Abstract: In the eyes of new institutional economists, one of an important functions of the institution is to lower the transaction costs serving as the “friction” during the economic operation. In theory, transaction costs will be reduced along with the advancement and improvement of the institution of one country. However, according to Wallis and North (1986)’s estimation, in the last 100 years from 1870 to 1970, rather than declining, the ratio of total transaction costs in GNP in United States was getting higher and higher. The contradiction between the theory (along with institutional progress, the transaction costs should be lower and lower) and the reality ( the measured total transaction costs are getting higher and higher) is called “the Second North Paradox”. This paper argues that the total transaction costs measured by Wallis and North are not the entire transaction costs. On the surface, the measured amount of total transaction costs are rising, but in fact, the “theoretical” total transaction costs are falling, that is, along with the institutional progress, not only the transaction costs per transaction are getting down, the theoretical total transaction costs are falling too, therefore, the so-called “the Second North Paradox” does not exist at all.

Key words: the second North Paradox; transaction costs per transaction; measured total transaction costs; theoretical total transaction costs