now a professor at Tepper.
It was no wonder that Bonini, an expert on quantitative techniques, sensed how well the young Williamson would fit in. Simon, March, and Cyert, along with Williamson, embraced a new and unpopular notion that economics should be open to the influence of other social sciences, like organizational theory and political science. And like many path-breaking ideas, this behavioral approach met with initial resistance. Even more unusual was that it progressed right alongside another, seemingly incompatible viewpoint. The second, more traditional view involved rational expectations and efficient markets and was represented by Modigliani, Miller, and Meltzer.
The seminars of those days were, to put it mildly, feisty. "In one way, it was extremely collegial," Lave recalls. "In another way, there were really hot discussions and arguments going on. Everybody described those seminars as extraordinary. People would be talking with each other, disputing what others were assuming, making something really interesting out of it."
While Williamson was a student of the behavioral camp, he managed to involve and intrigue both sides. "Because Carnegie was a permissive place...I was comfortable operating between the two extremes." Cyert, Simon, and Meltzer sat side by side on his dissertation committee. Williamson's later comments about his "enormously exciting" and "unforgettable years" at Carnegie Mellon would be echoed by others who shared the experience. "You know, when you've got future Nobel laureates on your dissertation committee," says Bonini, "that's pretty impressive."
Looking back, Williamson (GSIA'62,'63) notes: By far, the most important event of my intellectual development was my PhD training at Carnegie Mellon." It would lead to this inscription on Hunt Library's copy of The Mechanisms of Governance by Oliver Williamson, donated by Cyert.
From whom I learned BTOF [Behavioral Theory of the Firm]… and much else; and with fond memories of unforgettable years at GSIA.
By 2003, Barak Richman has finished law school and is spending the year clerking. He hasn't given up on his economics thesis. Draft by draft, Williamson remains in touch. After what seems like a thousand iterations regarding the diamond merchants, Richman thinks he finally realizes where Williamson has been leading him. While focusing on the benefits of ethnic ties, he'd been missing the costs—understanding the bigger picture, the trade-offs. Richman emails the outline of his newest theory.
Williamson's email response comes while Richman is at work in his cramped and cluttered second-floor office in a Providence, R.I., courthouse. This time, Williamson doesn't pose a question.
Several dissertations on which I was beginning to despair actually came together very nicely. I would like to believe the same will be true for yours...
Now you need to exercise that talent in a positive way and make people sit up and take notice of what is distinctive about what you have to offer. And then you need to pull it off.
Richman doesn't delete the email. "It made me feel like maybe I really could finish this thing."
The fact that I have found the alliance of law, economics, and organization so productive is partly because, as a student of Carnegie, it could hardly be otherwise."
—Oliver Williamson, The Mechanisms of Governance
After completing his degree at Carnegie Mellon, Williamson devoted himself to academia. Using the interdisciplinary approach he honed at GSIA, he went on to increasingly greater achievement, credited by many for changing the landscape of economics.
Williamson's teachers, Simon, Cyert, and March, had pioneered economic thinking about the behavior of companies, or "the firm." Prior to this, economists had focused primarily on markets, or the exchange of goods and services, studying factors like price and quantity. Firms were generally considered no more than "black boxes" of production, which meant ignoring the real and complex way that companies operate in the real world. Williamson opened the black box and laid its contents on the table. He demonstrated that firms and markets should be examined in tandem, joining behavioral and mainstream economics in unprecedented ways.
He initially analyzed the make-or-buy decision, or why a company chooses to produce in-house or outsource to another firm. Building on economist Ronald Coase's observations, Williamson framed the problem in a way he termed "transactions cost economics," by looking at how variations in the characteristics of a company's transactions, or exchanges, influence its ultimate structure. Specifically, he demonstrated that contrary to popular thinking, a very large corporation might, under the right conditions, be an efficient way to conduct business. An example given—how should an electric power plant obtain its coal? Should it purchase the nearby mine? It makes sense if the mine is the only one in the region. If there are several, the power plant could be better off letting them compete.
At the time, Williamson thought this would be a one-shot problem to study and then move on. He was surprised to discover that his work applied broadly—not just to transactions in general, but to organizations, both public and private. His theories were comprehensive and testable, prompting hundreds of studies in a wide range of industries, and his work is credited with influencing the analysis of critical issues from antitrust policy to investment in Eastern Europe.
On October 12, 2009, the phone in the Williamson house rings at 3:30 a.m. It's a call from Sweden. The call from Sweden. Williamson has been named co-recipient of the Nobel Prize in Economic Sciences. He becomes the seventh individual from Tepper to be honored with the most prestigious award in economics, and the 17th Nobel winner from Carnegie Mellon.
Now grey-haired, with blue eyes behind wire-rimmed glasses, Williamson is still soft-spoken but has a quiet authority borne of years. Fittingly, the scholar who wouldn't be limited by one discipline now holds joint appointments at Berkeley's Haas School of Business, the Department of Economics, and the Berkeley School of Law. During post-prize interviews and speeches, he also gives a glimpse into larger issues he's pondered.
On what we can learn from his work: "To try to understand that all feasible forms of organization are flawed and that we need to understand the trade-offs that are going on, the factors that are responsible for using one form of governance rather than another, the strengths and weaknesses that are associated with each of them."
On organization in government: "Take the Department of Homeland Security—that was put together in rapid fashion, and in a way which I think...this really should have been vetted by people with organizational backgrounds and interests and capabilities."
On governmental advisors: "I think that organization is sufficiently important...that all nation-states ought to begin thinking about having a council of organizational advisors. There's lots of stuff that's going on in Washington, D.C., and around the world right now that has huge organizational ramifications and isn't being factored in in the same systematic way that the basic economics is. Sometimes that comes back to a serious regret."
Incidentally, Richman finished his dissertation. The student is now the teacher, the law professor receiving his correspondence in a much cushier space—his private office at Duke University. He finds himself using Williamson's questioning technique with his students, understanding how it pushes them to become critical thinkers and independent scholars. And he still has that email from 2003.
Melissa Silmore (TPR'85) is a Pittsburgh-based freelance writer and a regular contributor to this magazine.