Williamson's Back Door: Transaction Costs and the Efficient Firm (1)

By Freedman, Craig | History of Economics Review, Summer 2004 | Go to article overview

Williamson's Back Door: Transaction Costs and the Efficient Firm (1)


Freedman, Craig, History of Economics Review


Abstract: Oliver Williamson has made an acknowledged contribution to the theory of the firm by incorporating Coase's idea of transaction costs in his analysis. However, by identifying market efficiency with the minimisation of transaction costs, Williamson has linked rhetorically two concepts which are not by necessity connected.

   [Morishima] attributes the continuous frustration which has beset
   the development of economic theory over the last thirty years or
   more to 'failure of economic theorists to carry out sweeping
   systematic research into the actual mechanisms of the economy and
   economic organisation, despite being aware that their own models
   are inappropriate to an analysis of the actual economy.' (Feiwel
   quoted in Williamson 1985, p. 386)

**********

By drawing attention to transaction costs, Oliver Williamson (1985) deliberately took up the challenge first laid down by Coase (1937) (2). According to this formulation, corporate configurations necessarily reflect decisions to retain certain operations in-house, while others remain the province of market exchange. Thus the competitive imperative of minimising the cost of transactions determines the limits of a firm. Though a useful categorisation, it still has the static feel of a catalogue featuring a typological division of existing organisational structures (3). Fixing a butterfly on a mount may provide the chance for dissection but it need not convey an image of the insect in flight. We are left instead with a series of unrelated snapshots. Missing are the limitations imposed by an historical context and its concomitant prior choices. Because of this distinct approach, transaction costs under Williamson's tutelage do not emerge as an alternative but rather as a complement to the standard neoclassical theory of the firm. What Williamson ultimately tries to demonstrate is that markets, when endowed with a richer economic environment of positive transaction costs, still yield efficient outcomes even if only in a relative rather than an absolute sense as Williamson puts it (1985, p. 22) (4). Unfortunately, positing such an end result serves only to confuse Williamson's analysis. The peculiar economic issue of optimal or even relative efficiency is not intrinsically related to the body of his analysis (5). Nothing inherent in the notion of transaction costs leads inevitably to issues surrounding firm or even market efficiency. This will cause any serious student of Williamson's work to suspect that its intrusion into what is essentially only a methodological approach has more the status of a conjuring trick than a necessary cornerstone supporting a theoretical framework.

My objective is to explain what Williamson did and to unearth a possible rationale which can explain why he would choose to adopt such an approach. By pointing this out, I am not denying the potential usefulness that the transaction cost approach may yield. Instead, it serves as a clear example of how such analysis can be captured and enlisted for rather peripheral purposes. To use the language of von Clausewitz, some economists by capturing the high ground of economic debate can hope to determine how future campaigns will be conducted. In Williamson's case, whatever interest the question of efficiency may have, it need not have come to be identified with or to dominate this quite separate issue of transaction costs. Moreover, by separating the two, we can make a definite break with the standard economic technique of postulating the a priori existence of economic efficiency (6).

1 Williamson's Crusade

   ... the transactions cost approach maintains that these
   institutions have the main purpose and effect of economizing on
   transaction costs (Williamson 1985, p. 1).

Oliver Williamson self-consciously sees himself as an institutionalist, an economist for whom the stylisation of the firm as a production function is an inadequate explanation of corporate activity (7).

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Williamson's Back Door: Transaction Costs and the Efficient Firm (1)
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.