Transaction Costs, Social Costs and Open Systems: Some Common Threads

The present paper draws upon the open systems perspective to identify the common systems‐theoretic core of two schools of modern economic thought, the new institutional economics and the heterodox institutionalism. This core is shown to be in the argument that the maintenance of complexity requires appropriate self‐regulatory mechanisms. While the new institutional economics focuses on the technological complexity maintained by corporate hierarchies, the heterodox institutionalism is concerned with the civilizational complexity that needs to be maintained by broader self‐regulatory institutions of the public and nonprofit sector. This argument highlights the complementary and paradoxical relationship between the concepts of transaction costs and social costs analyzed by the respective schools. Corporate hierarchies may successfully exercise their self‐regulatory role by economizing on transaction costs, yet in doing so they generate social costs that are reducible through the self‐regulatory activity of public and nonprofit institutions.