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Transaction 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 structures

Also posted, with resources for teaching and learning, at Adam Smith Works, thanks to Amy Willis. 

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(N.B.:  This episode is cross-posted at our partner site, Adam Smith Works. There are lots of resources and background material there, if you want to delve deeper)

The Scottish Enlightenment emerged as a remarkable intellectual movement that shaped modern economics, philosophy, and social science, with Adam Smith at its center developing a dual theory of human nature through his two masterworks.

• Scottish Presbyterian education fostered literacy and critical inquiry despite doctrinal rigidity
• The 1707 Act of Union created unique conditions where Scots pursued intellectual achievement rather than political power
• Scottish universities thrived through student-funded education while Oxford professors "gave up even the pretense of teaching"
• Thinkers like David Hume, Francis Hutchison, and Thomas Reid established key intellectual foundations
• Smith's concept of sympathy involves synchronizing sentiments with others, not just feeling pity
• Justice protects "person, property and promise" as the foundation of social order
• Beneficence is "the ornament" of society while justice is essential to its existence
• Smith was strongly anti-slavery, describing enslaved Africans as "nations of heroes" superior to their captors
• The Theory of Moral Sentiments and Wealth of Nations form a unified system, not contradictory works
• Commercial society requires both moral foundations and economic understanding to function properly

For the complete series on Adam Smith's Wealth of Nations and additional resources, you can also visit Liberty Fund's Adam Smith Works website.  For the material on this episode, go here. 

APPENDIX:

To reduce transaction costs, here is substantial amount, probably more than you want, of primary and secondary material on Smith and WoN.  Enjoy!

Primary Smith Sources From Liberty Fund

 1.      The Theory of Moral Sentiments (1759/1790). Edited by D. D. Raphael & A. L. Macfie (Indianapolis: Liberty Fund, 1982)
 https://oll.libertyfund.org/titles/theory-of-moral-sentiments-and-essays-on-philosophical-subjects 

 2.      An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Edited by Edwin Cannan (Indianapolis: Liberty Fund, original editions 1904, in two vols.): https://oll.libertyfund.org/titles/smith-an-inquiry-into-the-nature-and-causes-of-the-wealth-of-nations-cannan-ed-in-2-vols 

 3.      Lectures on Astronomy (c. 1748).  Essays on Philosophical Subjects (1795), which contains Smith’s “History of Astronomy”—based on his lectures.
  https://oll.libertyfund.org/titles/theory-of-moral-sentiments-and-essays-on-philosophical-subjects

 

 General Resources

 1.      Aristotle. (n.d.). Nicomachean ethics. (Jowett translation)

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Mike Munger explores how Monty Python brilliantly illustrated transaction cost economics through their legendary comedy sketches. The British comedy troupe's most famous routines provide perfect, hilarious examples of the frictions that make economic interactions costly and complicated in the real world.

• Three definitions of transaction costs from Ronald Coase, Douglas North, and Oliver Williamson
• The Dead Parrot sketch as an illustration of ex-post recontracting problems and contract enforcement
• Ministry of Silly Walks demonstrating how inefficient institutions persist due to high reform costs
• The Argument Clinic depicting problems with contract scope and definition
• Monty Python and the Holy Grail showing barriers to entry and communication costs
• Spanish Inquisition sketch revealing coordination failures

The five MP sketches mentioned here:

• Dead Parrot Sketch:  https://youtu.be/4vuW6tQ0218?si=hHfu07sgQeCgxUxx 
• Ministry of Silly Walks:  https://youtu.be/iV2ViNJFZC8?si=U5QxzDeYXeT3UhIq 
• Argument Clinic:  https://youtu.be/uLlv_aZjHXc?si=aU14dFjwnJeDvRf7 
• Holy Grail—Anarcho-Syndicalist Peasant:  https://youtu.be/_EMZ1u__LUc?si=C9z8e4NAQDRkU8q7 
• Spanish Inquisition:  https://www.youtube.com/watch?v=D5Df191WJ3o   

Letter:  Swiss Air's efficient window-seat-first boarding policy

Book'o'da'week: To Overthrow the World: The Rise and Fall and Rise of Communism, by Sean McMeekin

Next episode releases July 22nd, beginning the co-produced series on Adam Smith's "Wealth of Nations" with an overview of the Scottish Enlightenment.

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

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Middlemen are not parasites but essential "engineers of exchange" who create value by connecting buyers and sellers who might never find each other otherwise.

• The word "monger" (and Munger) comes from a Saxon root--Mancgere-- meaning trader or merchant
• Middlemen historically seen as parasites for buying cheap and selling dear without improving products
• 11th-century "mancgere" traders defended their value despite not changing the goods they sold
• RA Radford's 1945 POW camp study shows how middlemen increase beneficial exchanges
• The prison camp padre who traded his way to wealth, while making everyone else better off!!
• Arbitrage improves market efficiency by exploiting price differences, and reducing differences in price so that people can rely on the price they are offered rather than having to bargain or comparison shop. 
• Middlemen only become problematic when they control exclusive information or "rents"

The first "middleman" episode of TAITC:  May 2023....

R.A. Radford, "The Economics of a POW Camp." 

M.C. Munger, "Market Makers or Parasites."

Book'o'da'week: Country Music USA by Bill C. Malone, published by University of Texas Press.

Bonus: a great example of a middleman, from a listener in Oz!

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

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The 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 production

Mentioned 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 Radio
• Segments with Ross
• Ross on X (@rossputin)

My Duke colleague Bruce Caldwell, on the intellectual history of Hayek's 1945 AER paper

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"

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The 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 infrastructure

Grass 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] !

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How 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 performance

And....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 Engineering

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Transaction 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 1973

Keech and Munger article 2015

Chris Rock, "Tiger!"

Parkinson's Law

Michael Munger: The "Trouble Tax"

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Adam 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. 

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What happens when we stop seeing politics and markets as separate spheres and start recognizing their deep entanglement? Mikayla Novak, senior fellow at the Mercatus Center, challenges conventional economic thinking in favor of Dick Wager's "entangled political economy."

Drawing from her fascinating career path through Australia's Treasury, free market think tanks, and her pursuit of multiple courses of study, Novak offers unique insights into institutional economics and political networks. Her background bridges disciplines in ways that embody Hayek's wisdom that "you can't be a good economist by just being an economist."

We consider Boettke's distinction between "mainstream" economics—with its equilibrium models and market failure diagnoses—and the "mainline" tradition that views economies as dynamic processes shaped by institutions. This conversation reveals how Richard Wagner's entangled political economy theory helps understand policy failures. When government and markets form complex networks rather than separate spheres, simplistic reform attempts like "just cut spending" are disastrously unsuccessful.

The discussion vividly illustrates why transaction costs matter deeply for institutional analysis. We examine how political networks form with elites enjoying low-cost access while ordinary citizens remain at the periphery. This structural understanding helps explain why some inefficient policies persist despite their obvious flaws—they benefit the well-connected core of our political-economic system.

Mikayla Novak's page link

Richard Wagner: 

• Entangled Political Economy Research Network
• Buchanan's Liberal Theory
• Politics as a Peculiar Business

Previous TAITC Episodes of Relevance:

• Randall Holcombe and Political Capitalism
• Donald Boudreaux on Law and Legislation

Late Bloomers book, by Rich Karlgaard

Munger on tariffs and costs

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