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‘Transaction’ is a word that carries associated taboos. But ‘transaction costs’ is a term of art in economics, which means any cost associated with exchanging value. Because not all human relationships are direct exchanges—strictly speaking—we can extend the logic of transaction costs to cooperation.
Whether the parties immediately get something out of the interaction is not relevant to the question of how costly it is to interact. We can measure transaction costs in time—for example, It took me a couple of hours to find you online. We can measure transaction costs in opportunities foregone. I could have been working on my book instead of waiting in line. Or we can measure transaction costs in monetary terms. I had to pay a brokerage fee to find you.
The essence of the idea—which helps to formulate a principle—is that those entrepreneurial innovations that lubricate cooperation should apply to any aspect of life where people stand to benefit from such cooperation. That insight is perhaps no more apt than in the domain of governance. In other words, governance systems tend to enable or obstruct cooperation. Governments—as species of governance systems—almost universally obstruct.
Yet today, our legacy systems too often raise cooperation costs. Whether in the top-down corporate form or within state bureaucracies—where these forms might once have reduced transaction costs, today, they buckle under structural inadequacies as the world grows increasingly complex.
New institutional economics puts transaction costs squarely at the center of economic thinking, where it should be.
In a certain sense, the Decentralist revolution is an effort to reduce transaction costs in areas where such costs might have been higher historically—such as under various command and control systems. More importantly, though, new rules, tools, and cultures will change human power dynamics so that more people can participate in social, economic, and communitarian life.
And flourish.
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