Max Sawicky writes: > > >> Coincidently I'm reading Oliver Williamson at the moment, > >> whose existence and inspired lit debunks your assertion. > >> > >> Transactions costs can make hierarchy (the firm) more economical > >> than market exchange.
David Shemano writes: > I am not sure I understand the significance of this. If I > want to acquire a widget, what difference does it make at a > theoretical level whether I acquire the widget by contracting > pursuant to a purchase agreement (market exchange) or > employment agreement (hierarchical firm)? I understand why > transaction costs would influence how I acquired the widget, > but what is the significance for neoclassical economics (or a > critique of neclassical economics)? I don't think it suggests a critique of NC economics (except maybe for the fact that it took so long for NC economics to accept the idea of transactions costs). The significance for NC economics is that it means that there are many places where the pure market exchange relation -- the ideal that NC prefers -- doesn't prevail. If the transactions costs involved buying a widget exceed the benefits of (presumed) greater productive efficiency of countracting out vis-a-vis having it produced in-house, then using a hierarchy to organize in-house production will be preferred by profit-maximizers over using exchange and producing out-house. The key distinction is between production costs (actually making a widget) and transactions costs (costs of making deals, transferring property). (BTW, the latter corresponds to one kind of what Marx called "unproductive labor.") This stuff isn't radical. It was developed by Coase, who's very much part of the Chicago school of laissez-faire economics. Jim
