Firms, Organizations and Contracts: A Reader in Industrial Organization

The editors of The Economics of Contracts and Industrial Organization have put us in their debt by compiling an extremely valuable collection of articles on a subject the importance of which has only recently been recognized. However, work on it is now going on apace in many countries and the issue of this book of readings is therefore timely.

What is this new subject? Williamson called it 'the new institutional economics' or 'transaction cost economics' and its scope is well described by the title of this book. The articles in Part I, "'The Theory of the Firm'", tell us about the origin and development of the ideas that were to produce 'transaction cost economics'. In my article "'The Nature of the Firm'" (published in 1937) I introduced the concept of transaction costs and the dichotomy of co-ordination through the market and within the firm. For reasons that are not altogether clear to me, it was not until the 1970s and 1980s that the subject came alive again. What followed in those years was the very influential series of articles reprinted in Part I that carried the analysis well beyond my earlier formulation. Ambiguities were removed, errors corrected, new concepts introduced. The articles in Part II, Markets and Industrial Organization, and III, Joint Ventures, Networks, Clans and Alliances, carried the story forward. In them the focus is expanded and new questions are raised. The importance of such factors as reputation, the organization form, relationships outside contract and inter-firm agreements of various kinds, is demonstrated. These articles make clear that we have travelled far from a simple choice between the firm and the market, and that what we have to understand is the functioning of an intricate interrelated institutional structure about which we are extremely ignorant. Dispelling this ignorance will be an immense task, but, in carrying it out, the guidance provided by the articles in this book of readings will be of the greatest help.

Ronald Coase

-xiii-