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An Austrian Critique of Transaction Cost Theory

An Austrian Critique of Transaction Cost Theory

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In this paper, I (Jesper Juul Andersen) give an Austrain critique of Oliver Williamson's Transaction Cost Theory. The first part is a description of Austrian Market Theory. The paper builds upon the critque by Frederic Sautet.
In this paper, I (Jesper Juul Andersen) give an Austrain critique of Oliver Williamson's Transaction Cost Theory. The first part is a description of Austrian Market Theory. The paper builds upon the critque by Frederic Sautet.

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Published by: Jesper Juul Andersen on Mar 02, 2011
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02/18/2014

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An Austrian Critique of Transaction Cost Theory
En østrigsk økonomisk kritik af transaktionsomkostnings teoriA paper at the School of Economics and Management, Aarhus University                Course:  4810: Topics in Economics and Management
10 ECTSWritten by:  Jesper Juul AndersenStudent ID:  20062256Supervisor:  Niels Peter MolsHand-in date:  28-01-2011 The paper may be publicizedInternal grading
 
An Austrian Critique of Transaction Cost Theory
Jesper Juul Andersen
Arhus University
School of Economic and Management 
 2 
Contents
 
Contents ............................................................................................................................................................ 2Introduction ....................................................................................................................................................... 3The Austrian Understanding of the Market ...................................................................................................... 4Human Action ................................................................................................................................................ 4The Use of Knowledge in Society .................................................................................................................. 5Solving the Hayekian Knowledge Problem ................................................................................................ 5The Entrepreneur .......................................................................................................................................... 6The Pure Entrepreneur .............................................................................................................................. 7Entrepreneurial profit, alertness and knowledge ..................................................................................... 8Disequilibrium Analysis.................................................................................................................................. 9The Evenly Rotating Economy ................................................................................................................... 9The Equilibrating Entrepreneur ............................................................................................................... 10An Austrian Critique of Transaction Cost Theory ............................................................................................ 11A Critique of Equilibrium analysis ................................................................................................................ 11The Market Theory Problem ....................................................................................................................... 12Transaction Cost Theory and the MTP ........................................................................................................ 13Equilibrium used as a foil, description or benchmark? ........................................................................... 14Uncertainty and open ended vs. closed view of the universe ................................................................ 15Information and Knowledge .................................................................................................................... 16Disequilibrium analysis and the (Absent) Entrepreneur ......................................................................... 16Conclusion ....................................................................................................................................................... 17References ....................................................................................................................................................... 19
 
 
An Austrian Critique of Transaction Cost Theory
Jesper Juul Andersen
Arhus University
School of Economic and Management 
 3 
Introduction
Transaction Cost Theory (TCT) is one of the most successful explanations for the existence of the Firm. Ithas become one of the dominant explanations, and is also supported by a substantial empirical litterateur.(David & Han 2004.) However it has also its fair share of critics, one of them being the Austrian school of economics. (Foss & Klein 2010a)The Austrian school has only in recent years seen an emerging litterateur within the theory of the firm. Foss(1994a) finds this a puzzle, since the Austrian School have had many relevant tools early in its developmentin the thirties, which if put together, could be the building blocks for a new theory of the firm based on theAustrian principles and market understanding. Both Williamson (1985:47), which pioneered TCT, and scho-lars within the Austrian tradition, such as Foss (1993, 1994a) and Klein (1996), predicts that research acrosstransaction cost theory and the Austrian School of Economics could be a rewarding exercise. This paper willtry to do this by giving a critique of TCT from the viewpoint of the Austrian School. Even though a critiquemay not seem to be the obvious way to start collaboration between these two approaches, it is importantto know the differences between the theories, before it is possible to assess the potential outcome of com-bining them.I will in this paper give an Austrian critique of Oliver Williamson's Transaction Cost Theory by showing howTCT is suffering under what Frederic Sautet (2000) call
s the “market theory p
roblem
(MTP). The MTP is theinconsistency involved in trying to answer questions (such as; why does firms exist?) that would not exist inan equilibrium-always world, by using equilibrium theory. Thus it exists if a market theory uses the equili-brium concept as a benchmark, as a description of reality, or as an instrument (Sautet 2000.) I will in mylast half of this paper show how TCT suffers from the MTP.To understand the MTP we must first understand the Austrian understanding of the market. To get thisunderstanding it will be important to go through the basic notion of human action by Ludwig Von Mises,the Hayekian knowledge problem, the entrepreneur as understood by Israel Kirzner, and at last explainingwhy competition and the entrepreneur cannot be separated. At this is point, it will be clear that the marketin the Austrian tradition is understood as a process and not as a state.In my presentation of the Austrian understanding of the market, I will as key sources use the classical worksof the Austrian School and will abstain from including later investigations of these theories. I will do this,partly because Austrian economics is an a priori science, a science where the propositions is based on logicand not empirical observations,
1
but also to give a short and general description of the theory.  In the criti-que of TCT, Williamson and his works will be my focus. I will base my critique on the critique already pre-sented by especially Frederic Sautet (2000), Nicolaj Foss (1993, 1994b) and Esteban Thomson (1992.) Theseare from the latest wave of contributions to the Austrian school, which has taken the firm up as a subject of interest.
2
  
1
This is one of the major distinguishing mark of Austrian School of Economics, when compared to other schools of economics. Hoppe (1995)
2
 
I will throughout this paper integrate my citations in the text by putting them in cursive, and make my reference inthe footnotes. I have done this to integrate the citations smoothly in my own text.
 

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