Firms, Organizations and Contracts: A Reader in Industrial Organization

Ronald Dore

HOBHOUSE MEMORIAL LECTURE

Why have large factories given way to the co-ordinated production of specialized family units in segments of the Japanese textile industry? One reason is the predominance of 'obligated relational contracting' in Japanese business. Consumer goods markets are highly competitive in Japan, but trade in intermediates, by contrast, is for the most part conducted within long-term trading relations in which goodwill 'give-and-take' is expected to temper the pursuit of self-interest.

Cultural preferences explain the unusual predominance of these relations in Japan, but they are in fact more common in Western economies than textbooks usually recognize. The recent growth of relational contracting (in labour markets especially) is, indeed, at the root of the 'rigidities' supposedly responsible for contemporary stagflation. Japan shows that to sweep away these rigidities and give markets back their pristine vigour is not the only prescription for a cure of stagflation. The Japanese economy more than adequately compensates for the loss of allocative efficiency by achieving high levels of other kinds of efficiency--in many respects thanks to, rather than in spite of, relational contracting. We would do well to be more concerned about those kinds of efficiency too.

One of economists' favourite Adam Smith quotations is the passage in the Wealth of Nations in which he sets out one of his basic premises.

It is not from the benevolence of the butcher, the brewer and the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities but of their advantages. ¹

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