The Answer Is Transaction Costs

• FA Hayek: Price Whisperer

  Send us a textThe 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 unknowingly serves society better than altruistic Al• Markets generate information through commercial processes that otherwise wouldn't exist• Goodhart's Law – when measures become targets, they cease to be good measures• Soviet planning failures – absurd outcomes like factories producing single giant nails to meet weight quotas• Recycling pennies – potential approaches as the US phases out penny productionMentioned in the podcast:FA Hayek, "Use of Knowledge in Society" (AER, 1945) Michael Munger, Socialist Generation Debate"Goodhart's Law""What Do Prices Know That You Don't?"Ross Kaminsky, of KOA:iHeart RadioSegments with RossRoss on X (@rossputin)Book'o'da'week! Three suggestions (but mostly Red Plenty!)Paul Craig Roberts' "Alienation and the Soviet Economy" Alec Nove's "The Economics of Feasible Socialism"Francis Spufford's "Red Plenty"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

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• The Price of Pennies: Make or Buy?

  Send us a textThe 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• Most pennies end up sitting idle in jars, drawers, and coin collections after minimal use• Arguments against pennies include production costs, inflation reducing value, transaction inefficiency, and environmental impact• Canada successfully eliminated the penny in 2012, rounding cash transactions to the nearest five cents• A potential alternative: buying back existing pennies at a price below manufacturing cost• The Federal Reserve could implement a system paying $1.50 for 100 pennies, still saving over the $2.72 production cost• This system would utilize the billions of idle pennies while maintaining the existing distribution infrastructureGrass seed:  Expensive!Book'o'da'week: Abortion, Baseball, and Weed Join us next week on Tuesday, July 1st for a new episode with a fresh topic, letters from listeners, and of course, a hilarious new TWEJ.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

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• Pretty Pigs and Talking Dogs

  Send us a textHow 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 socialism• Every system has both an ideal form and a corrupted form that must be considered• The "Pretty Pig Problem" highlights our tendency to unfairly compare real systems to idealized alternatives• People on the left note market problems and conclude state intervention is necessary without examining real state actions• People on the right highlight state problems and assume markets are better without considering actual market performanceAnd....TWEJ!  And Book'o'da'week!Listen next Tuesday, June 24th, for a new episode of Tidy C with a new topic, letters, and another hilarious TWEJ.LINKS:Peter Boettke on EconTalk and a "Living Economics"Brooks' Law of Software EngineeringIf 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

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  11:01
• Barking Cats: On the "Nature" of Bureaucracy

  Send us a textTransaction 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 operate with completely different incentives than private businesses. While companies balance money costs against convenience to attract customers, government agencies focus solely on their budgets while taxing citizens with enormous "trouble costs." North Carolina's DMV perfectly illustrates this dysfunction—appointments require six-month waits while the state proudly touts its budget savings. Most maddening is that these aren't even genuine services, but rather artificial permission requirements the government imposes before allowing us to live our lives.This represents a textbook government failure—what economists call a Pareto inferior outcome. Most citizens would gladly pay slightly more in fees or taxes to avoid wasting hours (or months) of their lives in bureaucratic purgatory. That additional revenue could easily fund more staff and faster service. Yet the system has no mechanism to capture these preferences or respond to them.The problem isn't partisan, and it can't be fixed by shuffling leadership or staff. As Chris Rock might say about bureaucracy—"that tiger ain't go crazy, that tiger went tiger." Bureaucracy simply acts according to its nature. Reformers who believe they can fundamentally change how these institutions function are like people who want cats that bark—they fundamentally misunderstand the beast they're dealing with.Listen in for insights on why bureaucratic inefficiency persists despite our best efforts, complete with revealing (but not really funny) quotes from political thinkers ranging from Schumpeter to Trotsky. Have your own bureaucratic horror story to share? Let me know in the comments or on social media.Links:Friedman article 1973Keech and Munger article 2015Chris Rock, "Tiger!"Parkinson's LawMichael Munger: The "Trouble Tax"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

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  21:06
• Pins: Division of Labor is Limited by Transaction Costs

  Send us a textAdam 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 exchanging goods across distances—determine this market extent. As railroads, steamships, and eventually air freight reduced these costs, pin manufacturing evolved from numerous small local producers to global consolidation. The largest pin producer today, Prim-Dritz Corporation (headquartered in South Carolina), conducts most manufacturing in Asia. Modern pin factory workers now produce approximately 800,000 pins daily—200 times more than in Smith's era.This transformation wasn't about "exporting jobs" but rather the natural evolution of specialized production. Multiple attempts to form price cartels in the pin industry failed as producers leveraging greater division of labor could always undercut competitors. The pattern we see in pins repeats across countless industries: as transaction costs fall, markets expand, allowing for increased specialization and productivity.Understanding this relationship between division of labor and market size helps explain why some manufacturing concentrates geographically, why attempting to "bring back" certain industries is economically challenging, and why consumer prices have fallen for many goods. Smith's insight continues to provide a framework for understanding economic trends in our increasingly interconnected global economy. Links:Dutton, H. I., and S. R. H. Jones.  “Invention and Innovation in the British Pin Industry, 1790-1850.”  British Business History.  57 (1983):  175-193. Jones, S. R. H.  “Price Associations and Competition in the British Pin Industry, 1814-40.”  Economic History Review.  26 (1973):  237-253.   Jones, S. R. H.  “Hall, English, and Co., 1813-41:  A Study of Entrepreneurial Response in the Gloucester Pin Industry.”  Business History.  18 (1976): 35-65.  Liberty Fund: Adam Smith’s Pin Factory. McNulty, Mary.  “How Straight Pins are Made.”  How Products are Made.   ENotes.  Pratten, Clifford J.  “The Manufacture of Pins.”  Journal of Economic Literature.  18 (1980):  93-96. Stigler, George J.  “The Division of Labor is Limited by the Extent of the Market.” Journal of Political Economy, 59(1951): 185-193. 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

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