Tag Archives: alchian

Transaction Costs and Secondary Calculation

Transaction costs are a “famously nebulous” concept in economics, and the relationship between the transaction cost approach and the Austrian tradition invites further development. Here’s my small step in that direction.

Defining and establishing property rights is a process that consumes valuable resources. Seemingly obvious, but mostly overlooked: sometimes, the value which can be seized by establishing property rights falls short of the resources necessary to establish them.

For one, under private ownership, economic calculation governs the decision of how, when, and where to construct a road in the first place. But after that initial decision, a form of calculation—what Piano and Rouanet term “secondary calculation”—continues to govern the very decision about whether to use prices for allocating space to the roads. Additionally, even if prices are used (as opposed to, say, a non-profit model), secondary calculation governs how swiftly and thoroughly to adjust those prices. Such secondary calculation assesses the profitability of first enhancing one’s private property right to the road and then subsequently implementing and adjusting prices. Once again, if transaction costs are prohibitive, pure market-clearing prices won’t be used, and some other mechanism will be, but importantly, this decision is itself also guided by (secondary) calculation.

Published at at EconLib. For the original discussion of “secondary calculation,” see Piano and Rouanet.