Posts filed under ‘Law and Economics’

“Robert Bork’s Forgotten Role in the Transaction Cost Revolution”

| Peter Klein |

E1725-27Thanks to Danny Sokol for passing on this paper by Alan Meese.

Robert Bork’s Forgotten Role in the Transaction Cost Revolution

Alan J. Meese
Antitrust Law Journal 79, no. 3 (2014)

This essay, prepared for a conference examining Robert Bork’s antitrust contributions, examines Bork’s hitherto unknown role in the transaction cost economics (“TCE”) revolution. The essay recounts how, in 1966, Bork helped rediscover Coase’s 1937 article, The Nature of the Firm and employed Coase’s reasoning to explain how various forms of partial integration could reduce transaction costs. As the essay shows, Bork described how exclusive territories, customer restrictions and horizontal minimum price fixing that accompanied otherwise valid integration were voluntary efforts to overcome the costs of relying upon unfettered markets to conduct economic activity. To be sure, Bork did not develop a complete account of TCE capable of informing a full-fledged research program. Nonetheless, Bork did articulate and apply various tools of TCE, tools that reflected departures from the applied price theory tradition of industrial organization.

The essay also offers some brief speculation regarding why scholars have not recognized Bork’s early contributions to TCE. For one thing, Bork did not purport to offer a new economic paradigm. Instead, Bork repeatedly characterized his work as an application of basic price theory, the very economic paradigm that TCE overthrew with respect to the interpretation of non-standard contracts. Moreover, Bork did not persist in his critique of price theory’s once-dominant account of non-standard contracts. After reiterating his views in 1968, for instance, he did not revisit the economics of non-standard agreements for nearly a decade. Finally, when Bork did return to the topic, he deemphasized TCE-based arguments and focused more on the claim that such agreements could not add to the market power already possessed by manufacturers and thus could not produce economic harm. In short, Bork’s failure to reiterate his TCE-based interpretation of non-standard agreements seems partly responsible for the lack of recognition his early contributions have received.

On Bork see also Jack High’s useful 1984 paper, “Bork’s Paradox: Static vs. Dynamic Efficiency in Antitrust Analysis.”

6 February 2015 at 9:20 am Leave a comment

Henry G. Manne (1928-2015)

| Peter Klein |

manneVery sorry to report the passing of Henry Manne yesterday at the age of 86. Manne made seminal contributions to the literatures in corporate governance, securities regulation, higher education, and many other subjects. Here are past O&M posts on Manne and his contributions. I tried several times to get him to guest blog on O&M but couldn’t pull it off.

I got to know him fairly well in the last few years and he was a charming companion and correspondent — clever, witty, erudite, and a great social and cultural critic, especially of the strange world of academia, where he plied his trade for five decades but always as a slight outsider.

Here are tributes and commentaries from David HendersonJane Shaw, Don Boudreaux, and me. We’ll share more in the coming days.

18 January 2015 at 6:13 pm 1 comment

Two Interesting NBER Papers

| Peter Klein |

A couple of recent NBER papers of interest to O&Mers, one from Doug Irwin, another from Luis Garicano and Esteban Rossi-Hansberg:

Adam Smith’s “Tolerable Administration of Justice” and the Wealth of Nations
Douglas A. Irwin
NBER Working Paper No. 20636, October 2014

In the Wealth of Nations, Adam Smith argues that a country’s national income depends on its labor productivity, which in turn hinges on the division of labor. But why are some countries able to take advantage of the division of labor and become rich, while others fail to do so and remain poor? Smith’s answer, in an important but neglected theme of his work, is the security of property rights that enable individuals to “secure the fruits of their own labor” and allow the division of labor to occur. Countries that can establish a “tolerable administration of justice” to secure property rights and allow investment and exchange to take place will see economic progress take place. Smith’s emphasis on a country’s “institutions” in determining its relative income has been supported by recent empirical work on economic development.

Knowledge-based Hierarchies: Using Organizations to Understand the Economy
Luis Garicano, Esteban Rossi-Hansberg
NBER Working Paper No. 20607, October 2014

We argue that incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues like the evolution of wage inequality, the growth and productivity of firms, economic development, the gains from international trade, as well as offshoring and the formation of international production teams, among many others. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of its more salient implications.

Update: See also Irwin’s article in Monday’s WSJ: “The Ultimate Global Antipoverty Program.”

3 November 2014 at 12:45 pm Leave a comment

Contracts as Technology

| Peter Klein |

That’s the title of an interesting new law review article by Kevin Davis (New York University Law Review, April 2013). Just as we can treat organizational structure as as sort of technology, and study the introduction and diffusion of new organizational forms with the same theories and methods used to study technological innovation and diffusion, we can think of contracts as structures or institutions that emerge, are subject to experimentation and competition, and evolve and diffuse. Here’s the abstract:

If technology means, “useful knowledge about how to produce things at low cost”, then contracts should qualify. Just as mechanical technologies are embodied in blueprints, technologies of contracting are embodied in contractual documents that serve as, “blueprints for collaboration”. This Article analyzes innovations in contractual documents using the same kind of framework that is used to analyze other kinds of technological innovation. The analysis begins by laying out an informal model of the demand for and supply of innovative contractual documents. The discussion of demand emphasizes the impact of innovations upon not only each party’s incentives to collaborate efficiently, but also upon reading costs and litigation costs. The analysis of supply considers both the generation and dissemination of innovations and emphasizes the importance of cumulative innovation, learning by-doing, economies of scale and scope, and trustworthiness. Recent literature has raised concerns about the extent to which law firms produce contractual innovations. In fact, a wide range of actors other than law firms supply contractual documents; including end users of contracts, specialized providers of legal documents, legal database firms, trade associations, and academic institutions. This article discusses the incentives and capabilities of each of these potential sources of innovation. It concludes by discussing potential interventions such as: (1) enhancing intellectual property rights, (2) relaxing rules concerning the unauthorized practice of law and, (3) creating or expanding publicly sponsored clearinghouses for contracts.

See also Lisa Berstein’s comment. (HT: Geoff Manne)

17 March 2014 at 3:49 pm 1 comment

CFP: Coase Memorial Issue of Man and the Economy

| Peter Klein |

An important announcement from Ning Wang, editor of Man and the Economy:

Man and the Economy
Call for Papers for a Special Issue in Memory of Ronald Coase

“R. H. Coase: The Man and His Ideas”

Man and the Economy will devote a special issue (December 2014) to the life and ideas of Ronald Coase, the 1991 Nobel Laureate in Economics and Founding Editor of this journal. During his long academic life, Coase devoted himself to economics, which, in his view, should investigate how the real world economy works, with all its imperfections. Coase viewed and practiced economics as a social science, a study of man creating wealth in society through various institutional arrangements. To honor the memory of Coase, we welcome original research articles that extend and develop the Coasian economics, including empirical studies of the structure of production and exchange. We also welcome critical and constructive commentaries that clarify and elaborate the Coasian themes, from a law-and-economics/new institutional economics perspective, which include, but not limited to, topics on transaction costs, property rights, theories of the firm and China’s economic transformation. In addition, we also welcome personal reflections and reminiscences of Coase as a colleague, a teacher, an editor, and/or a friend.

Submissions must be made online via the Journal’s website:

Deadline for submissions is September 30, 2014.

12 February 2014 at 8:51 am Leave a comment

Symposium on Allen’s Institutional Revolution

| Peter Klein |

Here is a symposium on Doug Allen’s very important book The Institutional Revolution (Chicago, 2011). The symposium features essays by Deirdre McCloskey, Joel Mokyr and José-Antonio Espín-Sánchez, and our own Dick Langlois, along with a reply by Doug. The issue revolves around the role of measurement, and Doug’s thesis that reductions in measurement costs are central to improved economic performance.

My favorite line, from Doug’s reply:

I have read “The Problem of Social Cost” more times than I can recall, and study as I may, I have never found a logical error in it. But here is the point: if the author, both at the time and 30 years later, still failed to fully grasp his own perfect work, then it is an understatement to note that the ideas are subtle.

25 October 2013 at 9:24 am Leave a comment

Private, For-Profit Legal Education

| Peter Klein |

The WSJ profiles InfiLaw, a network of private-equity backed, for-profit law schools that is challenging the established model of legal education. From what I understand, InfiLaw seems to be the University of Phoenix of law schools, providing vocationally oriented training for the lower-end of the market (but, unlike for-profit business schools, charging upmarket prices).

InfiLaw’s schools aren’t designed to compete with the Harvards and Stanfords. The approach, the company says, has mostly been to target students, including many minorities, whose grade-point averages or LSAT scores don’t qualify them for admission at the top schools. . . .

Some in the academy think InfiLaw is compounding the problems in legal education, which is graduating far more students than there are entry-level jobs for lawyers. Critics, including former students who have sued Florida Coastal, see the company as a predatory outfit that peddles false promises to students in exchange for high tuitions.

Others think criticisms of InfiLaw are based on elitism embedded within the legal academy,

As we’ve noted before, it is unlikely that newer, private, for-profit colleges, universities, and professional schools can compete head-to-head with the traditional schools, but why should they? Certainly there is room for more creativity, experimentation, and innovation, structurally and pedagogically, in legal education, as with other forms of higher learning. InfiLaw may be ineffective, or even a scam, but viva la diversité!

21 October 2013 at 9:57 am Leave a comment

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).


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