The Answer Is Transaction Costs

Commerce and Sociology: Novak on Entangled Political Economy

• Michael Munger

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What happens when we stop seeing politics and markets as separate spheres and start recognizing their deep entanglement? Mikayla Novak, senior fellow at the Mercatus Center, challenges conventional economic thinking in favor of Dick Wager's "entangled political economy."

Drawing from her fascinating career path through Australia's Treasury, free market think tanks, and her pursuit of multiple courses of study, Novak offers unique insights into institutional economics and political networks. Her background bridges disciplines in ways that embody Hayek's wisdom that "you can't be a good economist by just being an economist."

We consider Boettke's distinction between "mainstream" economics—with its equilibrium models and market failure diagnoses—and the "mainline" tradition that views economies as dynamic processes shaped by institutions. This conversation reveals how Richard Wagner's entangled political economy theory helps understand policy failures. When government and markets form complex networks rather than separate spheres, simplistic reform attempts like "just cut spending" are disastrously unsuccessful.

The discussion vividly illustrates why transaction costs matter deeply for institutional analysis. We examine how political networks form with elites enjoying low-cost access while ordinary citizens remain at the periphery. This structural understanding helps explain why some inefficient policies persist despite their obvious flaws—they benefit the well-connected core of our political-economic system.

Mikayla Novak's page link

Richard Wagner: 

Previous TAITC Episodes of Relevance:

Late Bloomers book, by Rich Karlgaard

Munger on tariffs and costs

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:

Today's guest is Michaela Novak, a senior fellow at the Mercatus Center. She's had a variety of interesting academic and government jobs and I talked to her about institutions and entangled political economy. There's two new twedges this month's letter, plus book in a month and more Straight out of Creedmoor. This is Tidy C.

Ronald Coase/Douglass North:

I thought they'd talk about a system 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.

Michael Munger:

My guest today on the Answer is Transaction Cost is Michaela Novak, from the Mercatus Center. As always, I ask guests to introduce themselves. Michaela, welcome to. The Answer is Transaction Cost. And how did you make the journey that you have made to arrive where you have? Was it intentional? Were there some sort of unexpected steps along the way, and where is it exactly that you are?

Mikayla Novak:

Yeah, thanks, mike, it's a great pleasure to be here on the podcast with you, so it's an excellent sort of question to ask of me. So, as you've just indicated in your very brief introduction that I'm at the McHater Centre at George Mason University, so I'm one among the sort of FA, hiac sort of fellow, sort of cohorts engaged, you know, very intimately with the McHater Centre's academic and student programs, which is always a sort of fun and exciting process, being able to engage in the sort of the realm of mainline political economy ideas and classical liberal ideas with young people around the world. So what got me to where I am now is certainly a catalactic, spontaneously ordered journey, we might say. So I started out my undergraduate years in Brisbane, australia, which is basically the subtropical north of Australia, so think of my home state as effectively the equivalent of Florida, right, and you've got everything to a T. So I sort of started out in economics. So this is betraying my age a little bit. Well, at least indirectly sort of started out in the early 90s and so really at that time, you know, I mean there was sort of like a big sort of question in sort of the political and social life I felt that sort of need to be addressed. So the idea, in short, was well, you know, if communism and socialism is so good, then why did the Berlin Wall fall? Why did the whole regime collapse right around the time that I was an undergrad? So to sort of help answer that question, I sort of snuck into the sort of the JD story library at University of Queensland campus, st Lucia in Brisbane, and happily stumbled upon oh, I mean, I think what I might have detected sort of first was basically the Cato Journal and then sort of followed, yeah, followed by, you know, writings of these interesting sort of figures known as Mises, hayek and so on.

Mikayla Novak:

I was actually rather sort of fortunate during my undergraduate years I majored in public finance, and so I think I was fortunate that my sort of teacher and honours supervisor at the time was actually teaching his students about sort of James Buchanan's approach to public finance, and so Buchanan, you know, was a very natural sort of point of attraction for me. I just really loved that classic 1949 paper. I think that was just extremely illuminating. This is the pure theory of government finance right, which, as you, as you know, and if some of your listeners would know, will basically, you know sort of puts forward a uniquely, mythologically individualistic sort of purview of public finance. So I stumbled upon that during my undergraduate years and then and then, um, I came across a particularly interesting figure in public choice by the name of Richard Wagner, and so he was starting to sort of outline what you might sort of describe as a catalectical, process-oriented approach to public finance, which you know really sort of hit that sweet spot in terms of my own sort of intuition. So, you know, in a couple of short papers, actually in the American Economic Review and the papers and proceedings issue that typically comes out in May of each calendar year, wagner had a couple of papers in the late 80s, something like the early 90s, you know, presenting sort of an explicit process-oriented approach to public finance which you know I just found captivating. And that's sort of where I sort of initially got contact into classical liberalism.

Mikayla Novak:

Then later on I sort of connected myself a few short years later to my undergraduate studies when in oh gosh, it would have been 1996, I sort of had first contact with the Australian sort of free market think tank realm. So the Centre for Independent Studies had a wonderful event called Liberty in Society. They still run it. So it's basically, you know, much like Liberty Fund colloquia, much like Macadis Centre sort of colloquia, and so that was great. Got to meet, you know, excellent people like Chandran Kukathas for the first time there. He was an academic in Australia at the time, mesh Wolfgang Kasper, you know, who became a sort of a friend of mine sort of down the track. So this is sort of we're all talking about the, you know, sort of the 1990s, and so after that point I sort of diverted, right. So we're talking about this sort of this sort of catalactic sort of journey that has swings and roundabouts, right.

Mikayla Novak:

So shortly after that sort of encounter with the CIS, I went into, for all of my sins, into the Australian Civil Service. So I spent 10 years there, very interesting time, though you know this is kind of at the back end of Australia's sort of very productive experiment, I'm going to have to say, with microeconomic and macroeconomic reform. So one of the sort of the interesting sort of moments I had during that public service career, you know. So think about it as the 2000s, that decade.

Mikayla Novak:

Mainly it was in the sort of public sector. So I was involved in part in the Australian Treasury, in which sort of tax reform. A big tax reform process was sort of taking place. So Australia introduced their value-added tax right, the GST, at that time and that had some very significant implications for how Australia's sort of fiscal federalism, you know, was to be financed. So I was really in the sort of the administrative sort of end of that process. So that was really fascinating. So really during that decade I didn't really sort of maintain a lot of contact with sort of, let's say, classical liberal academia or think tanks, but by about it must have been about I think it was 2008, got out of the civil service.

Michael Munger:

So you were living in Canberra. You were living in Canberra.

Mikayla Novak:

So lived in Canberra for pretty much all of that time in the civil service, so this is the decade of the 2000s, then, in 2008, moved to Melbourne, right. So this is where the RMIT University doctorate sort of later comes in. So I had the good fortune of being appointed a sort of senior fellow at the Institute of Public Affairs, right, which is another sort of free market think tank. I think it actually describes itself as the world's oldest free market think tank. Maybe the IEA in London may wish to dispute this, perhaps, but there you go. So I spent 10 years there, and so one of the wonderful sort of things that came as a result of that experience at the IPA, the Institute of Public Affairs, was the capacity to toggle for a little time, part-time, to do my PhD thesis at RMIT University.

Mikayla Novak:

So this is economics, under the great tutelage of Sinclair Davidson, right, who's quite a prominent classical liberal in Australia. Also Steve Cates, right, and Steve Cates might be known to some listeners of your podcast as an expert in Say's Law, and Steve Cates had his own interesting career in which he spent the same number of years as Mises did, in Steve's case, in Australia's sort of national business representative organisation called the Australian Chamber of Commerce and Industry. So Mises has spent 24 years in the equivalent in Austria. Steve right, one of my thesis supervisors, spent 24 years at ACCI, and so 2010 sort of started on my economics PhD. So the topic was, I felt, an important one, and it actually still is, and it's certainly a topic I'm quite keen to delve back into in the near term, which is essentially empirical estimates of the relationship between governmental size and economic performance, and so unsurprisingly and this is consistent with the weight of the empirical literature sort of growth in Australian government actually detracts right from economic growth, and so this was the thesis Finished that in 2013 on time, which was good, and so basically spent, yeah, roughly. It ended up being eight years of lots of fun, lots of policy impact, actually with the Institute of Public Affairs.

Mikayla Novak:

So a couple of little claims to fame, if I can sort of note them is that one thing that was actually really very effective for this think tank was my role in sort of producing state tax benchmarking estimates for the different states on business taxes, and that actually was actually quite an effective process in that, first of all, in the initial years, a lot of the sort of state government treasurers in Australia were sort of grumbling and disputing the benchmarking results, but, you know, by the end of the process they actually came around to, you know, by the end of the process they actually came around to, you know, accepting the sort of veracity of the analysis and that actually contributed to downward tax pressure, you know, which represented real savings for taxpayers, which was a wonderful thing. And then, as a sort of final note, with respect to my period there in the free market think tank, the IPA, obviously the nature of public policy is one of flux and change and so you have to be very responsive, you have to sort of have a self-confident orientation to get out there and be in front of a camera and, you know, be able to sort of put forward a consistent, classical, liberal, directionalist position out there in response to sort of policies, a number of which were, you know, incredibly, quite retrogressive from the perspective of economic betterment. So that was that. So that was sort of that, the economic sort of period of sort of my life, you know, really spanning from the early 90s through to 2016. And then you know sort of, you know, a few years after that, I wanted to sort of do a bit of a change in direction.

Mikayla Novak:

I think I sort of I've always taken sort of FA Hayek's notion to heart that and this was expressed in one of his early lectures at LSE, I think the trend of economic thinking, if I recall correctly, in which he says and I'll paraphrase what Hayek says he says you can't be a good economist by just being an economist. I always sort of took that notion to heart, and so I engaged in a very interesting sort of U-turn of engaging in sociology. I guess there's probably a little bit of a Wagner, a Dick Wagner that kind of maybe inspired me there, because I was always impressed whenever I read Dick Wagner's work, most notably his 2007 book on fiscal sociology, dan, it seemed to me at least and others might dispute this, but you know this is a position I kind of held and still maintain that there's actually a lot of interesting research opportunities by trying to sort of meaningfully intersect economic and sociological concerns in interesting, incredible ways, and so that was really my motivation for doing well, actually, a second PhD I sort of figured. Well, you know, if you're going to actually try to learn something new, you might as well do it right, and part of doing it right was actually going through the labours again of another PhD, and so I went back to Canberra. So I lived in Melbourne during the think tank era, so to speak, and then, you know, back around I think 2016, I moved back to Canberra, you know, doing a lot of contract work with sort of my sort of networks that I built up in Australia and overseas, then sort of formally embarked on sociology PhD. It was actually computational social science, and so here, what I was doing, robert Ackland at the Australian National University was my primary supervisor. He's a really good guy, sharp guy. He himself is really interesting too because he's a sociologist now, but he actually started out in economics himself. So we actually had quite a lot in common in terms of our interests. So the thesis itself was in the domain of computational social science. I thought it would be interesting to have a look at that. Was this at the ANU then? Yeah, anu, australian National University right, so in Canberra.

Mikayla Novak:

So in 2019, I embarked on this second PhD. I embarked on this second PhD, so the topic was to. The subject was to look at online networks, so Twitter networks discussing green climate change mitigation right, so, with a focus on hydrogen technology, among other things, because that was sort of the great sort of fashion item in climate sort of mitigation at the time in Australia, and so that was really great because, you know, I'll mention this sort of pandemic in a minute. But it was really an excellent experience for me because I actually opened up new vistas for me in terms of, you know, just sort of building on my own empirical capabilities, because I'd never done sort of network empirical analysis before. That was great.

Mikayla Novak:

I could see clear relationships between that and entangled political economy, and indeed this is Dick Wagner's sort of approach, obviously, and so I sought to actually to some extent integrate sort of Wagner's approach and entangle political economy with this online sort of communicative network analysis. That was great. And one wasn't able surely to predict um beforehand that 2019 was on the cusp of a pretty terrible pandemic pandemic when people are locked up for years on end. Uh, and so yeah, it was. It was interesting in that I guess the, the thesis was sort of a, an oak I I guess a somewhat sort of satisfactory way of kind of living through that kind of weird and constrictive sort of period.

Michael Munger:

It was constrictive everywhere, but in Australia in particular it was constrictive.

Mikayla Novak:

Yeah, it's something I sort of I admittedly sort of still furrow about and puzzle about, you know, sort of quite keenly. What sort of really struck me from that time was, in addition to the, you know, really prescriptive sort of lockdowns and the seeming ready community acceptance of them, at least initially, and Australians are a bunch of bloody minded people, and yet they just lined up to be told what to do yeah, well, I mean, it does, it does sort of tell, tell us something interesting, I think.

Mikayla Novak:

I mean I I'm, I guess I can only sort of provide a somewhat of a sort of speculative set of reasons as to why, uh, so so I think I think the best way I sort of describe Australians to my sort of colleagues and others who might care to listen is that Australians are actually not these sort of rugged, sort of individualist crocodile, dundee kind of blokes, kind of running around, you know, with kind of you know sincere, genuine ideas of liberty in their hearts and minds.

Mikayla Novak:

They're sort of described in as best described, as basically Benthamite utilitarians and you know, sort of quite you know, and Benthamite utilitarians of convenience as well. And so this kind of account of Australia and the Australian sort of political sociology was encapsulated in a paper in the mid-'80s, in a journal called Daedalus, which is kind of more of a public intellectual sort of discussion journal, and so there's a great paper actually discussing the sort of this psychology of australians as benthamite utilitarians, and so it kind of as it, as it works, as it kind of strangely pans out, um it's, it would seem that a benthamite utilitarian would be very happy, uh, to accommodate notions of control and restriction if they thought there was some sort of benefit in it for them.

Michael Munger:

Well, and for the collective? They're worried about the collective, and so the meek acceptance of it, I thought, was surprising. Well, I keep interrupting. How was it then that you went to Mercatus Right?

Mikayla Novak:

So, with respect to Mercatus, I finished my sort of PhD in 2023, 2024. So I think over the years, I mean, I had a really good sort of fortune, although I sort of never deliberately sort of planned for it. I think it was just through sociality and repeated contact, you know, through which I was able to sort of develop, you know, quite a sort of robust array of personal, professional affiliative networks with other like-minded classical liberals both in Australia and around the world, particularly in North America. Obviously, as you know, classical liberal sort of thinking is very well represented in North America, particularly the US, with respect to pockets of academia as well as the proliferating number of sort of think tanks around, and so I sort of knew people like Pete Becky for, oh gosh, 20-odd years. I knew Virgil Storr for a long time. You know a lot of the sort of senior people at Don Bedro and you know many others I just had known for a long time. And so the opportunity just really just came up in an impromptu phone call, not of my doing, you know, sort of suggesting look, you know there are opportunities here, might you be interested. I certainly was interested. So let me sort of, if I might, let me just sort of say a little story about sort of the interest from from my end.

Mikayla Novak:

So when, um, when I sort of finished my all my studies back in 1996, um, there was a, there was obviously an opportunity for me to sort of transition into a PhD back in 1996, a long, long time ago. So I I remember I recalled back back then I actually had all the paperwork ready to go to submit, to enrol, to try to enrol in the PhD program at the Department of Economics at GMU back in 1996. Yeah, yeah, so I had this sort of paperwork and I just never acted on it, right, I just sort of let it just sit and, uh, the paperwork got lost. But, um, but so for me, when you know someone, someone great, who I really admire, like Virgil Storr, um, you know, gets into contact with me and say look, you know, here's an opportunity at the Mercatus Centre, you know, obviously connected to GMU, what do you think? Well, I'm jumping at the chance, right, because you know that for me sort of represents, you know, sort of fulfillment of that kind of grand circle of kind of the ambition At a much higher level.

Michael Munger:

the experience you had, the education that you had, meant that you were bringing out something outside that really added something to Mercatus rather than being, forgive me, another George Mason clone who had gone through the same. So good on you. That was well done.

Mikayla Novak:

Yeah, no, no, thank you, I didn't. So I never planned at all, it was all spontaneously ordered or you know elements of surprise, but you know it's just, I mean there is, there is always a little measure of persistence as well. And you know, it's just, I mean there is, there is always a little measure of persistence as well. And you know, and, and just as much as you do I have, you know the sort of the tenets and the principles of classical liberalism strongly in my heart and you know that you know that's a fire and that will never extinguish, and so, um, you know, really it's, you know it's the development of experience plus combined with principles which are actually really, really important, I think, these days, because I worry that, you know, principles seem to be a little bit in short supply nowadays. So that kind of combination Kind of worked out well for me, even though, as I said, I never planned any of it.

Michael Munger:

Well, there are a number of messages here for young people. I have some brief kind of follow-up questions because you have used a number of terms of art and then I do hope we can get to entangled political economy and the difference, the sort of connection with transaction costs and the differences from transactions costs. But first let me say one of the themes I always try to talk about for young people and there are young people who listen to this podcast life is long and it's not a race, and sometimes the most direct path to what you want can be quite roundabout. So trying to go directly may lead you astray and your story is an excellent example of that.

Mikayla Novak:

May lead you astray, and your story is an excellent example of that. Yeah, look, I think so, and I'll say just consistent with that, I'm just trying to recall who actually wrote the book. There was a very recent book about late bloomers. I don't know if you ever came across it yourself, I'm just trying to think of the author, if I recall the author, I'll come back.

Michael Munger:

I'll put it up in show notes. You can email it to me.

Mikayla Novak:

yes, yeah for sure. So there's sort of a book about sort of late bloomers, and I kind of see myself a little bit in that vein. You know, it's never, ever too late to be able to sort of strive to fulfill your ambitions, dreams and aspirations.

Michael Munger:

You didn't waste the time this was not too late. This is more than that. It was indispensable. Those other experiences just make you so much better. Now, this is self-serving. I myself had a while in the wilderness. I couldn't get a job in academics out of graduate school, so I worked for the US Federal Trade Commission. It's not what I wanted, but it's absolutely what I needed.

Mikayla Novak:

Yeah, absolutely, and I sort of see my time, for example, in the Australian Civil Service places like Treasury and the Productivity Commission as being very similar.

Michael Munger:

So that's very interesting. Thank you Well. Another question I had you used very quickly you slipped in a term of art which at George Mason is understood but outside is rather cryptic, even enigmatic. You said you were interested in mainline economics. That says to be distinguished from mainstream economics. Help our listeners out. What's the difference?

Mikayla Novak:

Right, so Pete Becky is the person who coined this term of mainline political economy. In spite of that, it's a good idea. I hope he doesn't hear that I tell him every time I see it.

Mikayla Novak:

He probably will, describes mainstream political economy as effectively what's, let's say, epistemically, sociologically, at least academically, fashionable. So if we think about the mainstream of economics, as I'm sure many listeners will be well aware, it, you know, it seems to sort of have a very constrictive view of the rich tapestry of human life. This is because it's economic sort of models you know, perfect competition maybe so the exemplar sort of microeconomic instantiation of this modelling you know, which assumes sort of equilibriation right throughout the economy. It assumes a whole range of things with respect to sort of human knowledge and behaviour, such as sort of the possession of full knowledge on the part of agents and so on and so forth. But curiously enough, in that sort of mainstream approach and obviously the mainstream approach gives itself, lends itself to a certain degree of mathematisation and quantitative analysis as well but by the by the mainstream approach, I think the significance of it is that it gives ready diagnosis for a range of government interventions, because you sort of have a nirvana of a perfect competition model that will never satisfy real-world processes as it is. So these are depicted as being failures right with respect to a perfectly competitive, pareto-efficient standard. Someone, some agent, a government, competitive, pareto efficient standard, someone, some agent, a government must come in to intervene exogenously to correct for all these market failures. That's the mainstream approach. And the mainstream approach, at least as I see it, is highly correlative with this sort of 20th century growth in economic statism. Right, keynesianism, sort of regulatory economics and so on and so forth. Right, because the economy is supposedly under the mainstream framework, it's shot with market failures. Right, there needs to be some sort of corrective. Okay, so that's the mainstream, the main line, the main line is in contrast, obviously, to the.

Mikayla Novak:

The mainstream, so becky identifies a mainline mainline tradition tracing from adam smith through to car Menger, through to Mises, hayek, buchanan, the Eleanor Ostrom as well, we can think of Vernon Smith and a number of others who sort of have an alternative view of the economy as a process in which sort of exchanges are dynamically taking place which are governed, right, not only by the movement of prices and also costs, transaction costs being very important, as I'm sure we'll discuss.

Mikayla Novak:

But human action in an economy is also guided, you know, guided, constrained, even empowered by institutions. And some of these sort of key messages have tended to be lost in this conventional mainstream approach of the market, the economy as a process unfolding over time that inspires and empowers entrepreneurship, right to be implicated in material betterment. That tends to get lost in the sort of the mainstream approach, the idea that institutions and institutional quality might have actually a say with respect to the wealth of nations, as Adam Smith had sort of famously enunciated. It is also something else which is very much at the centre of mainline political economy but has somehow been lost from the mainstream of conventional economics, maybe because you know there's some sort of physics envy, you know, within sort of the mainstream of economics that basically anesthetises, you know, all of the dynamic processes, the role of institutions, and the institutions of course, as you know, will include not only law, formal institutions and the rule of law, but also informal institutions, culture and norms.

Michael Munger:

So what's interesting about that? And one place that it arguably went astray. Now, in a way it went astray with John Marshall in the way it went astray with John Marshall in the beginning of mathematization, but he was still interested in intuition. But Lionel Robbins a lot of us blame Lionel Robbins. He was a very good economist, but his definition of economics was the study of the allocation of resources among competing scarce uses. And that lends itself to a calculus treatment of optimization, where you have an individual, all the parameters are given and there exists a determinate solution. We then aggregate that using general equilibrium theory. We can evaluate the quality of that equilibrium with comparison to an idealized setting, show that actual markets fall short and then we have a justification for government.

Michael Munger:

I myself am a student of Douglas North and Barry Weingast, their emphasis on institutions, and North was another Nobel Prize winner in the list that you rightly laid out. There's a lot of very important economists that have departed from that. But the reason it's mainstream, and I almost never compliment Pete, but I have to in this case Pete Betke, the person who I think came up with this distinction. Almost anywhere you go, if you have an economics major at very elite universities, and in Australia also, for the most part you will never encounter the name Hayek. You will never encounter most of the names that we're talking about. There might be some advanced elective course where you read North Ostrom, but for the most part you're just going to study that optimization view.

Michael Munger:

But that brings us to sociology and entanglement. So what in the world is a sociological approach to economics? How does it differ from the mainstream? Because it's also a little different from the main line. A sociological approach really is a. It's not quite a third thing, but it's a second and a half thing. It's consistent with institutions. So what is the sociological approach and what is Dick Wagner's particular contribution has been what he calls entangled political economy. So what's that about?

Mikayla Novak:

Right. So, yeah, so what you're raising here is some really important issues. So let's just think a little bit about the sociological sort of dimension of economic action first, and this is actually something that you know, mises and others had sort of recognised that sort of culture, right. So culture will have some sort of influence among many other influences with respect to individual decision-making and collective behaviour and collective action possibilities within sort of economics. And so I think actually the best exponent of an intersection of economics and sociology today, aside from Dick Wagner's, virgil Storr, and so he's written quite sincerely and meaningfully with respect to what we might actually mean by informal institutions and particularly culture, and so, drawing upon sort of Clifford Geertz, who was an anthropologist of all things, so Virgil sort of refers to sort of culture as webs of meaning.

Mikayla Novak:

So the significance of that is also encapsulated by the work of the Austrian economist Don Lavoie, right, who says that, look, entrepreneurial sort of action is a little more than, let's say, the curzinarian alertness to profit opportunities that exist out there in the world. Lavoie would say, look, there's actually an interpretive function behind entrepreneurship, in which entrepreneurs have to sort of accurately sort of read, you know, the signals from sort of the economic and cultural environment. There's no point, for example let's let me just sort of give an example so let's say you're in an Islamic country or you're in Israel, something like that there's no point being an entrepreneur trying to sell pork products right in those sort of environments because you know they're just not consistent right with the sort of the cultural environment. And so you know the cultural environment is, you know, can also be sort of understood by, for example, age-old debates about usury, right about interest-bearing loans and so on and so forth and sort of just accepted sort of modalities of behaviour. And so the sociological sort of issues are quite interesting because you, you might think that there actually might be some tension between, um, so the effect of these sort of cultural or sociological variables in constraining human action or individual behavior and the possibility of entrepreneurship, let's say in a shackackleyian vein or a Lockmanian sort of vein so it's George Shackle, ludwig Lockman, about entrepreneurship, you know, really being sort of an open-ended, creative process that actually might challenge not only sort of incumbent economic positions.

Mikayla Novak:

So you know, for example, and as you've written yourself in the past, the reason why you know we actually really support freer, open markets is that they can actually undermine economic incumbency, including cronyism. This is really important. But also, entrepreneurship can probably play a role in actually shaping our culture as well. I mean, think about, you know, for example, the sort of the economic and cultural significance of things such as social media, or you know, hip hop, or you know, or what have you, or you know, even sort of like the tech economy. Okay, so that's all the sociological kind of stuff. So that was, admittedly, quite a long preamble toward, well, okay, what does Dick Wagner have to do with sociology, right? So I think Dick Wagner actually has quite a lot to do with— we should.

Michael Munger:

For interrupting, we should say Dick Wagner was a student of James Buchanan. He well, fairly early on 1966 is when he finished his PhD, it was at the university of uh Virginia. One of the just before uh Jim was at the time getting thinking about leaving. There were problems? But uh, there were. There was a whole crop of very prominent, amazingly prominent students and Dick Wagner was one of them, and so that that was the context. He was a student of Buchanan, but he also has a lot of questions about Buchanan and that's something that you yourself have thought about. So in this, if you could touch on the relationship between Buchanan and Wagner, I'd appreciate it.

Mikayla Novak:

Yeah, very good. No, that's great, and thank you for that as well, because I think the um, the, the intellectual background of wagner uh in itself sort of is is warranting uh sort of attention, as you've just sort of very nicely laid out there. So as, as as you've said, mike, um, you know, wagner was uh one of buchanan students, arguably one of his best students actually. Actually, in my opinion, it's objectively true, he really was great.

Mikayla Novak:

Yes, he was and he is and he's still plugging away and very productive. So even you know, even from sort of Wagner's early works, it's quite evident that sort of sociological considerations sort of come into play. So what Wagner's really sort of sociological considerations sort of come into play, so what Wagner's really sort of pointing out, is that in the economic action people often give justifications for their actions, and so the use of Vilfredo Pareto's sociology is actually very central to Wagner's sort of conception. I'll actually get to a bit of a definition of entangled political economy in a moment, but just to try to provide a better bridge between the two aspects of your preceding question. So Wagner has been very forthcoming in using sort of Vilfredo Pareto's logic, if I dare say, of logical action, right, which occurs in the economy, right in which, let's say, the credence of claims made about, let's say, product quality can actually be empirically tested by customers in a market. Right, if you know someone you know like think about the lemons problem by Akalov so you know used car salesman says, oh look, you know, the used car that I'm selling is great. Well, a customer you know can engage in logical action by purchasing the vehicle and empirically testing that used car salesman's claims as to whether indeed the used car is actually running and fully operative or not. So, and profit and loss is a very important mechanism through which these sort of claims about the sort of the credibility or the credence of goods in a private market are tested and sorted through.

Mikayla Novak:

By contrast, in a public economy dominated by public sector activity, it's actually very difficult for citizen taxpayers to actually make a meaningful connection between the credence of claims that political actors make about standards of public goods that they're providing versus the actual outcomes. Probably a most notable example of this, which is the subject contemporary discussion, is basically school education, right, so there's more and more money public money, taxpayers' money being ploughed in to public education in the US and other countries. Yet it seems that the student test score standards seem to be sort of flatlining, if not in decline. So therefore, there's an important disjunction right between sort of the credence of claims that political actors sociologically make and, uh, the actual performance and the outcomes. And why is that? Well, you know, as mese has said in 1944 in his book bureaucracy, short book bureaucracy there's no profit and loss mechanism that actually operates.

Mikayla Novak:

In the sort of the public economy you know, we might have sort of occasional or infrequent voting processes going on, but as many scholars, many scholars Anthony Downs, brian Kaplan, jeff Brennan with expressive voting motives and so on, motives and so on and many others, have indicated that voting procedures themselves can't necessarily ensure that the public economy is characterized by logical action. So look, if I might just on. So what is this entangled political economy that? Well, let's take one second and say traditionally, this is often treated as a transaction cost problem.

Michael Munger:

William Niskanen in this entangled political economy that Well, let's take one second and say traditionally this is often treated as a transaction cost problem. William Niskanen, in his book Bureaucracy and Representative Government, said that the key problem is that even legislators don't have the information that they would need. So there's a principal agent framework, the, the, the. The problem is that in the mainstream setting we often talk about price. In the main line setting we recognize that every transaction requires a disagreement about value. If you and I agree on a price, it must mean I value it less and you value it more. That's what enables the transaction.

Michael Munger:

John r commons actually talked about the trans action as saying it should be. That's what enables the transaction. John R Commons actually talked about the trans action as saying it should be. That's the unit of analysis. And so there was sort of a. Some people went in the transaction cost direction to look at that. There was a history. John R Commons really was a sociologist. He thought that institutions themselves should be the object of analysis. And so the trans action, which takes place in a context with a set of social norms surrounding it, is more the sociological approach. And I'm just repeating what you said. But I wanted to make sure that that was clear to someone that had not thought in those terms before. The mainstream economics tends to look at price and equilibrium. Institutional economics and sociology tend to look at the transaction, the action of people in a social context as what is to be explained. So sorry to interrupt, but to clarify.

Mikayla Novak:

No, and this might serve as a useful connection for what I was wanting to say. So Wagner, you know, has engaged very thoroughly with sociological sort of concerns which I sort of personally sort of find valuable, originative sort of contributions to political economy. Is this development of a sort of a framework or a system of thought called entangled political economy? So before, so before and even now just in in discussion, we uh sort of refer to um. This is the mainstream conventional approach of exogenous political action seeking to intervene right exogenously from on high.

Michael Munger:

It's a binary, they're disjoint Right.

Mikayla Novak:

So that's the thing. So the mainstream approach right is of a disentangled right set of arrangements where polity is estranged from economy. Now what Wagner is saying is that no, actually in reality what we actually have are a range of individuals and meso-level collective entities, not actually estranged from one another right in the world, but they're actually entangled right. So there are network connections right between private sector actors and public sector actors, actually entangled right. So there are network connections right between, you know, private sector actors and public sector actors. These may be competitive interactions, these may be collaborative or cronyistic sort of interactions, but I think the connection to transaction costs is actually really very interesting.

Mikayla Novak:

So think about sort of Wagner's political economy. In his effort to try to put relations at the forefront of political economy, he does say in dispatches that he is backgrounding prices and costs, including transaction costs. Now Wagner recognises that in the world, you know we don't live in a world of zero transaction costs, including transaction costs. Now Wagner recognises that in the world, you know we don't live in a world of zero transaction costs. Therefore, the need for institutions and you know, intermediation and all those sort of things to help, you know, economise on transaction costs and whatnot, but there's sort of the relationships that have come to the fore. So what's interesting I find about this entangled political economy approach is that there has been some recent developments that try to build upon this entangled political economy approach by trying to understand the shape, right the contours and network structures between, let's say, public sector actors and private sector actors as being influenced by transaction costs themselves, right as they operate in the public economy.

Mikayla Novak:

Let me explain a little further, if I can. So Randy Holcomb has written a couple of excellent books, right? Everyone should read them. One of them is called Political Capitalism.

Michael Munger:

Randy was a guest here on Tidy C and we talked about that, and so the listeners that are interested can go back and listen to that, because that is an important connection.

Mikayla Novak:

Thank you, yes, exactly right. And so what Holcomb is saying and people can recall the previous podcast episode of yours, in fact and what he's saying is that the network structure of public economy, right, where elite political actors, right, legislators and senior bureaucrats are tightly clustered together, bunched up diagrammatically in a network, and this happens because the transaction costs of political interaction and exchange for them right are relatively low. Right, by contrast you have and think about this again diagrammatically you have outside that so tight political elite bundle. In your network, your cluster, in your network, you have all of these private actors, small businesses, individuals on the periphery who don't have a great connect with politics, with insider politics. Why? Because the actors on the periphery, right of this economy experience high transaction costs of political exchange. Effectively, they're shut out.

Mikayla Novak:

Right, there may be some, you know, some basic sort of consultation processes, perfunctory in nature, that may sort of take place, but the reality is, as Holcomb says, that a network, an entangled political economy network, has a structure, a structure that is influenced by transaction costs. This is, in its own right, an important contribution to entangle political economy, because all that Dick Wagner has done is sort of laid out this idea that look, actually you know, public actors and private actors in the economy, even civil societal actors and whatnot, right they have. They are entangled. There's a network structure, but then Holcomb comes along and actually thinks about well, what does actually the structure of the network look like? That gives rise to many interesting empirical possibilities for entangled political economy and its future.

Michael Munger:

So what is it that I will learn from? What will I learn about possible policy implications, from studying entangled political economy? What is it from reading that? What is it? Because the one possibility is that economists are famous for coming up with new proofs for old theorems, with new proofs for old theorems. So there's a bunch of stuff we already know and this is a new way of proving it. Well, ronald Coase showed that we can explain institutions because of transaction costs. This is something. Entanglement is something more than an extension of that. What is it that Dick Wagner is contributing to our understanding of basic questions? Why is it that some nations prosper and grow, others fail to grow? That kind of thing.

Mikayla Novak:

Right. So I think admittedly that sort of brought us to a macro question about, let's say, the wealth of nations. You know, just to paraphrase Smith, yet again is sort of yet to be sort of fully explored in an entangled political economy framework. But I think I can point to at least a sort of couple of implications for our understanding of public policy using this entangled political economy sort of framework. Right, the first thing is to dispel right this sort of this modelling sort of assumption that you know sort of public sort of political actors can just sort of intervene from on high, you know, let's say, like a philosopher, king or imbued with special technocratic expertise, to be able to rejigger the rest of the economy in a greater, improving direction.

Mikayla Novak:

That sort of, you know, entangled political economy disproves that basic sort of fundamental assumption about how public policy works right. So in this sort of entangled public policy world right, we're actually going to have some rich interaction, public catalaxy right going on between sort of entrepreneurs in the public economy and the private economy actively all the time. What I find particularly helpful as a sort of a case example, was a number of papers that Dick co-wrote with one of his graduate students now with the AIER, dave Hebbett, with respect to the catalactical, processual nature of tax policy. That is an entirely different lens or window of thinking about tax policy than your standard public finance textbook which says oh you know, dial a couple of knobs here and press a couple of buttons there to get a sort of Pareto improving result.

Michael Munger:

You said several interesting things there. One is I think five times now you use catalectics or catalepsy. Can you tell people what that means, because that is a term of art? And the other thing is that I think even public choice is guilty, though in the reverse of the kind of Keynesian separation into this disjoint binary, because a lot of public choice. People says all we need to do is get rid of government. Well, that's just as impossible as saying government comes in from on high. If these are networks, then it's not something. The metaphor may be infelicitous, but this is a cancer that has metastasized and it's everywhere. You can't just say, well, we'll take out the tumor because it has in a network. So catalaxy and the binary, if you could say so.

Mikayla Novak:

Right, so yes, no, so, uh, cadillac C and the binary. If you could say some right so yes, um, no, so that's, that's, that's great. So, uh, let me, let me deal with this sort of term. I've been throwing around yes, and and if I've been um, uh, sort of using sort of jargonistic terms, just keep holding me up. Yeah, you, you, you it's.

Michael Munger:

it's like a club you have a password and a special language.

Mikayla Novak:

Yeah, let's unscramble the password, shall we? So, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so, so it's something of a placeholder for this idea of a process right of the market or the public economy being a process which might not necessarily have equilibrating potential. Now, so what's sort of you know so what's sort of what's distinct from so just sort of describing Cadillaccy as just a placeholder for process is that it connotes a process of exchange right between either sort of two consenting parties or three parties, including in a public economy where you have non-consenting third parties being taxpayers. So Cadillac C is meant to represent a sort of process of exchange between, you know, different, heterogeneous parties, and you know just sort of outlining that is actually quite distinctive with respect to sort of the mainstream approach, which doesn't really take any of these sort of catalactical kind of notions on.

Michael Munger:

But it really captures the thing we were talking about before. It is not optimization, it is exchange Right, and that's a different thing.

Mikayla Novak:

Yep, that's right, exactly that's right, and sorry. Can you just repeat what was the second?

Michael Munger:

Well, the distinction you made, I think a correct criticism that a lot of public finance people see markets and government as being separate. A lot of public choice, people do the same thing and so it is a little heterodox for Dick Wagner, who is one of the major figures of public choice, to say, wait, it's not quite that simple.

Mikayla Novak:

Yeah, and thank you for just a reminder about that. So yeah, look, I think you're right. So this message about the sort of difficulty of disentangling sort of public and private economy is very neatly encapsulated in Dick Wagner's latest book, which is co-authored with Meg Tuzinski I think. It's called Reason, ideology and Democracy. It's a monograph produced by Springer, by Palgrave. It just came out, actually about a couple of months ago, and so what both of these authors are at pains to indicate is that you're quite right. Both of these authors that are at pains to indicate is that you're quite right. So this public choice, implication of separability between sort of market and state, let's just remove the government.

Michael Munger:

The policy we'll just remove the government, yeah, so there's government failure, you know, let's just eliminate government.

Mikayla Novak:

Well, you know, chesinski and Wagner say, look, you know, obviously, as we're indicating here, well, not's just eliminate government. Well, you know, tuszynski and Wagner say look, you know, obviously, as we're indicating here, well, not so simple folks. And if I may, as sort of an aside, this might help explain sort of, let's say, some of the difficulties of Doge, for example, in terms of its ability, or lack thereof, to engage in meaningful reductions in public sector expenditure. Right, that's because government is deeply embedded within economic practice, deeply embedded even within modernist Western culture, for better or for worse.

Mikayla Novak:

So this has a really important implication. So I wrote a book chapter for Wagner Festschrift that was published by McAdis a couple of years ago, about 18 months ago. The chapter's called Wagnerian Relationality and what I'm saying here is that the inescapability of just sort of cutting government size to zero percent of GDP means that we actually have to kind of re-entangle right the public economy in such a way that public sector actions are more in accordance with the rule of law. Let's get us back to, let's say, a Hayekian or Buchanan generality principle. You know, let's just get away from fiscal and regulatory discrimination, which seems to be the norm now, tariffs being a good example of this. We have to. We can't eliminate the entanglement because the entanglement's locked in right between public and private actors. What we need to do is reimagine the nature of the entanglement's locked in right between public and private actors.

Michael Munger:

What we need to do that would require constitutional restrictions of the sort that Buchanan talked about in his book Politics by Principle, not Interest, where you need this generality principle that the state would only be allowed to do things that we're doing or we're not doing for everyone, rather than having tariffs.

Michael Munger:

That claim may or may not be right, but the point is you people who are proposing and the Doge example is so deliciously perfect that I wish it hadn't happened, because it was obvious it wouldn't work to anyone who had thought for even a moment about this process. Now, knowing about entanglement is a big help because it gives you a lens to understand all of this, but anyone who had thought about this for even a moment would realize that Doge was doomed to failure from the beginning, and then, when people were surprised, it just shows a deep ignorance and sort of willful unwillingness to think about how the process. If we're going to have it, we're going to have to change the way that the Constitution works. We can't do it within the existing process, and that's a really radical claim. So, dick Wagner, there is I think there is a very different implication from the sort of standard public choice theory, and so thank you for elucidating that.

Mikayla Novak:

Oh, of course, and if I might just briefly add to what you said which is all excellent, by the way is that what Wagner is really trying to do ultimately and this is very much in the spirit of mainline political economy is that research is being conducted in the interest of gaining understanding, right. Look outside the window itself, look outside the window, see what's going on. You know, rather than trying to sort of impose, you know, your sort of idiosyncratic notion of betterment or whatever it is, at least first try to understand it. And if there was a better gauge upon understanding the public economy as it works, there may be practitioners who were in charge of doge or whatever may have been able to achieve, let's say, their two trillion dollar, you know, reduction target, rather than the sort of paltry $150 billion, or perhaps probably likely even less once the legislative catalytic process goes through.

Michael Munger:

So that was the centerpiece of Buchanan's organon for social science was this idea that we're going to make the world a better place is just a non-starter, if we can find. Buchanan would often use Nietzsche's windows metaphor. So all of us look out different windows. Some of them are cracked, some of them are dirty, but all of them there is a world outside, there is an objective world. We have many different windows on them. Look out the window that you have, see if you can gain some understanding. It won't be a complete picture, but it'll teach you something. And the result might be not now we know what to do, but at a minimum we'll know that this thing that you want to try that won't work. That'll make things worse. That is, knowing that this is a will be.

Michael Munger:

A policy failure is a policy contribution for those of us who revere Buchanan, and I would certainly put Wagner in that camp. You have thought a little bit about some of Wagner's criticisms of Buchanan. So what is it that Wagner would say? That perhaps Buchanan was either incomplete or didn't get quite right about this understanding, because what you just said is sort of pure Buchananism. Dick also has gone beyond Buchanan in some ways, though.

Mikayla Novak:

Yeah. So if I can mention a couple of things, mike, so it's very striking even early on, as I sort of discovered some of Wagner's early works, as I sort of mentioned right at the outset of this episode, is that Wagner is actually genuinely and sincerely taking on the sort of central themes from Buchanan's presidential address to the Southern Economic Association in 1964, entitled what Should Economists Do? And in that sort of presidential address Buchanan is inviting economics to become what he termed symbiotics, which is a sort of science of not of allocation right, which is now largely the preserve of sort of mainstream conventional economics, but a sort of a human science of exchange right, which the mainline political economy tries to faithfully represent. So Wagner, his work, particularly Entangled Political Economy Approach, represents a very sincere sort of effort to take Buchanan's original message to heart in a way that probably a lot of his contemporaries and successors probably haven't done. So that's one thing I'll say. But the second thing that I will say and this is a very interesting sort of line of sort of critique by Wagner Wagner is suggesting that, you know, Wagner is suggesting that Buchanan's frame of analysis is, for Wagner, incomplete in a sense, in that Wagner is saying that Buchanan, although he is an immense contributor to political economy there cannot be any question about that there are some aspects of Buchanan's own thinking as a system which are in tension or perhaps incomplete. I'm reminded most forcefully along this line of a book chapter that Dick wrote for a volume published by the Mercatus Centre called Buchanan's Tensions. Pete Becky and Solomon Stein were the editors of this volume called Buchanan's Tensions, and so Wagner is actually putting out, actually very directly and rather forcefully, this idea that, look, you know, buchanan was an immense contributor to development of political economy and economics as a human science. But you know, buchanan, you know, is a human being like the rest of us, right. So you know, there are always going to be sort of limitations or blind spots right in one's own system of thinking.

Mikayla Novak:

What Sir Wagner is suggesting in this book chapter is that Buchanan clearly showed an interest in Italian public finance, right? So De Vitti, de Marco, pantaleone, amalcare, puviani, these sort of figures, and pareto was actually kind of associated, uh, with this uh school of italian public finance, which um models, right, the public economy, much like uh, randy holcomb does today. Right, you have an elite set, a set of rulers, right, who are principally involved in the determination of fiscal policy pretty, you know, let's just sort of say simply largely behind closed doors to be imposed upon the rest of the agents, that population economy. So Buchanan recognised and actually made a very important contribution in bringing this Italian public finance to English language readers in a 1960 survey article. But Wagner is critical in that Buchanan didn't really go far enough in his view.

Mikayla Novak:

And so what Wagner's entangled political economy does, though I might even argue, maybe even not even far enough himself is trying to recognise that. Look, you know, we have an entangled political economy, but entangled political economy, qua network, has a structure, right, and the structure may include elite clustering within it. Now, to be true, you know, buchanan sorry Wagner, I should say, on several occasions does mention throughout his works this sort of possibility that a large-sized democratic polity may transmogrify into sort of politically oligarchic sort of structures, right in that, and this is sort of attested by the separability between who decides, like the elite that decides and, you know, those who are governed by the decisions. So Wagner does acknowledge, right, this de Juvenal, a sort of political, french political sort of writer, acknowledges this as well. But that's Wagner's. One of Wagner's key criticisms of Buchanan is that he doesn't take this sort of Italian public finance model of an elite and a non-elite seriously enough. Maybe some argue that Wagner himself didn't do so, but if that is the case, then it's up to Wagner's intellectual successes to fill the breach.

Michael Munger:

Well, and it is an interesting point, that book chapter that wagner wrote is his claim is that buchanan could never quite get away from equilibrium theory. So the, the italian kind of approach, where it's an open system and at one extreme, if you go far enough, you get out to shackle and lockman, where it's kaleidic and the the. It's not that it's entirely unpredictable, but the process is constantly changing. The idea of equilibrium is almost nonsense. Buchanan wanted to try to preserve that and Buchanan had a notion that he used people made fun of him for it the relatively absolute absolutes. And the relatively absolute absolutes are we're going to use this until we're going to not use it. And sometimes he would be quite facile in invoking that as a kind of get out of jail free card.

Michael Munger:

Now, one way of thinking about that is that there's a tension or contradiction. Another is that there's a dialectic. But Buchanan never fully bought into the idea that there's a dialectic. One of my favorite examples here for dialectic is my favorite philosopher is David Hume. I am a Humean being and Hume said that there are two things that human beings want. They want authority and order and they want liberty. And there's a dialectic between those two. And we're done. There's really nothing more that can be said. But understanding that those two repellers and attractors are what drive what we see in the construction of institutions is a very deep insight.

Michael Munger:

So Wagner's claim that Buchanan would never fully buy into that because he didn't want to go out to Shackle and Lachman because there'd be dragons there was almost nothing more that we can say except that there's going to be a dialectic and so wanting to have it both ways is something that may be unavoidable. I'm going to put up. I found a PDF of that book chapter. I'm going to put that up. I think that that is a good place. Given that our time is up, we should start to move in the direction of closing. If someone wanted to know get an introduction to Entangled Political Economy by Wagner and wanted to get some insights into your contributions to political economy, where might they go to look?

Mikayla Novak:

Right. So, in terms of Wagner himself, I think his single best known work in terms of Entangled political economy will be his 2016 work, which is called Politics as a Peculiar Business. The subtitle Insights from a Theory of Entangled Political Economy. That 2016 work is the single best place to go, but we're very fortunate in that a lot of Sir Wagner's works are available online, as are mine, actually.

Michael Munger:

Well it has been a great pleasure and great to get to know you. I hope we get to meet in person we have orbited each other for a long time but I really want to thank you for having contributed to. The Answer is Transactions Cost. Thank you, michaela.

Mikayla Novak:

Thank you, mike. Thank you, mike, good to be with you.

Michael Munger:

Whoa. That sound means it's time for the twedge. This is a joke that I've heard about Canadians, but it works well, I think, for any Commonwealth nation, and it's relevant to our discussion about Professor Nowak's theory that Australians are Benthamite rule followers. And it goes like this how do you get 10,000 Australians out of a swimming pool? And the answer is you say pardon me, pardon me, sorry, would you mind terribly getting out of the pool? And everyone, since they've been asked properly, was like well, get out.

Michael Munger:

Second, I asked ChatGPT for an Australian joke. Now, obviously this is offensive because it's a caricature, but I wanted to see what the AI would come up with. Let me note I'm not going to try to do the accent because that would be insulting, so I'm just going to read it straight in English what ChatGPT came up with. Here it is. So the missus was a bit of a souk last night, right Goes, you never buy me no bloody flowers. And I'm sitting there thinking struth love, I didn't even twig, you were flogging them, or I reckoned I would have snagged some Dead set. I saw the blooms in the veggie patch, but they smelled so bad I thought they was just there to keep the mozzies away. If you need a translation, you may have to go to Google Translate.

Michael Munger:

The first letter is from SB. Sb writes Hi, mike Munger, thank you for your fine podcast. I especially enjoyed the paradox and curation ones which encouraged me to think sensibly about the political turmoil in the United States. I've tried to stop thinking about that because the mobs are led by a narcissist. Doesn't seem to be a helpful dialogue starter. Your conversation with Patrick Lynch reminded me of the one-armed bandit in the old voting booths where you could vote the party line without all the bother of reading the ballot. Any chance of following up with a program about parliamentary governments. Have countries ever been able to restrain from a two-party duocracy plus demagogue oops, I mean president to a parliamentary system? Thanks again for your work. Cheers SB.

Michael Munger:

Well.

Michael Munger:

SB. Demagoguery is also possible in a parliamentary system. I know that you're joking. It is an interesting question about whether a country can successfully move. I don't know the answer to the question. I'm sure countries have moved from presidential to parliamentary system, but whether that new constitution survived more than a couple of years, an interesting question. I'll see if I can answer that in a future podcast Letter. Two Greetings, mike Munger, I always enjoy and learn a lot from your Tidy C shows and your conversations with Russ Roberts.

Michael Munger:

After the most recent Tidy C with Patrick Lynch, I was left wondering why are tariffs better or worse than any other form of taxation? Your guests seem to imply that tariffs are one of or the worst, but I didn't get why interfering with free trade makes it worse than all the other forms of taxation. If we agree we need a government and that the government needs funds, how do you rank the methods of funding? And here the letter writer, ab, lists a bunch of different kinds of ways of funding government printing money, tribute, income tax, property tax, capital gains, sales tax, fees, energy tax, all sorts of things. Well, ab, it's a fair question and if we gave the impression that we thought that tariffs were the absolute worst way. That's probably not true. Probably printing money is the worst Tribute. If you mean imposing taxes by force on basically an enslaved colony, that's probably worse. But the comparison that you make to a sales tax is an interesting one, and the reason why tariffs are worse than sales taxes is that sales taxes are, across the board, can't be avoided and it's basically a tax on consumption, and many economists do think that that would be better than an income tax. One of the things about taxes, of course, is that if you tax something, you get less of it, and if you don't want much less of it, you either have to have a very low tax or it has to be a general tax so that you don't have a specific impact. So income taxes probably do have some bad effects in just the way that you suggest.

Michael Munger:

Difference is that a tariff is not a sales tax. A tariff is a tax on some products and it is given the doctrine of comparative advantage. We're taxing consumption of exactly those things. We should encourage people to be buying from abroad, because it fails the make or buy decision. It's obviously, by definition, more expensive for us to make this thing at home than it is to buy it. That's why it's imported. So having a tariff, unless it's very low and can only produce a little bit of revenue, is not going to change the fact that we're importing it. If you want to have a consumption tax, great, and Europe has that. I think a lot of my colleagues who want to be more like Europe always draw the line at doing what Europe does, which is to have a consumption tax in many cases instead of an income tax. But it is a good question. Saying that tariffs are worse than a sales tax has to do with how general it is and how much of a distorting effect it has. A general sales tax will not distort things very much. A tax just on imported goods will mean that the United States will waste a lot of resources producing things domestically that it could buy more cheaply abroad, and I wrote a paper recently about the make-or-buy decision and I will put a link to that. But thank you for the good question, AB.

Michael Munger:

This month's Book in a Month is edited by two economic historians. The title of the book is Lives of the Laureates 23 Nobel Economists. It is the sixth edition. It was published in 2014 at MIT Press and the two editors are Roger Spencer and David McPherson. It's a terrific book because it gives you a lot of insight into the kind of background, the motivation and quite a bit about the theories, the contributions of the 23 Nobel economists that it talks about. Well, this is the last for this year, for this spring, of the monthly Tidy Seas We'll be moving to. Weekly means that the next episode will be released just next week, tuesday June 3rd. We'll be talking about Adam Smith's pin factory and the problem that we can solve by having division of labor but their transaction cost problem in deciding how much division of labor to have. We'll take that up. Next week We'll also have some letters and, of course, a hilarious new twedge. All that and more next week on Tidy C.