Advances in New Institutional Analysis series
Edited by Claude Ménard and Michel Ghertman
Chapter 1: Transaction Cost Economics: The Precursors
Oliver E. Williamson INTRODUCTION The first stage of the natural progression in the development of transaction cost economics is herein described. The period in question is 1920–70, especially the decade of the 1930s, during which period economists, organization theorists, and legal scholars were all taking exception with their respective orthodoxies. As developed herein, dissents of all three kinds had a bearing on the overuse of the resource allocation paradigm, according to which firms were described not as hierarchies but as production functions whereby inputs were transformed into output according to the laws of technology. Markets, moreover, were mainly described as simple market exchange where ‘faceless buyers and sellers . . . meet . . . for an instant to exchange standardized goods at equilibrium prices’ (Ben-Porath, 1980: 4). There being neither a need nor a place for hierarchy, the study of organization was relegated to sociologists and organization theorists. Prices and output, supply and demand were made the focus of attention. Never the twain shall meet.1 Objections were raised, but cogent and cumulative criticism does not, without more, carry the day. Here as elsewhere, it takes a theory to beat a theory. It was not until the 1970s that new theories of firm and market organization began to take shape.2 Transaction cost economics was one of these. Contrary to the standard assumption in economic theory circa 1970 that transactions costs were zero, transaction cost economics makes express provision for positive transaction costs. Contrary also to the standard presumption in applied microeconomics circa 1970 that nonstandard...
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