Is There a Role for Transaction Cost Economics If We View Firms as Complex Adaptive Systems?

By Foster, John | Contemporary Economic Policy, October 2000 | Go to article overview

Is There a Role for Transaction Cost Economics If We View Firms as Complex Adaptive Systems?


Foster, John, Contemporary Economic Policy


JOHN FOSTER [*]

This article assesses the usefulness of transaction cost economics when we view economic organizations, such as firms, as complex adaptive systems. Modern complexity science is a radically different in orientation to neoclassical economics, which deals with decision making in contexts that are presumed to be simple and, therefore, disconnected from complex reality. However, transaction cost economics can be related to aspects of modern complexity science: bounded rationality, opportunism, and asset specificity are all associated with behavioral complexity. Furthermore, the emphasis of transaction cost economics on hierarchy and organizational rather than technological considerations is also consistent with complexity science. Drawing on literature in psychological economics, this article synthesizes transaction cost economics with aspects of complexity science in a manner that offers a new research agenda, not only in the context of the organization of production but in economics generally Such theoretical d evelopments are vital if policy makers are to have at their disposable analytical perspectives that are coherent and applicable in complex historical settings. (JEL A12, A13, D23, L14, L22, O31, Z13)

I. INTRODUCTION

Over the past decade, transaction cost economics (TCE) has provided a major stimulus to research on the firm and other organizational forms in the economic system. Developed and promoted vigorously by Oliver Williamson (see particularly Williamson, 1985), it represents an important departure from the conventional neoclassical vision of the firm and its activities: Rationality is bounded, the firm is not viewed through the lens of a production function but is seen as a governance structure; uncertainty is acknowledged; the specific character of human capital is recognized. We can trace TCE back to Coase (1937), who argued that the existence of transaction costs explains the extent of the firm relative to a subcontracting arrangement. The firm, as an organizational structure, achieves lower transaction costs than would prevail in a set of market transactions. This is because subcontracting involves asymmetric information that can result in moral hazard and, therefore, contractual uncertainty that is costly to monitor. In recent years, TCE has dealt with many of the implications of asymmetric information and attendant opportunism in a range of contexts. With regard to intrafirm contracts, TCE adopts a principal-agent perspective on relations between, for example, managers and workers that also involve monitoring costs. However, TCE is an approach that has generated controversy:

Economists object to it because limits on rationality are mistakenly interpreted in non-rationality or irrationality terms. Regarding themselves as they do as the "guardians of rationality" (Arrow, 1974, p. 16) economists are understandably chary of such an approach. (Williamson, 1985, p. 45)

Also, those who belong to a much older dissenting tradition that emphasizes the importance of institutions have been critical of attempts to deal with institutions in a conventional maximizing setting and see TCE as no more than "old wine in new bottles" (see Rutherford, 1989). However, although "bounded rationality invites attacks from both sides" (Williamson, 1985, p. 45), TCE has proved to be a congenial analytical compromise for many economists and economic historians (e.g., North, 1990) who feel that institutions should play a more prominent role in economic analysis.

Over roughly the same time that TCE has developed, we have witnessed a rapid expansion in interest in the manner in which complex structures emerge, particularly in the natural sciences. This began in physics and chemistry, where the phenomenon of "self-organization," that is, an endogenous tendency for both complexity and organization to increase, was identified in "dissipative structures," that is, structures capable of importing free energy and exporting high entropy waste. …

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

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

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.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

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 article

Is There a Role for Transaction Cost Economics If We View Firms as Complex Adaptive Systems?
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.
    Sign up now 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.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.