On Transaction Costs

Over at CafeHayek, economist Don Boudreaux made a terrific point regarding transaction costs yesterday morning in the context of ongoing parental-leave policy debates:

Our world is full of transaction costs; it’s these that prevent more individualized bargaining over the precise contents of pay packages. But the consequences of transactions costs are no more appropriately regarded as ‘inefficient’ than are the consequences of any other costs. Just as consumers are not willing to pay, say, to bargain individually with Coca-Cola in order to obtain for each consumer bottles of Diet Coke individually customized in size so as more precisely to match each consumer’s exact preferences, workers are not willing to pay to bargain individually with employers in order to obtain for each worker a pay package that more precisely matches each worker’s exact preferences [emphasis added].

Transaction costs function just like any other cost–they ration the willingness of an individual to engage in some activity. They can take the form of financial costs, or, as in Dr. Boudreaux’s example, they can take the form of inconvenience. In either form, they exact a cost above and beyond the price of the good or service one is purchasing.

So, while (say) the fees incurred in buying, selling, or transferring Bitcoin are transaction costs, so, too, is the time spent looking for the perfect find on a clearance rack; finding the right person with whom to barter in a moneyless economy; and commuting an hour one way on a daily basis for work. When transaction costs are high, exchanges don’t take place that would have otherwise, in their absence. But, to Dr. Boudreaux’s point, there’s no reason this should be considered inefficient–it’s simply a rationing mechanism, and self-selected rationing is good. Economic prices perform the same rationing function, even in the absence of transaction costs.

Economic prices are reflective of input costs, but labor and capital costs are no more intrinsically inefficient than the transaction cost associated with doing one thing–driving 90 minutes to your favorite campground–instead of another–roasting marshmallows over the stove and sleeping outside on the trampoline. Value being subjective, it is the individual who determines whether or not the benefit of roughing it overnight at Sage Hen Reservoir outweighs not just the financial costs (gas, equipment, reservation), but also the transaction costs (time spent traveling and setting up equipment, and the frustration of starting and maintaining a fire).

Would it be (subjectively) better if transaction costs were low? Sure–I might go camping more often if it didn’t require any effort on my part–but complaints of inefficiency, whether in terms of economic prices or transaction costs, are essentially just complaints about the amount of surplus enjoyed by individual consumers, and, in the end, surplus is surplus is surplus.