Wednesday, 25 January 2012

Odd things you read

I've been reading parts of Roger Backhouse's book "The Ordinary Business of Life: A history of economics from the ancient world to the twenty-first century". From what I've read thus far the book is, by and large, a good read for the general reader with an interest in the history of economic thought. But every so often you come across something strange. For example at one point Backhouse writes,
Politically, the Austrians were conservatives [...].
How you can conclude that economists like Mises, Hayek or Rothbard were conservatives I'm not sure. Mises, for example, wrote a book on "Liberalism: The Classical Tradition" while Hayek wrote a very famous essay on "Why I'm Not a Conservative". All this seems very non-conservative to me.

Later Backhouse writes,
The term 'transaction costs' was first used by Marschak in 1950, but the idea has a long history.
Actually the term was used at least 10 years before Marschak. Tibor de Scitovszky in an article - A Study of Interest and Capital - published in the journal Economica in 1940 wrote,
One reason must be liquidity preference, another, perhaps equally important one, seems to be the high transaction costs (brokerage charges, stamp duties, commissions, etc.) on long-term securities. (Emphasis added.).
The idea of transaction costs or frictions was explained by John Hicks in 1935,
The most obvious sort of friction, and undoubtedly one of the most important, is the cost of transferring assets from one form to another
Backhouse also writes that
Transaction costs are the costs of transferring ownership from one person to another.
Coase pointed out that activities could be organized in two ways. One is through the market. The other is by management within the firm. Both methods involve transaction costs, but the costs are different.
If the costs are different then I would think one of them isn't a transaction cost. In fact I would interpret Coase as saying only the market costs are transactions costs. In his 1937 paper "The Nature of the Firm" Coase attributed the existence of the firm to the cost of using the price mechanism and Coase's point about about firms is that they suppress the price mechanism. Costs inside a firm are management costs or some such thing.

Related, if transaction costs are defined as the costs of transferring ownership - which seems reasonable - then how can costs within a firm be transaction costs? Ownership isn't transferred within a firm.

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