North Vs Williamson

NORTH VS WILLIAMSON: THE DEBATE OVER INSTITUTIONS' EFFICIENCY
Author(s): Irène Berthonnet

Source: History of Economic Ideas , 2013, Vol. 21, No. 2 (2013), pp. 53-68
Published by: Accademia Editoriale
Stable URL: https://www.jstor.org/stable/23723666
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«History of Economic Ideas», xxi/2013/2
NORTH VS WILLIAMSON: THE DEBATE

OVER INSTITUTIONS' EFFICIENCY
Irène Berthonnet*
Université de Lille 1
Clersé
The article focuses on the North vs Williamson debate over institutions' efficiency. It
emphasizes a paradox that stems from the fact that both authors share a common set
of explanatory concepts but at the same time conclude diversely on institutions' effi
ciency. This paradox can be released once is understood that despite apparent homo
geneity, nie concepts such as Nirvana analysis, bounded rationality, and economic
embeddedness, are used diversely by North and Williamson.
i. Introduction
North and Williamson,

provided both to
many contributions New Institutional
the question economists,
of knowing whether have
institutions are efficient. However, their conclusions are contradictory.
Indeed, Williamson considers that existing institutions are efficient, be
cause they economize transaction costs and because history drives
them into successive adjustments that progressively lead to greater effi
ciency: «the test of time turns out to be a robust criterion, more robust
than I had initially projected» (Williamson 1996, 211). On the contrary,
North criticizes this position, since to him, institutions are not necessar
ily efficient (Groenewegen, Kersholt and Nagelkerke 1995), and history
does not select institutions according to their efficiency.
Despite a common new institutional research tradition, Williamson
and North disagree on the final statement regarding institutions' effi
ciency. This article pursues a double objective: to show that there is a
conceptual homogeneity inside New Institutional Economics (nie) -
since Williamson and North use similar concepts to analyse institutions'
efficiency and both reject Pareto-efficiency; and at the same time, to re
place these concepts in North's and Williamson's divergent explanatory
frameworks. It thus shows that despite concept similarity, both authors
* Address for correspondance: irene.berthonnet@gmail.com

I would like to thank both anonymous referees for their comments and suggestions, as well
as Prof. Bernard Chavance, for first drawing my attention on this debate; and Prof. Olivier
Favereau for his remarks and advice on how to carry on the reflection. All mistakes and imper
fections left are my responsibility.

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54 Irène Berthonnet
have different approaches. Therefore, Ménar
edge that nie can be considered as a unified
consistent set of explanatory concepts, but
complete, since concept interpretation is di
ed here is that nie concepts are not interpr
way by North and Williamson and that this
posite conclusions regarding institutions' eff
The discussion introduced hereafter is base
three common concepts of North and Will
are used and why the theoretical interpretat
to different conclusions on the efficiency is
nie method for efficiency analysis as a rej
proach (Demsetz 1969). Section 3 discusses t
tionality, and section 4 shows how the institut
is necessarily embedded in other social scie
similarity in concept, while at the same tim
concept interpretation. This methodologica
liamson's and North's different explanatory
ing why they conclude diversely on institut
the debate over institutions' efficiency re-op
ious strands composing nie (Hodgson 1989,
1997, Dequech 2006).
2. A HOMOGENEOUS NIE METHOD:

REJECTING THE NlRVANA APPROACH
An undeniable common point between North and Williamson is their

similar methodology, described by Coase (1964) and Demsetz (1969) to
analyse institutions' efficiency. Demsetz distinguishes the Nirvana
approach from the institutional real comparison. The Nirvana ap
proach of efficiency is that of neoclassical economics, which analyses
economic performance in comparison to an optimal but hypothetical
state of the economy. An institution is considered efficient if it allows
the realisation of a Paretian optimum. On the opposite, institutional
economists evaluate institutions' efficiency through institutional real
comparison among feasible alternatives. New institutional economists
recognize that real world is characterized by frictions, and that these
frictions need to be taken into account when analysing efficiency issues.
Introduction of frictions in the theoretical framework implies rejection
of standard allocative efficiency and of the Pareto criterion (Furubotn
1999)- However, North's and Williamson's same attention to frictions
does not lead to the same conclusions regarding institutions' efficiency.
It will be shown that this is because North's analysis integrates the dy

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North vs Williamson: the debate over institutions' efficiency 55
namic aspect of institutional complementarity (as defined in Aoki 2001),
whereas Williamson rather focuses on the transaction framework.
2.1. Williamson and the remediableness criterion:
understanding the transaction framework
Williamson's reject of the Nirvana method for the analysis of institu

tions' efficiency can be best understood through his remediableness cri
terion: «an outcome for which no superior alternative can be described
and implemented with net gains is presumed to be efficient.»
(Williamson 1996, 7). Efficiency has to be defined from the existing
framework, and only viable and credible alternatives can be examined:
efficiency can only be stated in comparison, and strict efficiency as such
does not exist for an institution. To illustrate his point, Williamson gives
the example of company towns,1 writing that they have often been
condemned as inefficient: «The company town is mainly regarded as a
painful reminder of labor abuses associated with an earlier era.»
(Williamson 1985,35). This conclusion makes absolutely no sense to him.
The efficiency of company towns can be suitably valued only in compar
ison to other feasible types of towns. Indeed, company towns have been
invented to settle the workers close to their workplace, which location
limits the efficient possibilities. Therefore, it is not relevant to compare
company towns to regular cities: the only relevant issue for institutions'
efficiency is that of knowing which is the best way to organize a transac
tion that has to take place anyway. In brief, the remediableness criterion
allows taking into account the context to measure efficiency of institu
tions, and denies any relevance to abstract and theoretical references.
This is why Williamson introduces the «weak form selection», which
is a principle that explains how and why existing institutions can be con
sidered efficient: they have survived the historical selection process. But
the «weak form selection» allows Williamson to specify that only the
«fitter» institutions survive, and not necessarily the «fittest». The «weak
form selection» is thus described in the glossary of The mechanisms of
governance:
Selection from among the better of the feasible alternatives, as contrasted with se
lection of the best from among all possible, to include hypothetical alternatives.
(Williamson 1996, 379)
Weak-form selection principle combines both a non-Nirvana approach

of efficiency and a historical selection process, which lead to the con
clusion that existing institutions are the fittest in a given context. As
Cities built in the desert in order to settle workers close to their working firm.

205.164.157.187 on Sun, 12 Mar 2023 15:03:36 UTC
soon as one element of the environment ch
be different. This is why both governance st
archies) exist in the real world: according to
to feasible alternatives, either market or hie
efficient. In order to choose between govern
ronment has to be understood (uncertainty,
it becomes possible to decide which alternative
the least inefficient. The whole arbitration i
by hypothesis concerning the framework of
curate understanding of this framework ena
nance structure will be most efficient.
This is why, despite the underlying historical selection of institutions,
Williamson s analysis of institutions' efficiency can be considered static
(Hodgson 1999). His analysis focuses on a given situation at a given
time, and does not delve into time adjustments. The dynamic aspect of
historical selection process is not analysed as such in Williamson's work
and his remediableness criterion is always used inside static analysis.
While North also rejects the Nirvana approach - which favours an in
terpretation in terms of theoretical unity inside nie - he focuses on long
term efficiency of a complex of institutions, rather than on static analy
sis of a specific institution.
2.2. North: institutional complementarity and long-term efficiency
North also thinks that institutions' efficiency can be understood only in

relation to the context, and is thus methodologically close to Wil
liamson. He introduces three concepts that emphasize the relevance of
contextualisation for stating on institutions' efficiency, and explain why
«There is a vast gap between better and efficient» (North 1990,109).
The first element is that North - thus following both Demestz and
Williamson - emphasizes the role of frictions. The Northian method
ology is based on a sharp criticism of the neoclassical program, whose
economists are depicted as naive Utopians:
Its harmonious implications come from its assumptions of about a frictionless ex
change process in which property rights are perfectly and costlessly specified and in
formation is likewise costless to acquire.
(North 1990,11)
Frictions allow taking into account the contextual elements that matter
to decide on institutions' efficiency, and this is one of the main features
characterizing the nie approach of efficiency (Furubotn 1999). Since the
real world does not match the neoclassical set of assumptions, nie
suggests taking into account transaction costs. This is the fundamental
parameter that makes real world more complex than the neoclassical

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Nirvana and thus requires a comparative methodology and an empiri
cal analysis.
Besides transaction costs, North insists on bargaining powers to explain

why institutions cannot be efficient in a Nirvana sense:
Institutions are not necessarily or even usually created to be socially efficient; rather
they, or at least the formal rules, are created to serve the interests of those with the
bargaining power to devise new rules.
(North 1990,16)
In the Northian theory, institutions are necessarily the fruit of a political

struggle between fractions with diverging interests: therefore they can
not be socially efficient (Groenewegen, Kersholt and Nagelkerke 1995).
Only the strength of a group's bargaining power allows transforming
private institutions into social institutions. Nirvana efficiency is never
the reason why institutions are created (Chabaud, Parthenay and Perez
2005): if, at the end of the process, some institutions are socially effi
cient, it is a historical hazard.
But North also introduces institutional complementarity as a third
contextual element.1 It is because institutions have to be compatible
with each other that the Nirvana approach is never relevant to discuss
institutions' efficiency. Institutions' efficiency depends on complemen
tarity, and only a comparative institutional real approach is thus relevant
to grasp this additional efficiency factor. For example, to North and
Thomas (1973), the feudal institutional context is efficient because all its
institutions are coherent: domains, castles and knights form a coherent
«complex of institutions» (North 1981, 205). If the environment is mod
ified (here, because of demographic growth), the former complex of in
stitutions can become inefficient. If one element changes, then all insti
tutions have to change in order to restore efficiency to the new
institutional set. In his 1990 book North introduces the concept of «in
stitutional matrix»:
The institutional constraints that define the opportunity set of individuals are a com
plex of formal and informal constraints. They make up an interconnected web that
in various combinations shapes choice sets in various contexts.
(North 1990, 67)
The institutional matrix is made of legal rules, informal norms, property

rights, and security mechanisms for transactions. An efficiency evalua
tion cannot be reduced to one of these factors, because coordination and
efficiency are springing from existence and consistency of the matrix.
1 His understanding of institutional complementarity is very similar to Aoki's 2001, al

though North does not use mathematics.

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The consistency of the institutional matrix
stitutions' efficiency, North's attention is
ments among institutions, which he calls «a
2005). Adaptive efficiency is a mechanism ch
tem: it means that the system can adapt to
changes in the environment, and that it can
do not solve new problems. Efficiency is thus a
than an intrinsic characteristic of an instit
sholt and Nagelkerke 1995). It is precisely in
aspect that North opposes to Pareto efficien
In allocative efficiency, the standard neoclassical Par
efficiency, on the other hand, is concerned with the k
an economy evolves through time.
(North 1990, 80)
Both Williamson and North use Demsetz's m

vana approaches and pleading for institution
a strong common methodological feature o
Williamson apply this method diversely. For
ciency, implies an approach in terms of inst
and therefore leads to a dynamic evaluation
"adaptive efficiency". Instead, Williamson's
(Hodgson 1999). Thus, the main difference
consideration of the long run. Indeed, as
(2000), attention is put on dynamics in Wil
form selection principle, which implies an e
the selection of institutions, allowing only t
adds to Williamson's perspective a long-term
institutions, of both its internal coherence a
This explains how a similar epistemological p
differently and applied to different objects, ca
sions. Despite a common methodological app
sis, Williamson accepts institutions' efficien
that they are often inefficient.
3. The hypothesis of bounded rationality

AS AN EXPLANATION OF INSTITUTIONS' EFFICIENCY
In this section is discussed North and Williamson's accepta

hypothesis of bounded rationality, showing that both use it
2006), but in a different approach.1 Williamson understan
1 Not all aspects of bounded rationality in either Williamson or North are d

but only the most relevant features that explain their divergent conclusions rega

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rationality as a cognitive limitation, whereas North includes social and
political influences on cognition (Groenewegen, Kersholt and Nagelk
erke 1995; Hodgson 2009). This difference of explanatory framework
partly explains why their conclusions about institutions' efficiency are
contradictory.
3.1. Williamson: bounded rationality and far-sightedness
As already noted, Williamson introduces frictions in order to explain

why neoclassical economics does not accurately describe the real world.
Bounded rationality is one of these frictions, but Williamson does not
define or formalize explicitly what he means by bounded rationality
(Foss 2001). To Williamson, it is obvious that any honest observer of the
real world cannot be firmly convinced that economic agents are perfect
ly rational. Following Simon, he describes human behavior as «intend
edly rational, but only limitedly so» (Simon 1961, xxiv; Williamson 1985,
11). Indeed, the economic agent is limited in her ability to analyse infor
mation. This limit is mainly cognitive: if she could, she would be
perfectly rational (Favereau 2011). To qualify this type of rationality,
Williamson uses the term «economizing» (Williamson 1996). This word
enables him to get rid of both neoclassical maximization and of Simon's
«satisficing». However, it borrows from both, keeping the neoclassical
idea of calculus and self-interest-oriented action, and Simon's concept
of cognitive limits.
The agent is limited in her abilities, but she is also limited by structur
al uncertainty. Uncertainty being the main feature of the environment,
it is impossible for the agent to be perfectly rational. Both cognitive lim
its and the environment gather to bound the agent's rationality. If no
perfectly rational choice is possible, it is because of the nature of real
world: it is uncertain, and it bears agents who are imperfect.
In The mechanisms of governance (1996) Williamson adds a further fea
ture to his concept of bounded rationality: the hypothesis of «far-sight
ed» agents. This further hypothesis means that agents are conscious of
their cognitive limits and of the mutual dependency that can result
from bilateral transactions. Being far-sighted, they act in consequence
and settle preventive structures to protect themselves from this depend
ency: far-sightedness endows agents with the consciousness of their
own limits.
Far-sightedness is a critical hypothesis in explaining Williamson's po
sition over institutions' efficiency. Indeed, endowing agents with a con
tions' efficiency (for a detailed discussion of bounded rationality in nie see Pagano 2007). Es
pecially, the whole debate around Williamson's opportunism hypothesis will be overlooked.

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6o Irène Berthonnet
sciousness of their proper limitations,

to another: it is precisely because agen
that they make the economical world m
rationality is bounded that efficiency
ness allows shaping efficient solutions.
their purpose is to provide an answer
designed to solve efficiency problems
institutions would not even be created (D
edness that allows them to be effic
far-sightedness are not necessarily con
plementary in the explanation of in
Williamson's far-sighted agents are bo
perfectly rational agents. They are less
anisms of governance (Williamson 1996
edness, Williamson's theory of bounde
ry of cognitive incapacity. But, they are
understand their limits and are able to
answer. Therefore, it must be noted t
bounded rationality is rather a hypot
gano 2007, 20) or meta-rationality. Far
cient governance structures that econo
ty at the inferior level. This is why Will
rationality is perfectly compatible with i
The content of Williamson's bounded
his proximity with the standard appr
stitutional Economics (Eggertsson 199
tegrates institutions in his analysis, bu
classical economics, that is the rationa
has been argued by Hodgson (1989), w
behaviour» to define neoclassical behav
liamson's opportunism. Northian unde
ty appears to be more distant from rat
3.2. North: from bounded rationality
North's work on rationality begins with

rationality model, based on the ackno
Structure and change in economic history
agents always choose the outcome that
The limits come from the fact that they
the consequences of their decision. In s
close to the Williamsonian approach o
would probably agree that economic a

205.164.157.187 on Sun, 12 Mar 2023 15:03:36 UTC
but that they both lack the cognitive capacity and suffer from uncertain
ty. To North too, institutions are the rules of the game shaped by agents
to limit the damages caused by uncertainty on economic action:
It is the existence of an imbedded set of institutions that has made it possible for us
not to have to think about problems or to make such choices. We take them for grant
ed, because the structure of exchange has been institutionalized in such a way as to
reduce uncertainty.
(North 1990, 22)
However, institutions are shaped by imperfect minds: they provide safe

ty and stability and help decision-making, but are not necessarily effi
cient. Boundaries on rationality are here taken more seriously than in
Williamson, since they also imply imperfect and inefficient institutions.
In a second period, North's use of bounded rationality is related to a dif

ferent explanatory framework. He changes his definition of bounded
rationality, which he no longer considers as a limitation of perfect ra
tionality, but rather as a different pattern of decision-making and prob
lem-solving. This second period begins with a paper from North and
Denzau (1994), in which they try to elaborate a new theory of decision
making under uncertainty:
But how do we make choices? Economists say we use the rationality assumption.
That is saying absolutely nothing. The rationality assumption at its best says that peo
ple are consistent and logical maybe, but it does not say how people make choices in
the face of enormously complex information, imperfect knowledge and imperfect
feedback on the consequences of their actions.
(North 2003, 2)
North tries to elaborate a complete behavioural theory based on what

he sees as the missing piece: mental models. This concept is based on
learning: in an uncertain environment, decisions reflect personal and
social interpretation of the environment. Mental models are represen
tations built through a learning process to interpret the environment,
which is a specificity of mankind, and which explains better the process
of decision-making. North and Denzau use as an example an experi
ment conducted by the psychologist J. Feldman in 1959. He showed to
several people a list of 1 and 0, asking them to predict which number
would appear next. Participants rapidly built mental schemes that al
lowed them to make credible predictions, when the sequence was actu
ally random. This experiment demonstrated the spontaneous human
capacity to build mental models, in order to ordinate the mass of infor
mation received by the brain. North drew the conclusion that humans
proceeded rather through form recognition than through abstract and
logical reasoning.

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The Northian theory of decision-maki

tern bounded by uncertainty and cogni
ferent theory that explains how agents r
decisions. Economic agents are not stri
neoclassical agents. They rather behave
basis, strongly determined by instituti
(Hodgson 2009). North's second concep
thus be described as an «institutionall
2008), rather than as strict bounded ra
knowledge that North's work with Den
proach to human behaviour, since from
tional choice approach (Dequech 2002, F
point for nie's conceptual homogeneit
now appears closer to old institutionali
2009).
Thus, Northian institutions help fighting uncertainty but are also pro
duced by agents who rely on mental models rather than rationality to
make decisions. This is why most institutions are inefficient: unlike in
the Williamsonian approach, no meta-level is introduced to deal with
bounded rationality. The link from mental models to inefficient institu
tions is direct: agents are not rational, institutions are created in order
to reduce uncertainty and favour coordination; therefore, institutions
are not necessarily efficient. Focusing on the political aspect of ration
ality, North takes into account the fact that rationality is not a feature
of isolated agents, but rather a characteristic of human beings trying to
coordinate and act together. On the opposite, Williamson's bounded ra
tionality hypothesis allows through an indirect mechanism the efficien
cy of institutions. Agents are not fully rational, but they know it and
then act preventively. It is the hypothesis of far-sightedness that ulti
mately explains Williamson's conclusions on institutions' efficiency.
Both North and Williamson claim to use bounded rationality. How
ever, their interpretation of the extent and consequences of this behav
ioural hypothesis are divergent, which explains why they derive contra
dictory conclusions on the specific issue of institutions efficiency.
4. Economics as a social science:

AN EMBEDDED APPROACH OF EFFICIENCY
The fourth section focuses on a third methodological simi

North and Williamson: their common embedded approach
tions' efficiency. Both North and Williamson use explanator
borrowed from other social sciences to decide whether or no
tions are efficient. Economic activities are never considered

205.16f:ffff:ffff:ffff:ffff on Thu, 01 Jan 1976 12:34:56 UTC
sub-systems, since general social rules apply to economic activities
(Polanyi 1944). It will be shown that Williamson's embedded approach
implies taking ethics into account; whereas North's embedded analysis
of efficiency focuses on the political context.
4.1. Williamson's atmosphere
Williamson's embedded approach can be grasped through his concept

of «atmosphere». The word first appears in Markets and Hierarchies
(1975), and is introduced as an additional component of institutions' effi
ciency (Williamson 1975,40). It means that the type of social interaction
that frames the economic transaction also matters for efficiency.
Williamson writes that the atmosphere criterion fully belongs to the ef
ficiency analysis and is not less important than bounded rationality or
uncertainty. Indeed, since the atmosphere shapes the framework of the
economic transaction, it belongs to the economic analysis:
Recognition that alternative modes of economic organization give rise to differing
exchange relations, and that these relations themselves are valued, requires that or
ganizational effectiveness be viewed more broadly than the usual efficiency calculus
would dictate.
(Williamson 1975,38-39)
In Markets and Hierarchies (1975), Williamson gives the peer group exam
ple: peer groups are non-hierarchical internal modes of organization.
The main justification of their existence is the atmosphere. Members
value a specific atmosphere of informal reciprocity inside the organiza
tion, which is not possible inside the hierarchical firm. Atmosphere is
thus an ethical criterion: somehow Williamson wishes to include ethics
in the economic analysis of efficiency (Favereau 2011). Individual ethical
values influence economic choices, and matter in the efficiency analy
sis, since preferences in terms of internal organization may favour ei
ther hierarchical or horizontal organization. The ethical framework in
which the transaction happens matters, and economic activities can be
understood only by taking ethics into account. Analysis of institutions'
efficiency thus embeds transactions in ethical frameworks.
However, Williamson remains convinced that peer groups are not as
efficient as hierarchical organizations. For example, as the size of the or
ganization grows, the positive externality of non-hierarchical group dis
appears. Hierarchical organization is more efficient than peer group,
because it makes collective decision less costly by removing the obliga
tion of debating with all members, and because it makes real sanctions
more likely (whereas in peer groups, no measure of individual produc
tivity is possible). Williamson concludes that «Simple hierarchy can do
everything the peer group can do and more.» (Williamson 1975, 54).

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How then to understand the links betwee
cy? Is atmosphere really a criterion of effic
had pretended? Is it not rather an import
mains contradictory with economic efficie
the existence of non-hierarchical structures is
type of relationship between members tha
chy: only atmosphere legitimates the exist
Williamson's position regarding the role of at
analysis is not perfectly clear. In 1975, he wro
institution could not be evaluated without
count. But, after Markets and Hierarchies (197
dons his criterion of atmosphere: it is only ve
conclusion of The economic institutions of cap
ther inquiry in this direction. It will be used
corporate governance issues, but in a very dif
4.2. North's social orders
Like Williamson, North refuses to analyse t

as a strict economic question. In order to u
their efficiency more accurately, it is imp
mains: «the component systems are embedd
own distinct logic.» (North, Wallis, Webb an
defines social orders as «ways of organizing
taining and internally consistent» (ibidem, 3).
cept to understand why institutions have diff
contexts. Two types of social order are int
Limited Access Order Societies (laos), m
countries. Economic profits are confiscate
share out rents according to a pyramidal st
Open Access Order Societies (oaos), whic
countries. Rights are impersonal, competiti
and political fields and makes confiscation
Lots of laos have the same institutions
multinational firms...), but «these institutions
logic and with different effects in the pre
cess» (ibidem, 9). Therefore, institution's effic
on economic factors, but also on the socia
more than only institutions, something mo
ded and which widely explains their (in)effici
1 In management, to allow efficient cooperation betwe

2007).

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of economic and political choices: the analysis of institutions' efficiency
is embedded in a political sub-system, which has to be analysed. Social
orders mix up economic and political factors. For example, competition
is both economic and political, and North cannot imagine one without
the other:
Almost all of the two dozen developed countries are developed politically as well as
economically; they have open access and competition in both economic and political
systems. The strong implication is that economic and political development are in
trinsically linked. The question is how? The answer begins with core aspects of open
access orders.
(Ibidem, 17)
Like Williamson, North claims that a relevant analysis must embed eco
nomic factors in a wider acceptation of efficiency. But like his colleague,
he does not manage to turn this claim into a sharp concept of embed
ded efficiency. Indeed, North's theory is not consistent without assum
ing that some institutions are strictly efficient, regardless of social or
ders: «Institutions determine the performance of economies, but what
creates efficient institutions?» (North 1990, 137). Two concepts used by
North confirm that some specific institutions are always efficient:
The developing path: North thinks there are «doorstep conditions»
(rule of law for the elites, centralized and consolidated control of vio
lence). Once these doorstep conditions overstepped, social orders
evolve by themselves toward the next developing step.
The lock in: once it is an oao, no social order ever goes back to a lim
ited order, oao s provide efficient institutions - such as competition -
which lock the path and prevent returns:
What prevents elites from transforming oaos back to laos? It is certainly not lack of
desire to create and enjoy rents. The persistent competition that results from open
entry, however, frustrates the desires of economic and political actors to create per
manent rents through limited access.
(Ibidem, 18)
Competition is considered an efficient institution in se, whatever social

order it is embedded in.
Thus, North's embedded approach of efficiency is not fully satisfying
either. Indeed, efficiency is somehow already present in some institu
tions. North (1990) explains that the souk is not efficient, because it has
no institutions to collect and distribute information: prices cannot be
seen, measures are not standard, and exchanges are not impersonal. On
ly competitive markets bear an incentive to innovate. Despite North's
general thesis according to which «Institutions are not necessarily or
even usually created to be socially efficient» (ibidem, 16), his theory can
not be completely understood without introducing some institutions

205.164.157.187 on Sun, 12 Mar 2023 15:03:36 UTC
that are more efficient than others.

efficiency allows him to introduce b
various economic development lev
cludes that some institutions are more efficient than others. It cannot
be decided whether this conclusion comes from a pro-democracy ide
ology or from the incapacity to explain the transformation of laos in
OAOS.
The common point between Williamson and North appears cle

both believe that economic transactions and institutions are also framed
by non-economic factors. But there is a major difference of level:
Williamson focuses on individual interactions, trying to include ethics
as an explanatory factor of institutions' efficiency; whereas North is in
terested in the macroeconomic perspective, of the structuration of eco
nomic activities. This is why he does not believe that institutions are
necessarily efficient. Both Williamson and North care to analyse insti
tutions' efficiency beyond a strict economic logic, but the project is not
completely fulfilled in either case. The embedded analysis of institu
tions' efficiency is never fully consistent with the general theoretical
framework. Williamson introduces atmosphere, but it is not compati
ble with the hypothesis that hierarchy is always more efficient than peer
groups. North is forced to hypothesize the efficiency of some institu
tions to explain the dynamic of social orders in which institutions are
embedded.
5. Conclusion
The investigation carried out here has proven that Williamson and
North share a common theoretical framework since they use similar
concepts and method. They both reject the so-called Nirvana analysis
of efficiency (Demsetz 1969), both rely on the bounded rationality hy
pothesis, and both claim that some relevant explanatory factors of in
stitutions' efficiency are not economic. This strong homogeneity in the
analysis of institutions' efficiency proves the existence of a specific in
stitutionalist approach of efficiency issues, which could provide rele
vant orientations to design a new efficiency criterion (Furubotn 1999).
Beyond this theoretical unity (Ménard 2001), the critical review of
Williamson's and North's concepts has also provided additional results,
showing that this unity is not complete. Indeed, the same concepts are
integrated in different epistemological frameworks: Williamson's
analysis is closer to mainstream analysis than North's approach. North
draws more attention to the long-term dynamic analysis, he under
stands bounded rationality as a type of human behaviour which is far
away from rational choice theory (and not only a limitation of perfect

205.164.157.187 on Sun, 12 Mar 2023 15:03:36 UTC
rationality), and he integrates macrosocial embeddedness inside the
analysis. Therefore his approach is closer to political economy than
Williamson's.
This explains why despite undeniable theoretical homogeneity,
Williamson and North conclude oppositely on institutions' efficiency. It
also reopens the question of the various strands constituting the nie,
while confirming the position of many commentators who write that
North's work is getting closer to old institutionalism (Rutherford 2003,
Hodgson 2009). Especially, following Dequech (2002), it can be said that
the recent evolutions in nie tend to make it less homogeneous, and to
question the relevance of existing criteria to draw lines between old and
new institutionalism, and between nie and mainstream economics.
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alism», Journal of Economic Issues, 36, 4,1025-1043.
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North Vs Williamson

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NORTH VS WILLIAMSON: THE DEBATE OVER INSTITUTIONS' EFFICIENCY

Author(s): Irène Berthonnet

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