This note is a part of my Zettelkasten. What is below might not be complete or accurate. It is also likely to change often.
20th July, 2020

Transaction costs lead to creation of Organizations

The existance of an Organization is required because Transaction costs of the market are often too high to run any operation of decent complexity directly using the free market.

Transaction costs of the market

Imagine a scenario where an entrepreneur has access to an Ideal Market - whatever they wanted to get done is available on the market for the right price - instantaneously and exactly as required. This is an ideal scenario - an ideal market. Reality is not different though, there are many transaction costs in an imperfect market. Read more.

Why Organizations?

An organization can reduce the number of transactions on the market by working internally to produce the same results.

  • By integrating vertically, the organization is able to avoid the transaction cost of the market
  • A corporation is also able to replace the transaction cost of multiple short term contracts with a single long term one (in case of labour - wages)