CALCULATIVENESS TRUST AND ECONOMIC ORGANIZATION PDF

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We use information technology and tools to increase productivity and facilitate new forms of scholarship. The relentless application of calculative economic reasoning is the principal device that I employ to define and delimit the elusive notion of trust. The calculative approach to economic organization is sketched in Section I. The concept of "calculative trust," which enjoys widespread and growing acceptance but with which I take exception, is examined in Section II.

Societal trust, which works through the institutional environment and takes a series of hyphenated forms, is briefly treated in Section III. Nearly noncalculative uses of trust of a personal kind are developed in Section IV. Concluding remarks follow in Section V. A failure to appreciate the limits of calculativeness purportedly gives rise to excesses, as a consequence of which economists are prone to make mistaken assessments of many economic phenomena.

This article has benefitted from comments from the participants at the Institutional Analysis Workshop at the University of California, Berkeley, and at the Research Conference on Industrial Organization in Toulouse. All rights reserved. I furthermorecontend that the analyticalreach of the calculativeapproachto economic organization is extended rather than diminished by admitting to these limita- tions.

Once the excesses to which calculativenessis given are displayed and understood,the distortionscan be anticipatedand can thereafterbe folded in at the design stage. A more farsighted calculativeresponse to the myopic excesses of calculativenessthereby obtains.

Providedthat bounds on rationalityare respected, calculativenessopens the door to a of deeper understanding economic organization. Economics and the Contiguous Disciplines2 Applicationsof economic analysis and economic reasoningto the contiguous social sciences-principally law, political science, and sociology-have increased considerablyin the past thirty years.

To be sure, John R. Commons deserves credit for his early recognitionthat "law The and economics" was a combinedenterprise. Legal Stud. Commons, Law and Economics, 34 Yale L. Some concluded, too harshly I think, that the work of American institutionalists "led to nothing.

Posner, Economic Analysis of Law As recent conference volumes in the Journal of Law, Economics, the make clear,13 use of economic reasoningto examine and Organization and political institutions has become widespreadand, for some politics issues, even essential.

Economics and sociology bear a more distant relationto each other,14 althoughthis too has been changing,especially as the "rationalchoice" has approachto sociology15 been takingshape. A wide gulf between them nevertheless needed to be bridged. Thus, Paul Samuelsondistinguished economics and sociology in terms of their rationalityorientations,with rationalitybeing the domain of economics and nonrationality being relegated to sociology.

What, it mightbe asked, is behind the successes of economics in moving into law, political science, and sociology? Coase observes that what binds a group of scholars together is "one or more of the following: 9 KennethJ. Arrow, Social Choice and IndividualValues It is the common interest in these social institutionswhich distinguishes the economics profession. Be that as it may, the economic approach, rather than the subject matter, is what I emphasizehere.

Calculativenessis the generalconditionthat I associate with the economic approachand with the progressiveextension of economics into the related social sciences. I view it as the strategy that has Note in this conGary Becker24 applied so widely and effectively.

The Economic Approach to Human Behavior Herbert Simon, however, takes exception with both. Becker is scored for excesses of hyperrationality Simon, supra note 19, at 2 , while I am scored for using an incomplete contracting setup for which empirical support is purportedly lacking Herbert Simon, Organization and Markets, 5 J. Becker is his own best agent. As for myself, I would observe that empirical work in transaction cost economics is much greater than Simon indicates see Oliver E.

Williamson, The Economic Institutions of Capitalism , ch. California, Berkeley and is growing exponentially. Joskow concludes that the empirical research in transaction cost economics "is in much better shape than much of the empirical work in industrial organization generally" The Role of Transac- 22 CALCULATIVENESS nection that calculative economic reasoning can take several forms-of which price theory, property rights theory, agency theory, and transaction cost economics are all variants.

Transaction Cost Economics Institutional Economics. Institutional economics works at two levels of analysis. The macro variant, which is especially associated with the work of Douglass North,27 deals with the institutional environment.

The micro variant deals with the institutions of governance. Lance Davis and North28distinguish between these two as follows emphasis in original : The institutionalenvironmentis the set of fundamentalpolitical, social and legalgroundrules that establishesthe basis for production,exchangeanddistribution.

Rules governing elections, property rights, and the right of contract are examples The way that I propose to join these two is to treat the institutional environment in which a transaction or a related set of transactions is embedded as a set of shift parameters, changes in which elicit shifts in the comparative costs of governance. My main purpose here is to examine the rudiments of governance. I concur. Many of the initial applications of economic reasoning to economic organization also rely, directly and indirectly, on transaction cost arguments Arrow, supra note 9; Kenneth J.

Joint Economic Committee, 91st Cong. Although hyperrationalityhas been responsible for some of the truly deep insights of economics, there is a need, at some stage, to describe "man as he is, acting within the constraintsimposed What are the key attributesof economic actors?

Standingalone, that is a negative result. But there is more to it then economizingon bounded than that. If mind is a scarce resource,34 rationalityis warranted. This expands, ratherthan reduces, the range of issues to which the economic approach can be applied.

Among other things, the "conscious, deliberate, purposeful"use of organizationas a means by which to economize on bounded rationalityis made endogenous.

By contrast with simpleself-interestseeking, accordingto which economicagentswill continuouslyconsult their own preferencesbut will candidlydisclose all pertinent informationon inquiry and will reliably dischargeall covenants, agents are given to self-interestseekingwith guile. Whether opportunistic economic agents will tell the truth, the whole truth, and nothingbut the truth and will reliably self-enforce covenants to behave "responsibly" are thereforeproblematic.

Accordingly,"contractas promise"is fraught with hazards. Although that too is a negative result, again there is a positive research agenda. Intended but limited rationality,however, is a broaderconcept. Not only are except, pereffectivelyto cope, whence irrationality intendedlyrationalagents attempting haps, for certainpathologicalcases is not implied,but satisficingis merelyone manifestation of coping.

The satisficingapproach,which appealsto psychologyand works out of an level mechanics, has not found wide applicationwithineconomics RobertAuaspiration in mann,WhatIs GameTheoryTryingto Accomplish? The myopic constructionis associated with Machiavelli,who advised his prince that he both could and should breach contracts with impunity.

That more deeply calculative response permits superiordeals to be made than could otherwisebe supMachiavelliangrabbingis not implied if economic agents have ported.

Contracts that have no need for added support the will "ideal" contracts of both law and economics 38 not be providedwith them. More generally, contracts will be provided with added supports only in the degree to which these are cost-effective. Calculativenessis thus pervasive. Taken together, the lessons of bounded rationalityand opportunism lead to the followingcombinedresult:organizetransactionsso as to economize on bounded rationality while simultaneouslysafeguardingthem against the hazards of opportunism.

Not only do credible commitments arise when incompletecontracts are examinedin their entirety, but complaints over obsessive calculativeness, truncated calculativeness, and anticalculativenessare mitigatedas well. Purported Excesses of Calculativeness A calculative approach to economic orga- Obsessive Calculativeness. One of the prescient lessons of sociology is that demandsfor control can 36Niccolo Machiavelli,The Prince The remarksof RichardDawkinsabout conscious foresight,expressed in the context of selfish genes, are pertinent RichardDawkins, The SelfishGene : One uniquefeatureof man.

We have at least the mental equipmentto foster our long-termselfish interests rather than merely our short-termselfish interests. We can see the long-term benefits of participating.

But that assumes that the economic approach is unable or unwilling to take into account all relevant regularities whatsoever. If the deeper lesson is to design control systems with those that are intended and those reference to all consequences-both that were originally unanticipated-and if economics can implement this deeper lesson, then the claim that the economic approach is mindlessly given to obsessive calculativeness is overdrawn. The correct view is that a naive application of calculativeness can be and sometimes is given to excesses but that this is often remediable.

On being informed about added consequences, these will be factored into the design exercise from the outset. A calculative response to the excesses of calculativeness thereby obtains. Truncated Calculativeness. Many models of economic organization work out of truncated logic, according to which economic actors are assumed to be myopic.

Aspects of the Keynesian macro model work out of a myopic logic. The same is true of the cobweb cycle,40 barriers to entry arguments,41 and the resource dependency approach to economic organization.

Many of the problems associated with truncated contracting are relieved in the process. The differences between the resource dependency and credible commitment approaches to economic organization are illustrative. The resource dependency approach is concerned with power disparities that arise when contractual dependency comes as an unwanted surprise. That occurs frequently if myopic agents are unable to project and make provision for the Fundamental Transformation-according to which a largenumbers bidding situation at the outset is sometimes transformed into a small-numbers supply relation during contract execution and at the 39 See Robert Merton, The Unanticipated Consequences of Purposive Social Action, 1 Am.

Transaction cost economics employs an efficiency perspective and treats dependency as a broadly foreseeable condition. Accordingly,farsightedparties purposefullycreate bilateraldependency and supportit with contractual safeguards,but only in the degree to which the associated investments are cost-effective.

Because price, asset specificity, and contractualsafeguardsare all determinedsimultaneously,calculativenessis the solution to what would otherwise be a problem unwantedresource dependency. Anticalculativeness: Voice. Yet another view is that the calculative approachto economic organizationemphasizes exit the traditionaleconomic means by which to express dissatisfaction to the neglect of voice which is associated with politics and is purportedlyless calculative.

First, if voice in the absence of an exit option is relatively ineffective, which evidently it is,46then voice really does have a calculativeaspect. Second, voice works throughmechanisms,and those mechanismsare often carefully designed.

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Calculativeness, Trust, and Economic Organization

JoJoshicage Transaction cost economics and organization theory OE Williamson Industrial and corporate change 2 2, Industrial and corporate change 2 2, The analysis of discrete structural alternatives OE Williamson Administrative science quarterly, RePEc uses bibliographic data supplied by the respective publishers. Email address for updates. Help us Corrections Found an error or omission? If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. The economic institutions of capitalism. Their combined citations are counted only for the first article. Get my own profile Cited by View all All Since Citations h-index 69 iindex The new institutional economics: As the access to this document is restricted, you may want to search for a different version of it.

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CALCULATIVENESS TRUST AND ECONOMIC ORGANIZATION PDF

Contents The Mechanisms of Governance. Calculativeness, trust, and economic organization — EconBiz Popular passages Page 8 — An economist by training thinks of himself as the guardian of rationality, calcualtiveness ascriber of rationality to others, and the prescriber of rationality to the social world. He is the author of numerous works in which law, economics, and organization are joined. My library Help Advanced Book Search.

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