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Fundamental Uncertainty and the Firm in the Long Run

Oliver Williamson claims that bounded rationality and 'behavioural uncertainty' are principal factors influencing market-based transaction costs. Post Keynesian economists typically distinguish between ergodic and non-ergodic processes with the latter providing a technical definition of 'fundamental uncertainty'. Often, the salience of this fundamental uncertainty has been ignored or conflated with bounded rationality and behavioural uncertainty. Consequently, the richness and distinctness of such concepts is much diminished. This paper shows that while bounded rationality is a key behavioural assumption that may account for the existence of high market-based transaction costs in an ergodic world, and thus for the emergence of firms as distinct modes of economic organisation, it may do so only in the short run. I demonstrate, however, that non-ergodicity can be used to explain the existence of transaction costs and thus firms in the long run.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09538250050175118
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Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

Volume (Year): 12 (2000)
Issue (Month): 4 ()
Pages: 419-433

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Handle: RePEc:taf:revpoe:v:12:y:2000:i:4:p:419-433
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  1. Paul Davidson, 1996. "Reality and Economic Theory," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 18(4), pages 479-508, July.
  2. Sent, Esther-Mirjam, 1997. "Sargent versus Simon: Bounded Rationality Unbound," Cambridge Journal of Economics, Oxford University Press, vol. 21(3), pages 323-38, May.
  3. Steven Tadelis & Oliver E.Williamson, 2012. "Transaction Cost Economics
    [The Handbook of Organizational Economics]
    ," Introductory Chapters, Princeton University Press.
  4. Paul Davidson, 1991. "Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 129-143, Winter.
  5. Stephen P. Dunn, 2002. "A Post Keynsian approach to the theory of the firm," Chapters, in: Keynes, Uncertainty and the Global Economy, chapter 5 Edward Elgar Publishing.
  6. Hodgson, Geoffrey M, 1994. "Optimisation and Evolution: Winter's Critique of Friedman Revisited," Cambridge Journal of Economics, Oxford University Press, vol. 18(4), pages 413-30, August.
  7. Foss, Nicolai J., 1998. "The resource-based perspective: An assessment and diagnosis of problems," Scandinavian Journal of Management, Elsevier, vol. 14(3), pages 133-149, March.
  8. Dunn, Stephen P, 2001. "Uncertainty, Strategic Decision-Making and the Essence of the Modern Corporation: Extending Cowling and Sugden," Manchester School, University of Manchester, vol. 69(1), pages 31-41, January.
  9. Paul Davidson, 1994. "Post Keynesian Macroeconomic Theory," Books, Edward Elgar Publishing, number 124, April.
  10. Stephen P. Dunn, 2000. "Wither Post Keynesianism?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(3), pages 343-364, April.
  11. Brian J. Loasby, 1989. "The Mind and Method of the Economist," Books, Edward Elgar Publishing, number 288, April.
  12. Dahlman, Carl J, 1979. "The Problem of Externality," Journal of Law and Economics, University of Chicago Press, vol. 22(1), pages 141-62, April.
  13. Paul Davidson, 1983. "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 5(2), pages 182-198, January.
  14. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  15. Davidson, Paul, 1988. "A Technical Definition of Uncertainty and the Long-run Non-neutrality of Money," Cambridge Journal of Economics, Oxford University Press, vol. 12(3), pages 329-37, September.
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