Extending the Constitutional Theory of the Firm by Introducing Conventions

In this paper, it will be argued that unanimous agreement as the ultimate criterion of goodness in constitutional political economy corresponds better with the analysis of the firm than it does with the analysis of much larger organisations, such as nation states. The aim of the paper is also to argue that conventions play a central role in the attainment of a social contract. Conventions enter the explanation in two ways. Firstly, they are logically prior to agreement, and secondly, as it is argued here, it is convention that carries behavioural influence through ongoing, collective interpretative effort, rather than the agreed explicit rule itself. A social contract upon a rule is here seen as the outcome of the process by which shared expectations emerge and change. Furthermore, as soon as a rule is agreed upon, it is the collective process by which the rule’s meaning is reinterpreted in future unforeseen situations that explains behavioural constraints, not the rule as a principle itself. The paper also connects the present approach to other theories of the firm.