The Emergence of Transaction Costs Economics and the Growing Pluralism in Mainstream Economics

As we all know economics in the 20s and 30s was a quite pluralistic undertaking. But after the War it has changed - economists started to build economic theory on the general equilibrium framework (GET), which leads to the emergence of the so called mainstream economics (ME). ME marginalized alternative approaches. Why the emergence and development of ME was a success story is not clear (see Weintraub 2002; Mirowski 2002). The best illustration of its revolutionary character was an attempt of many people in the field to build macroeconomics on the shoulders of microeconomics based on GET (i.e. micro-foundation of macroeconomics). But they failed, many started to claim that basing economic theory only on the GET is not possible (e.g. Sonnenschein-Mantel-Debreu theorem and its implications).

From the late 70s economic theory started to be more and more pluralistic again. ME has degenerated into various complementary approaches based on game theory, bounded rationality, experimental methods etc. Concepts hidden in heterodoxy during the domination of ME started to be used extensively in the now more pluralistic ME. One of these concepts is, in my opinion, the concept of TC. The research question is the following: Whether the growing importance of TCs contributed to the growing pluralism of ME in the 70s and 80s? I would say yes, and that is due to: 1/ the introduction of TCs into Arrow-Debreu framework transformed the very sense of GET; 2/ the notion of TC changed the agenda of economic research: from Adam Smith on economics was the study of the market with firms as purely theoretical "points" (or rhetorical devices), that was Coase (1937) who pointed out that firms also matter, but his contribution was disregarded due to the fact that the profession was not asking these types of questions at this point and was ill-equipped to deal with them. There are some parallels in the work of Berle and Means (1934), but issues of internal organization were not part of the meat of economics at the time; but economics rediscovered Coase (1937) mainly due to the TC approach developed by Williamson; from the 70s due to the Williamson's TCE (... and it was due to Carnegie school etc.) the very language (agenda) of economics has changed, namely not only market matters but also its inhabitants, i.e. firms and individuals; 3/ TC enters into ME also via monetary economics, Barzel's approach, Alchian and Demsetz (1972) ... BUT the two above-mentioned fields (Arrow-Debreu, and Coase and its followers) played the role of the crucial channels through which TCs entered and transformed the ME. Putting it briefly, I claim that the growing role of the concept of TC (and later TCE in general) played an important role in making ME more pluralistic.

This is a very preliminary version of the research project (LH 21.VII.06).