![4 Michael Dietrich
equilibrium analysis in economics essentially consist [require] definite state-
ments about how knowledge is acquired and communicated’. Alternatively
we can cite the not inconsistent view expressed by Joan Robinson (1964: 48):
‘Utility is a metaphysical concept of impregnable circularity; utility is the
quality in commodities that makes individuals want to buy them, and the fact
that individuals want to buy commodities shows that they have utility’
(emphasis in original).
Both writers, although coming from very different analytical traditions,
stress the tautological or circular nature of formal equilibrium economics.
The removal of such analytical tautology or circularity requires inputs from
external methods or focus. From this perspective, being silent on particular
issues, i.e. being explicit about what a framework cannot say, is a necessary
characteristic of adequate theory. Groenewegen and Vromen (1996) link the
incomplete nature of theoretical frameworks to the importance of accepting
theoretical pluralism. We can stress a similar point and link empty cells in a
diagram such as Figure 1.1 as a necessary condition for the relevance of an
interdisciplinary perspective on a particular issue. In terms of the subject
matter presented in this volume, if a narrowly defined economics of the firm,
perhaps involving different analytical economic methods, results in all the
relevant cells in the intellectual grid being non-empty, there is no obvious
comparativeadvantageforusingeconomicsasthebaseforaninterdisciplinary
perspective. Hence interdisciplinary approaches to the firm are based on the
presumption that empty cells exist in the relevant part of the intellectual grid.
Given these background points, we can now suggest that along the main
diagonal of the grid in Figure 1.1 we define core subjects. In terms of the
language presented by Lakatos (see, for example, Blaug, 1980), this main
diagonal defines the hard core of different scientific research programmes.
We should, of course recognise that some authors, for example Rosenberg
(1986), deny that Lakatos’s framework can be applied to economics as it
gives the subject a sense of scientific content that it does not deserve. In
addition we can recognise the complication identified by Groenewegen and
Vromen (1996). The hard core of a scientific research programme is defined
in terms of fundamental propositions that make up the heart of any frame-
work. As such they are not subject to empirical falsification because they are
shielded by the general framework. But how can we tell when we compare
two different theoretical approaches whether they belong to the same or
different scientific research programmes? This problem exists because, as
was stressed above, the rows and columns in a grid such as Figure 1.1 have no
natural taxonomy but instead the particular taxonomy can reflect (a) the
level of aggregation and (b) the purpose for which the taxonomy is being
used. The implication here is that the hard core of any discipline, i.e. the
main diagonal of Figure 1.1, may be subject to different definitions and
hence is likely to be the subject of debate rather than simply acceptance. In
terms of interdisciplinary work, this contested nature of a subject’s hard core
might result in differing perceptions of its relevance and acceptability.](https://image.slidesharecdn.com/8029-250308032031-4e4c6694/85/Economics-of-the-Firm-Analysis-Evolution-and-History-1st-Edition-Michael-Dietrich-24-320.jpg)
Economics of the Firm Analysis Evolution and History 1st Edition Michael Dietrich
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- 5. Economics of the Firm Analysis Evolution and History 1st Edition Michael Dietrich Digital Instant Download Author(s): Michael Dietrich ISBN(s): 9780415395090, 0415395097 Edition: 1 File Details: PDF, 3.03 MB Year: 2006 Language: english
- 7. Economics of the Firm This volume presents an interdisciplinary, critical perspective on current issues surrounding the economics of firms. The contributions largely depart from traditional approaches and stress the importance of interdisciplinary study of the firm as a dynamic evolving organisation. The chapters emphasise the themes of change and evolution, and explore issues arising from the history and organisation of firms. This combination of economics and history is the characteristic setting for interdisciplinary analy- sis of evolution and change. The contributors include Bart Nooteboom, Stavros Ioannides and Sue Bowden. Michael Dietrich is Senior Lecturer at the Department of Economics, University of Sheffield, UK.
- 8. Studies in global competition A series of books edited by John Cantwell The University of Reading, UK and David Mowery University of California, Berkeley, USA Volume 1 Japanese Firms in Europe Edited by Frédérique Sachwald Volume 2 Technological Innovation, Multinational Corporations and New International Competitiveness The case of intermediate countries Edited by José Molero Volume 3 Global Competition and the Labour Market Nigel Driffield Volume 4 The Source of Capital Goods Innovation The role of user firms in Japan and Korea Kong-Rae Lee Volume 5 Climates of Global Competition Maria Bengtsson Volume 6 Multinational Enterprises and Technological Spillovers Tommaso Perez Volume 7 Governance of International Strategic Alliances Technology and transaction costs Joanne E. Oxley Volume 8 Strategy in Emerging Markets Telecommunications establishments in Europe Anders Pehrsson
- 9. Volume 9 Going Multinational The Korean experience of direct investment Edited by Frédérique Sachwald Volume 10 Multinational Firms and Impacts on Employment, Trade and Technology New perspectives for a new century Edited by Robert E. Lipsey and Jean-Louis Mucchielli Volume 11 Multinational Firms The global–local dilemma Edited by John H. Dunning and Jean-Louis Mucchielli Volume 12 MIT and the Rise of Entrepreneurial Science Henry Etzkowitz Volume 13 Technological Resources and the Logic of Corporate Diversification Brian Silverman Volume 14 The Economics of Innovation, New Technologies and Structural Change Cristiano Antonelli Volume 15 European Union Direct Investment in China Characteristics, challenges and perspectives Daniel Van Den Bulcke, Haiyan Zhang and Maria do Céu Esteves Volume 16 Biotechnology in Comparative Perspective Edited by Gerhard Fuchs Volume 17 Technological Change and Economic Performance Albert L. Link and Donald S. Siegel Volume 18 Multinational Corporations and European Regional Systems of Innovation John Cantwell and Simona Iammarino
- 10. Volume 19 Knowledge and Innovation in Regional Industry An entrepreneurial coalition Roel Rutten Volume 20 Local Industrial Clusters Existence, emergence and evolution Thomas Brenner Volume 21 The Emerging Industrial Structure of the Wider Europe Edited by Francis McGowen, Slavo Radosevic and Nick von Tunzelmann Volume 22 Entrepreneurship A new perspective Thomas Grebel Volume 23 Evaluating Public Research Institutions The U.S. advanced technology program’s intramural research initiative Albert N. Link and John T. Scott Volume 24 Location and Competition Edited by Steven Brakman and Harry Garretsen Volume 25 Entrepreneurship and Dynamics in the Knowledge Economy Edited by Charlie Karlsson, Börje Johansson and Roger R. Stough Volume 26 Evolution and Design of Institutions Edited by Christian Schubert and Georg von Wangenheim Volume 27 The Changing Economic Geography of Globalization Reinventing space Edited by Giovanna Vertova Volume 28 Economics of the Firm Analysis, evolution, history Edited by Michael Dietrich
- 11. Economics of the Firm Analysis, evolution, history Edited by Michael Dietrich
- 12. First published 2007 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2007 Editorial matter and selection Michael Dietrich; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Economics of the firm: analysis, evolution, history/edited by Michael Dietrich. p. cm. 1. Industrial organization (Economic theory). 2. Institutional economics. I. Dietrich, Michael. HD2326.E2433 2006 338.5–dc22 2005035263 ISBN10: 0–415–39509–7 (hbk) ISBN10: 0–203–96639–2 (ebk) ISBN13: 978–0–415–39509–0 (hbk) ISBN13: 978–0–203–96639–6 (ebk) This edition published in the Taylor & Francis e-Library, 2006. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”
- 13. List of figures and tables ix List of contributors xi Preface xiii 1 Introduction: the firm in an interdisciplinary context 1 MICHAEL DIETRICH PART I The economics of the firm: analysis and background 17 2 The nature of the firm revisited 19 MICHAEL DIETRICH 3 Trust, learning and the firm 43 BART NOOTEBOOM 4 Accounting and the economic analysis of the firm as an entity 65 YURI BIONDI 5 The value of integration: old institutional economics and new institutional sociology 88 HASSAN YAZDIFAR PART II The economics of the firm: change and evolution 109 6 The evolutionary theory of the firm: routines, complexity and change 111 WERNER HÖLZL Contents
- 14. viii Contents 7 Insights into the self-reproduction of the firm with the Von Neumann automaton model 127 PAVEL LUKSHA 8 A Penrosean theory of the firm: implications and applications for the study of the growth of young firms 146 ERIK STAM, ELIZABETH GARNSEY AND PAUL HEFFERNAN 9 Entrepreneurship and corporate ownership: an Austrian view 169 STAVROS IOANNIDES PART III The economics of the firm: history and organization 185 10 Business history and the organization of industry 187 JACKIE KRAFFT 11 The firm in history: city–industry relations: a case study of the engineering sector in the UK economy during the interwar years 209 SUE BOWDEN, DAVID HIGGINS AND CHRISTOPHER PRICE Index 228
- 15. Figures and tables Figures 1.1 A taxonomy of interdisciplinary economics 2 1.2 The transaction cost layer schema 6 2.1 A fully connected model of the firm 34 2.2 Environmental impacts on the firm 37 3.1 Hierarchy of bodily and mental regulation 52 4.1 The firm-entity as economic organisation and institution 79 5.1 Mechanisms and drivers of homogeneity in organizational forms and practices – an NIS view 92 5.2 The process of institutionalization 98 5.3 Multi-institutional framework incorporating both NIS and OIE 101 7.1 Structure and operation of a JVN automate 132 7.2 Processes of an enterprise 140 8.1 Growth and non-growth by age of firm, Cambridgeshire cohort 158 8.2 Growth paths of new firms, Netherlands sample 160 8.3 Turning points among Cambridgeshire firms founded in 1990, surviving 10 years 161 11.1 Number of companies listed on the London Stock Exchange, 1917–38 213 11.2 Total book value of listed companies: engineering 213 11.3 Electrical engineering: debt and equity 218 11.4 Vehicle engineering: debt and equity (total) in the interwar years 218 11.5 General engineering: debt and equity book values 219 11.6 General engineering: the move from loan to overdraft finance 219 Tables 3.1 Sources of (intentional) reliability 46 4.1 Equilibrium and accounting frames 73
- 16. x Figures and tables 4.2 Proprietary and entity views 74 5.1 A continuum of managerial responses to institutional pressures 95 7.1 Analogies between a JVN automate and a self-reproducing firm 134 7.2 Classification of self-reproducing firms 137 8.1 Characteristics of the research samples 157 10.1 Competence, innovation and the vertical structure of the industry 198 11.1 Capitalisation (book value £), motor vehicle firms quoted on the London Stock Exchange in 1917 214 11.2 Significant entrants to London Stock Exchange listing, general engineering in the 1920s: date of first listing and book value (£) 215 11.3 Choice of finance instrument 217 11.4 Electrical engineering: finance by debt and equity of pre-1900 and 1900–14 cohorts of firms 220 11.5 Vehicle engineering: finance by debt and equity of pre-1900 and 1900–14 cohorts of firms 221 11.6 Interest rates levied on long-term debt 223 11.7 Re-capitalisation and survival 224
- 17. Contributors Yuri Biondi, Conservatoire National des Arts et Métiers (CNAM), France Sue Bowden, University of York, UK Michael Dietrich, University of Sheffield, UK Elizabeth Garnsey, University of Cambridge, UK Paul Heffernan, University of Cambridge, UK David Higgins, University of York, UK Werner Hölzl, Austrian Institute of Economic Research (WIFO), Austria Stavros Ioannides, Panteion University, Athens, Greece Jackie Krafft, CNRS-GREDEG, University of Nice, France Pavel Luksha, Higher School of Economics, Moscow, Russia; University of Hertfordshire, UK Bart Nooteboom, Tilburg University, The Netherlands Christopher Price, University of York, UK Erik Stam, University of Cambridge, UK; Utrecht University, The Nether- lands; Max Planck Institute of Economics, Jena, Germany Hassan Yazdifar, University of Sheffield, UK
- 19. This volume emerged from the inaugural workshop of the European Net- work on the Economics of the Firm (ENEF) held at the University of Sheffield, UK, in July 2004. The guiding philosophy of this network was a perceived need to facilitate a loose coordination of academic research on the economics of the firm that was not constrained by a rigid view of the nature of economics. In particular the network was guided by the following principles: 1 To support and promote discussion, research contacts and collaborative work among primarily European university academics on the economics of the firm. 2 This research activity covers both theoretical and empirical work on the firm. 3 The primary intellectual focus of ENEF involves a research agenda that views the firm not simply as an economic entity. This implies that econ- omics should be viewed as the base from which interdisciplinary work is undertaken. 4 This interdisciplinary work does not involve a dominant economic methodology taking over other disciplines but instead using the insights offered to develop new and richer frameworks for understanding the nature of the firm than those traditionally on offer within economics. Anyone interested in this network might want to look at the website: www. enef.group.shef.ac.uk. Such was the enthusiasm generated at the Sheffield workshop that it was decided to build on the work undertaken by holding an annual workshop. ENEF2 was held at Erasmus University, Rotterdam, in September 2005, and at the time of writing plans are being developed for ENEF3 to be held at the University of Nice in 2006. In addition it was felt that the work being under- taken was sufficiently interesting that a wider audience might be interested. So, the main Sheffield workshop organiser became an editor and Routledge (Taylor and Francis) were sufficiently interested in the project to offer a publication contract. Preface
- 20. xiv Preface Eight of the eleven chapters in this volume are developed from papers that were originally written for the Sheffield workshop, i.e. chapters 2, 3, 6, 7, 8, 9, 10 and 11. Chapters 4 and 5 are authored by people who became interested in ENEF after the first workshop. They have been included by the editor because they complement the guiding philosophy of the volume and the con- tent of other chapters. Chapter 1 has been specifically written for this volume to provide this guiding philosophy and context for the various essays. To some extent this introduction can also be viewed as an attempt to develop an ENEF manifesto. But this suggested status to Chapter 1 does not reflect any agreement by the various authors in this volume, let alone the academics associated with ENEF. Although the content of this first chapter has been improved by comments offered by the other contributors, the editor is solely responsible for its content. If anyone associated with ENEF disagrees with what is written here, then I will offer a weak apology but equally I would be happy because the content of this volume will have stimulated academic debate. The editor has been reliant on the help and support of many people with- out which this project, and the wider ENEF initiative of which it is a part, would have been much more difficult than it turned out to be. Formal thanks are therefore due to many people. First, the authors of the various essays have responded to my comments in the positive way that was intended. In addition everyone submitted final copy by the deadline. This is a first in my experience! Also I would like to thank Abhi, Donna, and Mohamed who interrupted their PhD research to help organise the 2004 ENEF workshop and also coped with equanimity when confronted with my worries as the workshop approached and took place. Also as the main ENEF organiser I would like to thank everyone who has been remarkably enthusiastic about the network and those who attended the two workshops to date. But in particular I have to put on record my appreciation for the efforts of Erik, Albert, Jackie and Jacques for workshop organisation. Finally, I would like to thank the University of Sheffield for funding the 2004 ENEF workshop and for providing an academic environment that allows me to undertake research on the economics of the firm informed by an interdisciplinary perspective. To all concerned I hope this volume reflects your efforts. Michael Dietrich
- 21. 1 Introduction The firm in an interdisciplinary context Michael Dietrich It is now somewhat standard to recognise that the firm is one of the funda- mental institutions in a market economy. Not, of course, the black-box firm of equilibrium price theory, but real firms that enact strategies, manage the creation and acquisition of information and knowledge, and that have inter- nal organisational structures and processes. In terms of modern economics, these real firms, at the core of a market economy, are analysed by writers as different as, for example, Edith Penrose, Herbert Simon and Oliver Williamson. But the fundamental importance of the firm is not merely a modern observation. It can be traced back into the writing of, for example, Marx and Schumpeter. The essays presented in this volume continue this tradition, emphasising the fundamental institutional significance of the firm, without which a market economy cannot function. They are all original contributions to the economics of the firm. While the various chapters cover different aspects of this overall topic they are united by two common themes: that an adequate economics of the firm can be usefully informed by an interdisciplinary perspective and that much existing writing on the firm is overly static. This introduction will set out the basis and background of these themes and, in particular, explore the ways in which they are interlinked in their application to the firm. For instance, for reasons set out below, an interdisciplinary perspective on the firm gains a comparative advantage in dynamic circum- stances. Stressing the importance of an interdisciplinary perspective can, of course, mean different things to different people: perhaps even more so than emphasising the importance of non-comparative static reasoning. Hence, the discussion here will initially consider interdisciplinary economics in general before applying this to the firm. To some extent what is meant by ‘interdisciplinary’ depends on how we define an intellectual discipline in the first place. To identify the possibilities involved here, and also locate the background to the contributions in this volume, we can initially use Figure 1.1. In Figure 1.1 the idea of an intellectual discipline is defined in terms of two features: an analytical focus and an analytical method. The possible com- binations involved are illustrated, for economics, with a few suggestive
- 22. 2 Michael Dietrich examples. In philosophical terms the focus and method of a subject can be viewed as, respectively, the ontological and epistemological bases involved, both of which are necessary for an effective consideration of any subject (Lawson, 1997). The analytical focus of a subject involves its domain of refer- ence, for example: Economics: the study of the production, distribution and consumption of goods and services. Psychology: the study of mental processes and behaviour. Sociology: the study of the relationships between people living in groups. Politics: the study of the ways in which a country is governed. To some extent these broad subject domains are artificial aggregates. For example, within economics it is common to distinguish between the micro and macro domains of the subject. Furthermore, either of these domains are also aggregates; so, for instance, microeconomics can be divided into con- sumer economics, the economics of the firm, etc. A complete depiction of the domain of any subject can involve a level of detail that is not necessary for the current discussion; not least because Figure 1.1 is only intended for illustrative purposes. More fundamentally, there would appear to be no unique taxonomy for any subject. Instead any detailed taxonomy would seem to depend on the use to which it is being put. Turning to the analytical method, or epistemological base, of a subject, this is also an artificial aggregate as few subjects have a single or dominant method. Within economics, and also other subjects, we commonly distin- guish between theoretical and empirical work with different characteristic methods involved. In addition, further disaggregation of both theoretical and empirical work can involve different traditions. For instance, we have Figure 1.1 A taxonomy of inderdisciplinary economics. Analytical method Economics Psychology Sociology Politics Economics Core economics Experimental economics, Behavioural theory Economic sociology Political economy Analytical focus Psychology Core psychology Sociology Becker (1981) Core sociology Politics Buchanan and Tullock (1962) Core politics
- 23. Introduction: the firm in an interdisciplinary context 3 neoclassical and Austrian economic theory. But as with a subject’s domain, the level of detail shown in Figure 1.1 is useful for illustrative purposes. At this point we can recognise two important complexities concerned with any discussion of the analytical methods of a subject. First, there is no obvious single taxonomy of analytical methods within any discipline. Take, for instance, the relevant (for this volume) case of transaction cost econ- omics (TCE). The core analytical method involved here is based on the comparison of alternative institutional arrangements (or governance struc- ture in transaction cost language) using a cost economising lens to assess the relevance of arrangements in particular circumstances (see, for example, Williamson, 1985). This analytical method is then used with a particular focus: for example, the study of the firm. But it is by no means obvious whether TCE is an analytical method in its own right. On the one hand, Williamson (1985) argues that TCE is complementary to neoclassical econ- omics. The implication here is that the methods are consistent but different. On the other hand, it is common to view TCE as part of the same theoretical project as neoclassical economics (Hodgson, 1993; Lawson, 1994; Dietrich, 1994). The logic here is that both TCE and neoclassical theory have the same methodological principles involving, for example, individualism, atomism and a comparative static method. A key issue involves the same complexity as was just highlighted when discussing analytical focus: there may be no single taxonomy because the particular taxonomy involved can depend on the particular research agenda. So, for example, at a sufficient level of detail, and from a perspective that describes analytical tools, TCE is different from standard neoclassical theory because, for example, it recognises a form of bounded rationality that results in incomplete contracting. But if we move to a lower level of detail and move beyond description of tools to (often implicit) analytical methods the two approaches have the same roots. The second complexity that we can recognise about the analytical methods adopted by a subject is a point suggested by Groenewegen and Vromen (1996): particular theories can be silent on particular issues. To give an example, the relevance of which will become clear in later discussion, a theory built on a comparative static method can make statements (at most) about the direction of change from one equilibrium to another, but it cannot make statements about the dynamics of the change process. In short, analytical frameworks are silent on particular issues. In terms of Figure 1.1, if we imagine a fully specified, and detailed, grid (rather than the illustrative aggregate grid shown) some cells will be empty. An important principle is that these empty cells should not be seen as reflecting an analytical failure. If we conjecture that ‘formulating an all-embracing, all-condition theory is infeasible’ (Groenewegen and Vromen, 1996: 372), it follows that empty cells are a pragmatic response to our intellectual bounded rationality. But even ignoring our bounded rationality, there is the danger that a theory that claims to be universal can degenerate into tautology. Take, for example, the view expressed by Hayek (1948: 33): ‘the tautologies, of which formal
- 24. 4 Michael Dietrich equilibrium analysis in economics essentially consist [require] definite state- ments about how knowledge is acquired and communicated’. Alternatively we can cite the not inconsistent view expressed by Joan Robinson (1964: 48): ‘Utility is a metaphysical concept of impregnable circularity; utility is the quality in commodities that makes individuals want to buy them, and the fact that individuals want to buy commodities shows that they have utility’ (emphasis in original). Both writers, although coming from very different analytical traditions, stress the tautological or circular nature of formal equilibrium economics. The removal of such analytical tautology or circularity requires inputs from external methods or focus. From this perspective, being silent on particular issues, i.e. being explicit about what a framework cannot say, is a necessary characteristic of adequate theory. Groenewegen and Vromen (1996) link the incomplete nature of theoretical frameworks to the importance of accepting theoretical pluralism. We can stress a similar point and link empty cells in a diagram such as Figure 1.1 as a necessary condition for the relevance of an interdisciplinary perspective on a particular issue. In terms of the subject matter presented in this volume, if a narrowly defined economics of the firm, perhaps involving different analytical economic methods, results in all the relevant cells in the intellectual grid being non-empty, there is no obvious comparativeadvantageforusingeconomicsasthebaseforaninterdisciplinary perspective. Hence interdisciplinary approaches to the firm are based on the presumption that empty cells exist in the relevant part of the intellectual grid. Given these background points, we can now suggest that along the main diagonal of the grid in Figure 1.1 we define core subjects. In terms of the language presented by Lakatos (see, for example, Blaug, 1980), this main diagonal defines the hard core of different scientific research programmes. We should, of course recognise that some authors, for example Rosenberg (1986), deny that Lakatos’s framework can be applied to economics as it gives the subject a sense of scientific content that it does not deserve. In addition we can recognise the complication identified by Groenewegen and Vromen (1996). The hard core of a scientific research programme is defined in terms of fundamental propositions that make up the heart of any frame- work. As such they are not subject to empirical falsification because they are shielded by the general framework. But how can we tell when we compare two different theoretical approaches whether they belong to the same or different scientific research programmes? This problem exists because, as was stressed above, the rows and columns in a grid such as Figure 1.1 have no natural taxonomy but instead the particular taxonomy can reflect (a) the level of aggregation and (b) the purpose for which the taxonomy is being used. The implication here is that the hard core of any discipline, i.e. the main diagonal of Figure 1.1, may be subject to different definitions and hence is likely to be the subject of debate rather than simply acceptance. In terms of interdisciplinary work, this contested nature of a subject’s hard core might result in differing perceptions of its relevance and acceptability.
- 25. Introduction: the firm in an interdisciplinary context 5 Ignoring the complications hinted at in the previous paragraph, we can now define two types of interdisciplinary study that correspond to connect- ing along rows or columns of cells off the main diagonal of Figure 1.1. Down the columns of the grid interdisciplinary work is defined in terms of applying a dominant method outside a normal subject focus. In this tradition we can identify Becker’s (1981) analysis of the family and Buchanan and Tullock’s (1962) public choice theory. Along the off main diagonal rows of Figure 1.1 we have a more eclectic interdisciplinary world in which the analytical focus of a subject is given priority. The necessary reasoning here is that, for example, the firm or consumer behaviour is inherently interdisciplinary and so requires different analytical methods for a complete understanding. The essays presented in this volume are based on interdisciplinary connections that involve such row linkages. Before giving an introduction to this work, the arguments presented above will be rendered more concrete by briefly considering two examples that involve the analysis of the firm: Oliver Williamson’s transaction cost theory and John Dunning’s OLI framework. Among other things, these two examples will allow the development of linkages between interdisciplinary approaches to the firm and non-steady- state analysis. Example 1: Oliver Williamson’s transaction cost theory The basic principles of Williamson’s transaction cost approach to the firm are set out in many places, perhaps most famously in his 1975 and 1985 volumes. For current purposes the development presented in Williamson (1996) is useful. In the latter work discussion is organised around a diagram, a slightly adapted version of which is reproduced here as Figure 1.2. The primary analytical focus are institutions of governance (e.g. inter-firm con- tracts, corporations, bureaus, non-profits, etc.), shown here in the centre of Figure 1.2. These are explained in terms of two general factors: the institu- tional environment and individual behavioural attributes. ‘Secondary effects are drawn as dashed arrows’ (Williamson, 1996: 17–18, emphasis added). Changes in the institutional environment, either historically or geographic- ally, are argued to shift the relative costs of different forms of governance and so lead to micro-institutional change. The key behavioural assumptions are bounded rationality and opportunism. Different form of governance are seen to evolve to mitigate the adverse effects of these behavioural assump- tions. An important intervening variable here is the degree of human or physical asset specificity. A moment’s consideration of this transaction cost logic will reveal the now commonly recognised characteristic that the framework is a comparative static approach to institutions (for example, Dietrich, 1994). Among other things, this comparative static characteristic implies that the structure and functioning of the institutional environment is common knowledge to all actors. Note that this common knowledge is a matter of belief as well as
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