MICROECONOMIC MANAGEMENT AND POLICY

Microeconomic Management and Policy

Microeconomic Management and Policy

Introduction

The lens of contract approach to the study of economic organization is partly complementary but also partly rival to the orthodox lens of choice. Specifically, whereas the latter focuses on simple market exchange, the lens of contract is predominantly concerned with the complex contracts. Among the major differences is that non-standard and unfamiliar contractual practices and organizational structures that orthodoxy interprets as manifestations of monopoly are often perceived to serve economizing purposes under the lens of contract. A major reason for these and other differences is that orthodoxy is dismissive of organization theory whereas organization theory provides conceptual foundations for the lens of contract.

Discussion

As discussed elsewhere (Williamson, 2002a,b), the lens of contract approach to economic organization differs from orthodoxy in three significant respects. First and foremost, the lens of contract focuses predominantly on gains from the trade whereas orthodoxy is focused on resource allocation (prices and output). Second, and related, orthodoxy describes the firm as a production function while the lens of contract describes the firm as a governance structure. Third, the lens of contract is a more microanalytic construction and is more amenable to the lessons of organization theory. The essence of the Coasian contribution has been variously described (Williamson, 1994: 202; North, 2000: 37; Werin, 2000: 45). On reflection, and with the benefit of James Buchanan's declaration that 'mutuality of advantage from voluntary exchange is . . . the most fundamental of all understandings in economics' (Buchanan, 2001: 29), I would say that the overarching big idea is to move from the orthodox lens of choice to bring the lens of contract systematically to bear on economic phenomena of all kinds. For many transactions, of which the make-or-buy decision is one (Coase, 1937), the contractual structure is easily recognized. Other transactions, such as the externality problem (Coase, 1960), needed to be reformulated to bring out their latent contractual features.

The orthodox resource allocation approach to economics was famously described by Lionel Robbins (1932: 16) as follows: 'Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses'. Choice is based on two parallel constructions: the theory of consumer behavior, in which consumers maximize utility; and the theory of the firm as a production function, in which firms maximize profit. Economists who work out of such setups emphasize how quantities are influenced by changes in relative prices and available resources. The resulting resource allocation paradigm became 'dominant' for economics throughout the twentieth century (Reder, 1999: 48).

Buchanan (1975: 255), however, avers that economics as a discipline went 'wrong' in its preoccupation with the science of choice and the optimization apparatus associated therewith. What was needed was the parallel development of a science of contract. Awaiting this, some phenomena would go unnoticed, others would be poorly understood, and public policy error would result.

field of public finance and took the form of public ordering: 'Politics is a structure of complex exchange among individuals, a structure within ...