Last year, Frank Pasquale nominated Sanjukta Paul as the Ronald Coase of Law and Political Economy. I say, let’s take him up on that.
Coase, of course, laid the foundation for the transaction cost approach to conceptualizing the coordinating mechanisms of firms vs. markets. In “The Nature of the Firm”, he asked why there should be firms at all if production can be efficiently coordinated via unplanned markets in the neoclassical utopia. Coase answered that markets have their own costs–transaction costs–that can be reduced by bringing exchanges “into” the firm (i.e. converting them from trades to commands). The idea of transaction costs formed the foundation for the “New Institutional Economics” that provided the groundwork for Oliver Williamson’s work on firm structure and antitrust (which was hugely influential on Robert Bork, among others), for Jean Tirole’s theory of platforms as two-sided markets, for Douglass North’s groundbreaking work on economic history, for the “New New” Institutionalism of Acemoglu and Robinson, and for much else besides. It is out of “transaction costs” that neoclassical economists build their theories of institutions, because it is only possible to have enduring institutions (rather than a constantly shifting terrain of self-liquidating contractual relationships) if there is some “cost” preventing spot exchanges from regulating every contingency.
In her article “Antitrust as Allocator of Coordination Rights“, Paul flips this script. As the title indicates, Paul is also concerned with theorizing coordination. But she rejects Coase’s way of framing the question. Who cares how coordination would work in a neoclassical utopia? A “market”, as neoclassicals use the term, can never serve as a coordinating mechanism. To use the non-coordination coordination of that utopia as a descriptive or normative baseline for reality is to confuse our analysis. In the real world, some form of active coordination is always needed in both markets and firms. Antitrust law works together with corporate law, property law, contract law, et al. to determine which forms of coordination within the production and distribution system will be tolerated, which will be favored, and which will be prohibited. To determine how coordination works and how it might work, we must inductively examine how different patterns of coordination rights facilitate different production and distribution processes.
Paul’s article is the inverse of Coase’s in more ways than one. Coase started in the domain of social theory while ignoring law altogether. But it turned out that his social theoretic concepts provided a convenient way to make sense of the awkward mismatch between neoclassical models and instituted reality. Paul starts from the law, though with a critical eye to the way that neoclassical theory has been translated into legal doctrine.
It remains to build a social theory off of her legal groundwork.
Ulysse Lojkine recently suggested one way forward: to combine Paul’s framework with the work of Janos Kornai in a rejiggering of Marxian theories of surplus value and exploitation.
In a forthcoming contribution to an edited volume, Nathan Tankus and I articulate another. We incorporate Paul’s concept of coordination rights into market governance theories found in Postkeynesian economics, institutiontalist economics, and economic sociology in an effort to build out a Neochartalist micoreconomics. Nathan has a summary of one of the central arguments of the article over at his blog (to which readers of this blog should subscribe!). In the remainder of this post, I want to focus more generally on the concept of market governance and how it contributes to an alternative to the Coasian toy models that are so familiar to those of us who live in the world law-and-economics has created.
One way to get at the concept of market governance is to conceptualize the coordination of production and distribution as taking place within a “social field“. A social field exists when a group of individuals understand themselves as participants in a common social space–whether as collaborators, rivals, or some combination. For social fields to endure as stable spaces of action, participants must actively (though not necessarily consciously) reproduce the terms on which they exist: the rules and norms that govern social action, the rituals and social scripts that organize time, the discourses and knowledge practices that facilitate mutual understanding all only exist to the extent that they are continue to be followed, taught, enforced, etc. The terms on which action in a social field proceeds is the subject of a settlement that benefits incumbents, with insurgents benefiting from the stability produced by a settlement but chafing under its terms. This settlement can be challenged and destabilized, whether by insurgents, participants in neighboring fields, or others, whose efforts may be spurred or aided by a technological or organizational change that makes the previous settlement more difficult to sustain, by a collapse of an institution or field on which that field depended (e.g. a shift in a regulatory regime or a failure of some link in a supply chain), or some other deep shift of context with which the field must cope. But open contestation over the terms of the settlement cannot be constant, lest a field lack the stability necessary for coherent social action. Rather, most of the time contestation takes place in a more muted and gradual way, leaving most of the terms of the settlement in place, with more dramatic destabilization leading either to a field’s collapse or reorganization according to a new settlement.
If we understand production and distribution as taking place within overlapping social fields, we can conceptualize coordination and competition as always going on–always coexisting–at multiple levels. What neoclassical economics thinks of as “perfect” competition appears not as a plausible way of organizing a social space but as unmanageable chaos. It exists only times of social instability, when fields are in crisis. Most of the time, competition proceeds according to a social settlement that preserves the stability necessary for coherent social action (while preserving the advantage of incumbents). The pattern of coordination rights at any given time are part of this settlement.
To this general sociological account of economic action we can add heterodox economic accounts of modern production and distribution processes as money-mediated, with businesses operating as “going concerns”. As Jamee Moudud put it in a post on this blog,
Pricing policy is central to the going concern: setting an appropriate price over unit costs in an attempt to obtain a target rate of return has to generate adequate cash flow for the firm to grow. Crucially, the time gap between current debt obligations and future revenues always compels the firm to have an adequate stock of liquidity, or cash on hand to pay debts. This money-centered view of the firm is not consistent with the barter-based framework undergirding neoclassical economics which separates money from the “real” (production-based) economy.
In order to manage the inward and outward flows of money, participants in a production and distribution process must create a stable set of pricing practices–they must administer prices, to use a term from Gardiner Means. This can be done within a firm, but it can also be done across entities via horizontal coordination (in a cartel, via fair trade laws, or through other means). Thus, the practice of pricing (among other practices) can be understood as the subject of a settlement that stabilizes the social field in which money-mediated institutions operate.
With this lens, we can avoid comparing the real world to a single model of an ideal market and instead explore different ways that prices have been and might be stabilized. And we can then explore the good and bad of each form of price stabilization. Nathan and I begin this project in our article, surveying multiple contemporary forms of price stabilization (chartered exchanges vs. oligopolistic corporations, e.g.) and analyzing several historical forms (fairs, formal markets, early chartered exchanges). In doing so, we hope to illustrate a fundamentally different way of thinking about how coordination works, one that treats “microfoundations” as a project of attention to institutional detail rather than rational choice reconstruction
We think a paradigm shift along these lines will be crucial in connecting different LPE projects–for instance, the reconsiderations of money, banking, and financial regulation with the reconsiderations of antitrust, of public utility, and of corporate governance with the revisiting of the financial and organizational architecture of slave plantations. If we want to build on a different foundation than neoclassical economics, the anti-Coasian foundations of Paul’s groundbreaking work seems like a good place to start.