The list of new working papers this morning from nep-his contained one by Richard Langlois,
“The Fisher Body
Case and Organizational Economics”, which examines the case of Fisher Body.
Mary and I also examined the case in our paper “The
historian’s craft and economics,” This blog post is both a concurring
and dissenting opinion on the Langlois paper.
Fisher Body was an early manufacturer of automobile bodies
that merged with General Motors in the 1920s. Both our paper and Langlois paper
are, however, less about the story of the merger than they are about the story
about the story. The story about the story begins when Klein, Crawford and
Alchian published a paper in 1978 that used Fisher Body as an example of
vertical integration driven by the holdup problem arising from asset
specificity. For non-economists the terms may be unfamiliar, but the intuition
is straightforward. The relationship between the automobile manufacturer and
the manufacturer of bodies will be most profitable if they make investments
that are fitted to each other. For example, the assembly plants are close to
the body plants, or the body plants are designed to produce the sort of bodies the
automobile company uses. In other words, you have assets, factory and equipment
that are specific to a particular use and much less valuable in alternative
uses. Hold up is the idea that once such investments have been made one side
can try to exploit the other. “We are going to lower the price we pay for your automobile
bodies, and you will have to accept it because no one else is going to buy
those bodies that are designed for our cars.” That is a really simplified
version, but you should get the idea.
In 1988, Klein described this explanation for the merger
“Fisher effectively held up General Motors by adopting a
relatively inefficient, highly labor-intensive technology and by refusing to
locate body-producing plants adjacent to general Motors assembly plant” (Klein,
1988: 202).
In 1988, Coase began to question this explanation, and he
and several other researchers presented considerable evidence that the sort of
holdup described by Klein never took place and that the merger was motivated by
other concerns. Klein and Coase argued back and forth, and several other people
jumped in. Ultimately Klein acknowledged that the hold up he described never
took place.
Both Coase and Hansen and Hansen present the case as an
example of economists’ failure to give sufficient attention to empirical
evidence. Langlois on the other hand sees the entire episode as an example of the
process of developing economic knowledge. Here is the conclusion of his paper
I agree with the overall thrust of Langlois argument but
disagree with his specific case. I think there are numerous examples of cases
where economists have developed explanations that turned out to be incorrect
but were important because they generated debates and stimulated research that
led to better understanding.
For instance, Doug North’s explanation for economic development
in the antebellum period prompted research into agricultural production in the South
and industrial development in the North that overturned his explanation and led
to a better understanding of antebellum development. I think a similar thing is
going on with Pomeranz’s work on the Great Divergence. Academics should not be criticized just for being wrong,
especially if it leads to research that improves our understanding of
something.
So what is the difference between North and Pomeranz, on the one
hand, and Klein et al, on the other. First, Klein et al simply use Fisher Body to
provide a little color to the theory. Their primary objective is not to
understand the history of Fisher Body and GM. The work of North and Pomeranz on
the other hand was driven by the desire to understand history. Second, North
and Pomeranz based their theories on the available evidence, and some of their
claims were later challenged by new and better evidence. The initial claim of Klein
et al was not based upon the available evidence. There was already evidence in
support of a contrary claim and no evidence in support of their claim that
Fisher held-up GM. Finally, the responses to North and Pomeranz took us beyond
where we were before they wrote. In contrast, the responses to Klein et al
largely took us back to where we were before. According to Langlois
The use of Fisher by Klein et al is an example of trying to
cram history into a theory rather than using theory to understand history. When
I was studying economic history at the LSE in the early ‘80s I became
increasingly interested in the use of economic theory in economic history. My
advisor, Geoff Jones, told me that theory could be very useful but that I had
to be careful not to try to make a historical story fit into a theory. Theory
might help guide the search for evidence, but you have to go where the evidence
leads you even if that doesn’t fit your theory. And you must tell the story
honestly. Although I went on to get a
Ph. D. in economics rather than history, I have always tried to keep Geoff’s
advice as a guiding principle. I think Klein et al would have been less likely to follow the path they did if they had been driven by a desire to understand Fisher Body.