The Answer Is Transaction Costs
"The real price of everything is the toil and trouble of acquiring it." -Adam Smith (WoN, Bk I, Chapter 5)
In which the Knower of Important Things shows how transaction costs explain literally everything. Plus TWEJ, and answers to letters.
If YOU have questions, submit them to our email at taitc.email@gmail.com
There are two kinds of episodes here:
1. For the most part, episodes June-August are weekly, short (<20 mins), and address a few topics.
2. Episodes September-May are longer (1 hour), and monthly, with an interview with a guest.
Finally, a quick note: This podcast is NOT for Stacy Hockett. He wanted you to know that.....
The Answer Is Transaction Costs
Political Capitalism and the Power of Elites: Randall Holcombe
This episode explores the intersection of democracy and capitalism, focusing on the concept of political capitalism and its relation to cronyism. Randall Holcomb discusses transaction costs, charismatic leadership, and critiques the idea that democracy and separation of powers inherently checks coercion, stressing the need for competing elites to foster accountability.
• Transaction costs hinder citizen engagement in political processes
• Political capitalism defined as capitalism influenced by political motives
• Dynamic of cronyism within democratic systems
• Buchanan's notion of "politics as exchange" explored
• Political elites dominant in shaping policy and public preferences
• Charismatic leadership affects political beliefs and decisions
• Importance of competing elites for maintaining a balanced political landscape
• Reasons for optimism surrounding innovation in capitalism despite political challenges
• Upcoming book discusses further aspects of political exchange
Links!
Randy Holcombe's web site at FSU
Michael Giberson blog post at Knowledge Problem, on Price Gouging.
Book'o'da Month: Peter Boettke, Rosolino A. Candela and Tegan Lindstrom Truitt, The Socialist Calculation Debate: Theory, History, and Contemporary Relevance https://www.cambridge.org/core/elements/socialist-calculation-debate/5E63749F9D34D065193DCF77FC9FD8A9
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
This is Mike Munger, the knower of important things from Duke University. Today's guest is Randall Holcomb of Florida State University, who works in the James Buchanan tradition of public choice. His two recent books Political Capitalism and Following their Leaders will soon be followed by a third book in the series Politics as Exchange, out later next year, 2025. A New Twedge this Month's letter plus book it a month and more Straight out of Creedmoor. This is Tidy C.
Speaker 2:I thought they'd talk about a system where there were no transaction costs, but it's an imaginary system. There always are transaction costs. When it is costly to transact institutions matter and it is costly to transact institutions matter and it is costly to transact.
Speaker 1:My guest this month on. The Answer is Transaction Cost is Randall Holcomb at the Florida State University. At the Florida State University. Looking at his background, I have known Randy for a while, but looking at his background it did strike me that there's a number of parallels. We started in different places but arrived at surprisingly similar places. Both of us studied with Nobel Prize winners, randy with James Buchanan and I with Douglas North. We both have endowed chairs at our university, but we're perhaps not part of at least in my case the mainstream graduate focus of the department. We're both past presidents of the Public Choice Society, even though and again this is my opinion, I'm not trying to speak for Randy public choice has turned away from what I would say is the Buchanan view of politics, as exchange does a number of other interesting things, but it is not as Buchanan-centered as it once was, and both of us have become interested in a potential problem with capitalism that is deeper than I think many defenders of capitalism have recognized.
Speaker 1:I have argued that this problem is cronyism, that in a democracy, capitalism is likely to turn towards cronyism. Now many people see that as a pathology of capitalism which perhaps could be avoided. Randy has argued for a related but I think more useful concept, the more that I think about it, called political capitalism, and political capitalism is really a separate category of government. It is a long-term equilibrium, it can survive for a long time, it has properties of its own and it deserves kind of its own field of study. So I am coming around to that view rather than thinking that, you know, somewhere at the end of the study of capitalism we mentioned cronyism briefly we might try to study political capitalism as a standalone equilibrium system.
Speaker 1:Now you might think that it is not as good a system as capitalism, but one of the questions I want to get to with Randy is the question of whether capitalism is actually viable. Is it sustainable in a democracy or is it always inevitably going to turn towards the dark side, and what things, if any, might be done to accomplish that? So with that introduction, let me ask the question I always ask, which is what was your background? How did you come to decide to study economics, particularly the odd kind of economics that you and I do?
Speaker 2:An interesting question, mike. I got interested in economics as an undergraduate, taking my first economics course. I really didn't know what to expect and the thing that impressed me about it was understanding the way that markets work. I always have felt with economics, if you understand, if you know a little economics, you can really understand a lot with a little bit of knowledge. And I mean there are some things we take for granted I did before I studied economics. For example, you can walk into the grocery store that stocks tens of thousands of items. You're looking for some particular item. It's almost always there. Pretty amazing.
Speaker 2:I tend to drive my car. I don't like to go to the gas station that much, but I drive my car until the tank is almost empty, confident that I can pull into a gas station and there will be gas there that's available. And so understanding supply and demand and the way that markets work a spontaneous order that nobody plans out I mean to me that was really impressive and I felt again, you know, from knowing a little you can really understand a lot. But you mentioned the stuff that we've been doing in economics, a little bit outside the mainstream maybe, and you know how did I get there and it just so happened that as an undergraduate, I took a special topics course on public choice, and one of the books that we used in that Can you say where were you an undergrad, so that people I can say that I was an undergraduate at the University of Florida.
Speaker 2:Now I teach at Florida State now, so I really don't mention that to my students.
Speaker 1:I wanted it out on the record, though. This is full disclosure.
Speaker 2:Sure sure, yeah. So at University of Florida I had a special topics course on public choice, a special topics course on public choice, and one of the books that we used in that special topics course was the Buchanan and Tulloch book Calculus of.
Speaker 1:Consent, this was not in the 80s. This was cutting-edge stuff when you were an undergraduate.
Speaker 2:Yeah, yeah, yeah, this was back. I graduated as an undergraduate in 1972. So the book was published in 1962. So at that point it was 10 years old. Not really what you would call mainstream economics, as you know.
Speaker 2:It was a different way of looking at the public sector, and so and you mentioned that I'm a Buchanan student and I think that's really so true that, methodologically, the way I look at economics is a lot like the way that Buchanan looks at economics. You know, and one of the things he emphasized was the way that public policy was analyzed in economics at the time was to basically to derive to show that markets aren't always perfect. The term that the profession used for that is market failure, a term I'm not overly fond of, but Buchanan popularized the countervailing term, government failure. Okay, markets aren't always perfect, but governments aren't perfect either. So Buchanan was looking at a situation where the way economists tend to analyze public policy is to say look at this problem, look at that problem with markets, look at this other problem with markets. Here's the optimal outcome, here's the optimal thing to do.
Speaker 2:Let's have the government do that, and essentially, what you're doing, then, is substituting economic analysis for wishful thinking. We undertake all the sophisticated economic analysis to show possible shortcomings of the market. And then, instead of continuing with economic analysis, we engage in wishful thinking. Let's have the government do the optimal thing. So the Buchanan approach is oh, let's look at the way government actually operates. We can use these same principles of economics to analyze government decision-making, the same way that we use them to analyze decision-making in the market, and there can be government failure also. Anyways, I really liked that approach to economics. I was attracted to it, and so I ended up going to graduate school at Virginia Tech, where Buchanan and Tulloch were at the Public Choice Center.
Speaker 1:And Buchanan had not been there long. No, I wish I could remember the exact year I think he moved back 71 or 72 from UCLA, so he had not been at Virginia Tech that long. He hadn't been there five years.
Speaker 2:No, no, I think it was earlier than 72 or 71. I think it was late 60s. But since we don't know, we don't remember, we can leave it at that. But you know, when I went there to graduate school, buchanan and Tulloch was really like one term for me. You know we're going to study with Buchanan and Tulloch and when I got there, of course Buchanan and Tulloch are pretty different people in the way that they look at economics. So you know, I mentioned that I really feel like I'm a Buchanan student in that. Methodologically I don't know that I could really find anything that I would disagree with methodologically with Buchanan. But I do think he was a little bit overly optimistic about the prospects for collective decision making and so there I tend to side more with Tullock. Tullock was not so optimistic, I don't. Methodologically I view Tullock as more or less a Chicago school economist. I don't know whether you would buy into that or agree with that.
Speaker 1:More. If you look at Tulloch's work. Tulloch is more of a Chicago school economist than Buchanan, who is in fact a Chicago school economist. That's right. That's his PhD.
Speaker 2:That's right. Yeah, so you know, methodologically I feel like I'm pretty much in sync with Buchanan, but as far as trying to understand the way the world works and I think Buchanan was a little bit overly optimistic until it had a more realistic view along those lines. So I mean it was my good fortune to have that undergraduate course in public choice, be acquainted with the work of Buchanan and Tulloch, and that's what lured me to Virginia Tech, to graduate school, and it was a pretty exciting place at the time that the Public Choice Center was there. There was a lot of faculty who were very interested in public choice stuff. There were several public choice seminars. Faculty contributed their work, graduate students participated. So it was a really interesting intellectual environment at the time and in a way I appreciate it more after the fact. That I did when I was there, because when I was there I was struggling to try to keep up and this is just how things are.
Speaker 1:This is the way every university is, and that's not true. The excitement, the sense of shared purpose that's not true of most departments, most of the time.
Speaker 2:Yeah, oh, that's right. Yeah, so I mean, buchanan basically ran the show there in the department. He wasn't the department chair when I was there, but he had the ear of the department chair and basically the department chair. Well, he carried out what Buchanan wanted to have done.
Speaker 1:And it is good to be good at something. And for a while Virginia Tech was the center of the universe. It didn't last all that long. George Mason hired him away and then, not long afterwards, he got the Nobel Prize. He, buchanan, got the Nobel Prize in economics, and if you read the description of why he got the Nobel Prize, one of the things that's mentioned is the theory of clubs. But another thing that is mentioned and I wanted to ask your opinion of this Buchanan took back a lot of his earlier optimism in the limits of liberty.
Speaker 1:So he had been pretty optimistic. He was sort of a productive state theorist. A productive state is a state in which we can make agreements and the state should do the things that the state should do, and we will prevent pathologies by not agreeing on other things. He was much more of a minimal state theorist that he was skeptical about the ability to use contracts and agreement to prevent the state from acting badly. But what do you think about? Are you an anarchist? Do you consider yourself an anarchist? And the one way of thinking about being an anarchist in this setting is the question of politics as exchange. Buchanan was a radical Democrat in a way. If a group of people wanted, by unanimous consent, to say this is going to be the system that we choose. They got to do that. Values start with us. Anarchists tend to think they get to do that as long as either there is no state or they mostly use markets. So to what extent do you accept Buchanan's fundamental principle of politics as exchange, or would you back off a little bit?
Speaker 2:That's a complicated question, so let me step back and sort of address it step by step. Buchanan, I don't know, maybe you and I view that book a little bit differently, but Buchanan, I think, still has that optimism in that book in that he develops this model where, hypothetically, people agree to a social contract right. And so the fundamental idea behind that book is agreement we're going to agree on the rules.
Speaker 1:It strikes me Well. Buchanan describes it as his book about why he is not an anarchist, in spite of the fact that he had become more skeptical. So your view was he still wasn't skeptical enough.
Speaker 2:Yeah, that's right. I mean, basically he develops this model where people imagine going back to a state of anarchy and agreeing on the social rules, so we have a social contract. And agreeing on the social rules, so we have a social contract. And the problem, a problem with that particular methodology, is Buchanan is making out government to be the product of agreement, when in fact it's a product of coercion, it's a product of force. All government is a product of force, and that's true no matter how much you like your government. So I'm not, you know, I'm not saying how bad government is. All I'm saying is it's created by force. Every government around the world. I mean when you think about the United States government, where we have this romantic idea about, you know, trying to establish a government to protect our rights and our freedoms, and I think that a lot of that's true. But think about it the government was formed by winning a war.
Speaker 1:And you know before that, or two, depending where you grew up. If you grew up in the South, our government was formed by winning two wars.
Speaker 2:Yeah, yeah, yeah, yeah. And before that, the government and the colonies I mean that was formed by Europeans coming in and forcefully taking over over property. So all government is established by force and is run by force, and so that's I mean that would be my main criticism on Buchanan's limits of liberty is depicting something that is the creation of force as the result of agreement.
Speaker 1:What's interesting, I think, is the. I don't want to interrupt, but I want to go back to where I had started. What was mentioned was the theory of clubs and the theory of clubs. Clubs are coercive. Also, we agree that we will all be members of a club and then I have to follow the rules and if I don't I'll be punished or kicked out of the club.
Speaker 1:But the fact that I can exit with if I disagree with what the club does makes it very different in terms of the level of coercion. So I think Buchanan seems a kind of seamless connection between small groups of individuals that will decide to do things collectively and we'll just scale that up and we'll have a contract based on consent and provided that no one's consent is violated. The fact that it's coercive is not inherently a problem, because I consented to be coercive. But, if I understand you, at some point there's a qualitative difference and it might be hard to say where, and it might matter in different places in different ways. But anything that's actually identifiable as having the features we would associate with government consent is not really doing the work that Buchanan wants it to do.
Speaker 2:Well, I mean, there's this idea that we agree to be coerced and when you join a club, that's true. Okay, I'll join the club If I sign a contract.
Speaker 1:If I have an agreement with somebody that I will pay you to mow my lawn, you mow my lawn. I don't pay, I get coerced.
Speaker 2:Sure, sure. And the thing about government is, people didn't agree. I mean, here I am a citizen of the United States government, which really I'm pretty satisfied with Mike. However, I didn't agree to it and, like I said, no matter how much you like your government, it's the product of coercion, not agreement. So there's really, as you point out, there's not that same parallel between clubs and governments.
Speaker 1:Does that make you an anarchist?
Speaker 2:No, it doesn't.
Speaker 1:After all this, you believe in government.
Speaker 2:I believe government's inevitable. I wrote an article, probably 25 years ago now, and the title of it was Government Unnecessary but Inevitable, and that's caused me to receive the wrath of a bunch of anarchists. But basically I said look at all the things government does and the private sector could do all those things. You know I mean things like education. Obviously there are private schools, things like roads a little bit harder to imagine, but you know we could talk about that at some length and there are private, private roads and there could be more roads and there could be more.
Speaker 2:And libertarian anarchists like David Friedman and Murray Rothbard made pretty interesting cases about how the private markets could provide protection services in place of government police, could provide arbitration services in place of government courts, and so forth. So that's my unnecessary part of the argument government unnecessary but inevitable. Because those protection agencies that Rothbard and Friedman conjecture they have to operate because they have a comparative advantage in force, and when you have a comparative advantage in force, there's a temptation to use it. And so it's likely that if we did have those free market protection agencies, they would evolve into little mafias which would evolve into oppressive governments. So because there's a group of people who are power hungry and who have a comparative advantage in the use of force. I don't think there's any way to escape that. There's going to be a ruling class and there's going to be a group who are ruled, so I think that's just inevitable. So what we need to do is try to find ways to constrain those who are in the ruling class from abusing their power.
Speaker 1:Which brings us to Buchanan's magic Trump card, which was constitutions. So whether he actually believed that constitutions could accomplish what you just said, that's it. That's all we've got. So how can constitutions work to limit the size and power of Leviathan?
Speaker 2:I don't think they can work alone. Mike, if you think about, okay, it's inevitable that we're going to have a ruling class and a group who are ruled, the political elites and the masses and, by the way, some of the work I've done on this has relied pretty heavily on the concept of transaction costs to explain why that's the case. But that wasn't what you asked about.
Speaker 1:So we can come back In a very innovative way and we're going to come to that in a minute. That is a major innovation, I think.
Speaker 2:Yeah.
Speaker 2:So we'll come back to that. But you know what are ways that we can constrain the ruling elite? And one way would be a democratic oversight, that basically the government is accountable to the people, the ruling elite is accountable to the people, the ruling elite is accountable to the people. We have democratic elections and so forth, and I think maybe that's something we want to come back to. But the problem with that is that the masses essentially have no power. And again, we can talk about why that is later. But here's the thing the powerless can't control the powerful, even if they far outnumber the powerful. So I'm not.
Speaker 2:I like democracy, I think democratic government is a good thing, but I don't think democratic oversight by itself can constrain the ruling elite. And in fact, if you think about it, vladimir Putin was democratically elected, adolf Hitler was democratically elected, chavez in Venezuela democratically elected. So those are examples that illustrate democracy by itself isn't going to constrain the abuse of power by the political elite. Now, constitutional rules that's Buchanan's big idea. And again, I think constitutional rules are great, but they don't work unless they can be enforced right. So I mean, lots of countries have constitutions and also have oppressive governments where the constitutional rules aren't enforced, so you need to have some enforcement mechanism. The rules are good, but then we need to have some mechanism to enforce the rules. And so that comes to where I think the real constraint is if you have a ruling class, a political elite, and you have the masses, who essentially don't have political power, that the way that you control abuse of power by the political elite is to have competing elites. And that's one of the things the founding fathers thought of in the United States. Right, well, I have three branches of government. They'll check and balance each other, and really there was a fourth constraint there. Also, they viewed that the states could be a constraint on the abuse of power of the federal government. But if government's being run by a group of elites, but if government's being run by a group of elites, then in order to constrain their abuse of power, you need to have competing elites. And I talk about this in my classes, and one of the questions I ask leading up to this is what's the difference between Donald Trump and Vladimir Putin? Okay, now, there are lots of differences, but here's where I'm going with that question.
Speaker 2:In the 2020 election, donald Trump was the sitting president. After the election, he declared that he should be the rightful winner of the election. And so well, there was, you know, some political escapades there that went on. But Trump was the sitting president. He declared he was the rightful winner of the election, he should remain in the White House. And what happened? Biden took his place. Why, and what happened Biden took his place? And why? Because there were competing elites, so that Trump couldn't just say I'm the president and stay in power. Putin, on the other hand, there were term limits in Russia on Putin's presidency, so he changed the Constitution so he could remain as president. So you know, I mean the way. What I'm getting at in that question is Trump had to leave power because competing elites were able to force him out. In Russia there are no competing elites. Everybody is beholden to Putin. Elites, everybody is beholden to Putin. If you disagree with Putin, you end up accidentally falling out of a hotel room or you get poisoned.
Speaker 1:Your plane gets shot down.
Speaker 2:Your plane gets shot down, you end up in jail. So when you look at the way that power is actually constrained, it's competition among elites.
Speaker 1:Well, so let's turn to. You have written a number of books lately, which, by the way, means you are clearly a failed economist, because a successful economist would never write a book. So I don't know what's wrong with you as a failed economist myself. I'm in a political science department. So it's okay, but stay off my damn turf. You have two really important Cambridge books in the last seven years. The first one was political capitalism, the second was following their leaders, and that's not the only work that you've done, but I think the two of those show a real kind of sequence in your thinking and constitute together an important contribution.
Speaker 1:Let me give a little bit of setup and then you can elaborate or correct me. So I have written that cronyism is a perversion of capitalism. As I said before, you see political capitalism as being a standalone, sustainable system. It's not a good system, but it could last quite a while. Transactions costs play a really central role in that, which is interesting. Now we tend to think of politics as having a role for transactions costs, but that's good. For example, one of the ways of introducing transactions costs into the political's good. For example, one of the ways of introducing transactions costs into the political system is the Australian ballot. It makes it much harder for me to make a credible claim that I have sold you my vote, because what I might say is that you will give me the ballot. I will go in and publicly put the ballot in the box and it worked. And this is how it worked in the US in the 19th century. I would put my ballot in the box. Everybody could see it. It was blue or it was green, and I could reliably know that you had cast your vote in the way you had promised. And I give you five dollars when you come out. The secret ballot, the Australian ballot, prevents that, so it introduces transactions costs to make that kind of agreement harder.
Speaker 1:There's all kinds of collective action problems for elites where it is difficult for groups to get together. But the ballot box organizes the masses to allow them to overcome the collective action problem. We don't have to meet. We don't have to get together, we can just all vote and then the best candidate will emerge. Elites have trouble organizing against that and so we overcome the Marxist problem that you know. The masses are always going to be downtrodden because the elites are all together and the collective action problem will prevent that Now economists start with the idea that all of us have preferences that are fixed, exogenous and well-informed, and we'll admit that's not really true. But we'll start with that idea that preferences come from my experience in the world, my normative predispositions. I then choose among the alternatives that are given to me at the ballot box, and, yes, I don't know perfectly which one will be better. But there's campaigns, I have ways of working this through, and a better campaign will do a better job, and so you. It gets the competition among elites that you were talking about. And there's.
Speaker 1:You have argued and since I'm a North student, I would say that North had started to argue this in the early 1990s that people don't actually understand politics very well, they don't understand ideologies very well. They have mental models that they form in contact with the political culture and they never get a chance to update them. They don't get any kind of feedback, and so they might hold rationally hold because they don't have much of an impact on the outcome. They might rationally hold irrational beliefs about what's possible and what's good. So you have, I think, taken that a couple more steps in a way that is interesting and important.
Speaker 1:You argue for a kind of Max Weber, charismatic leadership. So Max Weber talked about a charismatic leader as someone who, for populist reasons, citizens really like. I like the way that this guy acts and the result is that since I like this person, I want to follow him. I find out what this person believes and then those become my policy preferences. It reverses the direction and that changes everything about the rationality of this model. So what I see here are two contributions.
Speaker 1:In political capitalism, you say that the actual institutions that we have reduce the transaction costs of elites, overcoming the collective action problem, and the result is that elites dominate to a far greater extent than the high school civics view of democracy.
Speaker 1:The second book says that once you understand that leadership actually involves telling voters what to believe, and if you're an effective leader, it works, those two things combined change the way that we should think about the state. Can you say something then, under those circumstances, about whether capitalism is sustainable? Is this system destined to get even worse? Part of the reason that it seems to me you wrote these two books in this sequence was looking at the political world around us. Have you become less optimistic Now? I understand that's a really long introduction, but I wanted to connect it to some of the things that I've talked about before, about Douglas North. How would you describe the evolution of your thinking? And, as I said, I think these two books actually stand together as a really important contribution and I hope that their influence continues to expand, because I'm persuaded I have become a Holcombean.
Speaker 1:Good for you, Mike. There's like seven of us now.
Speaker 2:Yeah, yeah. So you raise a whole lot of issues there, and so let me take a step back to provide some context for those issues. Going back to this concept of politics as exchange, so Buchanan advocated that concept of politics as exchange, and public policy is made through politics as exchange. So there's a political marketplace. Politics as exchange is a real thing. It's not an analogy, it's not that politics works as if there's a marketplace. There is a marketplace and exchange actually takes place, but here's the thing Only a few people are able to trade in that marketplace. It's because of transaction costs. So you have legislators engage in log rolling, vote trading and so forth. They negotiate with lobbyists to produce public policies. A lot of times the bills that come out of Congress are actually written by the lobbyists.
Speaker 1:You know it's much cheaper. That way it is much easier. I'm a legislator, I don't have time to write this damn thing.
Speaker 2:Right, ok, so what I'm saying is that there is a political marketplace. That's where public policy is made through politics as exchange. But in order for that to happen, people have to be able to trade with each other. Right, people have to be able to trade with each other, and most people are excluded from that political marketplace because of high transaction costs. Okay, so let's go another step back on that. This concept of transaction costs was popularized by Ronald Coase in his article the Problem of Social Costs.
Speaker 1:Really the theory of the firm and then, for present purposes, the Problem of Social Cost.
Speaker 2:Yeah, Right and I want to use that the Problem of Social Cost, the prototypical example, because Coase was talking about externalities in the economics literature on externalities at the time. The prototypical example is a factory that's producing air pollution and people around the factory have to breathe the air pollution and because there's a large number of them, they're unable to negotiate in order to reduce the pollution. So, basically, if you look at that model, let's imagine a steel mill that's producing steel for an automobile manufacturer. The two of them the steel mill, the auto manufacturer they face low transaction costs, so they're able to bargain to get a contract between them that maximizes the value of resources to the transacting parties, to the transacting parties, now, the people who are breathing the polluted air. It's not that the steel mill is trying to harm those people, it's just a byproduct. And because there's a large number of them, large numbers mean high transaction costs, so they're unable to negotiate in order to reduce the suffering from the air pollution.
Speaker 2:That exact same model works with government. You have the lobbyists, you have the legislators, you have the agency heads. Those are the people who face low transaction costs. They're like the steel mill and the auto manufacturer. And then you have the masses, the general public. Those are like the people who are breathing the polluted air. There's a lot of them. They face high transaction costs so they're unable to bargain in order to enter the political marketplace.
Speaker 1:Well, it's actually not rational. They could there's nothing preventing it but it's not rational for them to try to bargain because the costs of doing it would be so high. It just doesn't come up.
Speaker 2:And the cost of organizing the masses. So you have the people, the low transaction cost group the legislators, the lobbyists and so forth. Those are the people who make public policy. And then there's a high transaction cost group the masses and those are the people who are excluded Now. And then there's a high transaction cost group the masses and those are the people who are excluded.
Speaker 2:Now I want to come back to something you were saying about elections and use this framework to think about elections. When Congress votes on issues, it looks a lot like they're having an election. They're taking a vote, something like a general election for candidates, but it's a lot different. For this reason that the political elite negotiate on what they're going to vote on before they vote. So it's not that they're given alternatives, no, they decide what the alternatives are, they negotiate. So they have a pretty good idea before any vote takes place. They negotiate on what's going to pass and if it looks like something might fall a little short or something we need to buy a vote, they'll go to another legislator and say look, we can put a civic center, community center, in your district if you'll come to our side and vote for the legislation. So what they're voting on is what they've already agreed that they'll pass, right, so they decide what they're voting on. The general public, on the other hand, they go and they vote. The only choices they have are the choices that are presented to them by the political elite. And I'll tell you, over the last several years, you really see this so much.
Speaker 2:If you go back to the 2020 election, when President Biden was elected, I mean, there were a lot of Democratic hopefuls there who were engaged in campaigning, looking to win the election, and the political elite in that election basically talked them out of the election, talked them out of the primaries so that Biden could win, because they viewed Biden as a more moderate candidate. We don't want a Bernie Sanders. In fact, conor Harris was another one who was. You know. No, you know, she's too left wing. We don't want a Bernie Sanders. In fact, conway Harris was another one who was. You know. No, you know she's. She's too left wing. We don't want her. We want a more moderate candidate like Biden.
Speaker 2:The candidate was chosen by the political elite. And you see this even more in the 2024 election. I mean, there, biden won all the primaries. He's the one, he was the choice of the voters, and yet the political elite decide no, we don't want the people who the voters chose, we want to have somebody else run.
Speaker 2:So, basically, with legislation, the legislators themselves decide what they're going to vote on. They're like the auto manufacturer in the steel mill they decide here's what's good for us, whereas in the general election, yeah, you get to vote, but what you get to vote on is candidates who were chosen by the political elite. And you really see that over the last several years, it's always been true that the political elite decide who are the viable candidates, who's going to get the money, who's going to get the support, and you see that so much lately. So the thought that there's this democratic oversight, that the people are choosing who is going to be in charge. Well, fortunately, there are competing elites, so you have a little bit of choice, but the choices you are offered are the choices offered to you by the political elite.
Speaker 1:So, and that is your story in political capitalism, which is an extension, I would say, of some of the other work people that have done about cronyism, that is, that this is the way that capitalism in this system becomes something else, because it makes perfect sense for the steel manufacturer and the car manufacturer to include a third party, and that is the state, the regulatory agencies, and so that small group it expands to increase government, and so it's not capitalism like you teach it in textbooks, it's political capitalism, which is something else, and it is not only sustainable, it is almost impenetrable to outside forces, because everyone inside it is profiting from this kind of system.
Speaker 2:Yeah, I mean, I think the hope for capitalism is the continuing innovation that we see in the market economy, that you know, taxi cabs get displaced by Uber. So I mean one of the things if you think about, you know, government intervention. You look at the New York taxi cab medallions as an example. But Uber and Lyft have kind of undermined that. You see new businesses, things like Facebook that you just wouldn't have imagined Facebook and Google and so forth that are outpacing government. Overall I'm an optimist. You go back to the 1940s and in capitalism, socialism and democracy Joseph Schumpeter asks can capitalism survive? He says no, I don't think it can. And around that same time Frederick Hayek wrote the Road to Serfdom. And what was the road to serfdom? Socialism. So pessimistic outlooks. But here's planning.
Speaker 1:It's the socialism is now overused. It was central planning where you get this metastasizing. First, we try to regulate some prices. That creates distortions. To account for that. There's this expanding circle. So socialism is sort of a weird. That was the word he just he meant. So socialism is sort of a weird. That was the word he meant, but what he meant was an attempt to plan the economy, and both of them, published at about the same time, had this view that capitalism, in the sense of prices being allowed to dictate the way resources went. It couldn't survive, and it has survived, probably more than either of them would have predicted. Hayek actually lived to see that, that he became, in a way, a little bit more optimistic.
Speaker 2:Yeah, I'm not sure Hayek really saw that and I'll just relate an anecdote to you.
Speaker 1:Compared to 1944 in England, things were really bad for 10 years.
Speaker 2:Sure, yeah. And Hayek survived beyond the fall of the Berlin Wall. And I talked to Jim Buchanan, who related this story to me, that after the fall of the Berlin Wall he talked with Hayek, you know, saying wow, isn't this great? I mean, what a victory this is for freedom and free markets and capitalism.
Speaker 1:And he said at that point, hayek wasn't as sharp as he used to. He just didn't recognize what a big victory that was. That's interesting. That really is interesting, because maybe a lot of people didn't in 1990 or 1991. It took a little while to understand the implication of the temporary defeat of planning, but which brings us to the second book, to following their leaders.
Speaker 1:There was a kind of triumphalism among our people. I participated in it in the 90s and early 2000s. Capitalism is one George Will said the Cold War is over and the University of Chicago won. There was this view that liberalism, or what is called neoliberalism, had triumphed and that this was a permanent triumph. It wasn't, it didn't. We have now many college students, if asked, say that they think at least that socialism is as good and maybe better a system. I don't know what it means, but they like the idea that we should be socialism rather than capitalism, whereas political capitalism is kind of an extension of existing work. I think following their leaders is a radical departure from the whole Downsian approach to the economic modeling of democracy. What did you do? What made you think about following their leaders, and how do you think we should change the way that we teach economics in light of following their leaders in light of following their leaders?
Speaker 2:Oh, that's a tough question. One of the things that inspired me the starting point for following their leaders is the distinction between instrumental and expressive voting, and Brennan and Lomaski had that nice book on expressive voting and you know essentially well, with instrumental choices, what you choose influences what you get. With expressive choices, you make a choice and it has no influence over what you get. So you go to a restaurant, you order the salad instead of the pizza. You get the salad. That's an instrumental choice. And after you finish your lunch you go to the voting booth. You vote for candidate A over candidate B. You made a choice. It has no.
Speaker 1:You expressed a choice. Yeah, you expressed a preference.
Speaker 2:You expressed a preference. It has no influence over what you get, and so, as a result, people may not choose an expressive choice. They might express a preference for something they wouldn't choose if the choice were theirs alone.
Speaker 1:And, to be fair, Brennan and Lomaski say it's just two different domains. I may care which candidate wins and I may have a preference over what I express. They could be the same, but there's no reason because they're just separate things.
Speaker 2:Exactly exactly. And in following their leaders, I want to take the next step and say and following their leaders, I want to take the next step and say, ok, people are making expressive choices. What is it that determines the expressive choices that they make? And I go through some analysis, but you know, in the end I say that it's the political elite who tell them what to think. And that's what they think. I mean. If you look, what is it that determines people's political preferences? Some of it might be peer pressure.
Speaker 2:If you grew up in a family that has particular political orientation, you're more likely to have that orientation, that orientation and a whole bunch of theoretical reasons why you might choose a particular political, to express a particular political preference. And then there's the endowment effect. You know, basically, once something is yours, you value it more, and I think that applies to preferences also. So you're trying to decide. You know what are my political preferences and once you've expressed a choice, you're reluctant to change your mind. Cognitive dissonance plays a role there. You've expressed a preference for a particular party, a particular candidate, and to change your mind that would induce cognitive dissonance. You think oh, wow, maybe I was wrong over there. So there are a whole bunch of things that influence people's political preferences and I think cognitive dissonance actually plays a big role Because when you look at public policy issues, there's a whole bunch of them, right.
Speaker 2:I mean, what are we going to think about foreign policy? Do we want to keep supplying arms to Ukraine? Do we want to up our stake there? Maybe we want to pull back abortion, controversial issue, second Amendment, gun control. So there are a whole bunch of issues and a lot of them are complex issues where it's difficult to understand them. And if you pick a candidate, so you're following a particular candidate. If you don't agree with the candidate on all the issues that might induce cognitive dissonance when you show up at the polls, on all the issues that might induce cognitive dissonance when you show up at the polls, well I like him on this issue. But on this issue I don't really see eye to eye. But because it's an expressive choice, it costs you very little to just completely go along with the politician. Go along with the politician.
Speaker 2:So basically, in that book I say people anchor their preferences on a particular candidate or party or ideology. That's their anchor and their political anchor basically is how they see their political identity. You asked me right at the top of the podcast, you know, do I think of myself as an anarchist or a libertarian or whatever? So you have this political identity. That's your anchor. And then your public policy preferences are all derivative preferences, derived from your anchor. So what I perceive that I'm doing in that book is taking that idea of expressive preferences, going a step further and saying where do those expressive preferences come from?
Speaker 2:So, basically, you choose an anchor. That's my political identity, and then your public policy preferences are derivative of your anchor preferences. I mean, think about it and I mean there are all these issues that don't seem to be closely related. But if you tell me your preferences on the abortion issue, what you know, your preferences on the abortion issue, you know a woman's right to choose, right to life. You tell me your preference on the abortion issue. I can make a pretty good prediction about your preferences on taxes More progressive tax system, less progressive tax system. Those issues seem like they're not really related to each other and yet there's a pretty high correlation between people's preferences on the abortion issue and people's preferences on tax progressivity. You know why is that? My answer is they're following their leaders, they anchor on a particular political identity and then their policy preferences on all these other policies are derivative of their anchor preferences.
Speaker 1:So what is the implication of to be fair? You're not claiming that people are just tabula rasa. They wake up on election day and they take all their preferences and views from what their favorite candidate has said. And they take all their preferences and views from what their favorite candidate has said. Maybe I care about abortion for a long time. There may be some issues that I have some knowledge of and that I care about, but on the issues of the day, for the most part people, the direction of causation is I have an effective response to one candidate and I look to that candidate to inform the rest of my policy views.
Speaker 1:That means that and this is what Max Weber was concerned about it's the reason that Max Weber advocated for bureaucracy instead of democracy was voters are not capable of making this decision. They're going to make it badly. They're going to choose Hitler, and because Hitler was a charismatic person, and then maybe people weren't actually racist, maybe they weren't really anti-Semitic, but that's what Hitler says, and I want to be part of this group, I want to be part of this party, and then. So that's the direction. If that's true, what is the implication? What sort of reforms might we try to implement to limit the damage?
Speaker 2:Well, I'll go back to what I was saying earlier. The hope is competing elites, so we have two charismatic people competing.
Speaker 1:I'll just adopt the weird pathologies of whichever one. They're both bad.
Speaker 2:Well, that too, yeah, yeah, yeah, but but still those, those competing elites have to compete for votes. So ultimately, I mean I was sort of negative on the influence of democratic oversight on government, but ultimately, if you have a couple of strong candidates, you have competing elites. Ultimately they are competing for votes. So they need to try to put together policies that will attract voters. I mean, I think we've had very charismatic characters in American politics, but fortunately there have been countervailing powers. They are competing elites.
Speaker 2:Ronald Reagan what a charismatic guy. Bill Clinton what a charismatic guy. Barack Obama what a charismatic guy. Donald Trump what a charismatic guy. George W Bush oh, what a charismatic guy, donald Trump. What a charismatic guy. George W oh, wait a minute. But you know, again, going back to the example I gave, you know the difference between Trump and Putin. I think you know Trump has that charisma, but there are competing elites who were able to stand up against him. I think that's our hope and I mean, one thing you might question is you know, why is it that those competing elites haven't been able to win over and take over government altogether? I don't really have a good answer to that. I mean, you know, if you think about government rules by force.
Speaker 1:You know why doesn't the military just take over, and one answer is well, in some places it does.
Speaker 2:Yeah, often it does. Sure, those are the people that have the guns. So we've been fortunate in the United States, in Western Europe, that there have been competing elites so that nobody's been able to take over complete power. And I think if there's a threat, you know again going back, I mean democratic elections, that's good, but without competing elites it's toothless. Constitutional rules constitutional rules are good, but you need people who will enforce them. I think the United States Constitution, it's done pretty good service in that people will go back and talk about what's constitutional, but I think we're, you know, over the decades and the centuries we're moving away from that, the decades and the centuries. We're moving away from that A lot of times. What is decided, what the Supreme Court decides?
Speaker 1:the Constitution says isn't actually what the words of the Constitution say. That's worrisome. That, I think, probably is the best we can do, and I think maybe we lose sight of how important that institution might be. It actually requires the belief that all of us believe in the necessity of competition, even if that means we limit the power of our own side when we're in power. I've told this story a number of times, but it happened again after Trump was elected. This time First in 2016,. A lefty friend of mine at Duke comes in, closes the door and says Munger, I was reading the Federalist Papers. There's some really good stuff in there. Well, yeah, and there was really good stuff in there a month ago when your boy was in charge. Well, I wasn't worried about it. Then you actually have to be worried about it when your boy is in charge, when your girl is in charge.
Speaker 2:That's right.
Speaker 1:So if you only worry about it when the other side is in charge. That means you're not really concerned about competition, and I think that is the that's a good place to close. Following their leaders is a reminder, in fact, that the textbook vision of the outcomes of democracy will always be ideal. It makes no more sense than thinking the outcomes of textbook markets will be ideal. So let me ask if people want to follow more of their work, what should they look for and what are you working on now?
Speaker 2:Well, I actually have another book coming out with Cambridge University Press that's titled Politics as Exchange, and it extends these ideas and talks about why it is that not only there is a political elite who makes public policy, but it has to be that way. A lot of times, I mean, you see, critics say well, you know, it's the cronies, it's the elite who are running things. We need to have more popular support, we need citizens to get involved. But, going back to the title of your podcast, transaction costs prevent that. So I do have another book coming out in 2025 with Cambridge University Press, so we'll make that a trilogy.
Speaker 1:Well, the first trilogy is usually good. I think you shouldn't have a prequel. The prequel trilogy is always terrible. So I'm really glad to hear that there is a third book in this because, seriously, I think this is important work and I do want to try to draw attention to the fact that you're making a coherent, extended contribution to our understanding of public choice and public policy. Well, Professor Randall Holcomb, thank you very much for being a guest on. The Answer Is Transaction Costs.
Speaker 2:Thank you, mike, it's been my pleasure.
Speaker 1:Whoa. That sound means it's time for the twedge. First, since we were talking about Congress this month, a Congress joke. The secret to making Congress more efficient is to replace all of the people with horses. A lot of people already think that members of Congress are a horse's patootie. Why not just replace them with horses? Every budget vote on increasing spending would end in all nays and the housing market would be stable. Second joke how are politicians like diapers? Well, they both need to be changed regularly and for the same reason, this month's letter.
Speaker 1:Hello, mike, I've been catching up on your Tidy C podcast and enjoyed price gouging or private information. I thought you'd enjoy hearing the Massachusetts version of your bottled water gouging story. On May 1, 2010, a major waterline break in Boston led to a boil water emergency for part of the city and the surrounding area. To a boil water emergency for part of the city and the surrounding area. State and local officials, including the governor, attorney general and on down to the director of the Division of Standards, weren't against price gouging on bottled water. The director of the Division of Standards said it was sending out inspectors to check on prices. Now I blogged on it at the time at Knowledge Problem, noting that media reports that a woman complained, quoting her son, was charged $23.76 for a 24-pack of bottled water, and the family has since contacted the Attorney General's office. End of quote. Another example reported by the Boston Globe said, quoting Boston, police were sent to a Tedeschi food shop in Hyde Park at 8.57 am after the mayor's office reported that the store was charging $16 for a case of water. According to police and a mayoral spokesman. End of quote.
Speaker 1:Now, interestingly, massachusetts price gouging law at the time only applied to petroleum products was later expanded. But what were Division of Standards inspectors checking for? Turns out they were looking for violations of a state law requiring electronic cash registers to match shelf prices. Exactly the twist. In at least one case, the accused convenience store didn't have a case price in their system, so by law they could only sell at a price of 99 cents each, or exactly $23.76 if you buy a 24-bottle case. Discounting, as some consumers apparently expected, having a case price actually would have violated the state law on pricing. Further, since almost every consumer would have had easy access to means to boil water, bottled water wasn't even a necessary good for consumer health, safety or welfare. In a final ironic twist, the White House declared a state of emergency on May 4, 2010, for the water main break, but by that time the break had already been repaired. End of letter MG. Well, thanks, mg. That really is a great story. When we start to look at problems with price, it is often the case that what seems strange is actually mandated by government policy. So thanks for the example.
Speaker 1:It's time for Book in a Month. This month's book is by Peter Bettke, rosalino Candela and Tegan Truitt. Title of the book is the Socialist Calculation Debate Theory, history and Contemporary Relevance. It's from Cambridge University Press and tells a really interesting history. I recommend it. Well, the next episode will be released on Tuesday, january 28th. We'll have a new topic, some letters and, of course, a hilarious new twedge. All that and more next month on Tidy C.