Market transactions

is, market institutions restrict our behavior in voluntary exchange relations with strangers, in a way similar to how restrictions asking for reciprocity, which we habitually obey, restrict our behavior in relations with perceived relatives.

These restrictions allow us to organize a division of labor on a much broader scale than could be done through reciprocity and kinship considerations alone.

transaction very far away, from how it is commonly understood. Thus, if the market economy is understood as a way to organize transactions, what goes on under autarchy could not be described as a market activity.

When we move from a state of autarchy to an exchanging (market) economy, small uniform societies start trading with each other. We say uniform societies because it is not exactly individuals that employ autarchy, but small groups of individuals, which already have developed a division of labor within the group. In these groups – usually families or tribes – cooperative solutions are secured by reciprocity or kinship considerations, i.e.

Hayek’s first and second rules.

Transaction costs

Now that we have discussed how transactions are understood here, we ought to discuss also the concept of transaction costs. It is firmly associated with Ronald Coase, who describes it as “…cost to using the price mechanism”

(1937:390). From Coase’s discussion, Carl Dahlman (1979:148) has elaborated a functional taxonomy in which three categories of transaction costs can be distinguished: search and information costs, bargaining and decision costs, policing and enforcement costs. I would like to add that the words themselves imply a distinction too: “transaction” refers to certain situations of human interaction. That is, while a purchase at a supermarket is a transaction, this is normally not the case when you exchange benefits with your parents or children. Just a little bit of introspection is required to see this. You do exchange benefits with your children: on the one hand, you provide them with housing and meals, while on the other hand, you have the pleasure of watching them grow up and in time, they may even grant you grandchildren. However, I seriously doubt that you would call such an exchange of benefits transactions. In short, we ought not to stretch the meaning of the word transaction too far from how it is commonly understood, at least we will not do that here.

than the act of individual optimization; Buchanan (1964) contains a widely

To sum up this discussion, we can say that transaction costs are costs associated with voluntary exchanges in situations where neither inclusive self-interest nor reciprocity is necessarily enough to induce the transaction participants to commit themselves to honest behavior. We could also call this transactions between strangers, or people who perceive themselves as strangers.

Even in trade between strangers, exchange may still be possible without applying Hayek’s third kind of rules, i.e. what we call market institutions. In some very simple cases such as direct barter, where two goods with immediately recognizable quality and value are traded, exchange leaves no room for opportunistic behavior and is therefore straightforward.³⁷ Another way to put it is to say that if property rights could be perfectly delineated, there would be no transaction costs. Yoram Barzel (1989) has developed transaction costs economics along this line. If we are able to speak about particular rights instead of goods or services, which in fact are bundles of rights, a more precise analysis can be done. However, to our purposes, I do not find this higher degree of precision necessary, although it is perfectly consistent with the analysis carried out here. Markets where goods with immediately recognizable quality and value are traded have also been categorized as self-enforcing markets. These markets require nothing more than the potential gain from exchange and the physical possibility for exchange. Mancur Olson (2000:174):

The argument here is that some types of markets regularly emerge whether or not the participants have anything in common, and sometimes even when participants have antipathy toward one another. These markets emerge spontaneously and some of the are literally irrepressible. I call them self-enforcing markets.

recognized statement of this opinion.

37 Williamson (1985). The term opportunistic behavior describes man’s tendency, in contractual relations, to take advantage of a superior position concerning information, skills or whatever factor that is relevant to their relative strength.

These markets do not have to exclude transaction costs. On the contrary, the transaction costs can be quite high. Nevertheless, if there is enough to gain from an exchange, i.e. if there is a sufficiently high quasi-rent to appropriate, it will take place. Neither is it true that these markets are independent of institutional arrangements; they will be different under different sets of institutions. The point is that they need no supporting institutions to emerge; they do not need what we have labeled Hayek’s third kind of rules.

We will use the time dimension to see why some transactions are possible in the absence of institutions that reduce transaction costs, while others are not. In our example above of pure barter, costs for enforcing the transaction are low due to the transaction’s double simultaneous character. The label -double simultaneous character - refers to the fact that both payment and value evaluation is completed instantaneously. For a transaction of double simultaneous character, only property rights have to be recognized. However, transactions, in which payment is immediately secured and the value immediately recognized are very rare in modern society, both non-simultaneous payment and non-non-simultaneous quality evaluation is standard, both naturally following the division of labor. With the emergence of a developed division of labor, producers and consumers become increasingly separated both geographically and in their knowledge of the quality of a product.

If we see transactions in this way we infer that transaction costs are coupled with the time dimension – without any sequentiality, a transaction does not have any transaction costs. Payment becomes an issue first when there is sequentiality in the exchange of benefits, and the same holds for value evaluation. By sequential transaction, we refer to any transaction, or exchange, in which not all duties, by both parties, are fulfilled at the moment of transaction. The term sequential transaction is more general than the term sequential contract, since for the latter we demand that the nominal price is predetermined.

This suggests another way of logically distinguishing between two major groups of transaction costs: costs for securing payment and costs for finding out the value of the traded products. Finding out the value, in turn, involves both finding a ‘proper’ value of the products, given their quality, and finding out their quality.³⁸