Academic journal article Journal of Economic Issues

The Uncertain Foundations of Transaction Costs Economics

Academic journal article Journal of Economic Issues

The Uncertain Foundations of Transaction Costs Economics

Article excerpt

Uncertainty is a core assumption in transaction costs theory. It forms the basis of the explanation of transaction costs and also provides a vital link in the conceptual analysis of the transition from market coordination to internal organization. Yet, the term itself has been relatively neglected in transaction costs economics; issues of opportunism and bounded rationality have tended to assume a much higher status in analysis. The founding figures of transaction costs economics, Ronald Coase and Oliver Williamson, have steered away from offering a detailed explanation of the nature and origins of uncertainty. Coase, in particular, passes over the Knightian distinction between risk and uncertainty, leaving unclear his own position on uncertainty. Williamson's approach places great emphasis on bounded rationality, creating problems in distinguishing uncertainty from complexity. In neither case is close attention paid to the essential "unknowable" character of future events and outcomes--the endemic lack of k nowledge about a future world still to be created.

This paper reassesses the transaction costs explanation of uncertainty. It develops arguments along two fronts. The first looks in detail at how Coase and Williamson conceptualize uncertainty in their respective analyses of economic organization. Both see uncertainty as conditional in effect, being curtailed with other sources of transaction costs through an appropriate mix of market and internal governance. Williamson follows Coase in emphasizing the efficiency attributes of markets and hierarchies, showing the equilibrium conditions that allow for the achievement of minimum transaction costs under both governance mechanisms. Their approach remains firmly rooted in orthodoxy, building toward a general equilibrium conception of the allocation of transactions in the economy. The second line of argument highlights contradictions in Williamson's use of the bounded rationality concept. He is forced to assume that bounded rationality constraints can be breached in order to push through his arguments regarding eff icient organization. That this imposes closure on the world leaves him neglecting the processes of time and history. There can be no uncertainty, given that future states of the world are predetermined as a requirement for the attainment of a minimum transaction costs equilibrium. If, in contrast, agency is understood as being mutually constitutive, producing pervasive uncertainty about choice outcomes, there is scope for indeterminacy with no necessary presumption of organizational efficiency.

Transaction Costs and the Theory of the Firm

The development of the theory of the firm has recently undergone a "quiet revolution" [Demsetz 1997, 426]. For many years, the dominant neoclassical approach suggested that nothing would be gained from peering into the "black box" called the firm; it was enough to know that it operated to maximize profits. In the core model of perfect competition, this was achieved subject to known technology and known prices. [1] Indeed, the objective of neoclassical theory was to understand price-guided resource allocation; equivalent managerial coordination was almost entirely overlooked. In contrast with preceding classical analysis, these developments rendered the firm and the entrepreneur as entirely passive. Investigation of internal organization was considered insignificant (if not irrelevant) in terms of the research priorities of neoclassical economists [see McNulty 1984; O'Brien 1984; Stiglitz 1991].

The firm has been shunned in mainstream economics by an overriding emphasis on the efficient coordinating mechanism of the market. This approach--most vividly depicted in the Arrow-Debreu model--raised the fundamental question of why firms actually exist. [2] Only during the course of the last two decades has mainstream economic theory seriously considered this question [see Stiglitz 1991; Demsetz 1997]. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.