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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 

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We assess Adam Smith’s enduring ideas—moral authorization of commerce, division of labor, emergent order—and confront where his optimism breaks: how democratic politics and business fuse to create monopoly privilege. The result is a maintenance‑intensive commercial order that needs competition defended, not assumed.

• presumption for markets under secure property, justice, and competition
• division of labor as the main engine of productivity and growth
• invisible hand reframed as emergent order, not automatic virtue
• critique of mercantilism, monopoly privilege, and rent seeking
• limited but real state functions: defense, justice, public works, education
• motivational symmetry and public choice constraints on government
• trade clarity: buy where cheaper, specialize, gains from exchange
• competition as a public good that must be defended

Happy 250th birthday, Wealth of Nations

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

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We walk through Book Five of The Wealth of Nations to map a state that defends, adjudicates, and builds wisely, then pays for it without killing growth. From militias to standing armies, fee-based courts to salaried judges, turnpikes to basic schooling, and taxes to debt, we test what holds up now.

• defense as a professional, civilian-controlled standing army
• justice as predictable law and salaried judges
• public works funded by user fees where feasible
• education to offset division of labor’s civic costs
• incentives in universities and churches
• four tax maxims and ability to pay
• why land taxes beat mobile capital taxes
• state property and monopolies as bad revenue
• debt, consols, and fiscal illusion
• Smith with Hume and public choice echoes

We do have one more episode, which is a summing up and taking stock of why the Wealth of Nations still matters today. It will post Tuesday, February 24th, 2026.

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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Smith closes Book IV by dismantling mercantilism through the lens of colonial policy, monopoly, and rent seeking, then weighs physiocracy against the system of natural liberty. We trace why colonies grew despite Europe, not because of it, and how “wealth as money” broke policy and fueled war.

• mercantilism’s definition of wealth and the balance of trade myth
• monopoly and bounties as tools for concentrated gains
• chapter 7 on colonies as a case study in institutional design
• free ports versus exclusive companies and growth outcomes
• enumeration, navigation acts, and distorted incentives
• defense costs and the arithmetic of empire
• the “nation of shopkeepers” argument and public choice
• draconian wool laws, smuggling, and consumer losses
• physiocracy’s insights and errors, sector favoritism
• the system of natural liberty as Smith’s alternative

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

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We trace how Alex Schuessler, the once and once-again President of SmartEquip--also a scholar of expressive choice!--built a platform that makes machines more profitable by erasing the friction between parts, service, and uptime. The rental economy, Japan’s utilization model, and IoT diagnostics reveal why transaction costs, not price tags, decide who should own and who should rent.

• rental vs sharing and why property rights matter
• how serial-number specific data kills errors and downtime
• why parts discounts matter less than service speed
• Japan’s high saturation rental market and long lifecycles
• sensors, IoT, and AI for damage attribution and prevention
• decommoditizing parts through integrated workflows
• Coasean boundaries of the firm and renting incentives
• why RB Global acquired SmartEquip to span the lifecycle
• the back-office puzzle of bespoke systems vs SaaS

“Next week: Book 4, chapters 7–9 from The Wealth of Nations”

• (Parts is Parts, from Wendy's) https://youtu.be/OTzLVIc-O5E?si=Mjz8JX-Sl_sdG6bC
• SmartEquip web site:  https://www.smartequip.com/schedule-demo/
• Announcement of Schuessler being (re)hired as President:  https://news.ararental.org/schuessler-appointed-president-of-smartequip
• Why Japanese "used" equipment commands a premium:  https://everycar-review.com/2025/08/27/voices-from-global-dealers-why-japanese-used-machinery-is-their-first-choice/

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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We explore why money became the default middleman and how a modern platform can make barter practical by slashing the costs of search, matching, and trust. Founder Jassim Baqer shares the story behind Tbadel, what people actually trade, and how reputation, bundling, and scale (might) make swaps work.

• Adam Smith’s "double coincidence of wants" problem and transaction costs
• Platforms as connection engines that lower search and matching costs
• Tabottle’s origin, goals and name meaning exchange in Arabic
• How offers, counteroffers and bundles enable fair value without prices
• Building trust with profiles, ratings, in‑app messaging and reporting
• Local meetups versus future delivery options to cut transfer costs
• Why density and subcommunities unlock multi‑party and chain trades
• What trades dominate now: books, electronics, kids’ gear and services
• AI matching, alerts and global exchange as the growth roadmap
• Two‑sided market dynamics and the path to scale

Tbadel Web Site

Jassim Baqer on LinkedIn

From JJ's letter: Photos of "Parklet" in San Francisco.

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

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Tracing out Adam Smith’s Book IV, chapters 1–6, to show how mercantilism mistakes money for wealth, how protection creates monopolies at home, and why free exchange raises real prosperity. Smith defends two narrow exceptions—defense and tax parity—while rejecting bounties and politicized treaties that entangle trade with war.

• mercantile vs physiocratic systems and their influence
• wealth as goods and industry, not specie
• balance of trade as a “pestilent error”
• make-or-buy logic and misallocation from tariffs
• invisible hand clarified and limited
• natural vs acquired advantages in specialization
• two exceptions: national defense and tax parity on imports
• drawbacks as refunds vs bounties as subsidies
• corn bounties, higher home prices, cheaper foreign prices
• specie hoards as dams that inevitably overflow
• treaties of commerce, Methuen example, political risk
• case for unilateral free trade over reciprocity

Mentioned in the podcast:

• Laura Williams on Pineapples
• Pineapples in Sweden
• Oren Cass on Adam Smith
• Dan Klein's Law and Liberty piece on Oren Cass on Adam Smith

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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We trace how Adam Smith solves a historical puzzle: why Europe’s path to prosperity inverted the “natural order,” and how commerce quietly dissolved feudal power to make room for liberty. The story follows incentives, from primogeniture and entail to charters, free towns, and the market’s “silent and insensible” revolution.

• institutions as congealed preferences and elite incentives
• why Smith’s natural order inverts in Europe
• the physiocrats’ growth model and Smith’s critique
• Solow’s technology vs North’s institutions vs McCloskey’s ideas
• Joel Mokyr's synthesis and improvement (written BEFORE he Nobel'ed!)
• feudal constraints primogeniture and entail suppressing agriculture
• towns as islands of order through charters and fixed rents
• the king–burgher alliance against barons
• merchants as improvers of land and capital risk-takers
• commerce introducing liberty and good government
• Smith’s “most important” passage and its modern relevance

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

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A conversation with Andrew Wagner, production and manufacturing engineer, now in aerospace, but with experience also in the auto industry.

We trace how transaction costs shape production, from Adam Smith’s pin factory to Toyota’s SMED, and why empowering workers and redesigning tools can raise quality while cutting cost. An aerospace manufacturing engineer joins us to unpack Little’s Law, line reconfiguration, and the culture that makes flexibility real.

• division of labor limited by the extent of the market
• sub shop and Chipotle as live line-balancing examples
• Smith’s three productivity drivers applied to modern factories
• Little’s Law guiding WIP, stations, and throughput
• costly line changes and capacity planning in auto plants
• meta-tools, CNC, and multi-operation automation
• stamping dies, SMED, and Toyota’s flexibility edge
• just-in-time, early error detection, and quality economics
• U.S. responses: robotics, platforms, and Deming at Ford
• NUMMI proof: same workforce, new system, better output
• CAD parametrics, modular design, and clay by robot
• structure by design: darts, curves, and manufacturability
• specialization, ergonomics, turnover, and the $5 day
• worker empowerment as applied Hayekian local knowledge
• letter on bureaucracy, spending, and the social order book pick

Some links:

• Workload modeling and "Little's Law"
• Little on Little's Law
• "Just In Time" inventory and manufacturing
• Edwards Deming's "14 Principles for Management" 

Book o'da'Month:  Jacques Rueff, THE SOCIAL ORDER

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

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This episode explores Book 2 of Adam Smith's Wealth of Nations, focusing on his revolutionary concept of the "division of stock" and how capital accumulation drives economic growth.

• Smith distinguishes between fixed capital (machines, buildings, land improvements) and circulating capital (money, goods in transit)
• Money is described as "the great wheel of circulation" – necessary but not productive in itself
• Banking allows society to economize on expensive metallic currency by substituting paper money
• Smith's concept of productive versus unproductive labor helps explain which activities increase national wealth
• The acquisition of skills represents "human capital" – a concept Smith pioneered centuries before Gary Becker
• Interest on loans is justified as compensation for the productive use of capital, though Smith supports moderate usury laws
• Smith identifies four employments of capital: agriculture (most beneficial), manufacturing, wholesale trade, and retail
• Smith criticizes mercantilism for privileging foreign trade over domestic production
• Division of stock and modern financial markets solve the "time travel problem" by allowing entrepreneurs to access capital without primitive accumulation

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