Of transactions and transaction costs: uncertainty, policy, and the process of law in the thought of Commons and Williamson.

Author:Kemp, Thomas

Perhaps one of the reasons why judges do not like to discuss questions of policy, or to put a decision in terms upon their views as law-makers, is that the moment you leave the path of merely logical deduction you lose the illusion of certainty which makes legal reasoning seem like mathematics.

--Oliver Wendell Hohnes, Jr.

Oliver Williamson regularly makes comparisons between his work and the work of John R. Commons (Williamson 1975, xi, 3, 6, 24, 254; 1985, 3, 6; 1996, 12, 26, 220-221, 25 l; 2000, 599). Williamson bases his claims on two significant points: First, his transaction cost economics (TCE) takes the transaction as the central unit of economic behavior and, second, in TCE the transaction contains elements of conflict, order, and dependence (1985, 3; 1996, 12; 2000, 599). With regard to these points Williamson's claim is correct--these are points of similarity in his and Commons' work--however, as this paper will show, these similarities are largely superficial. The similarities are superficial because they are based on different conceptions of how legal process and enforcement ought to work in the face of uncertainty--arguably foundational issues. This paper argues that these differences logically require very different economic theories and different results when applied to economic policy.

There have also been several comparisons of Commons' work with that of Williamson's in the secondary literature. William Dugger (1983), Steve Medema (1992), and Yngve Ramstad (1996) have all compared aspects of Commons' work with Williamson's. These works focused on important differences in areas of Commons' and Williamson's ideas--work which this paper builds upon. However, this study most directly builds upon Dugger's (1983) paper which made note of--but did not pursue--Williamson's then failure to extend the assumptions of his transaction cost analysis to noneconomic realms (107).

This paper suggests that foundational differences are revealed in the two authors' ideas about the role of uncertainty in legal process and legal decision making and their respective places in the normative aspects of the authors' transactional theories. That is, it is argued here that Commons' and Williamson's thoughts on discretion and uncertainty in legal decision making reveals a foundational difference between the theories of the two authors from which other differences logically follow. Toward this end, this paper first reviews the transactional theories of both Commons and Williamson with regard to their basic premises. This paper does not make a thorough study of either author's work. Each author's work is reviewed here only to the extent that it sheds light on the primary discussion. Second, this study considers the role played by uncertainty in the process of law and legal discretion in the theories of Commons and Williamson. In this regard this paper does not consider or review more recent literature within the original institutional tradition as it is not this tradition that Williamson is comparing his work to. In short, Williamson regularly compares his work to that of Commons, not more recent authors in the institutionalist tradition, and it is this connection that this paper proposes to test. A final section makes comparisons between these two authors and the policy prescriptions that result from their ideas.

Commons' Transactional Economics

As many others have noted, virtually all of Commons' work is rooted in his transactional framework (Kaufman 2003, 71-96; Bazzoli and Kirat 2003, 171-209; McClintock 1987, 673-682). Because much of Commons' basic transactional framework has been elaborated upon at length elsewhere, the details of these ideas are skipped here. Instead only the basics of Commons' system are developed here. These basics are then only extended in directions applicable to the wider argument presented here. Specifically this section develops the reasons for Commons' statement that the concept of the transaction binds the study of law, ethics, and economics as well as other fields.

Commons used transactions as the basic unit of his economic ideas because he believed that exchange occurred within a relevant social framework. The social framework is relevant because Commons refused to separate exchange from the social and legal structures which lends authorization or authority to said exchange. The significance of this is seen in Commons' description of the transaction: "Transactions ... are not the 'exchange of commodities,' in the physical sense of 'delivery,' they are the alienation and acquisition, between individuals, of the rights of future ownership of physical things as determined by the collective working rules of society" ([1934] 1990, 58; italics in original). The social framework, in turn, determines, to a significant extent, the shape of economic interaction or transacting.

Commons divided his basic concept of the transaction into three types, each of which represents different legal-economic relationships that occur within the economy. Commons named these three transaction types bargaining transactions, managerial transactions, and rationing transactions. For the purposes of our discussion here it is only important to note that managerial and rationing transactions are hierarchical in nature while bargaining transactions are not. This does not mean that bargaining transactions do not ever involve economic power but simply that power is not built into the nature of the transaction ([1934] 1990, 64). With regard to this study, the significance of Commons' transactional framework is, first, the inevitable restrictions on individual liberty that occur in the managerial and rationing transactions and, second, Commons' focus on socio-legal relationships.

These hierarchical relationships introduce direct, authorized power into the transactional framework. The result, according to Commons, is that with regard to the managerial and rationing transactions it is a question for the courts to decide if the resulting contracts involve a reasonable restriction of individual liberty ([1934] 1990, 66). This is different from the bargaining transaction, where power is simply something to be equalized across transactors. Because of the inherent power relationships, the managerial relationship is one of degrees of persuasion and coercion. A similar situation exists with the rationing transaction-the difference is that in the case of the rationing transaction collective action may be used to constrain individual action.

It is important to understand that Commons did not attempt to portray his transaction types as either "good" or "bad" as a form of economic organization. There is no intention of any sort of instrumentality or valuation implied in either transaction type. This also does not mean to suggest that Commons thought that economy can operate only with bargaining transactions or that such a thing would be desirable. What it does say is that Commons realized that solutions to problems of economic power based upon command and control relationships would do nothing to address the fundamental problems associated with those relationships (1950, 288-289). For example, policy designed to reduce economic power through direct sanction would only transfer that power to the state and would therefore not remove the problem. Because of this understanding, Commons thought that truly progressive economic action must be cooperative rather than punitive or coercive (291). Thus, when managerial or rationing relationships are required by economic necessity, law and law enforcement should work toward the reduction of coercive forces and the equalization of power among all relevant participants.

To elaborate, Commons claimed that the responsibility for ensuring that transactions were not coercive in nature lay with the court system. For this reason Commons' theory of economy--like that of Williamson-relies on the courts to ensure desirable economic outcomes resulting from hierarchical organizational structures. For a variety of reasons Commons did not believe that the market alone would produce desirable results in the majority of cases; instead, in Commons the legal system is a method by which society makes corrections for the instabilities of capitalism without replacing it. Capitalism, in Commons, is unstable because of the fundamental uncertainties that occur in the...

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