orgtheory.net

On our evil twin blog, Peter Klein draws attention to a special issue of the Journal of Economic Behavior and Organization dedicated to Cyert’s and March’s classic A Behavioral Theory of the Firm. The issue includes articles by a number of distinguished scholars, including Jim March himself. For me the highlight of the issue is a piece by Mie Augier and James March that looks at the somewhat uneasy relationship between Herbert Simon and Oliver Williamson. Augier and March note that although Williamson considered himself to be a part of the Carnegie School tradition, Simon was reluctant to include Williamson’s transaction cost view as a legitimate exercise in behavioral economics because Williamson could not release his adherence to a neoclassical emphasis on maximization.

[T]he Simon complaint about Williamson’s work was persistent. In 1991 he wrote to Williamson, “We both agree on the importance of organizational and institutional factors for the understanding of the economy . . . Where we part company, if we do, is, first, your urge to legitimize your models by encapsulating them in a neoclassical framework of rationality, and second, my insistence that this (your work and mine) is all highly speculative until we carry out much more extensive empirical work, most of it not of an econometric sort but involving direct observation within institutions and organization”.
Williamson tried to balance behavioral views with more orthodox ones by emphasizing behavioral
factors that could be introduced into more conventional models.8 For example, he included one aspect of limited rationality as a central assumption of transaction cost economics, but he embedded that assumption in a framework that pictured an organization as a collection of strategic, rational actors. Simon summarized their disagreements as relating to “the issue of whether one can build a realistic theory of the firm while remaining a member in good standing of the economics profession (at least, of its neoclassical wing)” (99-100).

It appears that late in his life Simon demonstrated a greater appreciation of Williamson’s view.  In fact, shortly before his death Simon expressed “contrition at not having understood you as well as I should and at not having appreciated the amount of aid and comfort that yourwork gives to the cause of bounded rationality
and, more important, of returning economics to reality” (96).  But the central critique, as Augier and March argue, still holds.  While economists are likely to view different utility functions as competing and humans as capable of making tradeoffs, the reality may be that certain values are incommensurable. Making tradeoffs, even when it does happen, often yields pain and psychic discomfort, some of which may prevent decisions from ever being made in the first place.