Analyze the following critique from a Transaction Cost Economics perspective. If possible, skim before the first Chapter of Williamson’s The Economic Institutions of Capitalism (1985).
In business circles, a story is often told of two hikers who wake up one night to find a tiger lurking near their tent. One of the hikers immediately reaches for his running shoes. On being reminded by his partner that he could not possibly outrun the tiger, he responds that all he has to do is to outrun the partner. At a superficial level, the somewhat macabre humor of the situation also serves as a powerful reminder of the similarities between biological and economic competition. Survival of the fittest and, hence, the need to be the fittest, is seen as the moral of the tale.
On (still) deeper reflection ... the story reveals a set of assumptions and their self-fulfilling and ultimately debilitating consequences for the hikers that directly contradict the firstcut analysis. We begin our critique of transaction cost economics (TCE) with this story because much of TCE ... is based on a very similar set of assumptions with similar debilitating consequences for organizations whose managers knowingly or unknowingly adopt its prescriptions.
The first assumption is regarding human nature. In reaching for his shoes instead of considering any collaborative action with his partner, the first hiker represents the ‘model of humans’ that is embedded in Williamson’s brand of TCE logic. His behavior is opportunistic (i.e., an expression of ‘self-interest unconstrained by morality’) (Milgrom & Roberts, 1992). In deciding to abandon his partner, he assumes that he has no choice because he cannot be certain ex-ante that his partner will not behave opportunistically, and ex-post discovery can be costly (Williamson, 1975).
The second assumption is regarding the requirement for success. What matters is the speed of running, because that is the strength of the tiger. Going up a tree, or lighting a fire, or any other such ‘strategic’ actions are not contemplated. Rather, ‘efficiency’ within predefined rules of the game is the criterion that determines the desirability of the outcome (Williamson, 1991d).
In a world of hikers and tigers, given these two assumptions, tigers will ultimately prevail. Even if one hiker survives the first encounter by outrunning his partner, he would succumb in some subsequent encounter either to a faster partner or simply because he would soon run out of partners and would have to go hiking alone (Ghoshal and Moran, 1996, pp. 13-14).