The Economics of Contracts: Theories and Applications

By Eric Brousseau; Jean-Michel Glachant | Go to book overview

2
The New Institutional Economics
Ronald Coase

It is commonly said, and it may be true, that the New Institutional Economics started with my article, “The Nature of the Firm” (1937) with its explicit introduction of transaction costs into economic analysis. But it needs to be remembered that the source of a mighty river is a puny little stream and that it derives its strength from the tributaries that contribute to its bulk. So it is in this case. I am not thinking only of the contributions of other economists such as Oliver Williamson, Harold Demsetz, and Steven Cheung, important though they have been, but also of the work of our colleagues in law, anthropology, sociology, political science, sociobiology, and other disciplines.

The phrase, “the New Institutional Economics, ” was coined by Oliver Williamson. It was intended to differentiate the subject from the “old institutional economics. ” John R. Commons, Wesley Mitchell, and those associated with them were men of great intellectual stature, but they were anti-theoretical, and without a theory to bind together their collection of facts, they had very little that they were able to pass on. Certain it is that mainstream economics proceeded on its way without any significant change. And it continues to do so. I should explain that, when I speak of “mainstream economics, ” I am referring to microeconomics. Whether my strictures apply also to macroeconomics I leave to others.

Mainstream economics, as one sees it in the journals and the textbooks and in the courses taught in economics departments has become more and more abstract over time, and although it purports otherwise, it is in fact little concerned with what happens in the real world. Demsetzhas given an explanation of why this has happened: economists since Adam Smith have devoted themselves to formalizing his doctrine of the invisible hand, the coordination of the economic system by the pricing system. It has been an impressive achievement. But, as Demsetzhas explained it is the analysis of a system of extreme decentralization. However, it has other flaws. Adam Smith also pointed out that we should be concerned with the flow of real goods and services over time – and with what determines their variety and magnitude. As it is, economists study how supply and 45

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