During the Great Depression, British economist Ronald Coase wrote a famous essay on the nature of the firm or company. As with America at the time, many free-market economies were also enduring a severe and difficult economic depression. The Soviet Union, however, was growing to become a significant industrial economy. This led to a debate […]
Frictionless Transactions Are an Economics Textbook Myth
It is assumed in mainstream economic theory and economic modeling that transactions between economic entities are frictionless. Everyone knows that this isn’t true, but it’s broadly assumed that these transaction costs, which are a wedge between buyer and seller, are not significant to really matter. That assumption is problematic. Transaction costs are not everything, but […]
Transaction Costs and SG&A Expenses
Selling, General or Administrative Expenses One way to see how economic transaction costs are internalized within a company is in the SG&A Expense lines of a company’s income statement. All of the selling and administrative expenses are internalized transaction costs, and so is the insurance expense within the general expenses category. This is not the […]
SG&A refers to Selling, General or Administrative expenses. This is an accounting term that refers to a line on the Income Statement. From an economist’s perspective, these are essentially all transaction costs except for General Expenses other than insurance. Selling Expenses Selling expenses are a company’s costs incurred to interact with its customers. These include: […]
Why are managerial employees incentivized to maintain social networks with low social trust?
Company Size and Corporate Strategy Company size is a strategic decision. This decision, like all corporate strategy decision, is made by examining a company or nonprofit organization’s external environment. Coase’s theory of the firm tells us that big companies are big because they have decided to take in-house tasks that could otherwise have been performed […]
