The Uncertain Foundations of Transaction Costs Economics

Uncertainty is a core assumption in transaction costs theory. It forms the basis of the explanation of transaction costs and also provides a vital link in the conceptual analysis of the transition from market coordination to internal organization. Yet, the term itself has been relatively neglected in transaction costs economics; issues of opportunism and bounded rationality have tended to assume a much higher status in analysis. The founding figures of transaction costs economics, Ronald Coase and Oliver Williamson, have steered away from offering a detailed explanation of the nature and origins of uncertainty. Coase, in particular, passes over the Knightian distinction between risk and uncertainty, leaving unclear his own position on uncertainty. Williamson's approach places great emphasis on bounded rationality, creating problems in distinguishing uncertainty from complexity. In neither case is close attention paid to the essential "unknowable" character of future events and outcomes-the endemic lack of knowledge about a future world still to be created. This paper reassesses the transaction costs explanation of uncertainty. It develops arguments along two fronts. The first looks in detail at how Coase and Williamson conceptualize uncertainty in their respective analyses of economic organization. Both see uncertainty as conditional in effect, being curtailed with other sources of transaction costs through an appropriate mix of market and internal governance. Williamson follows Coase in emphasizing the efficiency attributes of markets and hierarchies, showing the equilibrium conditions that allow for the achievement of minimum transaction costs under both governance mechanisms. Their approach remains firmly rooted in orthodoxy, building toward a general equilibrium conception