Despite abundant literature on transaction costs, there is little to no in-depth analysis regarding what the transaction is or how it works. Drawing on both Old and New Institutional Economics and on a variety of interdisciplinary sources, this monograph traces the history of the meaning of transaction in institutional economics, mapping its topicality and use over time.
This manuscript treats the idea of ‘transaction’ as a construct with legal, competitive and political dimensions, and connects different approaches within institutional economics. The book covers the contributions of key thinkers from different schools, including (in alphabetical order) Ronald H. Coase, John R. Commons, Robert Lee Hale, Oliver Hart, Mancur Olson, Thorstein Veblen and Olver E. Williamson.
This book will be of interest to advanced students and researchers of institutional economics, law and economics, and transaction cost economics.
Massimiliano Vatiero is an Assistant Professor of Political Economy at the Department of Economics and Management (DEM) of the University of Trento.
From The Roadmap (pp. XI-XII)
The transaction is the basic unit of analysis of institutionalism. The aim of this volume is to provide a historical conceptualization of the transaction.
A trans-action represents a complex act in a composite institutional setting that trans-fers control over a resource. A transaction involves not only the actions of two actual trans-actors but also the actions expected by potential transactors (e.g., alternatives to two actual transactors) and the power of the public official actor. This idea of transaction, originally formulated by John Commons (and that for Oliver Williamson represents the unit of transaction cost economics), is able to take into account and combine different facets of transactions and transactor’s choices.
This book develops the three main dimensions which shape each transaction: the legal, competitive and political dimensions. The legal and political dimensions concern the relationships between each transactor and the public official actor. The legal dimension, in particular, involves the effects of rule-making and rule-enforcing processes over a transactor’s choices, whereas the political dimension involves the influence of each transactor over polity.
Finally, the competitive dimension concerns the impact of the market (especially throughout price) on a transactor’s choices and – vice versa – how a transactor’s choices affect market configuration and prices.
The book is divided into six chapters. Chapter 1 maps the meanings of transaction and their uses over time. It deals with the four most important (in my opinion!) authors of transactional theory: Ronald Coase, John Commons, Robert Lee Hale and Oliver Williamson. Chapter 2 introduces the narrative of the book: each transaction comprises three dimensions: the legal, competitive and political dimensions. Chapter 3 focuses on the legal dimension of a transaction and, in particular, shows that, given the adversarial nature of legal positions, the definition of rights may generate positional goods concerns. Chapter 4 involves transactions with specific investments and sheds light on the role of the outside market in both the emergence of the holdup problem and its remedies. This chapter also develops a “trade-off” between institutional remedies à la Oliver Hart and à la Oliver Williamson. Chapter 5 considers the fact that rules are not exogenous and immutable but rather that people can affect them via polity. This chapter centres on transactions within firms and their relationships with political arena. Finally, Chapter 6 summarizes the book’s major findings and implications and identifies one (just one, but remarkable) avenue for future research.
From Chapter 1: Mapping the meaning of "transaction" (pp. 1-3)
The transaction is the basic unit of analysis of institutionalism. Although the definition of institutionalism is complex and quite partial, this book refers to theories which hold that “(i) institutions do matter, [and that] (ii) the determinants of institutions are susceptible to analysis” (Matthews 1986:903). The “Old Institutionalism” of John Commons and Thorstein Veblen (in rigorous alphabetical order) and the New Institutional Economics of Ronald Coase and the Coasians such as Oliver Hart, Douglass North, Mancur Olson and Oliver Williamson (again, in rigorous alphabetical order) constitute keystreams, even if different and sometimes in contradiction, of institutionalism(cf. also DiMaggio and Powell 1991; Williamson 1996a; Rutherford 2001).
The main focuses of the institutionalism programme are transactions and their costs, or transaction costs. After Coase’s (1960) article (and in particular after Stigler’s formulation of the Coase theorem in 1966), there was an exponential increase in the use of word “transaction” in academic works, as Figure 1.1 suggests. This explains why Ronald Coase and his 1960 article are supposed to be the starting point of the theory of transaction costs. For this reason, this chapter starts from the idea(s) of transaction as described in Coase (especially Coase 1937, 1960).
Even if the theory of transaction costs does originate with the contributions of Ronald Coase, the theory of transaction is from earlier. Indeed, the first comprehensive formulation of an idea of transaction in the social sciences was conceived by John Commons in the beginning of the 1920s, as representing a unit of analysis of capitalism and its peculiarities. Williamson’s praise of John Commons as the great forerunner of transaction cost economics is well known among interpreters of institutionalist thought and methodology, especially as his tribute particularly concerns Commons’s idea of transaction as the basic unit of transaction cost economics (e.g.,Williamson 1981:549–550, 1985a:3, 6, 1985b:179, 1988:571, 1996b:50, 1996c:152, 1999:5, 2000:599). However, both Williamson himself and other transaction cost economists have poorly applied Commons’s proper idea of transaction.
Figure 1.1. The term "transaction" in the title, abstract and keywords of academic publications
The ideas of transaction in Coase (1937) and (1960)
Ronald Coase was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1991 (at the age of 81) for two main articles: “The nature of the firm,” published when he was 27, and “The problem of social cost,” which appeared more than 20 years later.
Although they are clearly linked thematically – both investigate the costs of transactions – the two articles are the consequence of different contextual and historical environments. In the 1937 article, Coase aims to challenge the laissez-faire ideology of time on the basis of the postulation that “the market system works itself.” In the article of 1960, instead, arguing that under certain conditions the market transaction can efficiently substitute state-directed transaction, he has a different scope: to question the claim that state intervention in the economy is necessary or desirable, as economic thought and political debate of the 1950s advised. The conceptualization of transaction in Ronald Coase’s thought shows a clear example of the influence of the historical context and political debate on the history of economic thought. A similar account holds for the formulation and use of the concept of the transaction in works by John Commons, Oliver Williamson and other scholars.
More in detail, in 1937, Coase asked why the firm emerges and replied that the reason is that there are costs in using the price mechanism. Moreover, he adds that these costs can be saved by the use of an alternative, hierarchical structure such as the firm: “[T]he operation of a market costs something and by forming an organization and allowing some authority (an ‘entrepreneur’) to direct the resources, certain marketing costs are saved” (Coase 1937:392). In doing so, Coase considers market transaction and transaction within the firm as alternative modes for organizing the same transaction. On the one hand,“price movements direct production, which is co-ordinated through a series of exchange transactions on the market” (Coase 1937:388); on the other hand, “[w]ithin a firm these market transactions are eliminated, and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator, who directs production” (Coase 1937:388).
Courtesy by Routledge