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This paper attempts to place the t h e q of the boundaries of thejirm within the context of the passage of time. More precisely, it resurrects and places in a modem frame some of the insights of the chsical and Marshallian theories of organization. The modem reinterpretation of those theories centers around the 'capabilities' view of the jirm. Taken together with governance costs, the capabilities ofjirm and market determine the boundaries of the jirm in the short run. Ovw time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost-the cost of trandewing the firm's capability to the market w vice versa. These 'dynamic' governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably txchnological and organizational innovation. In f i t , they are the costs of not having the capabilities you need when you need them. Dynamic transaction costs provide an explanation for vertical integration that is arguably more general than those dominant in the literature. In the face of uncertainty and divwgent views ofthe future, common ownership of multiple stages of production is a supwior institutional arrangement for coordinating systemic change. Asset-specrfity is neither necessary nor suffient for this to be true. Dynamic governance costs may also a f f I t internal organization. I t may sometimes be costly-in 3terms of persuasion, negotiation and teaching-to create within the firm capabilities _ readily available on the market. Indeed, in cases in which systemic coordination is not 4 the issue, the market may turn out to be the superior institution of coordination. In E 2 genwal, the capabilities view of the jirm suggests that we look atfim2 and market as alternative-and sometimes overlapping-institutions of learning. $-8 1. Transaction costs in the long rzln and the short 9 X u Classical and neoclassical perspectives k u One of the crucial ways in which classical economics differed from neoclassical s 3 was in its preoccupation with costs of production. In value theory, the inter-2 pretation runs along the following lines. The classicals were interested in the 3 long run. And in the long run, all factors are variable, implying production 0 Oxford University Press, 1992 ' For excellent modern drscussrons of the classrcal theory, see Sr~gler (1951). Ames and Rosenberg (1965) and Le~jonhufvud (1986) * The methodologrcal Issues surround~ng thrs assertron are rn fact somewhat complex For an rntro-duct~on, see Langlors (1984, 1986) For present purposes, however, I wrll not poke d~rectly Into rts explanatory merrts

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