Co-ordination and Spontaneity in Non-Hierarchical Business Organizations
Chapter 2: The Hierarchical Theory of the Firm
2. The hierarchical theory of the ﬁrm [Klein, Crawford and Alchian (1978)] imply that in distinguishing between transactions carried out within the ﬁrm and in the market, I believed that all that existed were these polar and clear-cut cases. This is incorrect. Indeed, I was quite explicit about it. In ‘The Nature of the Firm’ I state that ‘it is not possible to draw a hard and fast line which determines whether there is a ﬁrm or not. There may be more or less direction.’ (Coase 1988, p. 27) The study of contractual relations plainly involves more than an examination of discrete markets on the one hand and hierarchical organization on the other. As Llewellyn observed in 1931, the exchange spectrum runs the full gamut from pure market to hierarchy and includes complex ‘future deals’ located between market and hierarchy extremes . . . Suppose that transactions were to be arrayed in terms of the degree to which parties to the trade maintained autonomy. Discrete transactions would thus be located at the one extreme; highly centralized, hierarchical transactions would be at the other; and hybrid transactions (franchising, joint ventures, other forms of nonstandard contracting) would be located in between . . . Whereas I was earlier of the view that transactions of the middle kind were very diﬃcult to organize and hence very unstable . . . I am now persuaded that transactions in the middle range are much more common . . . Whatever the empirical realities, greater attention to transactions of the middle range will help to illuminate an...
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