"It is my duty to myself and to any man who is working for me that he honor all his contracts. When you came here you found out that we always honor our work, even when it means taking a loss."
--James Duncan MacHardie (From the Terrace)
Social science inquiry necessarily places the behavior of human beings front-and-center. In studies of economic organization, cognition and self-interest are particularly important (Williamson, 2008).
Simon (1957) famously observed that human actors are intendedly rational, but only limitedly so. Because people are boundedly rational, all complex contracts will be limited in their completeness. There will be gaps, omissions, oversights, etc. Fortunately, however, people are also capable of foresight. They have capacity to look ahead, and can therefore craft mechanisms ex ante to deal with disturbances as they arise which facilitate continuity and mutual gain during contract implementation.
Self-interest is also axiomatic of human behavior. In the context of contracts, most people will do as promised and some will do more. However, particularly as conditions change and stakes increase, defection from the spirit of a contract, thereby forcing termination or renegotiation, cannot be ruled out. Once again human capacity for foresight comes in handy. Readiness to defect can be mitigated by introducing safeguards ex ante that deter ex post opportunism.
Problems and features of human behavior therefore make it attractive to take some economic transactions out of the market and to place them either under control of a single hierarchy or under joint control of inter-firm hierarchies by means of contracting.
References
Simon, H. 1957. Models of man. New York: John Wiley & Sons.
Williamson, O.E. 2008. Outsourcing: Transaction cost economics and supply chain management. Journal of Supply Chain Management, 44(2): 5-16.
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1 comment:
We've heard so much about strikes, and about the dependence of the uncommon man upon the common. We've heard it shouted that the industrialist is a parasite, that his workers support him, create his wealth, make his luxury possible - and what would happen to him if they walked out? Very well. I intend to show the world who depends on whom, who supports whom, who is the source of wealth, who makes whose livelihood possible and what happens to who when whom walks out.
~John Galt, Atlas Shrugged
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