The Answer Is Transaction Costs

Monkey See, Monkey App! And IP Walks Into a Bar....

• Michael Munger

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The method of much of social science is "comparative statics." There's an amazing natura experiment going on, after Hurricane Maria changed the environment for the rhesus macaques of Cayo Santiago. Sometimes, you need a simulation to understand something is only obvious after the fact. These primates, known for their fierce competition and rigid hierarchies, expanded their social networks and reduced aggression to endure the island's new, harsh environment.

Plus, a politically incorrect TWEJ, and an interesting letter. 


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


Speaker 1:

This is Mike Munger, the knower of important things from Duke University Property, manners and monkeys. A new twedge plus this week's letters and more Straight out of Creedmoor. This is Tidy C. I thought they'd talk about a system where there were no transaction costs. It's an imaginary system. There always are transaction costs where there were no transaction costs. It's an imaginary system. There always are transaction costs when it is costly to transact. Institutions matter and it is costly to transact. There was an interesting news story in the New York Times. Quoting from the story, I'll skip around a little bit, mostly quoting from the story.

Speaker 1:

Hurricane Maria caused widespread devastation in the Caribbean, not only for people but also for wildlife. Five years after the storm, some of the effects still linger. Cayo Santiago, a small island off the southeastern coast of Puerto Rico, is a prime example. It transformed almost overnight from a lush jungle oasis to a desert-like spit of land with mostly skeletal trees. This posed a big problem for the island's resident macaques. They're rhesus macaques that were actually put there for research purposes, so it's interesting to think about this as being a kind of laboratory. Back to the story. The monkeys depend on shade to keep cool in tropical daytime heat, but by wiping out the trees. The storm had rendered that resource in very short supply. Rhesus macaques are known for being some of the most quarrelsome primates on the planet, with strict social hierarchies maintained through aggression and competition. So it would follow that a simian battle royale would break out over the island's few remaining patches of shade. So, again, what's interesting is that they compete for space, for resources. They have, if not a sense of property, then of territory. So when you have this artificial, new and dramatic scarcity of shade in a very hot climate, it seemed like there's going to be a problem.

Speaker 1:

Back to the story. Yet that's not what happened. Instead, the macaques did something seemingly inexplicable. They started getting along. This was not really what we expected, said Camille Testard, a behavioral ecologist and neuroscientist at Harvard University. Instead of becoming more competitive, individuals widened their social network and became less aggressive. Monkeys, who learned to share shade after the storm, researchers found had a better chance of survival than those that remained quarrelsome.

Speaker 1:

The approximately 1,000 macaques that live on the island are free ranging, but they're fed by the field station staff members. Access to food is not the main point of contention, dr Testard said Shade to avoid heat stress is Daytime temperatures on Cayo Santiago often soar above 100 degrees Fahrenheit, which can be deadly for monkeys stranded in the sun. After Hurricane Maria took out most of the island's trees, dr Testard and her colleagues expected that macaques might invest more in building close alliances so that they could join forces to secure shade, but the complete opposite happened, she said. Monkeys instead invested in looser partnerships with a larger number of animals, and they became more tolerant of each other overall. Dr Testard said she suspected that this was because fighting is an energy-intensive activity that generates more body heat and poses more danger to individuals than just caring a little bit less if another monkey is right next to me or not. During the most sweltering hours of the afternoon, the researchers observed macaques crowded together in thin strips of shade. But even when temperatures were less stifling, the animals gathered in larger groups compared with their habits before the storm. Now, not all monkeys jumped on the peace train, but those who had adhered to aggression were more likely to pay a steep price. The macaque population's overall death rate did not change after the hurricane, but monkeys that had a more friendly relation with other groups experienced a 42% decrease in their odds of mortality because they were less likely to suffer heat stress.

Speaker 1:

Whether other animals can also respond to environmental upheaval by adjusting their social norms is going to be very species and context specific, said Dr Testard. Humans probably fall into that category, though People often band together, for example after natural and human-caused disasters. However, dr Testard added, there are limits. If resources become too scarce then humans could descend into a Mad Max-like dystopia of violent competition. There's hope we'd band together to make things work rather than to fight, but that's a big speculation. Well, end of article.

Speaker 1:

What's interesting about this is that there's really three different origin stories for property rights that I've encountered at least. First is John Locke and the theory of natural rights. Whereas I combine some of my labor with a thing in the environment, that thing then becomes my property. There may or may not be a necessary condition that there's as much and as good of the natural thing available for you to combine your labor with. I think that's a sufficient condition, not a necessary condition. I've never really been very persuaded by that natural rights story. Second is Harold Demsetz and the problem of transaction costs. That is when there begins to be scarcity. The availability of a common pool resource means that it is much more valuable to be able to control access to the resource and transactions cost and, in effect, an externality. If I take some, it's not available for you means that we're going to have property rights to give people an incentive to take care.

Speaker 1:

The third is story is one that I've never understood why anyone believes, but it's actually fairly commonly believed, especially at English and sociology departments in the US and Europe, and that's the story that Jean-Jacques Rousseau has about society creating and defending artificial rights and the amazingly naive belief that if there just were no such thing as property, we would all govern together. I mean, it seems directly to run into the problem of common pool resources. Rousseau says that the first person who was simple enough to believe the claim of someone else when they put up a fence and said this is mine, should have torn down the fence and said to this imposter who claimed for the existence of property rights the fruits of the earth belong to all and the earth itself to no one. Well, unsurprisingly, jean-jacques Rousseau had never read the Tragedy of the Commons and had never read Eleanor Ostrom. We now know that unowned, uncontrolled property is likely to result in a disaster. Controlled property is likely to result in a disaster. Now, what's interesting is that none of these three accounts seem to account very well for what happened on Cayo Santiago. There may be and I think a number of people have claimed this the one that I think is most interesting is Friedrich Hayek. Friedrich Hayek claimed that we have a kind of atavistic set of moral intuitions about how we should treat each other, and we might transition between one or the other of these. So it may not surprise you to learn I'm a fan of the Demset story.

Speaker 1:

Property doesn't become a thing until there's problems of scarcity. Cayo Santiago is relatively small and the population grew to the point where there was scarcity, and then the monkeys defended their territory. But when scarcity became extreme after Hurricane Maria, the monkeys used a different mental model, sharing more like a family. After a natural disaster, the idea of using prices or invoking property rights becomes offensive, and we actually see that with humans also. So the price gouging laws, the laws that we have against raising price after a natural disaster, are not just an impulse to control the way goods are allocated. We have a moral intuition that it's wrong to do that. So humans, though unlike monkeys, should be able to understand price elasticity. Most of the time, using property and allowing prices to rise quickly attracts more of the scarce resources. So, even though we have this moral architecture that tells us it's wrong, it is morally wrong not to share after a disaster. Using price and the market mechanism is actually the fastest way to get more of the stuff is actually the fastest way to get more of the stuff. But it's true. For 10 human beings in a lifeboat or 1,000 monkeys on a newly barren island, there is no more supply. Primates, including humans, appear to have a mental model which is largely atavistic because humans have the chance to use markets. But, as we see from this example, it clearly has survival value in a setting where supply elasticities are low, which is really quite interesting. That's why I was so interested in that story. Whoa, that sound means it's time for the twedge. This week's economics joke.

Speaker 1:

Three beautiful women walk into a bar. They demand that the bartender judge which was most attractive a kind of economic judgment of Paris, if you will. The first woman says I'm trademark. The next woman says I'm copyright. The last woman says I'm patent, I'm copyright. The last woman says I'm patent. So obviously all three of these are ways of claiming ownership of intellectual property. The three women demand to know which one the bartender thinks he would spend the most money on. The bartender snorts and says ha, none of you. He pointed over to a darkened corner. A beautiful woman was sitting in the shadows, surrounded by gorgeous men in tuxedos. Some of the men were trying to buy her drink, others were rubbing her feet or trying to talk to her. The bartender says well, she would be my choice for pursuing, even though she's fast and never has long relationships. Well, trademark, copyright and patent are all angry. What makes her so great? We don't even know her name. Bartender smiled and said well, no one knows much about her, but she goes by the name Trade Secrets. So the point is that Trade Secrets is all one night stands, no commitment. You may find it's the best, hottest relationship of your life, but if you try to get a marriage license and make things formal, she'll just slip away.

Speaker 1:

Got a letter from JF. You likely saw this already, but coming off your Hayek episode, I thought I would share. It seems some people are listening to Tidy C and realizing there's a market for restaurant tables. What I think would really be funny is if the restaurant just created a futures market for table reservations. A few years of that, and hear me out. Commercial restaurant reservation-backed securities. Jf sends a link. So not only would there be an asset, there would be derivatives derived from the asset. End of letter. So that's pretty great.

Speaker 1:

It is interesting that for other things that we use to ration, normally by having a line, the system does have reservations. There's no reason to expect that the reservation will be owned by the person who has the highest valued use for that time slot, because it's kind of random. So should you be able to buy a reservation from someone who has it Notice? The premise would be that I've made a reservation at a fancy restaurant that I want to go to. You want to go to that restaurant also. I would pay up to a certain amount, say $100, for my reservation. You're willing to pay $500 for that reservation? I'd be better off selling the reservation. You'd be better off buying the reservation, and it doesn't harm the restaurant. Well, the problem is that once reservations are commoditized, people will start making reservations not because they want to go to the restaurant, but because they can claim for free this valuable asset, the reservation. And so you'll see, in effect, scalpers buying at a zero price all of these reservations. It was interesting.

Speaker 1:

There was a kind of analogous situation in the Bay Area where it was very difficult to find parking, especially in San Francisco, and somebody came up with an idea they called Monkey App, and I'm trying to connect back to the macaques. It may be a little clumsy, but work with me, I think that's the worst thing I've ever heard. How marvelous Monkey app was a way of selling, in effect, reservations for parking, and so if I am in a parking spot and I want to sell it, I will list the fact that I'm pulling out of this parking spot. Someone who's driving around looking for parking will pay me a certain amount. I'll wait until they come up and I can identify them because I have the description of the car. I pull out, they pull in and someone, instead of driving around and around, can just buy an immediate parking spot. Well, the problem is that people with low opportunity cost of time started just parking in parking spots, not because they wanted to park there, but because they wanted to sell that asset, that property, right. So Monkey App was finally outlawed because it meant that there were even fewer parking spots than before. All of them were taken up by people who, because once this asset had been commoditized, were occupying it just for the sake of reselling it at a higher price, and in the case of parking, that meant that I would be willing to pay the meter rate in order to make money off selling it on Monkey App.

Speaker 1:

Well, it's time for Book it a Week. It's an edited volume called Toward a Hayekian Theory of Social Change. It's edited by Peter Betke, erwin Decker and Chad Van Schoelend. It has contributions by some of my favorite young people, including some of the editors, so Erwin Decker, casey Pender, samuel Schmidt, abigail Stesa, kaylee Thompson and Chad Van Schoelen. It's worth taking a look at, though because it's published by Roman Littlefield, it has an extortionate price, but if you can find a way to get a copy, I certainly recommend it. The next episode of Tidy C will be released on Tuesday, july 9th. We'll have a new topic, some letters and, of course, a new hilarious twedge. All that and more next week on Tidy C.