First, the problems in defining the concept of transaction costs are brought to the fore through the identification of three different uses of the term, what we call market transaction costs, supervisory transaction casts and property rights transaction costs. It is argued that market transaction costs cannot actually be separated from property rights transaction costs because property rights are indirectly involved in the generation of market transaction costs. Then, we turn to the problems associated with the analytical distinction between the institutional environment and organizations as players of the game, and more specifically to the treatment of organizations as individual actors. Treating institutions as mere constraints on individual action and organizations as individual actors defies their very nature as institutions while also relegating or ostracizing altogether relations of power and conflict as basic motors of social change.

Second, granted that the operationalisation of transaction costs through quantification and measurement is a sine qua non condition for the validation of the theory, we question the validity of the transaction cost rationale by showing that the concept is inherently unqualified for operationalisation.

Last we examine the validity of the transaction cost concept in explaining the emergence of organizations by focusing on Coase’s and Williamson’s theories of the firm. Regarding the former, it is demonstrated that even in Coase’s own terms the notion of power, in the form of the power to employ, exists both inside and outside the firm. Coase cannot see this and is thus unable to explain how this power came about. This oversight generates a number of difficulties regarding the transaction costs rationale of the emergence of the firm, and hence severely limits the explanatory power of his theory. As far as Williamson’s theory is concerned, the inference is that neither a deliberate design explanation nor a natural selection analogy are applicable in Williamson’s theoretical framework. The first conflicts with the bounded rationality assumption, while the latter cannot explain the emergence of the firm given its functionalist nature and the fact that in order to compete with the market or other hierarchical structures, it has to be already in existence. Thus, Williamson’s analysis cannot in principle explain the origins of the firm as such, as a hierarchical form of organizing production, as opposed to the market contractual form. Williamson’s framework is used rather to elucidate the evolution of hierarchical organizations already in existence, whose actual emergence remains largely unexplained. To sum up, starting from this general theoretical viewpoint and ending up with the concrete problem of efficiency considerations, we pinpoint several theoretical problems associated with the explanation of the emergence of institutions and organizations in transaction cost terms. Our conclusion is that the transaction cost concept cannot provide a sufficient rationale for explaining either the emergence of institutions or the origins of organizations given its static, ahistorical and universalistic nature.