Transaction Costs and Institutions’ Efficiency: A Critical Approach

ABSTRACT. Institutions cannot “work ” by themselves, that is, without necessary efforts for enforcing, preserving, and improving them. For many economists, these efforts represent the costs of the economic system at work. Nowadays in institutional economics, the costs of running the economic system are generally called “transaction costs.” This article will offer a critical approach on the significance of trans-action costs. This study highlights the necessity of subordinating the efficiency criterion to the ethics criterion, not only in the human action area, but mostly in institutions, as rules of the game in the society. Institutions, Human Action, and Transaction Costs Institutional economics founds itself on recognizing the fact that human action and its results must be fundamentally analyzed in connection with the economic, social, and political rules that govern human action in the society.1 Thus, the economic approach on insti-tutions is focused on identifying the optimal institutional arrangement, given the obvious possibilities of the normative analysis of alternative institutional arrangements (see Eggertsson 1990; Pejovich 1995). Nowadays, economists consider that economic performance depends strongly on the societal institutional framework.ajes_829 254..276 In the institutional approach of Douglass North, the theory of institutions “is constructed from a theory of human behavior com-Cosmin Marinescu is an Associate Professor at the Economics Department, the Academy of Economic Studies, Bucharest. He has published in the fields of institutional econom-ics and Austrian economics. Recently, within the Centre for Economics and Liberty (ECOL; www.ecol.ro), he coordinated the volume Market Economy. Institutional Foun-dations of Prosperity, about free market institutions and building the market econom