Markets, False Hierarchies and the Evolution of the Modern Corporation

Transaction-cost economics, or the markets and hierarchies framework, has emerged in recent years as an important new approach for dealing with a variety of problems in industrial organisation. Although Coase (1937) provided an early statement of the role of costs of using the market in encouraging firm organisation to replace market exchange in certain circumstances, the development of transaction-cost economics as a coherent and systematic industrial organisation framework did not take place until the 1970s. The rediscovery, development and refinement of transaction-costs as a possible analytical tool is due in large part to Oliver Williamson, whose outline of the framework is contained in three works. The initial statement, Markets and Hierarchies (1975; henceforth M&H) provided an integration and synthesis of some earlier applications of transaction-cost economics in areas such as internal labour markets, vertical integration, conglomerates and the economics of internal organisation. Recently, his Economic Institutions of Capitalism (1985; henceforth EIC) has further extended the boundaries of transaction-cost economics, remaining broadly consistent with M&H and integrating many of its earlier arguments in the text. In addition, Economic Organisation (1986; henceforth EO) is a selected set of essays, some in transaction-cost economics and some from an earlier period in Williamson’s work. For our purposes, EIC may be taken as a definitive and current statement of Williamson’s approach to economics though both of the other works extend the analysis in significant respects.