8/26/2019

Why Transaction Cost Analysis is Attractive, and Very Flawed

"The problem is that something that appears to explain everything actually does not explain anything at all. Dressing up the history of the world, and its economic development, in terms of transaction costs is mostly not very helpful.

The reason is the flaw already existent in Coase's Nobel-winning 1937 article: the existence and size of the firm is explained using a simple calculus of costs transacting within the firm (organizing costs) and outside (transaction costs). But while this seems obvious, and in some sense it is, it assumes a certain degree of specialization/division of labor (Coase notes the "specialized economy") that is unchanging. Because if you engage in increased specialization, then there can be no calculus at the margin."