The Answer Is Transaction Costs

• When Bribes Become the System: Understanding Lock-In

  Send us a textCorruption 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 create feedback loops through rent-seeking, patronage, and corruption that redistribute resources to entrench elites• Mental models - our imperfect cognitive frameworks - resist change because belief systems are costly to abandon• Lock-in occurs when early institutional choices create path dependencies that make reform nearly impossible• Officials in corrupt systems treat public offices as prebends (sources of personal income) rather than public service positions• In Nigeria, prebendalism meant officials used positions to enrich themselves and distribute benefits to their ethnic communities• Russian corruption intensified post-Soviet era when state salaries plummeted and bribes became survival mechanisms• Reform typically requires massive shocks, external enforcement, or exceptional leadership willing to impose significant costs on corrupt officialsThe schedule is changing, because summer is over. Going forward, we'll have two episodes each month until January - one on Wealth of Nations and one interview. The next interview will be Tuesday, September 9th, and the next Wealth of Nations episode will be Tuesday, September 23rd.Some links:Previous episode on corruption:  Shruti RajagopalanRichard Joseph and "Prebendal" Nigeria Douglass North and transaction costs/lock-inDouglass North on InstitutionsDenzau and North, "Shared Mental Models" (Kyklos)Books o'da'week:Johan Norberg Peak Human: What We Can Learn from the Rise and Fall of Golden AgesGuy Gavriel Kay A Brightness Long Ago California's gigantic political theft of money for "High Speed Rail"If you have questions or comments, or want to suggest a future topic, email the show at [email protected] ! You can follow Mike Munger on Twitter at @mungowitz

  --------  

  25:57

  --------

  25:57
• Adam Smith's Wealth of Nations: Introduction and Book I

  Send us a textAdam 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 productivity through specialization, increased dexterity, and tool development• Smith's famous pin factory example shows how 18 specialized workers produce thousands of times more than individuals working separately• The extent of the market limits division of labor—larger markets allow greater specialization• Smith argues that differences between philosophers and street porters arise from "habit, custom, and education" not innate capacity• While profit is legitimate, Smith criticizes how powerful interests manipulate government to restrict competition• Justice (respecting person, property, and promises) forms the essential foundation for any functioning commercial society• Smith's work intended as a handbook for lawmakers, not ideological advocacy• The Wealth of Nations represents applied moral philosophy addressing how societies become prosperousJoin us next time when we'll examine Book Two of Smith's masterpiece.If you have questions or comments, or want to suggest a future topic, email the show at [email protected] ! You can follow Mike Munger on Twitter at @mungowitz

  --------  

  1:21:33

  --------

  1:21:33
• Second Place Is The First Loser: Strategy Over Speed

  Send us a textThe 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 opportunities for strategic corruption• Jockeys accept bribes up to €80,000 to impede rivals or assist allies, with reputation determining future employment• The "rincorsa" (starter horse) wields extraordinary power in determining when the race begins• Enforcement of bribe agreements relies on reputation, trust, and fear rather than formal contracts• Coming in second place is considered worse than finishing last, leading to public ridicule that can last generations• Neighborhood identities and rivalries date back to medieval times, with memories of betrayals lasting decadesBook o'da'week:  Okay, it's a film.  But it's great!Book o da week:  Il Palio documentary, 2015. Cosimo Spender, director and writer. https://www.imdb.com/title/tt3669520/ If you enjoy learning about the economics of unusual institutions, join us next week for the third installment of our Adam Smith podcast series with Adam Smith Works.If you have questions or comments, or want to suggest a future topic, email the show at [email protected] ! You can follow Mike Munger on Twitter at @mungowitz

  --------  

  42:22

  --------

  42:22
• When Bats Attack: Understanding Insurance

  Send us a textMike 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 marketsInsurance faces two major challenges: adverse selection (who buys insurance) and moral hazard (behavior changes after getting insurance)Deductibles and co-pays help align incentives between insurers and insuredInsurance history dates back 5,000 years to ancient China, Mesopotamia, Greece, and RomeThe "bat-in-mouth disease" case study shows what happens when someone tries to purchase insurance after an incidentTransaction costs explain why dogs sometimes stop climbing stairs and why freezing credit cards--ie, transaction costs--might prevent impulse spending. The piano player in a brothel story, and its history.The book o'da'month is Daniel Flynn, The Man Who Invented Conservatism. Bat in mouth story:  https://www.nbcnews.com/news/us-news/bat-flies-womans-mouth-arizona-costing-nearly-21000-medical-bills-rcna222463Some background on insurance:Kenneth Arrow on the Uncertainty & Welfare Economics of Medical CareAnja Shortland on Kidnap: Inside the Ransom Business"Piano player in a brothel" story origins:https://www.goodreads.com/quotes/93559-my-choice-early-in-life-was-either-to-be-ahttps://barrypopik.com/blog/dont_tell_my_mother_im_a_banker_she_thinks_i_play_piano_in_a_whorehouse Daniel Flynn book:  The Man Who Invented ConservatismIf you have questions or comments, or want to suggest a future topic, email the show at [email protected] ! You can follow Mike Munger on Twitter at @mungowitz

  --------  

  35:09

  --------

  35:09
• Adam Smith's Wealth of Nations: Episode #2--The "Model"

  Send us a textTransaction 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: justice (respecting others' person, property, and promises), beneficence (proper use of what's ours), and prudence (sacrificing present comfort for future well-being)• Self-command turns virtuous intentions into actual proper behavior• Four sources of moral judgment: motive, reaction, convention, and consequence• As societies scale up, we move from moral community (acting from love) to moral order (following rules from their utility)• Smith's "Chinese earthquake" example anticipates the modern trolley problem by revealing how moral agency affects our decisions• The "man of system" tries to impose ideal plans without regard for human nature or gradual change• Smith's egalitarian views positioned economics against slavery and hierarchical social structuresAlso posted, with resources for teaching and learning, at Adam Smith Works, thanks to Amy Willis. If you have questions or comments, or want to suggest a future topic, email the show at [email protected] ! You can follow Mike Munger on Twitter at @mungowitz

  --------  

  57:13

  --------

  57:13

More Comedy podcasts

Trending Comedy podcasts

About The Answer Is Transaction Costs