Fear Prudence: Hobbes and Williamson on the Morality of Contracting

Abstract

Theories of new institutionalism, and specifically Oliver Williamson's theory of transaction cost economics, argue that complete presentiment in contracts is an abstract design of classical economics, not a pragmatic product of contingent experience. Exchange is not a costless activity, nor the market free. The ex ante costs of negotiation (finding a price) and the ex post costs of clarifying, executing, enforcing, sanctioning, and renegotiating are idiosyncrasies that interfere with the smoothness of an exchange. These idiosyncratic dimensions of contracting, in which transactions are neither faceless, nor instantaneous (Williamson 1985, 56), expose decision making to the contingent influence of habit, perceived vested interest, and limited knowledge and capacity. Organizations are a response to this decisional incompleteness and the attendant non-value-adding costs. An organization is a set of authority relations established by a general contract, whereby agents agree essentially to 'tell and be told' (Williamson 1985, 221) in order to minimize transaction uncertainty and hence costs (Spekle 2001). For Williamson, then, the driver behind organizational form is less the reduction in production costs (through specialization, etc.) than the increased certainty of exchange. This is realized by repressing the pursuit of localized interests; using decisional fiats rather than costly arbitration; having a bird's eye view of information flow facilitating the integration of activities both externally (for example, production with demand) and internally (for example, operations with strategy); and reducing the opportunity for shirking and embezzlement (1986, 143-146). Critics of Williamson's transaction cost analysis point to its apparent institutional nalvete. In addition to the transaction, there are other units of analysis that influence organizational form, such as production or prevailing culture. Moreover, even within the transactional unit, the alignment of hierarchies does not always tend toward equilib-