transaction costs

Every action in networks consumes >energy, or, in economic systems, is costly. Borrowing the term of institutional economics, these costs are transaction costs, here also including costs of communication and perception ("information costs").

Transaction costs are the crucial determinant of the evolution of >networks and >institutions, because the relative functional performance of certain >configurations will be determined also by the opportunity costs resulting from choosing alternative ways of action. For example, the overall performance of certain contractual arrangements in the market will be determined partly by the implied costs of controlling contract fulfilment. Hence, the hypothesis can be submitted that in the long run, network configurations evolve along a gradient of declining transaction costs. This allows to analyze observed changes of configurations in a similar fashion as is conventionally done in institutional economics.

As compared to institutional economics, however, in EE, the general approach to >opportunity costs also applies to transaction costs, that is, the fundamental distinction between subjective and "objective" costs holds, with the latter only being discovered during the competitive market process, albeit never completely. In particular, Arrow's impossibility theorem applies to transaction costs, too, so that there is no ex ante optimization possible. This result is also obtained when analyzing whether global optimization is possible for a linked set of institutions, because there is an infinite regress, for example, in the problem of contracting about the activities that lead toward the conclusion of a contract. In particular, the market/firm dichotomy cannot be analyzed in a coherent framework because EE holds that organizational costs and transaction costs are incommensurable in terms of a single optimization calculus. This imples that the theory of the >firm cannot be based on transaction costs exclusively.

As a result, transaction costs are a determinant of the evolution of economic systems, but they are not fully reducible to rational choice. In most economic contexts, it is further useful to distinguish between economic and political transaction costs, with the latter focusing on the special role of political organizations in the economy.

Basic References

There are many sources of this term which are close to EE, suffice to mention here the classic:
Douglass C. North, Institutions, Institutional Change, and Economic Performance, Cambridge et al.: Cambridge University Press, 1990.

A usfeful reader including some evolutionary perspectives is:
Christos Pitelis, ed. (1993): Transaction Costs, Markets and Hierarchies, Oxford/Cambridge: Blackwell.

Semantic Field
institutions
organization   transaction costs   opportunity