CONCEPT
Transaction Costs
The costs of defining, protecting, and exchanging property rights — the economic friction whose magnitude determines whether productive exchange happens at all, and whose collapse under AI's language interface has reorganized the institutional landscape.
Ronald Coase asked in 1937 why firms exist if markets are efficient. His answer was transaction costs. Markets coordinate through the price mechanism, but using the price mechanism is itself costly — the costs of discovering prices, negotiating contracts, monitoring compliance, and enforcing agreements. North extended Coase's insight from the firm to the economy: if institutions exist because transaction costs exist, and if institutional quality determines the magnitude of those costs, then the institutional framework is the primary lever of economic performance. North estimated transaction costs consumed roughly forty-five percent of U.S. net national product. The AI language interface did not merely reduce software production costs. It eliminated an entire category of costs that had structured knowledge work since its inception — communication overhead, specification friction, coordination expense. But transaction costs do not vanish from a system; they shift. The net effect depends on what the new costs look like and which institutions manage them.
