INTRODUCTION
Lars Werin
There was a time when almost every economist took it for granted that buying and selling occur like free fall in a vacuum: there is no obstacle whatsoever to these activities.The information needed to carry them out was supposed to be automatically available, like ether in space. No resources would have to be spent in entering into and implementing transactions. Or, perhaps more accurately: either transactions were considered to take place costlessly, or the costs in carrying them out are so high as to make transactions unfeasible.In the latter case, it was perhaps natural that many economists should go on and suggest the need for the state to provide a helping hand-also assumed to be costless. As for “firms”,these were seen as exogenously given sets of technologically possible combinations of inputs and outputs, with an attached device-something like a thermostat-which costlessly registers market prices and automatically brings about profit-maximizing quantities.
The originators of the traditional theory were among thebest minds in economics through the ages. They neverintended the theory to be more than a stylized description ofthe essence of economic order. This, however, was no modestaim. The economic order is one of the most remarkablephenomena we can think of. Just ponder the fact that the market is capable of bringing about a reasonably successful coordinationof the activities of practically each and every humanbeing all over the world, continuously! This the traditionalanalysis succeeded in formalising. It certainly enlarged ourunderstanding of the basic workings of the human anthill.However, over the years, the traditional model and its componentsincreasingly became used for purposes alien to them.Given its level of abstraction, the analysis cannot be expectedto explain all the particular and detailed phenomena we connectwith markets. It cannot account for the institutions wecall firms-there was hardly any place for them except as formalskeletons, as we saw. Nevertheless, more and more economistsbegan to use the traditional theory for such purposes.
Occasionally these exercises turned out well, but veryoften eager students came to faulty conclusions-withouteven considering the possibility that the model was not up tothe task. In literally thousands of applied investigations, oneeconomist after another thought they could say that observedeconomic behavior was unsystematic, inefficient, or outrightanomalous. They were, of course, in a scientific quagmire:you end up with a theory which rationally describes people asirrational. What, basically, was wrong was that certain cruciallyimportant constraints on individual decisions and activitieswere missing from the traditional analysis.
The main gaps were filled in the 1930s, 1940s and1950s by a little group of brilliant scholars. The most significantachievement was Coase's demonstration, that individualdecisions and activities are always restricted by the structureof property rights, and by transaction costs. (Some timebefore that, Knight had laid his finger on the strategic, but tillthen misunderstood aspect of this argument.) Alchianexplored the role of property rights side by side with Coase.Hayek, Arrow and Stigler began to investigate the crucial role of information-or rather, the lack of it. Other names can be mentioned, almost all the pundits, in fact.
One important task remained. A new theoretical frameworkhad been created-but for its scientific value to bedemonstrated, it had to be used in the full light of day. Aboveall, the paradigm must be employed for the analysis of importantmarket phenomena, of the kind which had roused thecuriosity of economists schooled in the old tradition, andwhich they thought they had explained. Unless this step wastaken, the power of the new framework would not be finallyand convincingly acknowledged. The baptism of fireremained.
It is hardly possible, I think, to single out some particularstudy as clearly and indisputably the one responsible forthe rites. There was, for instance, the study Coase himselfmade of the (non-existing!) market for radio frequencies.There was an investigation by Director on the intriguing phenomenonof tie-in sales, often referred to but never formallypublished. There were the examples and illustrations Coaseand Alchian presented in their basic articles, but they werebrief and sketchy. Here and there, however, ambitious youngscholars began to apply the new tools in the proper scientificmanner. One of them was the thirty-year old Steven Cheung.If the laurels of victory should be awarded to someone, to mymind it has to be to him. Cheung's magnum opus was the presentvolume, first published in 1969 and for many years out ofprint. Given its status as a classic, reissue is long overdue. Itmust have taken the people responsible for the presentendeavour enormous effort and patience to bring it about, notleast to convince the author that his book has indeed become aclassic.
The Theory of Share Tenancy is a scientific tour deforce. It drew up a model pattern for research which aims toexplain the market arrangements we observe around us, withall new analysis included. Cheung was perhaps the first todemonstrate convincingly that it is necessary to interpret contractsas economically structured. Most contracts, he argued,are results of choices among possible structures of clauses aswell as arrangements for the handling of information and control.As a result of this seminal analysis, the crucial importanceof contractual choice became established in economics.The Theory of Share Tenancy contributed substantially tomaking “contracts” a household term in the profession.Before about 1970, the word hardly appeared in the index ofan economic treatise or textbook, but soon it became one ofthe most important entries.