Double-0 Economists [May 22]*

The first section of North's article on institutions and economies (transaction costs) had some interesting concepts I hadn't had a formal introduction to, so I took some time to reason this argument out. As I understand it, transaction costs include time, effort, and resources invested in research (availability of a good, reliable sellers, lowest prices, quality levels), bargaining (contracts, haggling, acceptable goods for barter), and enforcement costs (privately or via public institutions).

Transaction costs between individuals (personal exchange) involve a long term investment in research and bargaining that pay off through repeated exchanges; in this sytem, reliability is incredibly important, as is personal reputation. Between individuals, goodwill and trust in trade is of utmost importance. In North's simple personal exchange example, he claims that formal contracting doesn't exist, and there are few formal, specific rules, and by default of the personal scale, cheating is low. This means enforcement costs by public institutions are low, and enforcement privately likely equally so (ignoring hiring third parties to shake down the cheater) and publicly equal zero. Personal exchange is basically the immediate trade of goods for goods or goods for currency in this sense. I don't know that I would say overall transaction costs are low; engaging in trade with individuals does require a great deal of personal knowledge as he says, which means information costs--usually time. As we all know, time is money. A good professional or personal relationship with an individual producer is what encourages repeat transactions (that or scarcity of what the individual produces--in which case, cheating might actually be very profitable. North seems to assume that scarcity plays no role in personal transactions where division of labor plays little to no role; I disagree with that assessment).

Interdependent transaction has high transaction costs, but with public enforcement, those costs are spread to the government (legislative, judicial, and executive bodies responsible for regulating transactions, property, and bargains) and therefore the public through taxation. The individual to individual transaction doesn't spread the cost of transaction to the public, but keeps these transaction costs limited to those engaging in trade.

Stiglitz and Squire's article is more positive about globalization than I'd come to expect from Stiglitz's Making Globalization Work. On 386, I was rather disappointed to see that the authors didn't explain the statement "highly centralized state planning has failed as a development strategy." Are states featuring highly centralized economic planning necessarily unstable, uncredible (is that even a word?), and unfocused? I'll stay away from the uncompetitive--the answer is obvious, at least via the ideological practices highly centralized states have pursued in the past.

Why is privately directed investment better than state-directed investment? Diversification of portfolios. Even a virtuous state-directed investment mechanism would be limited in its ability to minimize maximum losses because of political games and staffing limitations. On the other hand, the number of potential private investors is practically limitless, and with each making individual decisions, it's likely that the country's overall risks will be diversified away. Of course, that's not really a perfect system either, but the disasterous aspects can be forestalled by mature policy, as pointed out to us time and again.

A note on natural monopolies that keeps popping up... Economists tend to agree that overall, competition is good. Great, even; we should as a matter of course try to prevent anything that weakens competition. However, natural monopolies contradict that all competition is all good. Here's that market failure thing. There are some natural monopolies, though, that may be made competitive after the heavy initial investments into infrastructure are made and have provided returns--telecommunications, railways, and utilities, all systems requiring lots of physical inputs and labor--can be broken down into smaller, discrete units of ownership eventually, much like what happened with Ma Bell. On the other hand, places where this can't be done--health, education, and the like--do require the state to step in, but only if the population believes that the individual has a right to those things.

The emphasis on the environment in this article and in "The Market Is Not Enough" sidesteps the general agreement that people in general become concerned with environmental safety when their basic needs are met and they have profited enough to gain time and energy to consider the issues. Environmental justice isn't something the truly poor think about--it requires a majority, or at least a very vocal and powerful minority, to speak up and push any sort of "progressive" agenda on environmental rights. Areas experiencing a surge of interest in environmental health are areas that have had enough growth to make the interest feasible. They may have suffered from environmental damage, but they most assuredly profited off of it in a wide scale, too. Additionally, the dichotomy of environmental health versus economic growth is a false one. Even if entrepreneurs within the country do not have the capital to invest or a labor supply with the required skillset to employ, the government can always do the dirty incentive tango to draw companies dealing in the environmental industry, which provides employment.