Transaction-cost Economics in Real Time

Abstract

This paper attempts to place the theory of the boundaries of the firm within the context of the passage of time. More precisely, it rescurrects and places in a modern frame some of the insights of the classical and Marshallian theories of organization. The modern reinterpretation of those theories centers around the ‘capabilities’ view of the firm. Taken together with governance costs, the capabilities of firm and market determine the boundaries of the firm in the short run. Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost—the cost of transferring the firm's capability to the market or vice versa. These ‘dynamic’ governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. Dynamic transaction costs provide an explanation for vertical intergration that is aruguably more general than those dominant in the literature. In the face of uncertainty and divergent views of the future, common ownership of multiple stages of production is a superior institutional arrangement for coordinating systemic change. Asset-specificity is neither necessary nor sufficient for this to the true. Dynamic governance costs may also afflict internal organization. It may sometimes be costly— in terms of persuasion, negotiation and teaching—to create within the firm capabilities readily available on the market. Indeed, in cases in which systemic coordination is not the issue, the market may turn out to be the superior institution of coordination. In general, the capabilities view of the firm suggests that we look at firm and market as alternative—and sometimes overlapping—institutions of learning.