Economic Change and the Boundaries of the Firm by Richard

The study of economic change including technological change has long been a subject of fascination to economists. It is also a subject that has proven refractory to most attempts to capture it adequately. This essay is an attempt to walk a small piece of this difficult ground. Specifically, it aims to examine the problems that economic change poses for the explanation of the organization of firms. By this I mean the problem of explaining the boundaries of the firm -explaining the extent of internal organization o r vertical integration. What follows is an intellectual progress report rather than a polished theory. In an earlier foray into the field (LANGLOIS [1984]), I tried to sort out some of the methodological issues that would attend an explanation of vertical integration in a regime of rapid economic change. That paper was in part an attempt to locate the connections between a transaction-cost approach to the study of internal organization (WILLIAMSON [1985]) and an evolutionary or process discussion of economic change (NELSON and WINTER [1982]). I suggested then that any explanation of internal organization in a regime of rapid change ought to take into account two factors: disequilibrium and pathdependency. The present paper sets out to elaborate such an explanation, incorporating both my own more recent ideas o n the subject and the relevant work of such writers as SILVER [I9841 and TEECE [1984, 1986a, 1986bl. Economists confronting a phenomenon as complex as internal organization are faced with an inevitable tradeoff. On the one hand is the impulse to multiply variables and auxiliary conditions in order to capture a passable likeness of the world. On the other hand is the quite sensible desire to edit out such entities, even at the risk of leaving the best scenes o n the cutting-room floor. The tendency in the management literature is generally to err in the former direction; this is what makes that literature s o rich and, for economists, so