Transaction costs can help institutions build loyalty and commitment among their members. Starting with the biblical story of Abraham, we delve into the delicate balance of setting transaction costs to neither alienate nor diminish values.
Then: loyalty filters. The civil service of imperial China. Email spam. "The Word of Wisdom", a LDS dietary and lifestyle principle. But....there are cola vending machines at Brigham Young University, a seeming detour from the teachings of the Word of Wisdom.
Lagniappe: A note from listener J: I was particularly interested in today's topic as I am a member of the "Mormon" faith. I remember growing up when caffeinated sodas were seen as a huge deal, you would never bring one to a church BBQ and I remember being kicked out of a friend's house for drinking a diet mountain dew. I thought you may find it funny that after almost 100 years of confusion around caffeinated sodas, the church finally clarified in 2012 that in fact, caffeinated sodas are okay and not against the word of wisdom. Many speculate that this was due to MItt Romney being thrust into the spotlight as a presidential candidate, and he often drinks diet coke, and the church didn't want to turn off potential converts who might think, "I would never join a church that would ask me to g
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
Transaction costs can help institutions build loyalty and commitment among their members. Starting with the biblical story of Abraham, we delve into the delicate balance of setting transaction costs to neither alienate nor diminish values.
Then: loyalty filters. The civil service of imperial China. Email spam. "The Word of Wisdom", a LDS dietary and lifestyle principle. But....there are cola vending machines at Brigham Young University, a seeming detour from the teachings of the Word of Wisdom.
Lagniappe: A note from listener J: I was particularly interested in today's topic as I am a member of the "Mormon" faith. I remember growing up when caffeinated sodas were seen as a huge deal, you would never bring one to a church BBQ and I remember being kicked out of a friend's house for drinking a diet mountain dew. I thought you may find it funny that after almost 100 years of confusion around caffeinated sodas, the church finally clarified in 2012 that in fact, caffeinated sodas are okay and not against the word of wisdom. Many speculate that this was due to MItt Romney being thrust into the spotlight as a presidential candidate, and he often drinks diet coke, and the church didn't want to turn off potential converts who might think, "I would never join a church that would ask me to g
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
Michael Munger:
This is Mike Munger of Duke University, the knower of important things. We'll be talking more this week about positive uses of transaction costs, loyalty filters and the value of being able to trust. Also, twedge and this week's letter Straight out of Kreebmore. This is Tidy C. Last week's letter was from S.
Michael Munger:
I've enjoyed the new show so far, but what's intrigued me most is the positive value of transaction costs. You got me thinking about church. I'm a pastor and theologian, so that was inevitable. There are some transaction costs that are stupid and detrimental to church life. An obvious one is the lack of parking or a web presence that's so badly maintained or even non-existent. It takes so much for people to visit a church for the first time anyway that these things will put them off entirely. That's at one extreme. At the other extreme is transaction costs that are vetting for someone who can be brainwashed. Cults use this tactic. It's precisely by having extraordinarily high transaction costs that they locate exactly the kind of people they want. It's also why it's so hard to reason with the cultically brainwashed with the argument that it's unreasonable to sacrifice so much for the cult because the high transaction cost is actually what they wanted. It's how they were selected in the first place. A lot of churches put out an all-or-welcome sign, thinking this will reduce the emotional or social transaction costs of getting people through the door. I suspect it does the opposite, because it sounds a bit desperate like begging for a date. It's a well-meaning but misapplied expression of the Christian principles of universality and grace Within the life of the congregation.
Michael Munger:
There are normally very high transaction costs to becoming clergy. In my Lutheran tradition you need a bachelor's degree of some kind, a master's of divinity, and then a vetting process that lasts several years, including psychological exams and a year-long practicum under an ordained pastor. This makes sense. You want to make it difficult to achieve religious power? Well, what about congregational members? In practice, there's a lot of variety. In my congregation we try to minimize the transaction cost of joining for Sunday morning worship. You don't have to be baptized or believed to attend a service. On the other hand, to become a member there are a few imposed transaction costs because it shouldn't be too easy to gain access to votes, budgets, a seat on the church council decision making and so on. There has to be some clearly established common ground of belief and ethics, otherwise our common life would devolve into constant battles, and any church person will tell you that battles are common enough as it is. In my setting, I usually wait till the person has been attending worship regularly for at least a year before raising the issue of membership, and then we spend six sessions reviewing Luther's small catechism. The transaction cost of becoming a member of the Lutheran congregation is nowhere near as high as becoming a pastor of the congregation, but the willingness to pay their respective transaction cost is, in general, a good measure of commitment. My guess is that a lot of churches seesaw back and forth between transaction costs that are too high or too low, trying to figure out how to create the right incentives that are still in alignment with our core beliefs.
Michael Munger:
I have often thought that a better grasp of economic concepts would benefit pastors and theologians, and this email is my own proof. All the best S End of Letter. Whoa, that's tremendous. That's a really excellent set of insights. I think the best way to start to respond to us is to go back to the beginning of the Judeo-Christian version of the Bible. So in Genesis of the Hebrew Bible, in Genesis, chapter 22, there's the story of Abraham who was asked to sacrifice his son Isaac. So in verse 1 of Genesis 22 it said and it came to pass after these things, that God did prove Abraham and said unto him Abraham. And he said here am I. Now the translation that I just read is, as I said, from the Hebrew Bible.
Michael Munger:
When I said proved, that word is often translated tested. The Hebrew word is nazah and I think a better translation, after doing a little research on it, would be proved. Because to prove something, the archaic meaning of to prove something was to test its quality, to check if it was worthy. By putting it through a trial of some kind, god wanted to prove the validity, the authenticity of Abraham's faith. We still use prove in this way. Sometimes the Aberdeen proving ground, for example, is a place where we see if military equipment actually works in more or less combat conditions. But there's another sense of nazah and instead of translating it tested, then proving is more like the process of becoming, and so Abraham was being asked to become the sort of person that could be trusted.
Michael Munger:
Now I've mentioned before and S in her letter, did a good job of describing this problem. If we want to raise transaction costs before people get access to something remember, we talked about the problem of the coupon and I jokingly suggested that grocery executives might have said, well, before they can get the cheap price, they have to eat a buck, but instead of that they use coupons. Well, in this case, I could imagine God and the devil were playing cards, because of course they were. And God just happens to mention you know, abraham is awesome. And the devil says you know, I'm not so sure he talks a big game, but you can't see his heart.
Michael Munger:
It's trust, and I've been listening to Munger's podcast, and trust is one of the three problems of transaction costs, along with triangulation and transfer. So sure, abraham seems like someone you can trust, but are you sure? And God says Abraham no, he is totally down. And the devil said look, you are so trusting of these fickle humans. I will bet you a golden fiddle that Abraham cannot in fact, be trusted. So it's important to note, of course, that the devil can quote scripture even when it comes to transaction costs. So, anyway, god asked Abraham to sacrifice Isaac. Abraham shows that in fact, he can be trusted. Well, the devil hung his head because he knew that he'd been beat and he laid that golden fiddle on the ground at the big man's feet. I hope you didn't find that example offensive, but it actually is an astonishing story. What was the point of God being so needy that he could not know in advance how Abraham was going to react? Or he did know in advance how Abraham was going to react and he was just needlessly imposing suffering? So that story in Genesis 22 is a difficult one for many people of the Judeo-Christian tradition to try to wrestle with. The answer the transaction cost answer would be something like what S suggested in her letter Type is unobservable.
Michael Munger:
We can't see into the hearts of others. We often need costly signals to be able to distinguish type as a way of being able to trust others. That process is selection. Sometimes selection is positive, sometimes adverse or harmful. Now I've mentioned adverse selection several times now, but a careful definition is going to have to wait, for now let's just note the transaction cost problem of trust. A being able to know that another person will keep their promise is a key explanation for many things that we do that otherwise seem to make no sense. So let's consider a classic example of costly signals to determine type and let's consider two large corporations with very different corporate cultures IBM and Apple.
Michael Munger:
Now, ibm made mainframes, at least a long time ago, when this example was relevant. For making computers, ibm made mainframes and it was one of the biggest companies in the world. They wanted to ensure that all of their employees went by the book. So if you were sent out from our Monk, new York to fix an IBM mainframe computer that had been purchased by a company in Iowa, you just sent the one person and that person had the manual, but you couldn't observe what the person was actually going to do. Could you be sure that once they were off by themselves in Iowa, they would actually perform the procedures to fix the mainframe in the way that was dictated by the manual?
Michael Munger:
Now notice that, since all IBM mainframes were the same and they all had both hardware and software that were massive, monolithic, if you changed one part of the software, if you fixed one part of the hardware incorrectly, the next person, when they came to try to fix it, might not be able to figure out what you had done. And so procedures following procedures was very important, but that was unobservable. We couldn't be sure what was in the person's heart, but it was observable that someone's willing to dress like a Mormon on a mission Short sleeve white shirt, dark pants, dress shoes, clip on tie Not that there's anything wrong with that, mind you. You had to live in our Monk, new York, in the middle of nowhere and go to boring barbecues at the backyard of your bosses and coworkers. There was absolute conformity as a requirement to work for IBM no differences. If you're willing to accept those visible signals, you're much more likely to accept the need to do things straight from the manual. We don't really want innovation. Innovation is going to take place from the research people. If you're a repair person, you need to do everything exactly by the book.
Michael Munger:
Now, apple had a very different corporate culture. They made personal computers. Everyone is going to be different and the needs of each person are quite different, and these are not being sold to large companies. They're being sold to individuals, and so there's a lot of video synchrosies, and so for Apple, we expect Hawaiian shirts, shorts, sandals, skateboards, beards all the things that you would not expect at IBM and so you could look at someone and decide whether or not they were likely to be an Apple employee or an IBM employee. It was important that those two corporate cultures revealed something about the likely behavior of employees who were often relatively unsupervised, off operating on their own.
Michael Munger:
Now there's a lot of examples of this kind of the use of transaction costs on visible signals as a way of judging trustworthiness on other things that are not visible. Famously, the Chinese Empire was one of the first to have a civil service a very long time ago, and the saying among Chinese provinces was the mountains are high and the emperor is far. So if you had bureaucrats that were far away, it might take months to ask questions, but there were a set of procedures that you were supposed to follow. The question is could you be relied on to follow those things? So what kind of filter would you use to be able to gauge someone's trustworthiness? Well, you'd want to impose high transaction cost on acquiring these jobs. This was a very attractive job. You were the emperor's representative in a far off province. You had status, you had pay, you had a nice place to live. People would kowtow, they would come. Maybe you would receive bribes, but not too many, because you were the emperor's representative and most of the bribes are supposed to go to the emperor. So the test they came up with was Were you willing to memorize classic Chinese poetry and then be able to write it out over a period of weeks in beautiful calligraphy? So you would have to write thousands and thousands of characters from memory and do it beautifully and carefully. And that has absolutely nothing to do with the job that you're supposed to be doing, but it's a perfect test in the sense that if you're willing to do this pointless thing well, you probably were willing to do pointless things well when no one was watching you. So it was a means of rationing access to this scarce good using transaction costs you may also have encountered.
Michael Munger:
Sometimes on your computer you'll get a spam message that has typos. Your name is misspelled. It seems that when you look at it you think this is stupid. No one's going to fall for this. Maybe that's right. Maybe the spammers just aren't very smart and they're not trying very hard. But there's another explanation and that's filtering. It's actually important that the rules that you use to filter are stupid and a waste of time. If they produced value, a recruit might engage in the signal for its intrinsic value. That is, the applicant at IBM or Apple would say I really want this job because having the job pays a lot. The applicant for the Chinese civil service wants it because you get status.
Michael Munger:
The spammer wants you to respond and if the message sounds persuasive, you're likely to respond and say, yes, I want to talk to you, prince from Nigeria, because you're going to give me a million dollars, but then, as soon as you find out that you need to send $2,000 so that the Nigerian Prince can put together the bank package to give you a million, you're going to say no, there's no way, that's not right. So they need to impose transactions cost in a way that will filter out those people that they don't want to waste their time on. It's actually like Miracle Max and Princess Bride. There's a big difference between no one would fall for that and almost no one would fall for that. Spam, after all, is costless to the sender. They send out millions and millions of these spam messages that have misspellings and the story is so stupid that almost no one would believe them. But if only one half of 1% of the really gullible people do respond, that's actually worth your time as a fake Nigerian Prince, because you have managed to select, at no cost to you responses from only those people that where you have some chance of actually fooling them into sending you money or something else which matters for religion, which was discussed by S in her letter. After all, inconvenience and sacrifice can actually be a positive recruiting device.
Michael Munger:
My favorite example is from the word of wisdom, what is now in Doctrine and Covenants, number 89. It was written in 1833, dictated by Joseph Smith as a revelation, and it's a really interesting read. I put the link in the show notes and I suggest that you take a look at it. The word of wisdom is the source of the dietary and lifestyle advice that is distinctive about many Mormon communities. The word of wisdom lists a number of things that are not good. That's actually a quote. I didn't say it's evil, it's just not good. But it actually starts out by saying this is not by commandment or constraint, but by revelation and the word of wisdom. So you actually have to do this, but if you're wise you should do this. To summarize the word of wisdom and, as I said, it's really interesting to read it says no wine, strong drink, tobacco or hot drinks. It actually appears to say you shouldn't eat meat except in time of famine, but that doesn't get discussed very much and, interestingly, it says that mild drinks made from barley are okay and acceptable, though not to excess. Well, mild drinks made from barley's beer, and that's not something that's allowed by the usual interpretation of the word of wisdom.
Michael Munger:
When you think of it in the context where we've been talking about this and that's why I appreciate S's letter this whole business is almost perfectly calibrated as a loyalty filter. I can't tell what you do in your house or when you're away, but if I see you having coffee after dinner or spitting tobacco or drinking whiskey, I'm going to doubt your piety. And there's some amazingly small distinctions that turn out to be the very fulcrum of the faith for some people. At the Y at Brigham Young University in Provo, they've made a very controversial move. There are cola dispensing machines on campus. Unbelievable. Why would there not be cola dispensing machines on campus? There's cola dispensing machines on all college campuses.
Michael Munger:
Well, the question is whether the word of wisdom was meant to outlaw hot drinks or to outlaw caffeine. It depends on whether you recognize that this is a loyalty filter. The point is not so much about the broader meaning. You must literally obey the observable rule so that others can infer your piety, in the case of religion, or your commitment to the organization, in the case of IBM or the Chinese civil service. The point is that, just as S points out, transaction costs can be used as an intentional or accidentally efficient means of distinguishing people who can be trusted from those who cannot. Game theorists call this type. Type is often private information. Let's suppose there are two types trustworthy and not trustworthy. Transactions. Costs can be used to reveal type and the word of wisdom probably wasn't intentionally done for that reason.
Michael Munger:
The history of the word of wisdom is interesting. Joseph Smith had stomach problems and hot drink Spothered him. We usually interpret hot drinks as being coffee or tea, but any hot drink disappears. To outlaw it doesn't outlaw Diet Coke. Many people have interpreted it as well. What he meant was caffeine. Maybe what he said was hot drinks, and so that's why, in spite of what you might expect, you can find cola machines on the Brigham Young campus, which for a while was pretty scandalous. So we've already seen one example where type might be elastic or inelastic demanders. So if you think back to the episode about coupons, I can't tell if you're an elastic or inelastic demander. And remember that means people who will shop for a lower price compared to those who will pay full price. That's private information, but using transaction costs. In that case coupon reveals type and increases the benefit to the organization.
Michael Munger:
Loyalty filters are everywhere in religion and business settings and they may not be intentional but they are a big part of why some organizations succeed and others fail. So let me say that again, they may not be intentional, they may be accidental and I think in many ways the word of wisdom was accidental. Joseph Smith after the word of wisdom in 1833, they were still in Kirtland this was early in Mormon history Joseph Smith was seen to drink alcohol, to have coffee, even to use tobacco quite a number of times after he had issued the word of wisdom and a number of other church leaders, including Brigham Young who was a famously big user of tobacco. It didn't really become institutionalized until it became very important to be able to distinguish committed members from non-members, to have to reveal that private information. Whoa, that sound means it's time for the twedge.
Michael Munger:
Three economists and three mathematicians were going for a trip by train and there was a little professional rivalry and smack talking between the two groups Before the journey. The mathematicians bought three tickets for the train, but the economists only bought one. The mathematicians were looking forward to seeing their stupid greedy colleagues. They were going to have to get caught and pay a fine when the conductor called them out on this. But when the conductor was approaching their compartment, all three economists scurried to the nearest toilet and locked the door. The conductor, checking to see if someone was in the toilet, knocked on the door. In reply, a hand came out with one ticket. He clicked it, validated the ticket and the economists saved two-thirds of the ticket price. Well, the next day the mathematicians decided to use that same strategy. They bought only one ticket, but this time the economists didn't buy a ticket at all. The mathematicians were really looking forward to seeing what was going to happen now. Anyway, mathematicians saw the conductor. They all ran and hid in the toilet giggling, and then they heard knocking on the door. They handed out the ticket. The economists took it, they went and locked themselves in the other toilet and that's how they got away without buying any ticket at all.
Michael Munger:
This week's letter is from JT. I would love to hear your thoughts on academic publishing through the lens of transaction costs. Specifically, I'd love to hear your thoughts on what transaction costs can tell us about why the industry is structured the way it is, whether it serves academics or anyone else well, and what counterintuitive changes might result in improved outcomes. I'd be fascinated to hear your thoughts on broader questions, even about science funding and the diffusion of innovations through the economy, through academic journals, but that might be too broad for the format. End of letter. Well, thanks, jt. That's great, and thank you for listening. We'll all work on that puzzle. Have another hilarious twedge and more next week on Tidy C.