The nature of the firm is not simply a minimizer of transaction costs, but a kind of protective enclave from the potentially volatile and sometimes d… - Geoffrey Hodgson

The use of the term institution has become widespread in the social sciences in recent years, reflecting the growth in institutional economics and the use of the institution concept in several other disciplines, including philosophy, sociology, politics, and geography. The term has a long history of usage in the social sciences, dating back at least to in his Scienza Nuova of 1725. However, even today, there is no unanimity in the definition of this concept. Furthermore, endless disputes over the definitions of key terms such as institution and organization have led some writers to give up matters of definition and to propose getting down somehow to practical matters instead. But it is not possible to carry out any empirical or theoretical analysis of how institutions or organizations work without having some adequate conception of what an institution or an organization is. This paper proposes that those that give up are acting in haste; potentially consensual definitions of these terms are possible, once we overcome a few obstacles and difficulties in the way. It is also important to avoid some biases in the study of institutions, where institutions and characteristics of a particular type are overgeneralized to the set

The firm as a relatively durable organizational structure is able to deal with the lack of knowledge about the future fruits of research and development and innovation. Its relative internal stability means that it can carry unquantifiable risks which would be eschewed in the volatility of the market. In particular large firms are able to set up and sustain R&D departments with their own funds. It is widely recognized that atomized, small-scale private enterprise is not well able to make such long-term commitments.

Market exchange requires a combination of both state and customary institutions. For any developed system of commodity exchange there must be a legal system inscribing and protecting rights to individual or corporate property. There must be a body of contract law with criteria for distinguishing between voluntary and involuntary transfers of goods and services, and courts to adjudicate in such matters. However, the evolution of law is not simply a matter of legislative construction; a great deal of law grows out of custom and precedent. Property and contract law are not exceptions. Consequently, the existence of property and exchange is tied up with a number of legal and other institutions, e.g. government, political system, and common societal values.