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Corruption persists not because people like it, but because it becomes embedded in the incentive structure of the state, creating feedback loops that reinforce themselves and resist reform. 

• A prebend is a type of benefice historically given to clergymen, now a useful concept for understanding corruption in developing nations
• Douglas North extended Coase's concept of transaction costs to explain why institutions matter in economics and politics
• Bad institutions create feedback loops through rent-seeking, patronage, and corruption that redistribute resources to entrench elites
• Mental models - our imperfect cognitive frameworks - resist change because belief systems are costly to abandon
• Lock-in occurs when early institutional choices create path dependencies that make reform nearly impossible
• Officials in corrupt systems treat public offices as prebends (sources of personal income) rather than public service positions
• In Nigeria, prebendalism meant officials used positions to enrich themselves and distribute benefits to their ethnic communities
• Russian corruption intensified post-Soviet era when state salaries plummeted and bribes became survival mechanisms
• Reform typically requires massive shocks, external enforcement, or exceptional leadership willing to impose significant costs on corrupt officials

The schedule is changing, because summer is over. Going forward, we'll have two episodes each month until January - one on Wealth of Nations and one interview. The next interview will be Tuesday, September 9th, and the next Wealth of Nations episode will be Tuesday, September 23rd.

Some links:

• Previous episode on corruption:  Shruti Rajagopalan
• Richard Joseph and "Prebendal" Nigeria 
• Douglass North and transaction costs/lock-in
• Douglass North on Institutions
• Denzau and North, "Shared Mental Models" (Kyklos)

Books o'da'week:

• Johan Norberg Peak Human: What We Can Learn from the Rise and Fall of Golden Ages
• Guy Gavriel Kay A Brightness Long Ago 

• California's gigantic political theft of money for "High Speed Rail"

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

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Adam Smith's "The Wealth of Nations" developed from decades of lectures on jurisprudence, examining how market exchange creates prosperity through division of labor and specialized skills.

• Two core observations drive Smith's thinking: humans seek approval from others and have a propensity to "truck, barter and exchange"
• Exchange is Smith's key concept—not just for goods but for ideas, sentiments and social coordination
• Division of labor dramatically increases productivity through specialization, increased dexterity, and tool development
• Smith's famous pin factory example shows how 18 specialized workers produce thousands of times more than individuals working separately
• The extent of the market limits division of labor—larger markets allow greater specialization
• Smith argues that differences between philosophers and street porters arise from "habit, custom, and education" not innate capacity
• While profit is legitimate, Smith criticizes how powerful interests manipulate government to restrict competition
• Justice (respecting person, property, and promises) forms the essential foundation for any functioning commercial society
• Smith's work intended as a handbook for lawmakers, not ideological advocacy
• The Wealth of Nations represents applied moral philosophy addressing how societies become prosperous

Join us next time when we'll examine Book Two of Smith's masterpiece.

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The ancient tradition of Il Palio in Siena showcases a complex system of strategic corruption, neighborhood rivalries, and high-stakes horse racing that has endured for centuries. This 90-second race around Siena's central piazza involves extensive bribery, intense negotiations, and centuries-old vendettas that make speed secondary to political maneuvering.

• Horse assignments determined by lottery prevent wealthy neighborhoods from buying fastest horses but create opportunities for strategic corruption
• Jockeys accept bribes up to €80,000 to impede rivals or assist allies, with reputation determining future employment
• The "rincorsa" (starter horse) wields extraordinary power in determining when the race begins
• Enforcement of bribe agreements relies on reputation, trust, and fear rather than formal contracts
• Coming in second place is considered worse than finishing last, leading to public ridicule that can last generations
• Neighborhood identities and rivalries date back to medieval times, with memories of betrayals lasting decades

Book o'da'week:  Okay, it's a film.  But it's great!

• Book o da week:  Il Palio documentary, 2015. Cosimo Spender, director and writer. https://www.imdb.com/title/tt3669520/ 

If you enjoy learning about the economics of unusual institutions, join us next week for the third installment of our Adam Smith podcast series with Adam Smith Works.

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

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Mike Munger explores insurance economics through the lens of transaction costs and risk management, culminating in an amusing case study about "bat-in-mouth disease."

• Insurance transfers risk from individuals to larger pools, reducing the expected variance of outcomes
• The fair price of insurance equals expected value (probability × potential loss) plus transaction costs
• Information asymmetry, subjective risk valuation, and strategic behavior complicate insurance markets
• Insurance faces two major challenges: adverse selection (who buys insurance) and moral hazard (behavior changes after getting insurance)
• Deductibles and co-pays help align incentives between insurers and insured
• Insurance history dates back 5,000 years to ancient China, Mesopotamia, Greece, and Rome
• The "bat-in-mouth disease" case study shows what happens when someone tries to purchase insurance after an incident
• Transaction costs explain why dogs sometimes stop climbing stairs and why freezing credit cards--ie, transaction costs--might prevent impulse spending. The piano player in a brothel story, and its history.
• The book o'da'month is Daniel Flynn, The Man Who Invented Conservatism. 

Bat in mouth story:  https://www.nbcnews.com/news/us-news/bat-flies-womans-mouth-arizona-costing-nearly-21000-medical-bills-rcna222463

Some background on insurance:

• Kenneth Arrow on the Uncertainty & Welfare Economics of Medical Care
• Anja Shortland on Kidnap: Inside the Ransom Business

"Piano player in a brothel" story origins:

• https://www.goodreads.com/quotes/93559-my-choice-early-in-life-was-either-to-be-a
• https://barrypopik.com/blog/dont_tell_my_mother_im_a_banker_she_thinks_i_play_piano_in_a_whorehouse 

Daniel Flynn book:  The Man Who Invented Conservatism

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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. 

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

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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.

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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!

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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"

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

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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] !

You can follow Mike Munger on Twitter at @mungowitz