Monday, October 12, 2009

Simon on Williamson

Organizations and Markets, Herbert Simon
Journal of Economic Perspectives, Spring 1991, Pages 25-44

"In classical and neoclassical economic theory, markets are at the center of the stage...The economic world of the neoclassical textbooks is a world of transactions ...The description of the parties who participate in these transactions is minimal. However, as soon as firms are elaborated to become more than simple nodes in a network of transactions, to be producers - transformers of 'factors' into products - difficult and important questions arise for the theory. A large part of the behavior of the system now takes place inside the skins of firms, and does not consist just of market exchanges...This raises the question of why there are firms at all...These
questions about the scope of activity and operation of firms have spawned a vigorous cottage industry, a branch of which is sometimes called 'the new institutional economics,' which tries to explain when activities will be carried out through the market and when they will be carried out within the skins of firms, and tries to explain also how it is possible for firms to operate efficiently. In the literature of the new institutional economics, two ideas that play a major role in the explanations are 'transaction costs' and 'opportunism' (for example, Williamson 1975, 1985)...

(Nod to Kevin L)

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