The Elgar Companion to Transaction Cost Economics
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The Elgar Companion to Transaction Cost Economics

Edited by Peter G. Klein and Michael E. Sykuta

Since its emergence in the 1970s, transaction cost economics (TCE) has become a leading approach in the research on contracts, firm organization and strategy, antitrust, marketing, inter-firm collaboration and entrepreneurship. With contributions by leading scholars in economics, law and business administration – including Oliver E. Williamson, recipient of the 2009 Nobel Prize in economics for his development of the transaction cost approach – this volume reviews the latest developments in TCE and applies them to contemporary theoretical and empirical problems.
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Chapter 6: Chester Barnard

Joseph T. Mahoney


1 Joseph T. Mahoney Oliver Williamson did his doctoral training at Carnegie and it is clear that the behavioral theory of the firm – originating from the Carnegie School (Cyert and March, 1963; March and Simon, 1958; Simon, 1947) – is an important building block to transaction cost theory (Williamson, 1975). The most important antecedent of the Carnegie School was Chester Barnard’s (1938) The Functions of the Executive. Indeed, Barnard wrote the foreword to Simon’s (1947) Administrative Behavior, and Barnard (1938) foreshadowed the concepts of authority and bounded rationality (Simon, 1947). According to Williamson, Barnard (1938) developed the following: ‘(1) Organization form – that is, formal organization matters; (2) informal organization has both instrumental and humanizing purposes; (3) bounds on rationality are acknowledged; (4) adaptive, sequential decision-making is vital to organizational effectiveness; and (5) tacit knowledge is important’ (Williamson, 1985, p. 6). Andrews maintains that ‘The Functions of the Executive [is] the most thought-provoking book on organization and management ever written by a practicing executive’ (Andrews, 1968, p. xxi), and attributes its endurance to Barnard’s (1) capacity for abstract thought; (2) ability to apply reason to professional experiences; (3) probable expertness in practice; and (4) simultaneous exercise of reason and competence. Barnard’s aspiration was contributing to a ‘science of organization’ (Barnard, 1938, p. 290). Barnard’s (1938) The Functions of the Executive emphasizes skills, judgment, stewardship and professionalism, and connects ethical and practical teachings. Barnard’s (1938) impact on organization theory is well documented (Scott, 1987; Williamson, 1995), and even those taking vigorous exception concede...

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