How TC’s Change the Analysis

Ennio and I find Doug Allen’s definition of transaction costs to be fruitful.

Over at Econlib last year, I offer a few ways–some more speculative than others–that this definition changes how we think.

From my piece:

Incorporating transaction costs—in the sense defined by Allen—does not invalidate the positions expressed above. Rather, these positions can be viewed as “baseline,” zero transaction cost cases. As such, they may serve as foils in a way similar to that employed by Ronald Coase in his seminal 1960 paper. While debates about “what Coase meant” continue, a fruitful way of seeing his argument is that he did not mean to suggest that a zero transaction cost scenario is an approximation for our world. Rather, the existence of positive transaction costs serves as the engine by which we explain the diverse array of institutional arrangements that characterize social life. Indeed, evidence for this interpretation stems from his earlier 1937 paper that explores the consequences of positive transaction costs. The cases of “perfect” ownership and pricing can thus serve as benchmarks against which the zero transaction cost assumption is relaxed. Doing so opens an entirely new world of social practices and arrangements that beg for explanation.

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Caleb Fuller

Assistant Professor of Economics, Grove City College.

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