Saving "the Market” out of Cambridge: “Transaction Costs”
“Theories are approximations. Nothing is completely anything,” or so does the Nobel-laurate Eugene Fama quip. He is very true: At best, laws, principles and theories in science are approximations across the space or tendency over the time. There are two great reasons for such incompleteness: one is difficulty in specifying and defining the environment; the other presence of frictions. In conjunction with our economic activities in general and market trade in particular, the one may be dubbed as “imperfect knowledge” and the other “transaction costs.” The law of one price is a rough, very rough, approximation. First, we do not have the complete knowledge conducting arbitrage, interspatial, intertemporal or inter-substitutive. For instance, we do not know for sure prices at Walmart, Trader Joe’s and the other alternative sellers. Moreover, we h...