INTRODUCTION
LarsWerin
Therewasatimewhenalmosteveryeconomisttookitforgrantedthatbuyingandsellingoccurlikefreefallinavacuum:thereisnoobstaclewhatsoevertotheseactivities.Theinformationneededtocarrythemoutwassupposedtobeautomaticallyavailable,likeetherinspace.Noresourceswouldhavetobespentinenteringintoandimplementingtransactions.Or,perhapsmoreaccurately:eithertransactionswereconsideredtotakeplacecostlessly,orthecostsincarryingthemoutaresohighastomaketransactionsunfeasible.Inthelattercase,itwasperhapsnaturalthatmanyeconomistsshouldgoonandsuggesttheneedforthestatetoprovideahelpinghand-alsoassumedtobecostless.Asfor“firms”,thesewereseenasexogenouslygivensetsoftechnologicallypossiblebinationsofinputsandoutputs,withanattacheddevice-somethinglikeathermostat-whichcostlesslyregistersmarketpricesandautomaticallybringsaboutprofit-maximizingquantities.
Theoriginatorsofthetraditionaltheorywereamongthebestmindsineconomicsthroughtheages.Theyneverintendedthetheorytobemorethanastylizeddescriptionoftheessenceofeconomicorder.This,however,wasnomodestaim.Theeconomicorderisoneofthemostremarkablephenomenawecanthinkof.Justponderthefactthatthemarketiscapableofbringingaboutareasonablysuccessfulcoordinationoftheactivitiesofpracticallyeachandeveryhumanbeingallovertheworld,continuously!Thisthetraditionalanalysissucceededinformalising.Itcertainlyenlargedourunderstandingofthebasicworkingsofthehumananthill.However,overtheyears,thetraditionalmodelanditsponentsincreasinglybecameusedforpurposesalientothem.Givenitslevelofabstraction,theanalysiscannotbeexpectedtoexplainalltheparticularanddetailedphenomenaweconnectwithmarkets.Itcannotaccountfortheinstitutionswecallfirms-therewashardlyanyplaceforthemexceptasformalskeletons,aswesaw.Nevertheless,moreandmoreeconomistsbegantousethetraditionaltheoryforsuchpurposes.
Occasionallytheseexercisesturnedoutwell,butveryofteneagerstudentscametofaultyconclusions-withoutevenconsideringthepossibilitythatthemodelwasnotuptothetask.Inliterallythousandsofappliedinvestigations,oneeconomistafteranotherthoughttheycouldsaythatobservedeconomicbehaviorwasunsystematic,inefficient,oroutrightanomalous.Theywere,ofcourse,inascientificquagmire:youendupwithatheorywhichrationallydescribespeopleasirrational.What,basically,waswrongwasthatcertaincruciallyimportantconstraintsonindividualdecisionsandactivitiesweremissingfromthetraditionalanalysis.
Themaingapswerefilledinthe1930s,1940sand1950sbyalittlegroupofbrilliantscholars.ThemostsignificantachievementwasCoase'sdemonstration,thatindividualdecisionsandactivitiesarealwaysrestrictedbythestructureofpropertyrights,andbytransactioncosts.(Sometimebeforethat,Knighthadlaidhisfingeronthestrategic,buttillthenmisunderstoodaspectofthisargument.)AlchianexploredtheroleofpropertyrightssidebysidewithCoase.Hayek,ArrowandStiglerbegantoinvestigatethecrucialroleofinformation-orrather,thelackofit.Othernamescanbementioned,almostallthepundits,infact.
Oneimportanttaskremained.Anewtheoreticalframeworkhadbeencreated-butforitsscientificvaluetobedemonstrated,ithadtobeusedinthefulllightofday.Aboveall,theparadigmmustbeemployedfortheanalysisofimportantmarketphenomena,ofthekindwhichhadrousedthecuriosityofeconomistsschooledintheoldtradition,andwhichtheythoughttheyhadexplained.Unlessthisstepwastaken,thepowerofthenewframeworkwouldnotbefinallyandconvincinglyacknowledged.Thebaptismoffireremained.
Itishardlypossible,Ithink,tosingleoutsomeparticularstudyasclearlyandindisputablytheoneresponsiblefortherites.Therewas,forinstance,thestudyCoasehimselfmadeofthe(non-existing!)marketforradiofrequencies.TherewasaninvestigationbyDirectorontheintriguingphenomenonoftie-insales,oftenreferredtobutneverformallypublished.ThereweretheexamplesandillustrationsCoaseandAlchianpresentedintheirbasicarticles,buttheywerebriefandsketchy.Hereandthere,however,ambitiousyoungscholarsbegantoapplythenewtoolsintheproperscientificmanner.Oneofthemwasthethirty-yearoldStevenCheung.Ifthelaurelsofvictoryshouldbeawardedtosomeone,tomymindithastobetohim.Cheung'smagnumopuswasthepresentvolume,firstpublishedin1969andformanyyearsoutofprint.Givenitsstatusasaclassic,reissueislongoverdue.Itmusthavetakenthepeopleresponsibleforthepresentendeavourenormouseffortandpatiencetobringitabout,notleasttoconvincetheauthorthathisbookhasindeedbeeaclassic.
TheTheoryofShareTenancyisascientifictourdeforce.Itdrewupamodelpatternforresearchwhichaimstoexplainthemarketarrangementsweobservearoundus,withallnewanalysisincluded.Cheungwasperhapsthefirsttodemonstrateconvincinglythatitisnecessarytointerpretcontractsaseconomicallystructured.Mostcontracts,heargued,areresultsofchoicesamongpossiblestructuresofclausesaswellasarrangementsforthehandlingofinformationandcontrol.Asaresultofthisseminalanalysis,thecrucialimportanceofcontractualchoicebecameestablishedineconomics.TheTheoryofShareTenancycontributedsubstantiallytomaking“contracts”ahouseholdtermintheprofession.Beforeabout1970,thewordhardlyappearedintheindexofaneconomictreatiseortextbook,butsoonitbecameoneofthemostimportantentries.