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The Answer Is Transaction Costs

"The real price of everything is the toil and trouble of acquiring it." -Adam Smith (WoN, Bk I, Chapter 5)In which the Knower of Important Things shows how transaction costs explain literally everything. Plus TWEJ, and answers to letters.If YOU have questions, submit them to our email at taitc.email@gmail.comThere are two kinds of episodes here:1. For the most part, episodes June-August are weekly, short (<20 mins), and address a few topics.2. Episodes September-May are longer (1 hour), and

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54:38

Adam Smith's Wealth of Nations: Episode 4--Capital...

The Answer Is Transaction Costs ·

2025/09/23

Send us a text Book Two of Adam Smith's "The Wealth of Nations" provides the conceptual foundation for understanding how commercial society sustains growth through capital accumulation and the employment of stock. Smith challenges common misconceptions about wealth creation and offers profound insights on the role of capital in economic development. • Capital is not capitalism – Smith wrote before "capitalism" was invented, using the term "stock" to describe accumulated resources • Division ...

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68:39

The Innovation is the Exchange Itself!

The Answer Is Transaction Costs ·

2025/09/16

Send us a text Chris Cornette, a longtime securities trader who grew up in the business, reveals how the most important innovation that made US capital markets preeminent in the world was the exchange itself. • Cornette's father worked in the P&S (Purchase and Sales) department on Wall Street, eventually becoming the controller of an American Stock Exchange specialist unit • The original Buttonwood Agreement from 1792 created exclusivity among traders that helped establish trust in the m...

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25:57

When Bribes Become the System: Understanding Lock-In

The Answer Is Transaction Costs ·

2025/08/26

Send us a text Corruption persists not because people like it, but because it becomes embedded in the incentive structure of the state, creating feedback loops that reinforce themselves and resist reform. • A prebend is a type of benefice historically given to clergymen, now a useful concept for understanding corruption in developing nations • Douglas North extended Coase's concept of transaction costs to explain why institutions matter in economics and politics • Bad institutions crea...

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81:33

Adam Smith's Wealth of Nations: Introduction and Book I

The Answer Is Transaction Costs ·

2025/08/19

Send us a text Adam Smith's "The Wealth of Nations" developed from decades of lectures on jurisprudence, examining how market exchange creates prosperity through division of labor and specialized skills. • Two core observations drive Smith's thinking: humans seek approval from others and have a propensity to "truck, barter and exchange" • Exchange is Smith's key concept—not just for goods but for ideas, sentiments and social coordination • Division of labor dramatically increases productivit...

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42:22

Second Place Is The First Loser: Strategy Over Speed

The Answer Is Transaction Costs ·

2025/08/12

Send us a text The ancient tradition of Il Palio in Siena showcases a complex system of strategic corruption, neighborhood rivalries, and high-stakes horse racing that has endured for centuries. This 90-second race around Siena's central piazza involves extensive bribery, intense negotiations, and centuries-old vendettas that make speed secondary to political maneuvering. • Horse assignments determined by lottery prevent wealthy neighborhoods from buying fastest horses but create opportuniti...

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35:09

When Bats Attack: Understanding Insurance

The Answer Is Transaction Costs ·

2025/08/05

Send us a text Mike Munger explores insurance economics through the lens of transaction costs and risk management, culminating in an amusing case study about "bat-in-mouth disease." Insurance transfers risk from individuals to larger pools, reducing the expected variance of outcomesThe fair price of insurance equals expected value (probability × potential loss) plus transaction costsInformation asymmetry, subjective risk valuation, and strategic behavior complicate insurance marketsInsuranc...

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57:13

Adam Smith's Wealth of Nations: Episode #2--The "Model"

The Answer Is Transaction Costs ·

2025/07/29

Send us a text Transaction costs provide the key to understanding Adam Smith's complete philosophical system and how his two great works form an integrated whole. • Smith's two essential claims: humans desire to learn proper behavior and have an innate propensity to truck, barter, and exchange • Sympathy in Smith's view means synchronizing feelings with others—not perfect emotional matching but sufficient "concords" for social harmony • Three core principles guide proper behavior: just...

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57:21

Adam Smith's Wealth of Nations: Episode 1 (Background)

The Answer Is Transaction Costs ·

2025/07/22

Send us a text (N.B.: This episode is cross-posted at our partner site, Adam Smith Works. There are lots of resources and background material there, if you want to delve deeper) The Scottish Enlightenment emerged as a remarkable intellectual movement that shaped modern economics, philosophy, and social science, with Adam Smith at its center developing a dual theory of human nature through his two masterworks. • Scottish Presbyterian education fostered literacy and critical inquiry desp...

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16:47

Nnnnooooo one expects transaction costs!! The...

The Answer Is Transaction Costs ·

2025/07/15

Send us a text Mike Munger explores how Monty Python brilliantly illustrated transaction cost economics through their legendary comedy sketches. The British comedy troupe's most famous routines provide perfect, hilarious examples of the frictions that make economic interactions costly and complicated in the real world. • Three definitions of transaction costs from Ronald Coase, Douglas North, and Oliver Williamson • The Dead Parrot sketch as an illustration of ex-post recontracting problems ...

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16:25

The Engineers of Exchange: Middlemen, Part Deux

The Answer Is Transaction Costs ·

2025/07/08

Send us a text Middlemen are not parasites but essential "engineers of exchange" who create value by connecting buyers and sellers who might never find each other otherwise. • The word "monger" (and Munger) comes from a Saxon root--Mancgere-- meaning trader or merchant • Middlemen historically seen as parasites for buying cheap and selling dear without improving products • 11th-century "mancgere" traders defended their value despite not changing the goods they sold • RA Radford's 1945 POW ca...

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18:47

FA Hayek: Price Whisperer

The Answer Is Transaction Costs ·

2025/07/01

Send us a text The price system solves a profound coordination problem by communicating dispersed knowledge that no central planner could ever fully access or comprehend. We explore Hayek's insight about how prices serve as both information and incentives, allowing self-interested actions to inadvertently benefit society. • The "knowledge problem" – why information needed for economic decisions is dispersed among millions of individuals • Tale of two farmers – how profit-seeking Mo unknowing...

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19:20

The Price of Pennies: Make or Buy?

The Answer Is Transaction Costs ·

2025/06/24

Send us a text The make-or-buy decision is a fundamental aspect of economics that applies to businesses, households, and nations, with the U.S. penny providing a fascinating case study in economic inefficiency. • It costs 2.72 cents to manufacture one penny, representing a loss of 1.7 cents per coin to taxpayers • The U.S. Treasury loses between $85-120 million annually due to penny production costs • There are approximately 130 billion pennies in existence, but only 5-10% actively circulate...

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11:01

Pretty Pigs and Talking Dogs

The Answer Is Transaction Costs ·

2025/06/17

Send us a text How should we decide which political-economic systems are best for organizing society? Let's peer through the lens of the "Pretty Pig Problem," which highlights the flaws in comparing the actual implementation of systems we dislike with idealized versions of systems we prefer. The PPP shows that we must compare real-world options rather than theoretical ideals. Some details: • Only three social systems are viable at scale: authoritarianism, capitalism, and democratic so...

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21:06

Barking Cats: On the "Nature" of Bureaucracy

The Answer Is Transaction Costs ·

2025/06/10

Send us a text Transaction costs are the friction in the gears of society, but the worst transaction costs are the ones that reflect government failure. You can see it in ever cliche about government, from the dreaded DMV lines to the passport control bottleneck. Drawing on Milton Friedman's "Barking Cats" essay from 1973, I explore why bureaucracy remains fundamentally immune to reform efforts, regardless of which political party holds power. The frustrating reality is that bureaucracies op...

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22:32

Pins: Division of Labor is Limited by Transaction Costs

The Answer Is Transaction Costs ·

2025/06/03

Send us a text Adam Smith's pin factory example from "The Wealth of Nations" demonstrates how dividing labor into specialized tasks dramatically increases productivity. Ten workers specializing in different aspects of pin-making could produce 48,000 pins daily, while individually they might struggle to make even 20 pins each—a productivity increase of at least 240 times. This division of labor, Smith argued, is limited by the extent of the market. Transaction costs—expenses associated with e...

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80:55

Commerce and Sociology: Novak on Entangled Political...

The Answer Is Transaction Costs ·

2025/05/27

Send us a text What happens when we stop seeing politics and markets as separate spheres and start recognizing their deep entanglement? Mikayla Novak, senior fellow at the Mercatus Center, challenges conventional economic thinking in favor of Dick Wager's "entangled political economy." Drawing from her fascinating career path through Australia's Treasury, free market think tanks, and her pursuit of multiple courses of study, Novak offers unique insights into institutional economics and polit...

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68:00

The Paradox of Political Rationality: Lynch

The Answer Is Transaction Costs ·

2025/04/29

Send us a text Why do harmful policies like tariffs keep coming back despite universal condemnation from economists? The answer lies in the dynamics of collective action and concentrated interests. In this eye-opening conversation with G. Patrick Lynch, Senior Fellow at Liberty Fund, Mike Munger explores the fascinating world of public choice theory and how it explains some of democracy's most persistent puzzles. Lynch, a self-described "popularizer of public choice," breaks down complex eco...

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56:55

Curation Bubbles, Verification, and the Splintering...

The Answer Is Transaction Costs ·

2025/03/26

Send us a text What happens when we no longer consume scarce information through trusted, verified institutions, but instead through an abundance of unbundled content without context or curation? John Green, rising star in political science from Duke University, takes us on a tour of the rapidly evolving landscape of political information. Green challenges conventional wisdom about how ideologies function, arguing they're not so much coherent philosophical systems as they are socially ...

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65:12

The Socialist Generation Debate

The Answer Is Transaction Costs ·

2025/02/25

Send us a text Join economist Peter Bettke as he discusses how transaction costs impact market efficiency and our everyday decisions. We delve deep into historical examples, particularly the Soviet Union, to highlight the consequences of centralized planning versus individual market actions. Through engaging anecdotes and rigorous analysis, Bettke reveals why understanding transaction costs is essential for navigating the complexities of modern economies. We also explore the evolving d...

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63:51

Transaction Costs and Constitutions: India's...

The Answer Is Transaction Costs ·

2025/01/28

Send us a textWhat if transaction costs could shape entire political and economic systems? Join us for an insightful discussion with Shruti Rajagopalan, a senior research fellow at the Mercatus Center, as she takes us through her fascinating journey from the University of Delhi to George Mason University. Her research on India's economic liberalization shaped her understanding of economics and public choice theory, and now she is looking at the Indian Constitution as a subject of study. She s...

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