International Journal of Business and Social Science Vol. 10 • No. 7 • July 2019 doi:10.30845/ijbss.v10n7p8 60 Williamson's Theory of the Firm: Efficiency vs. Power Giorgos Meramveliotakis Department of Management Science & Technology Hellenic Mediterranean University Crete, Greece Abstract The purpose of this paper is to appraise the analytical usefulness of Williamson's theory of the firm by investigating the explanatory capacity of transaction cost concept. Particularly, the aim is to criticize Williamson's main tenet that the emergence of the hierarchical form of capitalist production system can be analysed in terms of efficiency considerations. Contrary to Williamson's rationale, I conclude that the concept of power seems, in contrast to Williamson’s adherence to the efficiency principle, to be a more effective analytical tool in explaining the establishment of the factory system. Keywords: Firms, Power, Transaction Costs, Efficiency. JEL Classification Codes: B52, D02, P14 1. Introduction In November 2009, Oliver Williamson was awarded the Nobel prize in economics. 1 This follows the award to Ronald Coase in 1991 and to Douglass North in 1993. Between them, Coase, Williamson and North, are the founders and most important representatives of new institutional economics. In what follows, I am going to analyse the validity of the “market transaction cost” approach. In particular, I am going to examine if the transaction cost rationale, given the existence of an institutional environment (e.g. property rights, a functioning market etc.), can explain the origins of organisations, most notably the firm. The benchmark point is the analysis of Williamson (1975, 1985). The main premises on which his theory rests is that transaction cost economising is the most important explanatory variable underlying the emergence and evolution of hierarchies (e.g. the firm). The pervasive logic is that high transaction costs associated with market functioning mean that rational actors will do their best to avoid these costs by organising the production under a hierarchical structure involving lower transaction costs, hence the emergence of the firm. Thus, granted the transaction cost minimisation principle, the very existence of the firm implies that the latter is a more efficient contractual form than the market arrangement. Specifically, Coase (1937) was the first among new institutionalists who argues that the main function of the firm is to minimise transaction costs by replacing market transactions with the hierarchical organisation of work (Meramveliotakis & Milonakis, 2010). Williamson further develops Coase‟s argument by describing the scope of conditions under which a transaction would be more likely to take place within a firm than in the market. He also introduces the concept of transaction costs in dealing with the internal management of enterprises, focusing on the study of the internal organisational structure of the firm. Initially, I will sketch the general logic of the new institutionalist theory of the firm, as represented by the classic contribution of Williamson. Then, a critical assessment of this contribution will be offered. It should be stressed from the outset that my critique is focused on the question of whether transaction costs can provide a reasonable rationale for explaining the emergence of the firm, and on this basis I will assess the theory of the firm itself within this framework. This is the reason why I am not going to analyse the other classical works within the new institutional economics‟ tradition, such as Alchian and Demsetz (1972) or to bring into picture any alternative theories of the firm such as the one by Penrose (1959). 2 What Williamson (1985) is trying to explain is the emergence and evolution of the capitalist firm and not any form of historical organisation devoted to the production of goods or services. As is already made explicit in the title of his book, his theory is focused on the explanation of the institutions of capitalism. Accordingly, the firm is viewed as a hierarchical organisation governed by the employment relation or else by the capitalist-worker relation. 1 Alongside Elinor Ostrom, a political scientist. 2 For a critical analysis of Coase's theory of the firm see Meramveliotakis & Milonakis (2010).