Transaction costs: they exist
Mar. 2nd, 2011 05:28 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
jackI was just reading another depressing internet debate. If all transaction costs for any kind of transaction were zero (no job hunting, no P&P, no retraining, no negotiation time, no getting up investment to start an alternative business, etc) then lots of things would just magically work well, and everyone would get fair prices for everything, and rainbows and puppies would fly out of...
Psst.
What?
Pssmbthowehojdslhrhubarb.
Wait, what?
GvchmtSDHJIfdjka.
WHAT? You say in the real world transaction costs aren't zero? And may in many cases be very large? But in that case you'd have lots of conversations like:
A: OK, I'll sell you a widget for $99.
B: OK, cool, that's slightly cheaper than Cara's price of $100. I'll drive over and get it.
A: Haha! Actually, I was lying and I'm going to charge you $101, possibly with some transparent pretext to make it seem less like a rip-off. And you're going to metaphorically take it because it'll cost more than $1 to drive to Cara's and get hers. And after all, maybe she's going to do the same thing.
B: Mutter, mutter, grumble.
Person on internet: Why are you complaining? Assuming you can instantly teleport around town and compare the functionality and prices of widgets by ESP without spending any time, you've not lost anything, you can just take Cara's. Why are people so whiny?
The person on the internet has made an understandable mistake, in that their approximation (no transaction costs) correctly predicted that B would normally get a widget within a few percent of the best price, and they forgot that their simplification wasn't true.
This incredibly simple and obvious example is nevertheless a good example of why you can't fix everything in the real world by going online and saying "FREE MARKET ECONOMY" loudly.
After this conversation, there are a few possible results.
1. If it's a really small issue, or big and important but sufficiently rare, everyone will have to put up with it (if you're buying a penny sweet, you don't care, if you're buying a house, there's little way to stop people being tempted to, or accidentally, doing this, you just have to accept some unfortunate overhead).
2. Everyone will band together and agree that they won't put up with it. B will say "yes, ok, you tricked me, but then I'm not going to buy from you even if it puts me out, and I'm going to warn everyone else too" and everyone will refuse to buy from A unless they're honest. And there will be some defectors, but in general, A will be blackmailed into honesty. This always happens to some extent, the question is to what threshhold people will put up with it.
3. It's so widespread and hard to measure that people (via government) make it illegal.
The same applies significantly to the concept of a worker's union or other collective bargaining, or to anti-monopoly laws, etc. Yes, if it were trivial to set up a competing company to a monopoly, monopolies wouldn't be a problem. But it really isn't which means it really is.
A: If you don't like it, then leave. Hah!
B: Hmmm... I don't think I can put up with it. Are you going to start giving a fair [price/wage/contract] or shall I leave.
A: OK, I'll give you a better offer by tomorrow.
B: OK...
A: Ha! Tricked you! There's no better offer. I was lying.
B: Gah! Then I'll leave.
A: OK, I'll give a better offer TOMORROW. I'm sorry. I totally repent. And setting up a new company/finding a new job/etc is SO much work.
B: OK, maybe...
A: TRICKED YOU AGAIN. OK, but tomorrow I really mean it...
B: Fuck you. *leaves to find replacement-A*
B: *replacement-A is nearly finished*
A: OK, well, now I'll give you an actually reasonable offer, although not as good as you like. After all, it's ridiculous to have TWO As even if you know I'm evil and you've already done 90% of the work on replacement-A.
Internet person: B IS SO STUPID. ASSUMING THEY CAN START A NEW COMPANY, FIND A NEW JOB, OR WHATEVER INSTANTLY FOR NO EFFORT, WHY WOULD THEY EVER PUT UP WITH ANYTHING THEY THOUGHT WAS UNFAIR FOR MORE THAN A SECOND? I AM A THROBBING SUPERMAN AND MY LIFE IS PERFECT AND EVERYONE WHO LIVES IN THE REAL WORLD IS AN IDIOT!
This is why, in many situations and many people's lives, there are problems that can't be instantly fixed. You have to know when they're too much. But instantly quitting in pique at any problem is probably too much.
It is much, much, better for EVERYONE if people recognise an impossible situation IN ADVANCE and make steps to compromise. In the real world, instead of relying on the potential threat of a theoretical competitor (that's an insane amount of work and the monopoly may be able to crush), it's better to persuade them that if things get that bad then people will go that much trouble, and that it's in their own best interests to transact fairly now.
Likewise, if the cost to an employee of finding a new job is significantly more than the cost of the company of finding a new employee (especially if, say, it's the only employer in the area) (or the reverse), or if the employer has multiple employees and can survive on 90% of them for six months (which is usually the case), then any individual employee can be intimidated by the company. The company can offer minimum survival wages, and they're still better than quitting and starving, so the company has all the power. However, the company certainly can't survive without ANY of the employees, so if the employees all bargain TOGETHER, they have as much power as the company.
This is why unions exist in the first place. It's not BREAKING the free market -- it's ENABLING the free market.
(Of course, the thread I was reacting to also had many examples of unions which had themselves become ridiculous counterproductive bureaucratic or downright evil, so it's not that "unions are always good" it's that "the concept of collective bargaining fulfils a necessary function in many situation".)
But many people seem to resist any sort of compromise at all. Yes, compromise can lead to bad things, but it can also lead to a fair division, where demonstrating each party's strength of position and committedness facilitates finding a compromise that might be found in a free market, but without all of the stabbing each other in the back manoeuvring first. Having settings between "everything's perfect" and "blow up the world" is probably good.
Psst.
What?
Pssmbthowehojdslhrhubarb.
Wait, what?
GvchmtSDHJIfdjka.
WHAT? You say in the real world transaction costs aren't zero? And may in many cases be very large? But in that case you'd have lots of conversations like:
A: OK, I'll sell you a widget for $99.
B: OK, cool, that's slightly cheaper than Cara's price of $100. I'll drive over and get it.
A: Haha! Actually, I was lying and I'm going to charge you $101, possibly with some transparent pretext to make it seem less like a rip-off. And you're going to metaphorically take it because it'll cost more than $1 to drive to Cara's and get hers. And after all, maybe she's going to do the same thing.
B: Mutter, mutter, grumble.
Person on internet: Why are you complaining? Assuming you can instantly teleport around town and compare the functionality and prices of widgets by ESP without spending any time, you've not lost anything, you can just take Cara's. Why are people so whiny?
The person on the internet has made an understandable mistake, in that their approximation (no transaction costs) correctly predicted that B would normally get a widget within a few percent of the best price, and they forgot that their simplification wasn't true.
This incredibly simple and obvious example is nevertheless a good example of why you can't fix everything in the real world by going online and saying "FREE MARKET ECONOMY" loudly.
After this conversation, there are a few possible results.
1. If it's a really small issue, or big and important but sufficiently rare, everyone will have to put up with it (if you're buying a penny sweet, you don't care, if you're buying a house, there's little way to stop people being tempted to, or accidentally, doing this, you just have to accept some unfortunate overhead).
2. Everyone will band together and agree that they won't put up with it. B will say "yes, ok, you tricked me, but then I'm not going to buy from you even if it puts me out, and I'm going to warn everyone else too" and everyone will refuse to buy from A unless they're honest. And there will be some defectors, but in general, A will be blackmailed into honesty. This always happens to some extent, the question is to what threshhold people will put up with it.
3. It's so widespread and hard to measure that people (via government) make it illegal.
The same applies significantly to the concept of a worker's union or other collective bargaining, or to anti-monopoly laws, etc. Yes, if it were trivial to set up a competing company to a monopoly, monopolies wouldn't be a problem. But it really isn't which means it really is.
A: If you don't like it, then leave. Hah!
B: Hmmm... I don't think I can put up with it. Are you going to start giving a fair [price/wage/contract] or shall I leave.
A: OK, I'll give you a better offer by tomorrow.
B: OK...
A: Ha! Tricked you! There's no better offer. I was lying.
B: Gah! Then I'll leave.
A: OK, I'll give a better offer TOMORROW. I'm sorry. I totally repent. And setting up a new company/finding a new job/etc is SO much work.
B: OK, maybe...
A: TRICKED YOU AGAIN. OK, but tomorrow I really mean it...
B: Fuck you. *leaves to find replacement-A*
B: *replacement-A is nearly finished*
A: OK, well, now I'll give you an actually reasonable offer, although not as good as you like. After all, it's ridiculous to have TWO As even if you know I'm evil and you've already done 90% of the work on replacement-A.
Internet person: B IS SO STUPID. ASSUMING THEY CAN START A NEW COMPANY, FIND A NEW JOB, OR WHATEVER INSTANTLY FOR NO EFFORT, WHY WOULD THEY EVER PUT UP WITH ANYTHING THEY THOUGHT WAS UNFAIR FOR MORE THAN A SECOND? I AM A THROBBING SUPERMAN AND MY LIFE IS PERFECT AND EVERYONE WHO LIVES IN THE REAL WORLD IS AN IDIOT!
This is why, in many situations and many people's lives, there are problems that can't be instantly fixed. You have to know when they're too much. But instantly quitting in pique at any problem is probably too much.
It is much, much, better for EVERYONE if people recognise an impossible situation IN ADVANCE and make steps to compromise. In the real world, instead of relying on the potential threat of a theoretical competitor (that's an insane amount of work and the monopoly may be able to crush), it's better to persuade them that if things get that bad then people will go that much trouble, and that it's in their own best interests to transact fairly now.
Likewise, if the cost to an employee of finding a new job is significantly more than the cost of the company of finding a new employee (especially if, say, it's the only employer in the area) (or the reverse), or if the employer has multiple employees and can survive on 90% of them for six months (which is usually the case), then any individual employee can be intimidated by the company. The company can offer minimum survival wages, and they're still better than quitting and starving, so the company has all the power. However, the company certainly can't survive without ANY of the employees, so if the employees all bargain TOGETHER, they have as much power as the company.
This is why unions exist in the first place. It's not BREAKING the free market -- it's ENABLING the free market.
(Of course, the thread I was reacting to also had many examples of unions which had themselves become ridiculous counterproductive bureaucratic or downright evil, so it's not that "unions are always good" it's that "the concept of collective bargaining fulfils a necessary function in many situation".)
But many people seem to resist any sort of compromise at all. Yes, compromise can lead to bad things, but it can also lead to a fair division, where demonstrating each party's strength of position and committedness facilitates finding a compromise that might be found in a free market, but without all of the stabbing each other in the back manoeuvring first. Having settings between "everything's perfect" and "blow up the world" is probably good.