The firm and the market
Focusing on concepts such as knowledge, capacities, routines, and their evolution, institutionalist (or competence-based) theories of the firm are very different from new institutionalist (or contractual) theories of transaction costs economics and property rights theory.
The production problem is viewed as distinct from the allocation of resources; technology is not given; the specificity of the employment contract is the object of study; firms are diverse and generate human learning and innovation in an uncertain environment. Reviving the Veblenian evolutionary view of economics, basing his work on a large panel of institutionalists and other social scientists, and claiming to complement NIE, Hodgson insisted in Economics and Institutions (1988) that firms and markets are two different institutions.Hodgson’s starting point is that fundamental uncertainty impedes decision, which therefore must rely on habits, routines, norms, procedures (Simon) and conventions (Keynes) that make perceptions and anticipations possible. Following Veblenian thought, stress is put on habits, which result from (collective) learning. Routines are defined as collective habits and they allow for coordination. Institutions, such as language, money, customs or firms, are systems of social rules, formal or not, but enforced. As stressed by Veblen (1899) and Commons (1934), they constrain and enhance behaviour. They function because the rules are embedded in habits of thought and behaviour. Habits and institutions reinforce each other in a cumulative process: individuals change institutions and institutions shape their perceptions, preferences and behaviours. There is no such thing as a state of nature without institutions: individuals rely on norms or customs.
Among institutions, organizations, such as firms or families, are specific institutions with boundaries and chains of command. Like in Nelson and Winter, firms incorporate routines involving competences.
Hodgson defines firms as specific organizations: they have a legal existence and are dedicated to production; they protect routines- competences in a durable structure, promote loyalty and trust and enhance innovations. A firm’s durability creates norms and rules on a long-term basis. And these norms do not have a quantitative expression, which allows going without costs calculus.Markets, on the contrary, are specific institutions that provide price norms through short-term contractual exchanges between numerous and ephemeral agents:
Exchanges themselves take place in a framework of law and contract enforceability. Markets involve legal and other rules that help to structure, organize and legitimize exchange transactions. They involve pricing and trading routines that help to establish a consensus over prices, and often help by communicating information regarding products, prices, quantities, potential buyers or possible sellers. Markets, in short, are organized and institutionalized recurrent exchange. (Hodgson 2008: 327)
Finally there exist some exchanges of property rights that do not take place in a competitive situation with numerous buyers and sellers: they are long-term contractual relationships, such as “relational exchanges” (Goldberg 1980), which involve cooperation as against competition. Such non-market exchanges are no longer “hybrid forms” or quasifirms. Hodgson argues that there is no continuum between firms and markets; rather, the firm, with its legal existence, is opposed to contractual exchanges, be they market or relational.