In Chapter 8, I moved from institutions and transaction costs to aspects of an economy's performance, excluding organizations from my analysis. In Chapter 1 I introduced the relationship between institutions and organizations, and I now return to it. Organizations and their entrepreneurs engage in purposive activity and in that role are the agents of, and shape the direction of, institutional change. I propose in this chapter to show how organizations induce change.

I begin by returning to the Coase (1937) argument that transaction costs are the basis for the existence of the firm. If information and enforcement were costless, it would be hard to envision a significant role for organizations. But they are not. What is the role of organization? The firm, a form of organization, has been considered a device to exploit the worker (Marglin, 1974), to overcome the problems of asset specificity and postcontractual opportunism (Williamson, 1975, 1985), and to reduce measurement costs in economic activity (Barzel, 1982).

Whatever the merits of these alternatives (and they are not altogether mutually exclusive), the focus in this study is on organizations as purposive entities designed by their creators to maximize wealth, income, or other objectives defined by the opportunities afforded by the institutional structure of the society.

In the course of pursuing those objectives, organizations incrementally alter the institutional structure.