What Strategy Took from UCLA—and What It Missed

Last week I gave a plenary talk at the Utah Winter Strategy Conference on the contributions of the UCLA school of economics and its enduring relevance for research in strategy, entrepreneurship, and organizations. This year’s conference honored the contributions of Bill Hesterly, who received his PhD at UCLA in 1989, thus inspiring the subject of my talk: what did management research take from the UCLA school of economics, and what did it leave behind?

The UCLA school—centered on Armen Alchian and Harold Demsetz, with Benjamin Klein, Sam Peltzman, Jack Hirshleifer, and a remarkable set of students and allies including Yoram Barzel and Stephen Cheung—was one of the most coherent and productive intellectual communities in economics between roughly 1960 and 1985. Its core themes were property rights, transaction costs, measurement and information costs, and the role of uncertainty in shaping economic organization.

The UCLA school’s influence on strategy is strong but underappreciated. The nexus-of-contracts view of the firm, the holdup problem and appropriable quasi-rents, endogenous property rights and their implications for innovation strategy, the comparative-institutional critique of market-failure reasoning—all of these migrated into strategy, often through intermediaries, but sometimes losing nuance in the process. The Alchian-Demsetz (1972) team production model became the intellectual foundation for agency theory. The Klein-Crawford-Alchian (1978) paper introduced the holdup problem to a generation of organizational economists and strategy scholars. Rumelt’s famous 1991 finding that firm-level effects dominate industry effects built on an earlier Demsetz insight about the direction of causality between concentration and profitability.

Dick Rumelt describes a 1979 faculty retreat where he was presenting on the future of strategy, and Alchian raised his hand and said, simply, “Do you have any propositions?” Rumelt was flustered, and went home angry—then worked out the core propositions of what became the resource-based view.

However, some of the richest UCLA ideas have been largely forgotten. The concept of plasticity—developed by Alchian and Susan Woodward in a 1988 Journal of Economic Literature review of Williamson’s Economic Institutions of Capitalism—refers to the degree to which asset use can be altered without detection, and it generates ongoing governance problems distinct from the holdup problem created by asset specificity. The ownership competence framework, rooted in an Alchian (1961) observation that people differ in their talents as owners, has only recently begun to receive attention as a distinct theoretical object. And Demsetz’s 1973 paper has passages that read like an early version of the RBV—team-specific knowledge, causal ambiguity, historic cost as a barrier to imitation—that most strategy scholars have never encountered (see Nicolai’s discussion here).

The UCLA school declined through a combination of absorption and formalism: many of its ideas were folded into mainstream economics without the underlying framework, and the UCLA writers’ reliance on verbal logic rather than mathematical expression made their work seem irrelevant to later generations of economists.

A broader lesson is that schools of thought—understood as cohesive sets of core constructs, theories, mechanisms, and approaches, or as communities of practice rooted in shared identity—can be highly productive, in contrast to the Whiggish understanding of science progressing through a series of conjectures and refutations, hypothesis testing and verification, and other elements of the caricature most people learn as The Science. From a Kuhnian point of view, schools of thought rise and fall, and the displacement of one by another (or by the “mainstream”) can result in knowledge loss. For that reason alone, the classics have a lot to teach us!

I’m developing some of these ideas more formally for an academic audience. More to come.

Originally published at Judgment Calls.