Transaction Costs and the Historical Evolution of the Capitalist Firm

By Pitelis, C. N. | Journal of Economic Issues, December 1998 | Go to article overview

Transaction Costs and the Historical Evolution of the Capitalist Firm


Pitelis, C. N., Journal of Economic Issues


The aim of this paper is to critically assess the contribution of transaction costs economics (TCE) in explaining the nature of the firm. TCE suffers from conceptual problems and lacks a historical-evolutionary basis. The pursuit of a historically informed evolutionary perspective exposes the limits of TCE and points to the need for a synthetic, integrative framework.

Transaction costs economics dates back to Ronald Coase's 1937 classic article. There, Cease claimed that given markets, firms should not exist in the absence of inherent market failures related to, what we call today, transaction costs. Such are costs of measurement, information, bargaining, contracting, enforcing, and policing agreements. Following O.E. Williamson's [1975] now classic book, these costs can be attributed to bounded rationality, opportunism, and asset specificity. The internalization of (imperfect) markets by firms (hierarchies) is said to increase overall efficiency. Firms are the result of a contractual arrangement between those involved in transactions. Removing market inefficiency is seen as both the reason for and effect of firms. Given costs of hierarchy (organization, management costs), the boundary of the firm is defined as being where an extra transaction can take place equally efficiently by organizing this transaction by the market or another firm. Accordingly, the observed market-hierarchy mix enhances overall efficiency. Market internalization, due to transaction costs, can also explain the evolution and strategies of firms, notably vertical integration, the M-form organization, the conglomerate, and the transnational corporation (TNC) [Williamson 1981]. Hybrid forms of organization, such as strategic alliances, networks, equity joint ventures, etc., can also be attributed to the quest for efficiency, a progression from markets to hybrids to hierarchies [Williamson 1993]. In short, the quest for efficiency explains why firms, hybrids, and markets exist. Efficiency is also the outcome of the process.

Numerous papers and books, some summarized in Y. Eggertson [1990], C.N. Pitelis [1991, 1993], and John Groenewegen [1996], have debated and critiqued the TCE perspective. In this paper, I focus on some conceptual problems of TCE, starting from the conception of the market and moving critically through the main claims of TCE.

Transaction Costs Economics: Some Problems

Our starting point is the important claim of TCE that "in the beginning there were markets." This is the explicit assumption of Coase and can be seen in a quotation from Williamson [1975, 20]. However, this claim need not be true. It depends on the definition of the market and the firm and also on the context and timing, whether we refer to a particular historical context or to the first emergence of firms (and markets). Let us clarify by using Coase as an example.

For Coase, markets differ from firms in that the former rely on voluntary transactions between individuals, while the latter count on the authority of one party over the other, namely, the entrepreneur over the laborer. This is one (arguably narrow) definition of a firm. One can define a firm as a single producer or as a family or friends (partners) cooperatively involved in production. The firm need not be a multiple person hierarchy, which the Coasean firm is.(1) Logically, one could argue that firms (or organizations) precede the market as firms produce while markets may not. Moreover, it could be questioned whether, historically, markets or hierarchies (families, states) appeared first. All of these criticisms are standard in the literature and are by no means original [Pitelis 1993]. They highlight the point that the Coasean firm is only one of many possible definitions of the firm.

Suppose, however, that we accept the Coasean definition. The question then becomes the context and timing one chooses for the beginning. Is it the beginning of a particular historical period or of life in general? …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Transaction Costs and the Historical Evolution of the Capitalist Firm
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    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.