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Massimiliano Vatiero, The Theory of Transaction in Institutional Economics: A History

Paul Dragos Aligica
p. 171-175
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Massimiliano Vatiero, The Theory of Transaction in Institutional Economics: A History, New York: Routledge, 2021, 104 pages, 978-036719469-7

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Crédits : Routledge

1The title of the book is somewhat misleading: the book is in fact both an essay on the intellectual history of the theory of transaction in economics, as well as an attempt to articulate a broad analytical framework for the study of the problem of transactions in institutional theory. In that field we usually associate almost instinctively the notion of “transaction” with the concept of “transaction costs”, embraced as a ready-made construct handed out to us via the intellectual tradition that created the transaction costs-based branch of modern institutional economics. Vatiero’s proposition challenges this expedient and­—to be fair—intellectually rather productive practice. The first generations of new institutionalists and their followers have managed to get a lot of analytical and theoretical traction out of it. However, Vatiero suggests a different approach.

2He argues that one should start by disentangling the notion of transaction from the notion of costs and concentrate on the systematic analysis of the first. The analysis involves conceptually mapping the transaction as an action arena and charting the nature and implication of the relevant facets. Then, shift the focus on the notion of “costs”, and more particularly, the costs related to transacting. A careful analytical taxonomy of this type of costs should follow. Then, and only then, one may rejoin the two building blocks into a reconstructed and more nuanced understanding of the nature and functions of “transaction costs”. This vision and what is at stake emerges fully only in the last chapter of the book: “Future work should study these transaction costs theoretically and empirically, but first the meaning of transaction needs to be identified. That first step was the chief objective of this book.” (79). The author has thus handed out a clear-cut self-imposed criterion for assessing the success of the book. And, indeed, a careful reading of this slim but rich volume, supports the conclusion that the author has achieved his objective.

3At the core of the argument advanced by Vatiero is a simple but ingenious conceptual framework build up around a nuanced “dimensionalization” of the typical action arena of a generic transaction. Revisiting John Commons’ classical work, he identifies and introduces the three dimensions defining any transaction: the legal, the competitive and the political. The structure of the book is built around the three chapters (chapters four to six) which discuss these three dimensions. The first two chapters pave the way. Chapter one revisits the problem of the meaning of transaction, via a conceptual and historical overview of the problem. The second chapter introduces the dimensions of the transaction using a framework designed for the conceptual mapping of its facets. The next three chapters—which provide the aforementioned core of the book—consist of in-depth incursions into the domains of the legal, the competitive and the political aspects of transactions. The concluding chapter looks back at the landscape after the conceptual mapping and the in-depth incursions have been completed, and outlines the directions for the next steps in the research program advocated by the author.

4The contribution brought forth by the book is twofold. The first contribution comes from the successful effort of articulating a general framework for mapping the economic, legal and political aspects of transactions-related phenomena and of applying it to the relevant institutionalist literature, an application which leads in various instances to a novel perspective on important themes of that literature. The framework is constructed on the idea that a transaction should not be seen as a mere dyadic exchange. Even a triadic approach—introducing externalities via a third party, not involved in the core transaction—is not sufficient to capture the basic structure of the phenomenon. A comprehensive conceptualization begins with the recognition of the fact that each transaction concerns five actors. Pivotal, are, obviously, the two parts of the transaction, the two transactors. Then there are also two potential other transactors which are indirectly part of the relationship: one competitor or counterparty for each of the actual transactor. This twin shadowing of the core transaction dyad is derived from the reality of opportunity costs: the alternative counter-transactors are implicit in it. Last but not least, there is a fifth actor or element involved: the authority defining and operating the legal, regulatory and enforcement structure within which the transaction takes place. With that, we have all elements in place for mapping a vast variety of transactions and their preconditions and implications.

5Once equipped with this instrument, we have a practical and constructive way of organizing the literature and a clear map to rigorously place the various authors and theories of transactions and their costs. In addition to the two major Nobel Prize winners who are dominating the literature (Ronald Coase and Oliver Williamson) and to the well-recognized contribution of the old institutionalist, John Commons, Vatiero brings to the fore the contribution of the less recognized Robert Lee Hale. Second, the conceptual space generated by the five elements and the three dimensions with all their facets, lends itself easily to combinatorial analysis or combinatorial reconstruction. Various conceptual and theoretical positions could be composed and recomposed by endowing them with different components of the framework, and by laying different emphases on them and their inter-relationships. That in itself, has to be acknowledged as a significant contribution to the literature. However, there is a second layer of contributions brought to the table by Vatiero’s book.

6This set of contributions is introduced in the three chapters dedicated the legal, competitive and political phenomena associated to transactions and especially economic transactions. The three chapters are successful in different degrees. Two of them advance a clear agenda and are richer and more convincing, while the third only succeeds more in identifying the basic issues.

7Arguably the most substantive and interesting is chapter three, which explores the legal dimension. It combines in an ingenious way the theory of transactions with the theory of rights and the theory of positional goods (economic goods whose value depends essentially on the comparison the consumer makes between one’s own consumption and that of others). The key of this compounded theoretical approach is an observation regarding "the correlated nature of legal positions” which means that “each legal position is available to an individual if, and only if, a corresponding corelative legal position is occupied by some other individual” (34). Noting that legal correlatives are adversarial in nature, the author is able to make the next move: because of their adversarial nature (“legal positions inevitably involve consumption and utilities with opposite signs”), the legal relationship scheme “overlaps with the characterization of positional goods” defined as “economic goods of which the consumption/utility is zero sum” (36). This inventive construct allows a methodical introduction into the picture of Robert Lee Halls’ perspective as a paradigmatic example of an analytical interpretation of economic structures from the perspective of zero-sum legal positions. Some of the implications of the compounded theoretical perspective are explored in the chapter, including among others, an interesting take on the Coase theorem (or more precisely a specific interpretation of the theorem). At the same time, other possible venues for developing fresh insights regarding the problem of transaction costs and the legal, institutional and regulatory structures related to them, are suggested. This is probably the richest and most inventive chapter of the book.

8The next chapter focuses on the competitive dimension of transactions. This is a perspective dominated by market theory, the problem of the market process and Oliver Williamson’s take on the relationship between hierarchical economic organization and the market. Its starting point is the observation that “the idea of a transaction imbedded in a perfect competition context casts little to no light on the legal, competitive or political factors that by contrast characterize all transactions in the real world” (19). Again, the author manages to create a clear conceptual benchmark on which he places both the standard positions familiar from the classical literature as well as the insights brought to the fore by his approach. A discussion of Oliver Williamson’s “fundamental transformation” acts well in this context as a vehicle to illustrate the strength of this approach: “The analysis of a transaction in an incomplete contract context allows us to investigate the nexus among the definition and enforcement of rights, market structures, market strategies and incentives to invest. That shows, once again, the great versatility of transactional economics” (62). As in the previous chapter, the reader gets a sense of the value added offered by approaching traditional problems using the conceptual frame advocated by Vatiero.

9The chapter dedicated to the political dimension of transactions is the least developed, both in terms of its anchoring in the existing relevant literature and in demonstrating the strength of the framework. The place and importance of the political dimension in the scheme of thought advanced by the book becomes obvious the very moment that the fifth actor gets introduced into the conceptual map of the action arena of a generic transaction. The link between transactions, transactors, the firm and the political system is crucial in understanding the economic process. As the author aptly puts it: “Corporate governance and therefore transactional outcomes within the firm depend on polity” (66). The corporate governance arrangements inside the firm “interact deeply with the nation's politics through party systems, political institutions, the political orientations of governments and coalitions, ideologies and interest groups” (68).

10Shareholders, managers and workers are both individually and in various organized forms pursuing their economic interests. As transactors, “they can affect rulemaking and rule enforcing processes through several political channels. Among other things the transactor can be a member of interest groups designed to capture the rule maker the rule enforcer and the regulators. Another political channel for the transactor is the vote: each transactor in a democratic nation is a voter … a further alternative is that the transactor contributes to the formation of ideologies which affect policy and therefore legislation” (28). Therefore “without a political economy analytics one can neither fully understand the structure of the modern corporation nor account for international differences” (68).

11These are important observations regarding key political economy processes of modern liberal-democratic-capitalist systems. The author does a great job in identifying these specific issues and placing them in relationship to the larger analytical structure articulated by the book. I have quoted extensively in presenting them because I want to show how close this vision is to the standard public choice perspective, a literature to which the book sadly pays little attention. The merit of the chapter is that it identifies the junction between the approach advanced by the book and this literature, with all its studies and technical apparatus. Although, for instance, Gordon Tullock’s insights are mentioned several times in the book, Vatiero does not follow through on them. If he had done that, the chapter would have been closer to the previous two both in terms of solid anchoring in the relevant literature and in terms of advancing and illustrating the theoretical agenda.

12In a similar way, the connections to Constitutional Political Economy, though inherent in the logic of the argument, are missing. At one point ordoliberalism is used as an illustration of attempts to connect and analyze the relationship between political and economic order. The author notes that “the ordoliberal solution to the political commitment problem was to embed the market in a constitutional framework that would protect the process of competition from distortion by transactors private power” (30). This is an excellent observation regarding the nature and functions of the constitutional level which is framing and determining the political and legal dimensions of transactions. But Vatiero does not pursue this line of thought or its implications, as did for instance James Buchanan and his followers. They used the ramifications of this insight to create the new field of constitutional political economy.

13That being said, this comment on the missed opportunity to engage and use modern insights from public choice and constitutional political economy to bolster the chapter and the project, should not detract us from the recognition of the overall merits of the book. We should also point out that Vatiero’s lack of engagement with these approaches is a symptom of a larger pattern present in the epistemic community of institutionalist scholars. Transaction costs inspired institutionalists and public choice inspired institutionalists do not communicate very well with each other and in too many cases they manifest an attitude of benign neglect to each other's contributions. Vatiero’s endeavors, and the promise his approach holds to integrate insights from both camps into the framework he has created, should therefore be praised. His book is an important step forward in building a bridge and a way to remedy to this problem. The framework he has created, the arguments he has advanced, the changes of perspective and approach he has made possible, create the conditions for an improved dialogue among the variety of scholars of institutional theory and institutional phenomena. The book and the research direction advanced by the author is in many respects more ambitious and consequential than one is led to believe from the title of the volume, it is not merely history but possibly also the future of the theory of transactions.

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Paul Dragos Aligica, « Massimiliano Vatiero, The Theory of Transaction in Institutional Economics: A History »Œconomia, 12-1 | 2022, 171-175.

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Paul Dragos Aligica, « Massimiliano Vatiero, The Theory of Transaction in Institutional Economics: A History »Œconomia [En ligne], 12-1 | 2022, mis en ligne le 01 mars 2022, consulté le 09 août 2022. URL : ; DOI :

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Paul Dragos Aligica

University of Bucharest and George Mason University.

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