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We connect Adam Smith’s moral psychology to the modern idea of transaction costs and argue that the biggest frictions in markets start with the cost of understanding other people. We show how sympathy, propriety, self command, and reputation turn separate perspectives into workable cooperation and why justice is the real precondition for a stable commercial order. 
• why transaction costs always exist and why institutions matter when exchange is costly 
• a brief history of the term from Coase to an early use in Scitovsky 
• transaction costs as asymmetric information and the cost of social coordination 
• Smith’s epistemic distance and why sympathy requires imaginative effort 
• propriety as social calibration through the impartial spectator 
• self command as the price of being socially intelligible 
• commerce as a practical school for restraint, trust, and predictability 
• the prudent man as a model of conduct that reduces suspicion and monitoring 
• Buchanan’s moral community, moral order, and moral anarchy as lenses on social stability 
• why society can survive without beneficence but not without justice 
• a listener’s college admissions case where interviews act as a separating equilibrium and improve aid allocation 

Links:

• Liberty Fund eBook--Theory of Moral Sentiments (PAGES DO NOT MATCH UP WITH PRINT EDITION!)
• TAITC with Steve Medema, on Coase and Transaction Costs
• Dan Klein and Russ Roberts on Theory of Moral Sentiments
• Tibor Scitovsky, 1940, Economica paper
• Gustavo Dudamel’s ‘the wealth of nations’ Melds Opera and Economics - Bloomberg 

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