Transaction Costs and the Historical Evolution of the Capitalist Firm

Abstract

An attempt is made to critically assess the contribution of transaction costs economics (TCE) in explaining the nature of the firm. TCE suffers from conceptual problems and lacks a historical-evolutionary basis. The pursuit of a historically informed evolutionary perspective exposes the limits of TCE and points to the need for a synthetic, integrative framework. The conceptual contribution of TCE to the issue of the nature of the firm is based on shaky theoretical grounds and offers no evidence to substantiate its core proposition that pre-existing markets fail due to transaction costs, which leads through a contractual process to emerging efficient firms, which thus exist for, and result in, efficiency. TCE's main contributions are in the make or buy decision of firms and in the analysis of economic development.