The growing importance of transaction costs

Statistics: Production costs v. transaction costs in the US GDP

Introduction: Key message: In modern economies transaction costs have become equally (and perhaps more) important than production costs. This is quite a development considering that early economic theory (e.g., the perfect market economy model) focused entirely on production costs assuming that transaction costs did not exist. Implication for economic research: It has become relatively more sensible to do research in transaction cost dynamics rather than production cost dynamics. This is perhaps also contributing to the surge of interest for research in corporate governance that clearly has more to say about transaction cost dynamics rather than production cost dynamics. The method used to calculate the numbers in the table below is roughly this: For each sector in the national account the number of workers in different occupations and a percentage of transactional work in each occupation is estimated. Then the salaries of these workers have been used to calculate the transactional part of the GDP in each sector. The weighted average of these figures is the numbers shown in this table. To illustrate, the following occupations have been deemed to be 100% transactional: accountants, lawyers & judges, personal & labor relations, farm managers, managers, clerical, sales workers, foremen, inspectors, guards, police, military, and postal service. Industries with many non-transactional jobs are: agriculture, mining, construction, manufacturing, and yes even transportation.

Year	Transaction costs from private sector	Transaction costs from public sector	Total transaction cost sector in % of US GDP
1870	22.5%	3.6%	26.1%
1890	29.1%	3.6%	32.7%
1910	31.5%	3.7%	35.2%
1930	38.2%	8.2%	46.3%
1950	40.3%	10.9%	51.2%
1970	40.8%	13.9%	54.7%

Source: Wallis, J., and D. C. North (Nobel laureate in economics) [1986, page 121]. “Measuring the Transactions Sector in the American Economy,” in Long Term Factors in American Economic Growth, S. Engerman, and R. Gallman eds., University of Chicago Press.