During the 1970s and 1980s, agency theory, transactions cost economics, and game theory came of age, collectively providing the theoretical hardware for a new sub-discipline called organizational economics that combined traditional managerial interests in organizational dynamics with rigorous economic analysis. At a moment in business school history when the search for scientific credibility created a demand for the tools that economists had on offer, management educators generally greeted the new tools of organizational economics with open arms. Here were methods and models, forged in the respected realm of scientific economics. As a result, organizational economics exercised significant influence on the evolution of management science. In hindsight, this influence has become a focal point for harsh criticisms of contemporary business school outcomes.
While it may be easy to characterize this infiltration of new methods and models as economic imperialism, and to label the pernicious outcomes as unintended consequences, the full story is more complex. This paper reviews this episode of economic history and argues that it reveals much about the difficulties associated with value neutrality in economics and the search for method in developing academic disciplines such as management science.
I.
Introduction
A.
Economics and the ethos of value neutrality
Blaug, Mark (1992). The Methodology of Economics, or How Economists Explain . Cambridge: Cambridge University
Press.
Caldwell, Bruce (1994). Beyond Positivism, Economic Methodology in the Twentieth Century . London and New York:
Routledge.
Mongin, P. (2006). Value Judgments and Value Neutrality in Economics. Economica , 73 , 257 – 286.
B.
Business schools in transition
Khurana, Rakesh (2007). From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession . Princeton and Oxford: Princeton University Press.
II.
Development and Influence of Organizational Economics
A.
Canonical texts of the emerging discipline of organizational economics
Alchian, Armen A., and Demsetz, Harold (1972). Production, information costs, and economic organization. American
Economic Review 62 : 777 – 795.
Coase, Ronald J. (1937). The Nature of the Firm. Economica 4 : 386 – 405.
Jensen, Michael C., and Meckling, William H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure. Journal of Financial Economics 3 : 305 – 360.
Ross, Stephan A. (1973). The Economic Theory of Agency: The Principal’s Problem.
American Economic Review 63 :
134 – 139.
Williamson, Oliver E. (1979). Transaction cost economics: The governance of contractual relations. Journal of Law and
Economics 22 : 233 – 261.
B.
Citation patterns

III.
Incorporation of Organizational Economics into the “New” Management Science
Eisenhardt, Kathleen (1985). Control: Organizational and Economic Approaches. Management Science 31 : 134 – 149.
Jensen, Michael C. (1983). Organization Theory and Methodology. The Accounting Review 58 : 319 – 339.
Milgrom Paul. and Roberts, J. (1992). Economics, Organization & Management . Englewood Hills, NJ: Prentice-Hall.
Rumelt, R., Schendel, D., and Teece, D. (1991) . Strategic Management and Economics. Strategic Management Journal 12 :
5 – 29.
IV.
Retrospective Views on the Influence of Organizational Economics in Management Education
A.
The “Ghoshal critique” and other views
Bennis, Warren G. and O’Toole, James (2005). How Business Schools Lost Their Way. Harvard Business Review .
Ghoshal, Sumantra (2005). Bad Management Theories are Destroying Good Management Practices. Academy of
Management Learning & Education 4 : 75 – 91.
------------- and Moran P. (1996). Bad for practice: A critique of the transaction cost theory. The Academy of Management
Review , 21 , 13 – 48.
B.
Positive science and ideology in organizational economics
Ferraro, F., Pfeffer, J. and Sutton, R. I. (2005). Economics language and assumptions: how theories can become selffulfilling. Academy of Management Review , 30 , 8 – 24.
Harris, Robert G.(1984). The Values of Economic Theory in Management Education. American Economic Review 74 : 122 –
126.
C.
The search for method and credibility in management science
V.
Summary: In the 1970s economists consciously extended their domain into the realm of organizational theory. Some have interpreted this as a prime example of economic imperialism, but as they exerted influence on a “new” management science, economists found willing customers for their theories and models. Business schools, eager to establish “scientific credibility”, generally greeted the new tools of organizational economics with open arms. In retrospect, this absorption of economic methods into management education included ideological influences as well, with what some now perceive as deleterious effects.