The Answer Is Transaction Costs

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We walk through how Chile converts retirement savings into lifelong income and why inflation protection and competition make the design work. Then politics collides with contract law as COVID-era withdrawals test credible commitment and raise transaction costs across the financial system. 

• how AFP accounts build national savings and deep capital markets 
• why a pension is more than a savings account, especially under longevity risk 
• how the renta vitalicia life annuity works and why it is irrevocable 
• what the UF inflation-indexed unit of account does for long-term contracts 
• programmed withdrawal versus annuities, including inheritance and market exposure 
• how the 2004 electronic quotation system reduces shopping costs and corruption 
• how 2019 unrest and COVID pressures drive the 10% retiro laws 
• why the third retiro for annuitants functions like breaking a sold contract 
• what “credible commitment” means for pensions, insurers, and bond markets 
• how the 2025 reform and a court ruling help restore trust 
• economics jokes, a listener letter on data center side payments, and the book pick

Links:

• Assessing Chile's Pension System
• Chile makes major changes to pension system

You can follow Mike Munger on Twitter at @mungowitz 

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We trace how Hebrew goes from a “museum language” to a living vernacular by treating language as a coordination good with huge network effects and real transaction costs. We follow Eliezer Ben-Yehuda’s strategy for lowering those costs, then watch the Technion language fight prove Hebrew can carry science, not just prayer. 
• Hebrew’s revival as a rare case of full language reboot at scale 
• Jewish linguistic diversity and why German, French, Russian, Polish, and Yiddish create coordination barriers 
• Spoken language as a network effect and why “no one wants to go first” 
• Inframarginality and Ben-Yehuda providing a public good as a private mission 
• Hebrew as a neutral focal point that no faction fully “owns” 
• Building missing vocabulary through roots, grammar, and standardization bodies 
• Bootstrapping with a native-speaking child as proof of concept 
• Newspapers as distribution channels that reduce divergence in word choice 
• Backlash from religious authorities and the real enforcement costs of change 
• The 1913 Technikum decision and the Technion language war over German vs Hebrew 
• A listener extension connecting Rawls, insurance, and the veil of ignorance 
• Book recommendation on American founding ideals and proclaiming liberty

You can follow Mike Munger on Twitter at @mungowitz 

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We tell the story of the Chicago dinner where Ronald Coase walks into a hostile room, and by the end everyone votes with him, led by Milton Friedman changing his mind in real time. Along the way, we unpack why transaction costs, not moral blame, often explain when law and institutions shape outcomes. 

• the Aaron Director dinner and the vote that flips 

• why Milton Friedman becomes a political symbol and lightning rod 

• critiques from the right and left on markets, shareholder value, trade, and Chile 

• Pigouvian externalities versus Coase’s reciprocal harm framing 

• the Coase theorem as a benchmark and why real transaction costs make institutions decisive 

• the “twedge” on comparative advantage and the “no free lunch” remix 

• listener question on tax horizons, regime uncertainty, and the permanent income hypothesis 

LINKS:

• Who's afraid of Milton Friedman (a video)
• Milton Friedman Lives (a blog post)
• Steve Medema, "What Happened on Blackstone Ave?"
• Mary Roach, BONK

You can follow Mike Munger on Twitter at @mungowitz 

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We walk through the weirdly powerful math that makes a stable $10,000 profit stream worth $50,000 in one world and $1,000,000 in another. Then we apply the same present value logic to politics and show how unpredictable rules raise transaction costs, inflate the effective discount rate, and freeze long-term investment.
• the discount rate as the hidden driver of valuation
• why the consol bond makes present value intuitive
• P = X / R as a shortcut for long-lived assets
• how low interest rates mechanically boost asset prices
• discount rates as opportunity cost plus inflation plus risk
• regime uncertainty as political risk priced into investment
• how New Deal “experimentation” can prolong a downturn
• modern examples through tariffs tax policy and regulation
• a listener puzzle on why Coke concentrate costs more
Tell me what the answer is.
If anybody knows of a recording of the George M. Cohan play, Broadway musical, I would certainly like to be able to find it.

Michael Munger, "How Interest Rates Set Asset Prices: One Weird Trick," The Daily Economy, May 28, 2025 

Robert Higgs, "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War," The Independent Review, Spring 1997 

Amity Shlaes, The Forgotten Man: A New History of the Great Depression (HarperCollins, 2007)

Franklin D. Roosevelt, Oglethorpe University commencement address, May 22, 1932 

Book o-da-week:  Robert Higgs, Depresssion, War, and Cold War, (reprint) Independent Institute. 

You can follow Mike Munger on Twitter at @mungowitz 

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We argue that “friction” is not always a flaw and can be a deliberate shield against bad collective decisions. We use Buchanan and Tullock’s public choice framework to show why supermajorities, veto points, and other transaction costs can protect rights while still leaving room for day to day governing. 
• contrasting cheap outrage with intentional institutional friction 
• explaining why constitutional amendment rules use supermajorities 
• breaking down external costs versus decision-making costs 
• applying the framework to routine policy versus foundational rules 
• linking cancel culture to collapsed coordination costs and lost buffers 
• spotting designed friction in bicameralism, vetoes, jury unanimity, central bank independence, corporate charters, and treaties 
• testing objections about minority rule, the filibuster, and who classifies “big” decisions 
• discussing ballot initiatives, referenda, and easy-to-amend constitutions 
• sharing listener letters, egg market notes, and a book recommendation 

Links:

• Shruti Rajagopalan on TAITC
• The Senate is the Enemy... (claims it comes from "The West Wing," but this is a story that I heard in the 1980s. West Wing just used it. Strange that people think a TV show is a SOURCE. It was just the MEDIUM, people!)
• Book-o-da-week:  Benjamin Labatut, THE MANIAC

You can follow Mike Munger on Twitter at @mungowitz 

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We test a simple bakery price-fixing pact and watch it unravel, then use that failure to explain how transaction costs shape institutions, from unenforceable contracts to the rise of the corporate trust. We connect the common law doctrine of restraint of trade to the Sherman Act, modern merger fights, and a real-world egg pricing controversy where evidence is hard to untangle from supply shocks.
• a two-baker cartel that collapses as soon as cheating pays
• why courts historically refuse to enforce restraint of trade agreements
• how the trust device unifies control and removes the need to “trust” rivals
• how the Sherman Antitrust Act targets trusts and criminalizes collusion
• why merger discretion creates power and invites rent seeking
• why high prices and parallel pricing are not proof of conspiracy
• how price indexes can reduce transaction costs and also enable coordination
• two antitrust “twedges” that poke at efficiency arguments
• a listener letter on lateness norms and why uncertainty matters
If any listeners have some ideas about it, please do write in.

Links:

• Egg producers settle
• Bartholomae, T.C. (1923). “The Common Law on Restraint of Trade.” University Journal of Business, 1(4), 451–466.
•  Munger, M.C. (2021). “Giants among us: do we need a new antitrust paradigm?” Constitutional Political Economy. https://doi.org/10.1007/s10602-021-09350-w
• Sherman Antitrust Act (1890)
• William Baxter Joke 
• Robert Bork, Antitrust Paradox

You can follow Mike Munger on Twitter at @mungowitz 

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We start with a simple mystery: how the same person can make a proud plan at night and break it in the morning, even while still believing the plan is good. We connect akrasia, free will, and moral responsibility to transaction costs, treating self-control as a contracting problem between competing versions of ourselves. 
• Jordan I and Jordan II as a model of divided preferences over time 
• Hard determinism, libertarian free will, and compatibilism as the main philosophical map 
• Responsibility and punishment as social conventions that reduce coordination costs 
• Aristotle on voluntary intoxication and why blame can attach upstream 
• Akrasia defined as wanting to want the right thing 
• Plato’s knowledge-based denial of akrasia versus Aristotle’s acceptance of weakness of will 
• Paul and Augustine on the internal conflict of the will 
• Time-inconsistent preferences and hyperbolic discounting as a behavioral explanation 
• Commitment devices as credible commitments and transaction cost engineering 
• Odysseus and the sirens as the classic precommitment story 
• Listener letter on military punctuality as costly signaling and institutional discipline 
• Listener letter on recycling labels as regulation creating new transaction costs 

Links and Sources

1. Ainslie, G. (1992). Picoeconomics: The strategic interaction of successive motivational states within the person. Cambridge University Press.  Link: Cambridge University Press — Picoeconomics

2. Aristotle. (1999). Nicomachean ethics (W. D. Ross, Trans.). Batoche Books. (Original work published ca. 350 B.C.E.)  Passage: Book VII (on incontinence/akrasia). Link: Nicomachean Ethics, trans. W. D. Ross (free PDF)

3. Augustine. (1838). The confessions of Saint Augustine (E. B. Pusey, Trans.). John Henry Parker. (Original work written ca. 397–400 C.E.)  Passage: Book VIII, Chapters 8–9 (§§20–21). Link: Confessions, Book VIII, Pusey translation (free full text)

4. Davidson, D. (1970). How is weakness of the will possible? In J. Feinberg (Ed.), Moral concepts (pp. 93–113). Oxford University Press. Link: Oxford Academic — "How Is Weakness of the Will Possible?" (in Essays on Actions and Events) (gated — subscription/institutional access)

5. Dennett, D. C. (1984). Elbow room: The varieties of free will worth wanting. MIT Press. Link: MIT Press — Elbow Room (gated — purchase; excerpts free)

6. Dennett, D. C. (2003). Freedom evolves. Viking.  Link: Internet Archive — Freedom Evolves (gated — free with Internet Archive lending account)

7. Hume, D. (1999). An enquiry concerning human understanding (T. L. Beauchamp, Ed.). Oxford University Press. (Original work published 1748) Passage: Section VIII, "Of Liberty and Necessity." Link: Hume Texts Online — Section 8 (free full text)

8. King James Bible. (2017). King James Bible Online. https://www.kingjamesbibleonline.org/ (Original work published 1769) Passage: Romans 7. Link: Romans, Chapter 7 (KJV) (free full text)

9. Plato. (1967). Protagoras (W. R. M. Lamb, Trans.). Harvard University Press. (Original work published ca. 380 B.C.E.)  Link: Perseus Digital Library — Protagoras (Lamb trans.) (free full text)

10. Schelling, T. C. (1984). The intimate contest for self-command. In Choice and consequence: Perspectives of an errant economist. Harvard University Press.  Link: National Affairs — "The Intimate Contest for Self-Command" (original 1980 essay, free full text) · Harvard University Press — Choice and Consequence (book page, gated)

11. Strawson, P. F. (1962). Freedom and resentment. Proceedings of the British Academy, 48, 1–25. Link: The British Academy — Freedom and Resentment (official publisher page, may be gated)

12. Vaihinger, H. (1925). The philosophy of 'as if': A system of the theoretical, practical and religious fictions of mankind (C. K. Ogden, Trans.). Harcourt, Brace. (Original work published 1911)

Link: Internet Archive — The Philosophy of 'As If' (free full text)

Book-o-da-Week:  Emily Wilson’s translation of Homer’s THE ODYSSEY, 2018, WW Norton. 

You can follow Mike Munger on Twitter at @mungowitz 

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We trace a straight line from a 1697 blasphemy execution to modern cancel culture by focusing on one variable: the cost of turning speech into coordinated punishment. We break down how social media creates common knowledge at near-zero cost, making outrage faster, bigger, and harder to control. 
• Thomas Aikenhead’s case as a story about information and enforcement costs 
• Transaction costs as the hidden limiter on persecution and social punishment 
• The First Amendment limiting state coercion while leaving private sanctions intact 
• Social media as a collapse in the cost of broadcasting accusations 
• Common knowledge as the trigger for coordinated action by strangers 
• Justine Sacco as the early template for modern cancellation dynamics 
• Brendan Eich, Emmanuel Cafferty, James Damore, and PyCon “donglegate” as repeating patterns 
• John Cleese on offense and the urge to control others’ behavior 
• Listener letters on healthcare markets, consolidation, and transaction costs 
• Certificate of need laws and price systems that shape competition

• Amy Poehler's super bowl ad (Dongle!):
• John Cleese on cancel culture

Letters:

• Dr. Anthony Digiorgio, UCSF, Graphic Novel Claim Denied, Off Label Ideas
• Surgery Center of Oklahoma

Book-o-da-week:

• Steven Pinker’s When Everyone Knows That Everyone Knows . . .: Common Knowledge and the Mysteries of Money, Power, and Everyday Life  Scribner, 2025. 

You can follow Mike Munger on Twitter at @mungowitz 

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We tell a story about German academic quarter hours-- akademische Viertel--  and use it to argue that lateness is an economics problem of coordination, incentives, and transaction costs, not just manners. We lay out five rules that predict who shows up late, why the pattern spreads, and how to spot it before you commit to a recurring meeting.
• the “academic quarter hour” as a rule that makes lateness predictable
• lateness as a transaction cost that blocks group goals
• platonic travelers and the habit of leaving no buffer
• five rules of lateness and what each predicts
• why meetings drift into equilibrium lateness over time
• lateness as an externality and prisoner’s dilemma
• incentive fixes from social sanctions to financial penalties
• watch setting quirks and backwards induction as a practical test
• listener letter on medical insurance hiding prices from consumers
• why hospitals were small before 1935 and how sulfa drugs changed that
• letter on permitting payments for solar projects and why people call them bribes
• book recommendation for the punctually challenged

Links:

• Munger, Chron of Higher Ed, 5 Rules of Lateness in Academe 
• Munger, Econlib, The 5 Sorry Rules of Lateness
• New York Times article on "Time Personality"
• U of Michigan's version of the academic quarter hour
  
  

Book-o-da-week:  Never Be Late Again: 7 Cures for the Punctually Challenged
by Diana DeLonzor and Gerry DeLonzor.  Post Madison Publishing    May 19, 2026.

You can follow Mike Munger on Twitter at @mungowitz 

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We try to make sense of a real problem many of us feel: paying a lot for U.S. healthcare while still waiting months to see a doctor. We trace how engineered transaction costs, from the Flexner Report to modern residency caps, restrict physician supply and protect price power while leaving clinicians overworked and patients stuck. 
• getting “fired” by a health system and what it reveals about access 
• why shortages don’t clear when prices rise, and how transaction costs block entry 
• the Flexner Report as quality reform and supply restriction 
• evidence of conflicts of interest and rushed methods behind the Flexner narrative 
• Ruben Kessel’s puzzle on persistent price discrimination in medicine 
• hospital privileges and county medical societies as cartel discipline 
• why advertising bans and professional norms can function as anti-competition tools 
• how residency caps and accreditation keep the bottleneck in place today 
• a listener letter on data center payments as compensation versus bribes 
• book of the week recommendation and a few parting thoughts 

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As I note in the episode, thanks to Dr. Lance Stell, Davidson College Department of Philosophy (emeritus).  Lance offered this note about the epidsode:

There's a footnote to the Flexner report. It killed the Davidson medical college - NC"s first. The school was founded by a DC faculty as a proprietary school. After 10 years operating on campus, it moved to Charlotte where it had a clinical relationship w/ the Good Samaritan Hospital - a black hospital, becoming the first medical school in the country to have such a relationship. I can send you an article about it written by Dr. Eddie Hoover, MD, a surgeon and Editor of NC"s black medical journal. Flexner execrated proprietary medical schools and it was his goal to "close them." His damning review of the Davidson medical School, renamed The NC Medical College, was successful.

Thanks, Lance, I did not know that!  I added that link, below. 

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Links:

• The infamous Flexner Report:  http://archive.carnegiefoundation.org/publications/pdfs/elibrary/Carnegie_Flexner_Report.pdf
• Hiatt and Stockton on the Flexner Report:  "The Impact of the Flexner Report on the Fate of Medical Schools in North America After 1909"
• Hiatt: "Around the Continent in 180 Days." 
• Hiatt: "The Amazing Logistics of Flexner's Fieldwork."
• Kessell, Journal of Law and Economics, 1958:  "Price Discrimination in Medicine." 
• Eddie L Hoover, Catherine R Lewis.  2006.  Journal of the National Medical Association. "Good Samaritan Hospital and the North Carolina Medical College circa early 1900: the first major affiliation between a black hospital and a white medical college."
• Ernest Jones, "The God complex" in Essays in Applied Psycho-Analysis. 

Earliest source I could find for the TWEJ:  https://www.netfunny.com/rhf/jokes/old89/godplay.840.html

PA data center story: https://www.thecentersquare.com/pennsylvania/article_3b615fd8-5d36-45c4-bfb6-4a3162104f0b.html

Book-o-da-week:  Daniel Hannan, Inventing Freedom, Broadside Press. https://www.amazon.com/Inventing-Freedom-English-Speaking-Peoples-Modern/dp/006223174X/

You can follow Mike Munger on Twitter at @mungowitz