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 only place where transaction costs are found in the financial statements, but it is a good clear place to see them. These expenses would not be incurred if the real world involved frictionless transactions as described in economics textbooks.
SG&A Workers
Economics literature on transaction costs traditionally distinguishes between three primary sources in the private sector. They are so-called Type 1 employees, the trade industry and the FIRE industry. The trade industry is wholesale and retail stores. The FIRE industry is finance, insurance and real estate. In the private sector, most if not all of the Type 1 employees’ salaries and costs would be classified as part of the SG&A expense.
These employees have job titles like manager, administrator, sales staff, lawyer, accountant, foreman, inspector, security staff, human relations staff, public relations staff, or clerk. I refer to these company employees as SG&A employees. More generally I refer to them as SG&A workers, which includes both employees and external service providers.
SG&A workers grew 322% as a share of the American economy from 1870 to 1970. Their growth rate in the private sector at 381% was actually higher than the 286% growth in the public sector.
The growth of SG&A workers within the American economy over the past 150 years is the largest single contributor to the growth of transaction costs.
As a fraction of the American economy, the wholesale and retail trade industry grew by only 13%. Even the fast-growing finance, insurance and real estate industry sector only grew by 190% over that hundred year span. The private sector SG&A worker growth rate was double that!