The Answer Is Transaction Costs

• Barking Cats: On the "Nature" of Bureaucracy

  Send us a textTransaction 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 1973Keech and Munger article 2015Chris Rock, "Tiger!"Parkinson's LawMichael Munger: The "Trouble Tax"If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com ! You can follow Mike Munger on Twitter at @mungowitz

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• Pins: Division of Labor is Limited by Transaction Costs

  Send us a textAdam 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. If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com ! You can follow Mike Munger on Twitter at @mungowitz

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  22:32
• Commerce and Sociology: Novak on Entangled Political Economy

  Send us a textWhat 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 linkRichard Wagner: Entangled Political Economy Research NetworkBuchanan's Liberal TheoryPolitics as a Peculiar BusinessPrevious TAITC Episodes of Relevance:Randall Holcombe and Political CapitalismDonald Boudreaux on Law and LegislationLate Bloomers book, by Rich KarlgaardMunger on tariffs and costsIf you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com ! You can follow Mike Munger on Twitter at @mungowitz

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  1:20:55
• The Paradox of Political Rationality: Lynch

  Send us a textWhy do harmful policies like tariffs keep coming back despite universal condemnation from economists? The answer lies in the dynamics of collective action and concentrated interests.In this eye-opening conversation with G. Patrick Lynch, Senior Fellow at Liberty Fund, Mike Munger explores the fascinating world of public choice theory and how it explains some of democracy's most persistent puzzles. Lynch, a self-described "popularizer of public choice," breaks down complex economic principles into digestible insights about political behavior.The discussion begins with the foundations of public choice theory—the application of economic reasoning to political decisions. Far from portraying politicians as uniquely self-interested, public choice simply acknowledges that all humans respond to incentives, whether in markets or politics. As Lynch explains, "It's a mistake to characterize public choice as people being just materially self-interested." Even Mother Teresa was pursuing her goals single-mindedly—the definition of self-interest properly understood.When the conversation turns to tariffs, Lynch delivers a masterclass in why bad policies persist. Manufacturing interests receive concentrated benefits and organize effectively, while consumers bear diffuse costs. "That $70,000 job costs consumers $210,000 to $250,000 in increased prices," Munger notes. But since an individual consumer might pay just pennies more per purchase, they won't mobilize political opposition.Perhaps most fascinating is the exploration of Elinor Ostrom's Nobel Prize-winning work on common-pool resources. Conventional wisdom suggested that without government intervention, shared resources face inevitable destruction through overuse. Yet Ostrom discovered countless examples worldwide where communities developed sophisticated management systems to sustain resources over generations.If you've ever wondered why policies that economists universally condemn keep returning, or why small groups seem to dominate our politics despite majority rule, this conversation offers profound and sometimes unsettling answers. Subscribe now for more insights that will transform how you understand politics, economics, and collective decision-making.LINKS:G. Patrick Lynch:https://www.econlib.org/author/plynch/ https://www.civitasinstitute.org/research/the-young-americas-need-each-other https://lawliberty.org/author/patrick-lynch/https://lawliberty.org/book-review/public-choice-with-chinese-characteristics/ Shaggy Dog story: https://www.phrases.org.uk/meanings/shaggy-dog-story.html The ORIGINAL Shaggy Dog story:  https://stephengreensted.wordpress.com/2011/01/20/the-original-shaggy-dog-joke/Book’o’da Month:    Two Books, both by William Bernstein. The Birth of Plenty: How the Prosperity of the Modern World was Created. McGraw-Hill, New York, 2004, If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com ! You can follow Mike Munger on Twitter at @mungowitz

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• Curation Bubbles, Verification, and the Splintering of Ideology: Green

  Send us a textWhat happens when we no longer consume scarce information through trusted, verified institutions, but instead through an abundance of unbundled content without context or curation? John Green, rising star in political science from Duke University, takes us on a tour of the rapidly evolving  landscape of political information.Green challenges conventional wisdom about how ideologies function, arguing they're not so much coherent philosophical systems as they are socially shared belief networks. In these networks, most people specialize in just one or two issues they deeply care about, while adopting their coalition's positions on everything else. This creates an environment where signaling group loyalty becomes crucial—explaining why people sometimes make outrageous claims not despite their falsity, but precisely because the willingness to say something costly signals authentic commitment.The conversation takes an illuminating turn when Green unpacks his groundbreaking research on "curation bubbles." Unlike echo chambers or filter bubbles, these environments emerge when people strategically share content based on its utility for their side, regardless of source. A conservative might enthusiastically share a New York Times article criticizing Democrats, while generally dismissing the publication as biased. This selective curation creates information environments that are neither completely closed nor genuinely diverse.Perhaps most troubling is Green's insight about misinformation in the digital age. The real danger isn't simply false claims from unreliable sources, but rather the strategic repurposing of true information to create misleading narratives. When accurate statistics or facts are stripped of context and woven into deceptive frameworks, traditional fact-checking approaches fall short.As we navigate this unbundled media landscape, the question remains: can we rebuild institutions that verify and curate information effectively? The answer may determine the future of our shared reality and democratic discourse.LINKSJon Green at DukeGreen, et al on "Curation Bubbles" in APSRConverse on Belief SystemsMunger on "Direction of Causation"Munger on Pub Cost, Curation, and VerificationLetter Response:Sweden is NOT socialist!  (If you don't believe me, believe Andreas Bergh...)Book’o’da Month:  Alexander Kirshner, Legitimate Opposition, 2022, Yale University Press.  ISBN:  9780300243468. https://yalebooks.yale.edu/book/9780300243468/legitimate-opposition/Excellent podcast with Kirshner on the book.If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com ! You can follow Mike Munger on Twitter at @mungowitz

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