DR EMANUELE LOBINA

Reorienting Industrial Organisation Theory: From Necessary to Possible Outcomes
POLITICAL ECONOMY RESEARCH FELLOW | SEPTEMBER 2017 – AUGUST 2018

Abstract

While government failure and market failure theories respectively predict the necessity of private and public efficiency, both fail to predict the public and private inefficiencies which are empirically pervasive. This failure of prediction is due to deductive reasoning that insulates explanatory claims from the real-world duality of agency and institutions. Oliver Williamson lays the foundations for recognising organisational failures of all kinds, by acknowledging this duality, but remains hamstrung by the limits of deductive reasoning. To resolve this impasse, this project develops a theory of organisational failure that illuminates the multiplicity of the possible organisational efficiency outcomes, explaining how public and private water utilities become more or less efficient under varying circumstances, and reveals the social and economic factors leading to these outcomes. It does so by revisiting Williamson’s comparative institutional analysis from a critical realist vantage point, using inductive reasoning as a method of theorising, adopting multiple rationality as agency model and the duality of agency and institutions as the key to explanation. The theory is developed through a new “remediable institutional alignment” framework, which operationalises the duality of agency and institutions by exploring the interplay of actors’ motivation, power, organisational arrangements and institutional environments. This framework is used to analyse the evidence from 30 qualitative case studies produced in 15 years of research on water service reform. Each case illustrates how path-dependency causes the temporary lock-in of organisational efficiency. The cases are then compared to formulate hypotheses on the causality of variations in relative efficiency. Throughout this process, inputs from industrial organisation, economic sociology, and political and policy sciences contribute to the emergence of socialised, historical and nonreductionist accounts of relative efficiency. The enhanced explanatory power of this theory promises to better support organisational reform and serve social justice in a sector vital to social and economic development.

The Research Idea

The thesis of the project is that, to strengthen its explanatory power, industrial organisation theory must abandon rational choice to adopt critical realism as a philosophy of science. Together with the assumptions of instrumental rationality and linear causation, deductivist theorising fictitiously insulates explanatory claims from actual causal mechanisms [43]. Therefore, rational choice accounts of relative efficiency assume that actors’ motivations and capabilities persist as if the duality of agency and institutions was ineffectual [30]. This aprioristic stance is better suited to portraying ideal states of affairs than comprehending the real world.While Tony Lawson [19], [20] shows critical realism’s potential for strengthening explanatory claims and reorienting economics, rational choice remains dominant [21], [11]. Hence the project aims to offer a non-reductionist account of organisational performance by producing a critical realist theory of relative efficiency, intended as the organisational capability to further the equal redistribution of social wealth [47], [28].The assumption of multiple rationality incorporates instrumental and bounded rationality, on the one hand and social, political, moral, and professional rationality, on the other hand [7]. Concerns with the duality of agency and institutions facilitate the understanding of path-dependent, circular and cumulative causation [40], because institutions enable and constrain agency and are shaped by agency in return [5], [41], [2]. This interaction produces a perpetual cycle that, due to contingency and irreversibility, results in nonlinear trajectories of events [9]. Finally, inductive reasoning is a method of theorising that informs historical modelling, thus representing an antidote to reductionism [10], [23].

Background

The explanatory limitations of current research reference points – market failure, government failure, and Oliver Williamson’s comparative institutional analysis – all originate from deductivist theorising. Rational choice theories of government failure became dominant by accusing market failure proponents of deductivism [4]. While government failure and market failure theories respectively predict the necessity of private and public efficiency, both fail to predict the public and private inefficiencies which are empirically pervasive. Urban water services offer a case in point. While market failure theory has little to say on the occurrence of public inefficiency [46], government failure theory cannot explain the increasing termination of private contracts due to unsatisfactory performance [27].Importantly, Williamson’s comparative institutional analysis lays the foundations for recognising organisational failures of all kinds, by acknowledging the duality of agency and institutions and the importance of path-dependency [49]. However, his analysis remains hamstrung by the limits of deductive reasoning and the retention of a rational choice agency model [42]. For example Williamson’s a priori assessment of the public sector as the organisational mode of last resort, to choose “when all else fails” [50], effectively reiterates the predictions of government failure and does not reflect the empirical reality of the water sector [8]. Although Williamson offers a healthy dose of realism by focusing on contract instead of choice [51], conventional theory remains unable to account for the full variety and dynamics of possible organisational efficiency outcomes [31].Addressing the explanatory limitations of extant theory requires abandoning deductivism and rational choice assumptions.

The Focus

The project focuses on organisational reform in the water sector. Because urban water services are critical to economic and social development [48], the pervasiveness of public and private inefficiencies is cause for social concern. While policies of privatisation have prompted widespread social resistance [17], [33], conventional theory offers limited guidance to decision-makers. Hence, this research develops a theory of organisational failure that departs from extant theory both methodologically and substantively. This theory is developed through the extensive and in-depth analysis of qualitative case studies. Inductive analysis allows for deriving hypotheses by moving from the observation of empirical evidence instead of proceeding intuitively as deductivism requires [28]. Analysing the evidence through the lenses of the duality of agency and institutions allows for avoiding the logical fallacies of rational choice and its reliance on linear causality. These fallacies are epitomised by property rights theory’s emphasis on ex-ante efficiency incentives and neglect of the agency-structure interaction that can offset these incentives in an ex-post phase [30]. This critical realist explanatory strategy is intended to generate understandings of the how and why real-world organisations might remain in positions of efficiency or inefficiency, and move between positions of efficiency and inefficiency. It thus promises to offer more accurate and reliable guidance on reforming urban water services than incumbent theories do. Also the adopted definition of efficiency prioritises outputs over inputs and developmental objectives over profit. The research is thus informed by the recognition that social justice is the overriding aim of water service provision [6].

Theoretical Novelty

The research revisits Williamson’s comparative institutional analysis from a critical realist vantage point. Going beyond Williamson’s mere acknowledgment of the duality of agency and institutions and the importance of path-dependency [49], the research operationalises path-dependent causation to identify the possible trajectories of organisational performance and the multiple organisational efficiency outcomes that these trajectories entail [31]. This operationalisation is achieved by refining a new “remediable institutional alignment” framework [26], which supports the investigation of the duality of agency and institutions by exploring the interplay of actors’ motivation, power, and institutions. In particular, motivation is influenced by multiple rationality and social interaction [7]. Power is the capability to influence the actions of others [18] by mobilising resources in an asymmetric relational context [25]. Institutions include organisational arrangements and institutional environments made of rules, norms and customs [45], [39]. Because pathdependency is a historical and dynamic process [9], [38], the perpetual interaction of agency and institutions determines a variety of organisational efficiency outcomes subject to lock-in, understood as a temporary rather than permanent condition. The proposed critical realist theory of organisational failure sees the duality of agency and institutions as the very source of path-dependent causation and the fundamental causal mechanism of relative efficiency. By so doing, the theory heeds Granovetter’s warning against the undersocialisation of Williamson’s accounts of economic action [12], [13] and illuminates how organisational performance is embedded in historical networks of social relations. By identifying multiple and specific outcomes, the theory avoids offering an oversocialised account of organisational efficiency.

Methodology

The “remediable institutional alignment” framework is used to systematically analyse the evidence contained in 30 qualitative case studies produced in 15 years of research [34], [24], [26]. These investigate the relative efficiency of public and private water utilities in developed and developing countries, looking at variations in efficiency with and without changes in ownership. Examples include the efficiency outcomes associated to changes from public to private to public ownership in Grenoble, France [35], and improved performance under public ownership in Phnom Penh, Cambodia [36].Each case illustrates how networks of events lead to the more or less temporary lock-in of organisational efficiency, categorised as strong and weak lock-in of public efficiency/inefficiency and private efficiency/ inefficiency. The causal feedback between actors’ motivation, power, and ability to respond to institutional and historical constraints and opportunities, is catalogued. Generalised observations are then compared across cases to formulate hypotheses on the causality of variations in efficiency. Throughout this process, inputs from industrial organisation emphasise the importance of asset specificity in shaping principal-agent relations [49]. Inputs from economic sociology reveal organisational efficiency as a multilevel social mechanism [22] whereby coalitions of actors strategically engage in relationships of conflict, collaboration or transaction, and agency is embedded in institutions. Inputs from political and policy sciences illuminate the explanatory power of path-dependency by showing how history interacts with a stratified social reality [14]. These complementary perspectives facilitate engaging with the data in a way that supports the emergence of socialised and historical accounts of multiple organisational efficiency outcomes.

Work Plan

Building on a sustained effort to develop the project’s conceptual framework [26], [28], [30], [31] and gather relevant evidence [34], [15], [24], [35], [36], [16], [37], [27], the work is organised as follows. Months 1-4: literature reviews and themed visits to world-leading scholars – Emmanuel Lazega, Sciences Po, Paris, on inputs from economic sociology with a focus on operationalising multilevel social mechanisms; Geert Teisman, Erasmus University Rotterdam, on inputs from policy sciences with a focus on complexity theory and public management; Mildred Warner, Cornell University, on inputs from applied economics with a focus on the relative efficiency of public and private enterprise (planned visit in Italy). Months 3-9: systematisation and integration of the qualitative evidence, generalisation of findings, and attendance of the Cambridge Realist Workshop to help root the project in critical realism. Months 7-12: development and finalisation of outputs. The outputs include four articles submitted to journals interested in critical realism, industrial organisation and applied economics: Cambridge Journal of Economics, on the explanatory limitations of mainstream industrial organisation theory – deductivism, linear causality, and reductionism; Industrial and Corporate Change, on revisiting Oliver Williamson’s comparative institutional analysis from a critical realist vantage point and remediable institutional alignment as a framework for organisational failure; International Review of Applied Economics, on the synthesis of the empirical evidence and its policy implications; Organization Studies, on the content of a critical realist theory of organisational failure. The remaining output is a seminar hosted by the University of Greenwich to discuss and disseminate the results.

Outcome

The project is part of a longer-term programme to reorient industrial organisation theory which will be pursued through a two-pronged strategy. First, the validity of the proposed theory of organisational failure will be tested by gathering and analysing more extensive evidence on the urban water sector. Also, the replicability of the theory will be assessed by focusing on other sectors where no conclusive evidence of superior private efficiency has been found [44]. For this part of the programme, similarly to Williamson [49], the analysis of institutions will be limited to the contract law associated with given organisational arrangements. This work could be furthered by applying for an ESRC New Investigator Grant.Second, the scope and explanatory power of the theory will be strengthened by mobilising all dimensions of the remediable institutional alignment framework – formal and informal rules, norms and customs. Here, drawing on Margaret Archer’s concept of morphogenesis [1], [2], [3] may reveal the role of culture in the duality of agency and institutions and offer new perspectives to my work on wicked problems. These are policy problems that in a pluralist society cannot be solved but only reinterpreted, and whose intractability originates from the interplay of norms and customs [29], [32]. This research could be furthered by applying for an ERC Starting Grant. The longer-term outcome of this programme is the formalisation of a theory of organisational failure invoked but not developed by Williamson [49], [52], which will rebase industrial organization theory on a critical realist paradigm.