The Answer Is Transaction Costs

Send us a textChris Cornette, a longtime securities trader who grew up in the business, reveals how the most important innovation that made US capital markets preeminent in the world was the exchange itself.• Cornette's father worked in the P&S (Purchase and Sales) department on Wall Street, eventually becoming the controller of an American Stock Exchange specialist unit• The original Buttonwood Agreement from 1792 created exclusivity among traders that helped establish trust in the market• Exchange specialists subsidized trading in small-cap stocks using profits they made from large-cap stocks• The phrase "your word is your bond" wasn't just a saying but the foundation of the trading system. Exclusion from the exchange was enough of a threat to discipline bad actors• Specialists would ensure market liquidity and "continuity" in pricing, preventing wild price swings• The transition to electronic trading and decimal pricing in the late 1990s fundamentally changed market dynamics• High-frequency trading firms don't have the same ethical obligations that floor traders did• The number of publicly traded companies has declined significantly since the move to screen-based trading• Self-regulation through the exchange helped create trust that made markets function effectively. Not perfectly, but effectively.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

Corruption is deeply ingrained in state incentives, creating feedback loops that resist change. The concept of prebends highlights how public offices can become sources of personal income. Lock-in effects make reform nearly impossible, especially in systems where bribery is normalized. The podcast examines how bad institutions and mental models entrench corruption, using examples from Nigeria and post-Soviet Russia. It also discusses the challenge of reform, suggesting that significant shocks or brave leadership are often required to break the cycle of corruption.

Delve into Adam Smith's groundbreaking ideas on market exchange and its role in prosperity. Discover how division of labor boosts productivity, exemplified by the fascinating pin factory case. Explore Smith's view on human nature, where our social instincts drive trade and ideas. Uncover his critique of powerful interests manipulating government and the foundation of justice in commerce. This intriguing discussion connects moral philosophy with economic policy, revealing how societies can thrive through fair interactions.

Discover the thrilling world of Il Palio in Siena, where ancient rivalries and strategic corruption reign. Learn how lottery-based horse assignments level the playing field against wealthy neighborhoods. Explore the staggering sums jockeys can earn through bribes and the extraordinary influence of the starter horse. Delve into the social stigma of finishing second, a fate worse than last place, echoing through generations. Finally, uncover the economic dynamics of seller clustering that enhance buyer interaction in various markets.

Explore the quirky world of insurance and its economics, focusing on the comical 'bat-in-mouth disease' case study. Discover the intricacies of risk management, including adverse selection and moral hazard, with a humorous twist. The history of insurance dating back 5,000 years reveals its evolution and importance. Learn how transaction costs shape everyday decisions—from managing personal finances to the curious case of dogs avoiding stairs. Dive into whimsical anecdotes that bridge past and present, making complex topics accessible and entertaining.

Dive into Adam Smith's profound insights on human nature! Discover how he connects transaction costs to morality and social harmony. Explore the importance of self-command in transforming virtuous thoughts into actions. Unearth the complexities behind moral judgments through motives and societal expectations. Smith's views challenge hierarchical systems and highlight the welfare of commerce. His allegories, like the 'Chinese earthquake', provoke a fresh take on ethics and decision-making in societal contexts.

The discussion shines a light on the Scottish Enlightenment, showcasing its unexpected intellectual vigor. Key figures like Adam Smith and David Hume are highlighted for their foundational contributions to economics and philosophy. The influence of Scottish Presbyterian education on literacy and critical inquiry is explored, contrasting it with Oxford’s stagnation. The dual theories of human nature and the moral foundations necessary for a thriving commercial society are unpacked, emphasizing Smith's anti-slavery stance and belief in justice and beneficence.

Dive into the hilarious world of Monty Python as their iconic sketches illustrate complex economic principles! Discover how the 'Dead Parrot' sketch cleverly highlights the absurdities of contract enforcement. Laugh along with the 'Ministry of Silly Walks,' showcasing inefficiencies in bureaucratic institutions. The 'Argument Clinic' brings contract scope problems to life, and 'Monty Python and the Holy Grail' depicts the hurdles in communication costs. Finally, the infamous 'Spanish Inquisition' exposes the hilarity of coordination failures!

Middlemen are crucial 'engineers of exchange,' connecting buyers and sellers who might otherwise never meet. Historically seen as parasites, they actually enhance market efficiency and promote beneficial trades. Interesting insights include the origins of the word 'monger' and R.A. Radford's POW camp study, showcasing how middlemen increased overall welfare. The discussion challenges common misconceptions, emphasizing that middlemen create value when they facilitate transactions, not just when they exploit price differences.

Explore the fascinating insights of Friedrich Hayek on how price signals convey dispersed knowledge that central planners can never grasp. Discover the tale of two farmers, revealing how profit-driven actions can benefit society more than altruistic ones. Learn about Goodhart's Law, illustrating the pitfalls of setting rigid goals, and witness the absurdities of Soviet planning failures. Delve into the future of pennies as a currency and the practical challenges they face today. A thought-provoking discussion on market dynamics versus centralization awaits!