Two features distinguish the third from the earlier editions of this book.
Firstly I have been encouraged by a number of users of the book to incorporate
a discussion of the implications of the theory of economic organisation
for public policy. In earlier editions my objectives were limited to
setting out various approaches to the positive analysis of business structure.
However, such has been the welter of experiment across the globe over
the last twenty years and such has been the controversy surrounding it that
a discussion of policy issues seems to be a desirable feature of a book on
economic organisation. Interest in the theory of economic organisation
will often be motivated by a desire to understand why privatisation has been
pursued in so many countries, whether ‘brown outs’ in California or train
crashes in the UK have anything to do with the reformed structures of the
electricity and rail industries, whether the government should give ‘stakeholders’
more power to influence corporate decisions and so forth. Part 3
of the book is devoted to an investigation of this type of question. It could
not provide a detailed review of every policy area for obvious reasons of
space constraints not to mention my own limited expertise. Its aim,
however, is to show how the theory introduced in Part 1 can be used to
provide a framework for criticising public policy. Transactions cost theory,
the theory of property rights, the theory of principal and agent, public
choice theory and evolutionary or Austrian considerations all play a part
in understanding public policy. The book does not provide definitive
‘answers’ to specific questions of policy but investigates alternative theoretical
approaches and their inter-connections.
The second major change is the incorporation of more material on the
theory of property rights. Although property rights featured prominently
in earlier editions the focus was mainly on claims to the residual. More
recent analysis associated with Oliver Hart, Sanford Grossman and John
Moore has highlighted the allocation of residual control rights as the
crucial issue. Clearer distinctions are therefore drawn in this edition
between the transactions cost tradition associated with Coase and
Williamson, the property rights theory of Grossman, Hart and Moore and
the principal–agent or optimal contracting tradition of writers such as
Holstrom, Stiglitz and others. The implications of property rights analysis