The Nature of Transition Cost Economics

By Pratten, Stephen | Journal of Economic Issues, September 1997 | Go to article overview

The Nature of Transition Cost Economics


Pratten, Stephen, Journal of Economic Issues


The emergence and development of Transaction Cost Economics (henceforth TCE) and New Institutionalism, more generally, have generated considerable debate about their relation to existing traditions.(1) Within economics, TCE is broadly conceived of as being consistent with, and supportive of, the orthodox/mainstream perspective. Despite this general consensus, little progress has been made in identifying the precise nature of the ground TCE and orthodoxy share. This task is complicated by the marked substantive differences that distinguish TCE, with its stress on the analysis of governance structures, organizations, institutions, processes, and so on, from the, at least traditionally, more narrowly focused orthodoxy. At the same time, economists working within those traditions that have shown most concern for institutional issues remain suspicious of the growing prominence of TCE and its associations with orthodoxy.(2) The nature of the differences between TCE and these alternative approaches is also contested.(3)

In this paper, I wish to clarify some of the issues bearing on the relationship between TCE and competing traditions. Oliver Williamson, the leading figure in the promotion of TCE and the author upon whom I will mainly focus, identifies the willingness to "operationalize" arguments as a crucial characteristic differentiating TCE from alternative perspectives. Meanwhile, commentators variously highlight the implicit methodological individualism, the preoccupation with equilibrium analysis and efficiency outcomes, and the nature of the isolations Williamson favors as the essential factors differentiating TCE.(4) Drawing on recent contributions within economic methodology gathered under the heading of critical realism,(5) the argument of this paper develops Williamson's own assessment that the emphasis upon operationalizing arguments is an important element in any attempt to locate TCE. However, whereas Williamson perceives the stress upon operationalization as a decisive strength over competing approaches, I argue that it effectively constrains his welcome attempts to promote within economics the analysis of social institutions and the development of a richer account of human agency. In particular, accepting Tony Lawson's [1995, 1997] argument that mainstream or orthodox economics can be characterized by its insistence upon a deductivist method, I argue that the stress Williamson places upon the need to operationalize transaction cost economics is suggestive of a commitment to the same view of explanation. I show that it is the retention of this ultimately debilitating deductivist method that both ties TCE to orthodoxy and distinguishes it from certain heterodox approaches. Williamson's preoccupation with operationalizing TCE once recognized as pointing to the retention of deductivism renders intelligible many of the tensions associated with TCE.

Transactions Cost Economics and Competing Traditions

Williamson has been particularly eager to differentiate TCE from Old Institutionalist perspectives. Typically, in distancing himself from the Old Institutionalists, he emphasizes the sensitivity of TCE authors regarding the need to operationalize arguments and suggests that this stands in stark contrast to the failure of the Old Institutionalists to add operational content to the insights they provide. Williamson then, although not entirely dismissive of the contributions of the Old Institutionalists, notes:

The New Institutional Economics turns on two propositions: institutions (1) matter and (2) are susceptible to analysis . . . Both the older and newer approaches to institutional economics are in agreement on the first of these. Where they differ is with respect to the second. Thus whereas the older institutional economics made little effort to operationalize the argument that institutions matter, the New Institutional Economics insists that reconceptualisation and operationalization proceed in tandem. …

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