Summary of JOIE article (22 April 2025) by Geoffrey M. Hodgson International Management, Loughborough University London, London, UK. The full article is available on the JOIE website.
Prominent scholars have complained of confusion in the literature over what transactions are, and how their costs are measured. This two-part article explores this topic and suggests an alternative approach. This first part examines different meanings of transaction cost used by leading scholars in this area, including John R. Commons, Ronald H. Coase, Oliver E. Williamson, Douglas C. North, Douglas W. Allen and Yoram Barzel. It reveals that prominent usages of the term that differ in several important respects. A sharper approach might focus on legal contracts and exchanges of legal titles, as suggested by Harold Demsetz (1968). That option is explored further in Part II.
Since the 1970s, the concept of a transaction cost has become central to the ‘new institutional economics’ of Coase, North, Williamson and others. Despite hundreds of articles on transaction costs, the meaning of the term is still disputed. Among others, in his review of empirical methods in transaction cost economics, Michael Sykuta (2010, p. 157) wrote: ‘Key terms and concepts in the underlying theories are both poorly defined and difficult to measure.’ Since then, and despite much effort and concern, we do not yet seem to have emerged from the thickets of confusion.
This two-part essay takes its cue from an early remark by Harold Demsetz (1968, p. 35) that ‘Transaction cost may be defined as the cost of exchanging ownership titles.’ This introduced the possibility of focusing on the legal aspects of a transaction to identify its general nature and its particular kinds of cost.
The review of the six leading thinkers in this area shows that the work of Commons was most prominent in focusing on the legal aspects of a transaction or contract. The review of the six authors addresses nine important issues. Does the author in question
1. establish any difference between ‘transactions’ and ‘contracts’?
2. see transactions as involving transfers of legal rights?
3. regard the protection of property rights as a transaction cost?
4. regard taxation by an authority as a transaction?
5. use ‘transaction’ to refer to transfers that are not agreed, or not contracted in law?
6. regard advertising as a transaction cost?
7. establish an analysis of money and debt in modern transactions?
8. see transactions as possible in societies where there is no state law?
9. discuss the role of state law in enforcing transactions in economies?
The contrasts between the authors are remarkable. On the first question, some authors treated contracts and transactions as synonyms. But Commons and North seemed to regard transactions as a broader category. On the second question, Commons, Coase and North saw transactions as generally involving transfers of legal rights. Williamson, Allen and Barzel did not. Answers to the third question show that North, Allen and Barzel regarded the protection of ‘property rights’ as a ‘transaction cost’. On questions four and five, Commons is shown to include ‘rationing transactions,’ which typically are not contractual in a legal sense. The Allen and Barzel concept of a transaction seems to include any transfer of resources, voluntary or otherwise. On question six, Wallis and North (1986) saw advertising as a transaction cost, but Barzel and Allen (2023) did not. Question seven identifies Commons as the only author in the sample to emphasise the transactional importance of money payments, seeing them as central to most modern transactions. There are also differences in answers to question eight, on the application or otherwise of the concept of a transaction to societies without state law, and on question nine, on the role of the state in enforcing transactions.
Two prominent ways forward emerge from these comparisons. The first is to take a more general and ahistorical approach, of which the works of Allen and Barzel are the most rigorous exemplars. But what their approach achieves in terms of much wider generality it loses in terms of its appreciation of powerful modern institutions. Their notion of a transaction goes beyond voluntary agreements, to include coercive, kleptocratic and other predatory relations. Money plays little role in their analysis, and no more than as a medium of exchange. For them ‘economic property rights’ are basically understood in terms of possession or control (Hodgson, 2015). Law is recognized, but it takes a secondary, incidental and instrumental role.
A more historically sensitive approach would use some general principles but it would not apply to societies without institutionalised legal systems or the rule of law. It would limit the scope of the analysis at most to a few thousand years of human history, but it would greatly improve the power of that analysis to understand modern economies. It would build on the work of Commons, on some aspects of Coase’s contribution, and on the ideas of several others. The transfer of legal title would be central. It would make law vital and constitutive, understand property rights in legal terms, and emphasise the role of money. It would highlight the terms contract and contracting costs. Its name is legal institutionalism (Deakin et al, 2017). Part II of this essay outlines some features and implications of this approach.
NOTE: Hodgson’s most recent book outlines the development of his thinking about institutions over the last 50 years: Geoffrey M. Hodgson, From Marx to Markets: An Intellectual Odyssey (Cheltenham UK and Northampton MA: Edward Elgar). Published March 2025.
References
Barzel, Yoram and Allen, Douglas W. (2023) Economic Analysis of Property Rights, 3rd edn. (Cambridge and New York: Cambridge University Press).
Deakin, Simon, Gindis, David, Hodgson, Geoffrey M., Huang, Kainan, and Pistor, Katharina (2017) ‘Legal Institutionalism: Capitalism and the Constitutive Role of Law’, Journal of Comparative Economics, 45(1), February, pp. 188-200.
Demsetz, Harold (1968) ‘The Cost of Transacting’, Quarterly Journal of Economics, 82(1), February, pp. 33-53.
Hodgson, Geoffrey M. (2015) ‘Much of the “Economics of Property Rights” Devalues Property and Legal Rights’, Journal of Institutional Economics, 11(4), December, pp. 683-709.
Sykuta, Michael E. (2010) ‘Empirical Methods in Transaction Cost Economics’, in Klein, Peter G. and Sykuta, Michael E. (eds) (2010) The Elgar Companion to Transaction Cost Economics (Cheltenham UK and Northampton MA: Edward Elgar), pp. 152-62.
Wallis, John Joseph and North, Douglass C. (1986) ‘Measuring the Transaction Sector in the American Economy, 1870-1970’, in Stanley L. Engerman and Robert E. Gallman (eds) (1986) Long-Term Factors in American Economic Growth(Chicago: University of Chicago Press), pp. 95-149.