The Problem of Transaction Costs

Abstract

This article takes the pathbreaking Coasen arguments against Pigou and turns them against "the market-based transaction cost" approach favored by Judge Posner and other Chicago-style microeconomists. The concept of transaction costs does not have the sort of theoretical intelligibility nor the operational applicability necessary to make the market-based transaction cost approach plausible. In turn, because the market-based approach depends so heavily upon this category of transaction cost, there is no reason to think that the results reached on the basis of market-based transaction cost analysis are efficient or otherwise desirable. The point here is not that the concept of transaction cost is meaningless or useless. Rather, the contention is that the concept is wholly inadequate to perform the specific intellectual function required of it by market-based transaction cost analysis. Both the Pigouvian and the Coasean approach (as deployed by market-based economists) depend upon information that will, for both empirical and conceptual reasons, be generally unavailable.

Keywords: Coase, transaction costs, Pigou, Posner, divisibility, indivisibility, law and economics, feedback loops, epistemology, market pricing

JEL Classification: D23, K00, D00