How Transaction Cost Economics Explains the Resurgence of the Idea of Monarchy in Iranian Public Discourse
by Amin Ghanbari Amirhandeh
Introduction
In times of social, political, and economic uncertainty, some ideas from the past unexpectedly resurface. One striking example is the renewed public discussion around monarchy in today’s Iran. While this might seem purely nostalgic or symbolic, economic theory—specifically transaction cost economics—offers a powerful lens for understanding why certain individuals might gravitate toward centralized authority as a way to simplify complex social and political interactions.
Understanding Transaction Cost Economics
Transaction cost economics (TCE) is a key approach within new institutional economics. It occupies a middle ground in economic thought: engaging with neoclassical, market-oriented perspectives (like Friedrich Hayek and Ludwig von Mises economics) and macroeconomic policy frameworks (like Arthur Pigou and John Maynard Keynes). Its theoretical foundation was first established in Ronald Coase’s seminal work on the nature of the firm (Coase 1937) and later extended in his analysis of social costs (Coase 1960). Oliver Williamson expanded it through organizational governance theory (Williamson 1985), and Douglass North complemented it with institutional analysis on economic and historical performance (North 1990).
At its core, TCE posits that the basic unit of economic analysis is not simply goods or utility, but the transaction: the transfer of rights over property/assets. These rights go beyond ownership in precise legal sense to include actual or prospects of usage, control, income, and transfer (Alchian & Demsetz 1972). Contracts are central, but because human decision-making is bounded in terms of rationality (Simon 1957), contracts are always incomplete. This incompleteness creates opportunism, prompting economic actors to adopt governance mechanisms—such as vertical integration, monitoring, or organizational structures—to reduce uncertainty and risk (Williamson 1985).
Institutions as Cost-Reducing Mechanisms
In this framework, the primary role of institutions is to reduce transaction costs. Institutions include formal rules—laws, regulations, contracts—as well as informal norms—customs, culture, conventions—that make behavior predictable (North 1990). Without such mechanisms, every interaction would require costly negotiation. Infrastructure such as property rights, stable currency, reliable banking, quality standards, and regulated markets are examples of institutional arrangements that lower transaction costs (Arrow 1969).
Why Monarchy Gains Appeal
How does this explain the renewed interest in monarchy? TCE emphasizes that individual preferences are heterogeneous and shaped by subjective perceptions. Motivations may include nostalgia for past lifestyles, psychological reactions to instability, or a belief that centralized authority provides predictability. In institutional terms, when intermediary institutions—like political parties, unions, civil associations, and transparent governance mechanisms—are absent, weak, or inefficient, the “political transaction costs” for citizens rise.
A political transaction is the process through which citizens delegate parts of their rights and authority to governance structures in exchange for stability, security, or efficiency. When information about alternative options is incomplete or missing, and political actors cannot offer credible rules or programs, institutional uncertainty rises. In such situations, some individuals naturally turn to historical or familiar institutions as cognitive shortcuts. Even if these institutions are not objectively efficient, they reduce the perceived cost of predicting and evaluating the future. From a TCE perspective, this is a strategy to reduce information and uncertainty costs—not necessarily an accurate judgment of real efficiency.
However, if alternative political orders are based on vague or informal norms without clear legal frameworks, contractual incompleteness increases, and the risk of opportunistic behavior grows—the very problem TCE warns against (Williamson 1985). Therefore, relying solely on symbols or titles without precise institutional design may actually increase transaction costs beyond the current situation.
Implications for Political Competition
For political actors, the lesson is clear: successful competition depends on reducing citizens’ transaction costs. This involves offering clear political contracts, measurable rules, accountability mechanisms, and stable organizational structures. The clearer and more verifiable future commitments are, the lower citizens’ perceived risk and the more likely they are to accept proposed reforms over turning to historical institutions. Sustainable political competition relies on institutional design that lowers the social cost of trust, not merely slogans or symbols.
Additionally, aligned with Public Choice School, a realistic assumption about political actors and leaders helps: leaders are not idealistic reformers but, like all economic agents, seek to maximize personal benefit and exploit institutional opportunities. Political positions matter because they allow access to public resources. When formal regulatory institutions are weak or absent, the advantage of accessing public wealth increases substantially. Transaction cost economics highlights that the risk of personal opportunism makes the design of transparent institutions, enforceable rules, and accountability mechanisms essential to reduce citizens’ risk and curb political opportunism. (Buchanan and Tullock 1962, Buchanan 1975)
References
Alchian, Armen A., and Harold Demsetz. “Production , Information Costs, and Economic Organization.” American Economic Review 62, no. 5 (1972): 777–95.
Arrow, K. “‘ The Organization of Economic Activity : Issues Pertinent to the Choice of Market versus Non-Market Allocation .’” 1969. https://www.semanticscholar.org/paper/%E2%80%9C-The-Organization-of-Economic-Activity-%3A-Issues-to-Arrow/49600424c52933806dd6f846d89faed9dd9b63c1.
Coase, R. H. “The Nature of the Firm.” Economica 4, no. 16 (1937): 386–405. https://doi.org/10.1111/j.1468-0335.1937.tb00002.x.
Coase, R. H. “The Problem of Social Cost.” The Journal of Law and Economics 3 (October 1960): 1–44. https://doi.org/10.1086/466560.
Commons, John R. “Institutional Economics.” The American Economic Review 21, no. 4 (1931): 648–57.
Commons, John R. “The Problem of Correlating Law Economics and Ethics.” Wisconsin Law Review 8 (1932): 3–26.
North, Douglass Cecil. Institutions, Institutional Change and Economic Performance. The Political Economy of Institutions and Decisions. Cambridge university press, 1991.
Riordan, Michael H., and Oliver Williamson. “Asset Specificity and Economic Organization.” International Journal of Industrial Organization (NETHERLANDS) 3, no. 4 (1985): 365–78. https://doi.org/10.1016/0167-7187(85)90030-X.
Simon, Herbert A. Administrative Behavior, 4th Edition. 4th ed. Free Press, 1997.
Buchanan, James, Tullocl, Gordon, The Calculus of Consent: Logical Foundations of Constitutional Democracy, 1962. https://oll.libertyfund.org/titles/buchanan-the-calculus-of-consent-logical-foundations-of-constitutional-democracy.
Buchanan, James M. The Limits of Liberty: Between Anarchy and Leviathan, 1975 The Collected Works of James M. Buchanan, v. 7 (Liberty Fund, 2000).