Fear Prudence: Hobbes and Williamson on the Morality of Contracting

By Holt, Robin | Journal of Economic Issues, December 2004 | Go to article overview

Fear Prudence: Hobbes and Williamson on the Morality of Contracting


Holt, Robin, Journal of Economic Issues


Theories of new institutionalism, and specifically Oliver Williamson's theory of transaction cost economics, argue that complete presentiment in contracts is an abstract design of classical economics, not a pragmatic product of contingent experience. Exchange is not a costless activity, nor the market "free." The ex ante costs of negotiation (finding a price) and the ex post costs of clarifying, executing, enforcing, sanctioning, and renegotiating are idiosyncrasies that interfere with the smoothness of an exchange. These idiosyncratic dimensions of contracting, in which transactions are "neither faceless, nor instantaneous" (Williamson 1985, 56), expose decision making to the contingent influence of habit, perceived vested interest, and limited knowledge and capacity.

Organizations are a response to this decisional incompleteness and the attendant non-value-adding costs. An organization is a set of authority relations established by a "general contract, whereby agents agree essentially to 'tell and be told'" (Williamson 1985, 221) in order to minimize transaction uncertainty and hence costs (Spekle 2001). For Williamson, then, the driver behind organizational form is less the reduction in production costs (through specialization, etc.) than the increased certainty of exchange. This is realized by repressing the pursuit of localized interests; using decisional fiats rather than costly arbitration; having a "bird's eye" view of information flow facilitating the integration of activities both externally (for example, production with demand) and internally (for example, operations with strategy); and reducing the opportunity for shirking and embezzlement (1986, 143-146).

Critics of Williamson's transaction cost analysis point to its apparent institutional naivete. In addition to the transaction, there are other units of analysis that influence organizational form, such as production or prevailing culture. Moreover, even within the transactional unit, the alignment of hierarchies does not always tend toward equilibrium (efficiency). At the heart of these critiques are theories of human nature. The root problem with transaction cost economics is its reputed insistence on economic agents having invariant preference functions, ignoring the lesson of old institutionalism that any such preferences are conceived and expressed under the rubric of social power and localized experiences of learning (Hodgson 2000; Ghoshal and Moran 1996). Williamson has appeared reluctant to accept the influence of power because the explanatory force of transaction theory (roughly, that organizations are more hierarchical the greater the complexities of their operational environment) requires agents who are able to rationally determine and affect the efficient level and nature of transactions in advance of their happening. This farsightedness assumes a set of unchanging futures (Slater and Spender 2000), a command of which cannot possibly be within the purview of an organizational agent beset with institutional habit, vested interest, and the founding logic of localized compliance.

This paper argues that while transaction cost economics relies upon a somewhat stochastic causal story linking bounded rationality and opportunist assumptions of human nature to organizational structures, its identification of the contract as a primal organizational form remains a vital insight--vital because the contract presents what is a near generic structural condition by which economic analysis might be made, without presupposing any neoclassical representation of a reality that persists outside of the peculiarities and localized perspectives of agents. Given this, a possible response to criticisms of transaction cost theory, and one hinted at but not actively pursued by Williamson's (1998) recent discussions of trust and human nature, is an analysis of contracting seen as an activity rather than as a unit, or object, of analysis. The paper develops this change of perspective by invoking, first, the work of John R. …

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