Why Transaction Cost Economics Failed and How to Fix It

TL;DR

This paper critically examines the conceptual foundations of transaction cost economics, revealing misinterpretations and proposing a reconstructed framework to address longstanding theoretical issues.

Contribution

It reconstructs the true meaning of transaction costs and clarifies their role within the broader economic framework, correcting prior misunderstandings.

Findings

Identifies endogeneity issues in transaction cost definitions

Reconstructs the concept within a 'transaction costs-property rights-competition' framework

Clarifies the historical development of transaction cost theory

Abstract

The connotation of transaction costs has never been definitively determined, and the independence of the concept has never been rigorously demonstrated. This paper delves into the thought systems of several prominent economists in the development of transaction cost economics, starting from first-hand materials. By combining multiple works of the authors, it reconstructs the true meanings and identifies endogeneity issues and logical inconsistencies. The conclusion of this paper is bold. Previous research has been largely filled with misinterpretations and misunderstandings, as people have focused solely on the wording of transaction cost definitions, neglecting the nature of transaction costs. The intention of transaction cost theory has been unwittingly assimilated into the objects it intends to criticize. After delineating the framework of "transaction costs-property rights-competition", this paper reconstructs the concept of transaction costs and the history of transaction cost concepts, providing a direct response to this theoretical puzzle that has plagued the academic community for nearly a century.