It is assumed in mainstream economic theory and economic modeling that transactions between economic entities are frictionless. Everyone knows that this isn’t true, but it’s broadly assumed that these transaction costs, which are a wedge between buyer and seller, are not significant to really matter.
That assumption is problematic. Transaction costs are not everything, but they are not nothing either. Consider the SG&A Expenses category of the Income Statement. Basically all of the selling and administrative expenses–sales commissions, accounting and so forth–are internalized transaction costs. Those expenses plus the insurance expense in the general expenses category are often significant components of a company’s operating expenses.
These are often at the front of the line when cost-cutting time comes, because they do not directly contribute to the product or service offered by the company. They represent the cost of doing business, which, since it has a cost, is by definition not frictionless. Since they appear on the face of a required financial statement, these costs must by definition also be materially significant.
Investors, accountants and finance professionals know what ivory tower economists apparently do not: transaction costs are materially significant and ongoing business expenses arising from transacting within the market aka doing business.