The Answer Is Transaction Costs

Pretty Pigs and Talking Dogs

• Michael Munger

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How should we decide which political-economic systems are best for organizing society? Let's peer through the lens of the "Pretty Pig Problem," which highlights the flaws in comparing the actual implementation of systems we dislike with idealized versions of systems we prefer.  The PPP shows that we must compare real-world options rather than theoretical ideals.

Some details:
• Only three social systems are viable at scale: authoritarianism, capitalism, and democratic socialism
• Every system has both an ideal form and a corrupted form that must be considered
• The "Pretty Pig Problem" highlights our tendency to unfairly compare real systems to idealized alternatives
• People on the left note market problems and conclude state intervention is necessary without examining real state actions
• People on the right highlight state problems and assume markets are better without considering actual market performance

And....TWEJ!  And Book'o'da'week!

Listen next Tuesday, June 24th, for a new episode of Tidy C with a new topic, letters, and another hilarious TWEJ.

LINKS:

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Speaker 1:

This is Mike Munger, the knower of important things from Duke University. Today I'll be talking about singers and pretty pigs. How can we tell how an activity should be organized? The problem is that you cannot use ideal theory. You have to be a comparativist. Which seems messy and requires compromise and involves transaction costs. A new twedge this week's letter plus book it a week 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. It's an imaginary system. There always are transaction costs, when it is costly to transact, institutions matter and it is costly to transact.

Speaker 1:

Any social system must coordinate production and cooperation and must also implement a system of distribution that participants see as sustainable, which often means morally fair. Participants see as sustainable, which often means morally fair. As Nobel Prize winner Lynn Ostrom in her books in 1990 and in 2000 demonstrated, there are many and widely varied social systems that can be found in settings where there are small groups and long-term, indefinitely repeated interactions. But division of labor, as we've talked about several times on this program, requires scale. Certainly groups of 10,000 or maybe many more. There's really only three social systems available at scale. One is some form of authoritarianism. Maybe there's some sort of legitimating creation, myth based on religion or tradition, a damp tart throwing swords in Monty Python. Sometimes it may be based simply on the threat of violence. In those systems, production and distribution are idiosyncratic. Some of them, like Singapore, results can be pretty good. In others, such as Zimbabwe or North Korea, their results are catastrophic. Second, capitalism, using markets for production and input prices, asset prices and profits and losses for distribution. To the extent that the violent powers of the state are put up for sale, distribution may be skewed toward wealthy elites and that's bad. Third, democratic socialism, where the means of production and most prices are decided by majority rule or by some technocracy to whom authority is delegated by law. I will say no more about authoritarianism. It's hard to be systematic about idiosyncrasy, and I'll note that zealous defenders of capitalism or socialism might object to my characterization of their bad tendencies. But there's a tradition dating back at least to Aristotle to mention both the ideal system and its corrupted form, and it's clear that in capitalist systems there is the possibility for wealth to metastasize into political power and in socialist systems there's the possibility that political power expands to command unearned material wealth. This problem of placing constitutional limits on power is the core of the limiting Leviathan approach of constitutional political economy, an offshoot of public choice that was pioneered by James Buchanan.

Speaker 1:

The reason to include both the ideal types and their corrupted form is to avoid a common mistake, a kind of ideal type bias. We all want to compare the actual form and pathologies of systems we dislike with the ideal form, as we can imagine it, of systems we admire. But it makes no sense to compare the real form of one with the ideal form of the other. I call this the pretty pig problem. The snag is that while some pigs may be less ugly than others. No, adult pigs are pretty. So imagine that there's a beauty contest of adult pigs, maybe at the state fair. Judges are ready. First pig is brought out. Ah, holy smokes, what an ugly pig. The judges gag in disgust. This old boar is muddy, smelly, fat, hairy. It grunts and blows snot out its nose as it walks. The judges whisper to each other and then they announce their decision that first pig is so ugly they will simply give the second pig the prize. Members of the audience protest, saying they hadn't even seen the second pig. Judges say well, yes, that's true, we have seen that first pig and it is not pretty. Second pig wins. Well, it doesn't make any sense in a contest at the state fair and it makes no sense as a way to choose political economic systems either.

Speaker 1:

This real versus ideal comparison is common for almost everyone. People on the left note the problems with market processes and then they conclude therefore the state should step in. Problems with market processes, and then they conclude therefore the state should step in. That's not obvious unless the actual actions of the state are an improvement over the actual actions of the market. The reverse is also true, I have to admit, highlighting legitimate problems with democracy or the state does not automatically imply and therefore the market is the best option. Now, my pretty pig version is not really original. Pete Bettke talked about a more traditional version on EconTalk.

Speaker 2:

Traditional economics, textbook economics had suffered from what Buchanan and Tulloch would refer to as the Roman emperor problem. Roman emperors asked to judge a singing contest between two contestants and, upon hearing the first, gives the award to the second, under the assumption that clearly the second couldn't be any worse than the first. This was the old market failure, government correction, you know kind of idea. Because we don't like the way the world is. Obviously we should use government because we don't like the way the world is. So we see the market fail and then we say, oh, government has to fix it, deus ex machina, the market fail. And then we say, oh, government is fixing it Deus ex machina. And Buchanan, by forcing us to do this behavioral symmetry, said that look, if people in the marketplace are doing these things because they're greedy, well what's it like when we look at politicians when they're greedy, rather than looking at people in the marketplace as greedy but people in politics as angels?

Speaker 1:

The point, regardless of which version you prefer, is that we have to be comparativists. The fact that a system has problems is a criticism, but that system may still be the best available, especially under differing circumstances. Figuring out which one is the best of the worst is the biggest problem that we often face in choosing a social system or in trying to change a social system. Things are rarely so bad that attempts at meddling won't make them worse, and that's really a problem of transaction costs. Whoa, that sound means it's time for the twedge. This twedge is about a talking dog. A woman sees an ad in the local paper. The ad says talking dog for sale, $10. Curious and thinking this has got to be a joke, she goes to the address that is listed. Man greets her, points out to the backyard where the dog is lounging under a tree. She approaches and casually asks so you talk? Dog looks up and says yep, sure do. Stunned, the woman blurts out wait, you can actually talk. Yep, the dog replies.

Speaker 1:

I discovered this talent when I was young. I wanted to help the government, so I told the CIA. They flew me around the world. I sat in rooms with world leaders eavesdropping. No one ever suspected that a dog would be able to report their secrets. Eventually I got tired of the travel, so I came home, settled down and I started mentoring underprivileged puppies. Several of them have become millionaires. And now I just relax. A woman turns and runs back to the owner. That dog's amazing. You're selling him for just $10?. The man shrugs he's a liar, he didn't do any of that stuff. Problem, of course, is transaction cost. It's very difficult for us to know that other people are telling the truth or not. So the woman didn't believe that the dog could talk. But he could. And then the dog talked and talked and none of that stuff was true.

Speaker 1:

This week's letter Good evening, mr Munger. One of the truest of truisms in software engineering is Brooks' Law, coming from Fred Brooks' 1975 book the Mythical Man-Month. Brooks' Law states that adding manpower to a late software project makes it later. Put another way, quote what takes one engineer one month to accomplish takes two engineers two months to accomplish. End quote. So to put it another way, if it takes a woman nine months to make a baby, it doesn't stand to reason. It would take nine women one month to make a baby. The connection I never made. Well, the answer is transaction costs. If you add another engineer. You actually have to train that person, get them to the point where they understand what the project is. It ends up taking even more time. From Sunday Santa Barbara, california, da. End of letter. Oh thanks, da, that's terrific. I wasn't sure whether to use it as a twedge or a letter. It works well for either one. Thanks for writing and thanks for listening.

Speaker 1:

Book of the week this week is Intellectuals by Paul Johnson, 1988. It was published by Harper. It's kind of a hit job on a number of intellectuals. He's not really doing a fair treatment of biographies, talking about why some of these people my favorite among them are Rousseau and Marx, but there's a number of others, including Hemingway. His description, his Johnson's description of the lives and morals and the power of ideas for these intellectuals makes for great summer reading. It is a little bit tawdry and, as I said, it's kind of a hit job, but it's a terrific insight into the minds and worldview of many people we otherwise admire. Well, the next episode will be released next week, tuesday, june 24th. We'll have a new topic, some letters and, of course, a hilarious new twedge. All that and more next week on Tidy C.