May 6, 2015

The epic ping-pong of empty problem and vacuous solution

Comment on 'Transaction Cost Confusion’


You say “Transaction costs were invented by Ronald Coase to help explain why we see business firms littering the economic landscape when orthodox economic theory argues that the marketplace is the superior and unequalled coordinator of economic activity.” (See intro)

That ‘the marketplace is the superior coordinator’ is an assertion that needs proof. No such proof exists. So it is still an open question. Because of this, there is no need at all to invent a new explanation for the existence of the firm.

All the more so, as the correct answer has already been given by Adam Smith. Remember the pin factory? Division of labor and exchange are the two sides of the same coin and reinforce each other. This interaction is the big bang of the market system's vast expansion (see also 2014). Division of labor, clearly, presupposes the firm.

What Coase and Williamson explain is that pigs can fly because they have yellow wings.

“Cunningham in 1891 remarked that in the choice of premises “it is not always easy to tell when a professor of the dismal science is making a joke” and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself.” (Viner, 1963, p. 12)

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2014). Exchange in the Monetary Economy. SSRN Working Paper Series, 2387105: 1–19. URL
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp. 1–22. URL