Edited by Peter G. Klein and Michael E. Sykuta
Chapter 3: Transaction Cost Economics and the New Institutional Economics
Peter G. Klein The concept of transaction costs is central to the modern economic analysis of organizations and institutions, and transaction cost economics (TCE) is often regarded as a subset of what has been called the new institutional economics. The term ‘new institutional economics’ (NIE), introduced into the literature by Williamson (1975), emerged in the 1970s and 1980s as a convenient label encompassing TCE, parts of the ‘new’ economic history (particularly the contributions of Douglass North), positive political economy, and related developments in applied social science. Klein (2000, p. 456) describes the NIE as: an interdisciplinary enterprise combining economics, law, organization theory, political science, sociology and anthropology to understand the institutions of social, political and commercial life. It borrows liberally from various socialscience disciplines, but its primary language is economics. Its goal is to explain what institutions are, how they arise, what purposes they serve, how they change and how – if at all – they should be reformed.1 Institutions and the economics of institutions North (1991, p. 97) defines institutions as: humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). . . . Together with the standard constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity. This definition places institutional analysis squarely within the ‘rational’ or optimizing framework of conventional economics. Just as economic actors...
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