Transaction Costs and Institutions' Efficiency: A Critical Approach

By Marinescu, Cosmin | The American Journal of Economics and Sociology, April 2012 | Go to article overview

Transaction Costs and Institutions' Efficiency: A Critical Approach


Marinescu, Cosmin, The American Journal of Economics and Sociology


Institutions, Human Action, and Transaction Costs

Institutional economics founds itself on recognizing the fact that human action and its results must be fundamentally analyzed in connection with the economic, social, and political rules that govern human action in the society. (1) Thus, the economic approach on institutions is focused on identifying the optimal institutional arrangement, given the obvious possibilities of the normative analysis of alternative institutional arrangements (see Eggertsson 1990; Pejovich 1995). Nowadays, economists consider that economic performance depends strongly on the societal institutional framework.

In the institutional approach of Douglass North, the theory of institutions "is constructed from a theory of human behavior combined with a theory of the costs of transacting" (North 1990:27). By combining these theories, one can understand why institutions exist and what role they play in the functioning of the society. North also mentions that if you add the theory of production, one can analyze the institutions' implication on the economic performance.

It is obvious that the immutable role of the social institutions is to reduce and limit the uncertainty of human cooperation, to give a steady structure for everyday life. With no intention to underestimate the role of social institutions in the reduction of uncertainty, this paper will emphasize the irrelevance of the transaction costs criteria, as objective sources of valuation of the institutions' efficiency. Contrary to North and other mainstream institutionalists, when the human action theory is combined with the transaction costs theory, the result can be exactly the misappropriation of the fundamental criteria according to which we have to judge the institutions and institutional change. In fact, a real human action theory is one that necessarily includes the (transactional) essence of the human interaction costs. In order to lay the scientific foundations of an economic theory of the institutions and, at the same time, to find out the role of the institutions upon prosperity, a real human action theory does not need to be combined with a hypothetical transaction costs theory. This paper will also emphasize the implications of the institutions' utilitarian approach in the economic science and public debates on politics.

One may ask whether there had ever been any other two words in the economic literature that generate as much friction as "transaction costs?" (2) The economics of transaction costs began with "The Nature of Firm," the famous article of Ronald Coase from 1937. (3) The Swedish Bank Prize in Economics laureate, Ronald Coase explains the existence of the firm and the integration of the activities from this kind of organizational structure using the transaction cost concept--"the cost of using the price mechanism" in the original terminology of (Coase 1937: 390). But, as Oliver Williamson shows (Williamson and Winter 1991: 8), "one could say that Coase's approach on the transaction costs did not face time as well as the theory [of firm], on the whole." In "The Nature of the Firm," Coase neither defined the empiric character of transaction costs, nor explained how these could be recognized. Despite all contradictions regarding the transaction costs, today this theory represents the cornerstone of efficiency analyses on comparative institutional arrangements. (4) These analyses are focused on the role transaction costs play in determining the distribution of property rights; broadly defined as all laws, rules, social customs, and organizations that generate incentives for human action.

The economic theory reveals the universal fact that any human action entails a cost, as human action means choice, and therefore sacrifices and foregone opportunities. Accordingly, doing a transaction has a cost; conceptually, the transaction cost phenomenon becomes easily accepted (see Williamson 1979: 234). …

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Transaction Costs and Institutions' Efficiency: A Critical Approach
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