The Answer Is Transaction Costs

Michael Munger
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Sep 30, 2025 • 1h 16min

Adam Smith's Wealth of Nations: Episode 5--The Text of Book II

Send us a textThis episode explores Book 2 of Adam Smith's Wealth of Nations, focusing on his revolutionary concept of the "division of stock" and how capital accumulation drives economic growth.• Smith distinguishes between fixed capital (machines, buildings, land improvements) and circulating capital (money, goods in transit)• Money is described as "the great wheel of circulation" – necessary but not productive in itself• Banking allows society to economize on expensive metallic currency by substituting paper money• Smith's concept of productive versus unproductive labor helps explain which activities increase national wealth• The acquisition of skills represents "human capital" – a concept Smith pioneered centuries before Gary Becker• Interest on loans is justified as compensation for the productive use of capital, though Smith supports moderate usury laws• Smith identifies four employments of capital: agriculture (most beneficial), manufacturing, wholesale trade, and retail• Smith criticizes mercantilism for privileging foreign trade over domestic production• Division of stock and modern financial markets solve the "time travel problem" by allowing entrepreneurs to access capital without primitive accumulationIf 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
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Sep 23, 2025 • 55min

Adam Smith's Wealth of Nations: Episode 4--Capital and Book II: Introduction

Send us a textBook Two of Adam Smith's "The Wealth of Nations" provides the conceptual foundation for understanding how commercial society sustains growth through capital accumulation and the employment of stock. Smith challenges common misconceptions about wealth creation and offers profound insights on the role of capital in economic development.• Capital is not capitalism – Smith wrote before "capitalism" was invented, using the term "stock" to describe accumulated resources• Division of stock works alongside division of labor – capital must be accumulated before it can be employed productively• Justice (protection of person, property, and promise) is prerequisite for investment – without security, people hide rather than invest their stock• Fixed capital (tools, buildings, skills) versus circulating capital (money, wages, materials) form different branches of stock• Money serves as "the great wheel of circulation" – facilitating exchange but not itself productive• Banking allows society to operate with less precious metal – freeing resources for productive investment• Productive labor creates vendible commodities while unproductive labor (government, services) perishes in performance• Parsimony (saving) drives growth while prodigality reduces funds available for productive employment• Interest is legitimate compensation for foregone use of capital – similar to rent on land• Agriculture, manufacturing, wholesale trade, and retail are the four main employments of capital• Modern financial markets solve Marx's "primitive accumulation" problem – entrepreneurs can sell shares of future profitsLet me know your thoughts on these ideas from Adam Smith in the comments below. 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
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Sep 16, 2025 • 1h 9min

The Innovation is the Exchange Itself!

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
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Aug 26, 2025 • 26min

When Bribes Become the System: Understanding Lock-In

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.
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Aug 19, 2025 • 1h 22min

Adam Smith's Wealth of Nations: Episode #3--Introduction and Book I

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.
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14 snips
Aug 12, 2025 • 42min

Second Place Is The First Loser: Strategy Over Speed

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.
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8 snips
Aug 5, 2025 • 35min

When Bats Attack: Understanding Insurance

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.
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Jul 29, 2025 • 57min

Adam Smith's Wealth of Nations: Episode #2--The "Model"

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.
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24 snips
Jul 22, 2025 • 57min

Adam Smith's Wealth of Nations: Episode 1 (Background)

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.
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11 snips
Jul 15, 2025 • 17min

Nnnnooooo one expects transaction costs!! The economics of Monty Python

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!

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