Memorial Day weekend was not kind to the economics profession, as it saw two of its most distinguished thinkers leave this world. Oliver Williamson died on May 21 and Alberto Alesina on May 23. My colleague Scott Burns also memorializes Richard Timberlake, a giant of the monetary economics profession, who passed away on May 22^nd. 

Their passing represents a tremendous loss for anyone who loves the sheer joy of economic discovery as well as all who champion a free and open society grounded in private property rights and the rule of law. Alesina and Williamson were certainly not card-carrying “Austrian” economists: Williamson student Peter Klein writes that “Williamson is no Austrian” but is “sympathetic to Austrian themes,” while Alesina, a staunch critic of Keynesian fiscal policy, seemingly had little direct contact with the Austrians.  Nonetheless, for their unwavering commitments to the logic of choice as it unfolds within the constraints of the institutional environment, Peter Boettke would surely find a place for them in his “mainline” economics tradition. 

Oliver E. Williamson was the co-winner with Elinor Ostrom of the 2009 Nobel Prize in Economic Sciences. Born September 27, 1932 in Superior, Wisconsin, Williamson left an indelible mark on the social sciences that will continue yielding new insights for decades to come. At the time of this writing (May 24, 2020), Google Scholar reports that Williamson had amassed some 274,133 citations—a number that promises to balloon in the coming years. Until his passing, he was the second most-cited of all living economists behind only Harvard’s Andrei Shleifer. 

There is hardly a corner of the social sciences to which Williamson’s influence did not reach, as evidenced by his own appointments in economics, business, and law at the University of California, Berkeley. This wide-ranging influence reflects Williamson’s deep and abiding drive to explain a plethora of institutions, society’s rules of the game, which have the unruly tendency of transcending disciplinary boundaries. It is thus no surprise that Williamson’s influence extends far beyond economics proper into business administration, strategy, organizational science, law, and sociology. 

Williamson’s chief concern was in extending the “transaction cost” revolution of his inspiration, Ronald Coase, who famously asked (1937), “Why does the entrepreneur not organize one less transaction or one more?” This question about the boundaries of the business firm—where does the firm end and the market begin—provided the animating question for Williamson who deployed his understanding of “transaction costs” to illuminate not only this “make-or-buy” question, but a myriad of other business phenomena that were previously seen as either inscrutable or somehow nefarious. 

Known to friends and students as “Olly,” Williamson saw the economic transaction as the unit of analysis and he saw the diverse fauna of business arrangements as alternative means for resolving conflict, each tailored to minimize the transaction costs of which Coase had famously used to explain the very existence of business firms. Production and exchange create value, but cooperation between multiple parties is required to maximize that value. This raises the specter of “opportunism” (to use one of Williamson’s favorite phrases), wherein parties attempt to grab as much of the newly-created value for themselves, possibly dooming the whole enterprise to failure. For example, a producer of a highly specialized part might initiate a contractual, “arms-length” relationship for a buyer. When the time comes to deliver the part, the buyer might “hold up” the specialized producer by forcing a lower price or demanding a renegotiation of the contract. With nowhere else to sell the relationship-specific investment and with the court system costly to use, the seller might be forced to take the buyer’s low-ball offer. Of course, foreseeing this possibility, the more likely possibility is that no contract occurs at all. And with fewer exchanges occurring, the world is a poorer place. 

Williamson identified vertical integration as a solution to this problem: The buyer can purchase his specialized producer, thereby eliminating the incentive for holdup. Production can go on. Insights like these were important in the 1960s and 1970s when Williamson and his “transaction cost revolution” provided an efficiency rationale for myriad business practices that were frequently drawing the ire of the antitrust authorities. In arguing against what he called the “inhospitality tradition” in antitrust theorizing, a view that saw wasteful market power in virtually every business practice and configuration, Williamson joined Chicago thinkers like Yale Brozen and Harold Demsetz and Austrian thinkers like Dominick Armentano in upending the structure-conduct-performance paradigm which dominated mid-20th century thinking in industrial organization.

Williamson’s tremendous legacy lies in the fact that his approach generated a host of testable predictions, many of which have been borne out. As Williamson himself put it in his 1986 The Mechanisms of Governance: “As I see it, transaction cost economics is an empirical success story.” Speaking personally for a moment, I’m appreciative to Williamson for inspiring me to think of creative ways that corporations can credibly commit to the avoidance of opportunism with their employees, a theme I explored here and here. 

Born April 29, 1957 in Broni, Italy, Alberto Alesina was the Nathaniel Ropes Professor of Political Economy at Harvard University, where he obtained his economics Ph.D. in 1986. Google Scholar also confirms that Alesina was no lightweight—clocking in at 120,389 citations as of May 24, 2020. An unconventional thinker, Alesina made important contributions at the intersection of political economy and macroeconomics. After the world financial crisis of 2008, Alesina’s perspective assumed new significance as he emerged as a leading critic of central tenets of contemporary fiscal orthodoxy.

In short, Alesina has empirically demonstrated, across a wide array of contexts, that reductions in public spending are routinely followed by an improvement in economic conditions. That these findings hold in the wake of downturns is in fundamental contradiction to the predictions of New Keynesian models. 

While not necessarily embracing a thoroughly microeconomic approach to macroeconomics, Alesina is notable for eschewing overly aggregative approaches to macro that posit an omniscient and benevolent central planner in order to generate mathematically tractable results. Instead, Alesina shares more in common with the late 19th and early 20th century Italian public finance tradition that contributed to the birth of public choice economics. Like the Italian public finance theorists of old, Alesina’s work emphasizes that phenomena such as business cycles cannot be divorced from political considerations which shape the incentives that state actors face. 

Alesina’s work provides empirical confirmation of Adam Smith’s timeless observation that “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom…” He does this through careful, yet magisterial, empirical work. For example, his book with Francesco Giavazzi, Austerity: When it Works and When it Doesn’t (2019) carefully examines thousands of fiscal policies, implemented worldwide since the 1970s. Alesina and Giavazzi disaggregate approaches to fiscal policy, concluding that not all austerity is created equal. Specifically, plans which seek to close the budgetary gap by raising taxes tend to be recessionary, whereas plans that cut taxes tend to be long-run expansionary.

Since such fiscal policies are often accompanied by bursts of deregulation, the crippling of unions, or a change in monetary policy, Alesina and Giavazzi do careful empirical work to control for these factors, concluding that the “good” kind of fiscal austerity is a prime driver of economic expansion. Consistent with these broad findings, his 2002 paper, “Fiscal Policy, Profits, and Investment,” finds a devastating effect of public spending on business investment. In the face of contrary views by most in the economics profession, Alesina was unafraid of standing on his findings. For example, in this mid-2014 edition of the famed IGM Forum poll of economists, only Alesina (of 44 economists polled) answered “Disagree” to the question: “Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.” 

For work in two other areas, political business cycles and the cultural underpinnings of economic activity, Alesina also deserves recognition. In his carefully-researched 1997 book, Political Cycle and the Macroeconomy, Alesina and his coauthors demonstrate that macro phenomena (most notably, the business cycle) are often the product of democratic politics (once again, not of omniscient and disinterested central planners). In understanding long-run development, Alesina has called for researchers to more carefully examine the causal relationships between culture (informal institutions) and the formal institutions promulgated by states. 

These thinkers are united by their devotion to understanding the institutions which underpin free and flourishing societies. They both understood that society’s “rules of the game” structure the incentives that economic actors face and downstream of these incentives lie the economic outcomes—for better or for worse. More than that, however, each of them was unafraid to stand against consensus viewpoints, even if “caving” would have made them more popular in their times. And for that, we’ll miss them. We are forever in their debt for the proud legacy they left and the great scholarship that they will no doubt inspire for decades to come.