Schumpeter posed the question “Can capitalism survive” to which he ventured the opinion, “No. I do not think that it can” (1942, p. 61). Lack of intellectual support for—indeed, prevailing intellectual skepticism regarding—the merits of capitalist modes of organization was among the factors that led to that negative assessment (Schumpeter, 1942, chap. 13).
Forty years is not a long period in the evolution of economic organization. Schumpeter’s negative assessment may be borne out yet. Plainly, however, the demise of capitalism is not imminent. It is furthermore noteworthy that intellectual opinion has improved over the interval. Partly that is explained by a deeper appreciation for the purposes served by complex economic institutions; but the intervening record of economic accomplishment has probably been the more important factor. Whatever the explanation, earlier intellectual skepticism regarding the merits of capitalism has given way to qualified respect.
Inasmuch as no complex form of economic organization, capitalist or otherwise, is unproblematic, qualified respect is all that any deserves. It is not therefore inconsistent to regard some economic institutions as marvels, even as awesome, and simultaneously to express real concerns. To the contrary, any other posture is injudicious.
Grudging respect is warranted for another reason as well: It reinforces the perspective that economic institutions are always means and never ends. Rarely does any mode of organization dominate another in all relevant performance respects. Choice among alternative modes—at least among the “finalists” under review—always involves tradeoffs: Improvements in one or more performance measures are realized only at the sacrifice of others. That is true even when the comparison is among efficiency attributes.153 It applies a fortiori when sociopolitical features are introduced.
Preferences among alternative modes thus may differ not because perfor- mance is judged to be different on any particular performance dimension, but because individuals use different weighting schemes in reaching an aggregate assessment. Efficiency sacrifices that are voluntarily and knowledgeably made so as to accomplish some other valued purpose are “merely costs.” Involuntary or non-knowledgeable sacrifices, however, are another matter.
Transaction costs economics holds that microeconomic institutions play a crucial, subtle, and relatively neglected role in explaining differential economic performance—over time, within and between industries, within and between nation states and sociopolitical systems. The huge valuation disparity between technological and organizational factors, to which Hayek referred with dismay in 1945, is still awaiting redress.
Transaction cost economics helps to inform the study of economic orga- nization by requiring the analyst to examine those microanalytic attributes of organization where the relevant comparative institutional action resides, by disclosing hitherto neglected transaction cost features, and by insisting that assessments be made not abstractly but in comparative institutional terms. “Flawed” modes of economic organization for which no superior feasible mode can be described are, until something better comes along, winners nonetheless.
Source: Williamson Oliver E. (1998), The Economic Institutions of Capitalism, Free Press; Illustrated edition.