Thursday, November 05, 2009

Misled by Transaction Costs

That is the title of a paper delivered at a conference held GMU Law School by UCLA professor Harold Demsetz.


Organizational efficiency cannot be established simply by knowing the properties of organizational forms...The second erroneous notion is that the efficiency of an organizational form can be determined by transaction cost considerations.....(p.9)

My quick response to the first point:

Now what professor Demsetz refers to in his first point is that exogenous conditions may render it efficient to have commons in one location while private property in one cannot make a judgement on the efficiency properties of an institutional arrangement by looking at the organizational form and its properties alone (ie commons vs private ownership).

The key word here is alone. Even if professor Demsetz's point is valid, ie one has to examine exogenous conditions which govern/dictate an organizational form, there might still be choices to be made by economic agents. For instance, while both commons and private property are organizational forms which would help individuals to tackle their day to day problems under a set of given exogenous transactions, one organizational form might still be better than (less costly to maintain and operate) the other. Hence, the properties of the organizational forms might still matter even if we pay heed to professor Demsetz's point.

Or do we really have to?

Once a given set of exogenous conditions are set/given, by implication of the maximization postulate, wouldn't the least cost organizational form be automatically taken up by individuals? If so, why bother with the properties of the different organizational forms at all? Because we know that whatever properties the ultimate choice of organizational form would have (common vs private property), they would be optimal in any case. What is, is efficient.

Let us call this point "Organizational Properties Irrelevant Theorem", what do you think?

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