Toward a Unified Transaction Cost Theory of Economic Organization

ing as it does from population growth and technical progress, the model does not generate perpetual growth. It does, however, illustrate the role of organizational change in exploiting the gains to labor specialization and, thereby, overcoming diminishing returns to capital. The focus on organization, in turn, highlights the role of transaction costs as a determinant of long run economic performance. Provided transaction costs increase sufficiently slowly in labor specialization, the model exhibits increasing marginal returns to capital and growth proceeds according to a virtuous cycle of mutually reinforcing increases in labor specialization and the capital-labor ratio. Both high and low level stationary equilibria are possible, and these capture, in a stylized manner, the organizational characteristics of traditional and industrial economies. During transition to the steady state, a growing economy exhibits the hallmark of an evolving complex system: it adopts increasingly complex patterns of self-organization. 4.1 Specialization and Increasing Returns As noted in the previous section, an increase in the capital-labor ratio increases equilibrium labor specialization. Greater labor specialization, in turn, allows specialized capital goods to be utilized more intensively, increasing the return to capital. Provided this effect is sufficiently strong, the model exhibits increasing marginal returns to capital. As indicated by (16), at internal equilibria labor specialization is increasing in the capital-labor ratio. Thus, we may write s* = s*(h), s*’(h) > 0. Net per capita income is given by w(h) = y[s*(h), h] – t[s*(h)], with first and second derivatives (20a) r(h) = yh[s*(h), h] (20b) r’(h) = yhh[s*(h), h]+ yhs[s*(h), h]s*’(h) where r(h) = w’(h) is the marginal product of capital. As indicated by the second line of (20), capital accumulation has two effects on the marginal product of capital. The direct effect, captured in the first term, results from diminishing marginal returns to capital in the production of each intermediate good and is negative. The indirect effect, captured by the second term, is positive: an increase in the capital-labor ratio increases equilibrium labor specialization, allowing for greater utilization of task-specific capital and increasing the marginal return to capital. If the direct effect outweighs the indirect effect, the model exhibits diminishing marginal returns, with the familiar neoclassical implication that accumulation driven growth is self-limiting. If the indirect effect more than offsets the direct effect, however, production exhibits increasing marginal returns to capital. In this case, the model supports a virtuous cycle of growth due to mutually reinforcing increases in labor specialization and the capital-labor ratio. Recalling from (16) that s*’(h) = yhs/(tss yss), it is clear