Institutional Economics at the Micro Level? What Transaction Costs Theory Could Learn from Original Institutionalism (in the Spirit of Building Bridges)

By Pessali, Huascar F.; Fernande, Ramon G. | Journal of Economic Issues, June 1999 | Go to article overview
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Institutional Economics at the Micro Level? What Transaction Costs Theory Could Learn from Original Institutionalism (in the Spirit of Building Bridges)


Pessali, Huascar F., Fernande, Ramon G., Journal of Economic Issues


Inertia in the academic environment sometimes obstructs the incorporation and development of some ideas. That is what is claimed in the case of the long gap separating Ronald Coase's seminal paper [1937] that laid the foundations of current transaction costs theory (TCT) and the efforts of scholars to develop his ideas [Azevedo 1996, 5]. But as TCT has evolved and become associated with the name of Oliver Williamson, it has become clear that its development has also been impeded because it has absorbed Williamson's tension "between an intuitive commitment to realism . . . and his commitment to some core presumptions of mainstream economics" [Hodgson 1998a, 189ff.]. Most TCT scholars seem to hold fast to the latter commitment, and this could mean losing a chance to enrich economics methodologically and theoretically. Attempting to avoid this, our paper regroups and comments on criticisms by "original" institutional economists (OIE) of TCT. We do this in the spirit of building bridges by discussing (1) discrepancies between TCT's and Commons's concepts of transaction; (2) TCT's use of efficiency as a status quo rationalization; (3) the static analysis that ignores institutional feedbacks; (4) the assumption of opportunism; and (5) the incompatibility of bounded rationality and optimizing behavior.

Misleading Inheritance? Transactions in Williamson and Commons

The first criticism is of the use of transactions by TCT as a unit of analysis - an idea attributed by Williamson [1996, 371] to John R. Commons. This inheritance is, however, contested. Commons's concept of transaction involves property transfers with all their underlying incorporated rights, and this differs from exchange, which refers to physical transfers. Williamson sees the transaction as the passage with frictions between separable production interfaces. The difference is illustrated by Yngve Ramstad [1994, 330], who notes the lack of similarity among the concepts, since most transfers of goods in capitalism do not involve passages through different technological interfaces, but "merely" through different agents without changing the underlying objects. They are transfers of property rights whose features are defined outside the exchange itself. Commons identified three types of transactions [McClintock 1987, 674-5]:

1. Bargaining transactions, involving voluntary transfers of property rights over scarce goods among legally equal agents.

2. Managerial transactions, characterizing labor relationships, involving the promotion of technological efficiency and creation of wealth in productive processes.

3. Rationing transactions, involving decisions of legal superiors on burdens and benefits of legal subordinates in social reproduction; it is accomplished with the exercise of sovereignty.

Regarding collective arrangements developed in a society or group of individuals and of sovereignty spectrum thereof configured, transactions may be classified in those three categories. Markets - as institutions created by collective actions - work in agreement with the principles of property rights, resolution of conflicts, and performance requirements delineated by the exercise of sovereignty.

Although Commons [1950, 56] divided transactions for analytical purposes, the levels are linked in daily social relationships, requiring an analysis of economic systems within the social context as a whole. This can be seen in the case of rationing transactions designed during a meeting of a firm's directors without bargaining with subordinates. The execution of tasks results from managerial transactions, while bargaining transactions depend on previous settlements by legal superiors of rationing transactions. Once wealth is created, payoffs of bargaining transactions to individuals derive from the power related to each position in the arrangements of rationing and managerial transactions - thus, among economically unequal, although legally equal, individuals.

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