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Transaction Costs and the Shared Interest

Updated: Jun 3

Dual Interest Theory (DIT) helps explain why TAITC (Updated June, 2024)

The Michael Munger TAITC Podcast --- The Answer is Transaction Costs (try it, you will like it!) --- stimulated this Post, using Dual Interest Theory in Metaeconomics to comment here on parts of the August 1, 2023 TAITC Podcast “Packing Out Your Trash, Brown M&Ms, and $100 Bills on the Sidewalk.” The comments are based on empirical research we have done on related topics. Also, stay tuned, as I am working on a Review of the original Ronald Coase journal paper "The Problem of Social Cost." It turns out the Coase framework makes a lot more economic sense using DIT in contrast to Coase and others trying to fix Single Interest Theory (SIT) in Microeconomics with a patch to somehow represent TC as related only to self-interest, which does not work

Munger commented on an e-mail I had sent him about how DIT relates to TAITC (go listen to both the end of the July 25 and the beginning of the August 1 Podcast), and pointed to our most recent published paper on Dual Interest Theory (DIT, Lynne and Czap 2023; also see What is Dual Interest Theory here on the Metaeconomics website), before weaving his analysis and story about these topics: Suggest you go listen to the two TAITC Podcasts before reading the rest of the Post here!

I am commenting here on only parts of the August 1 TAITC, mainly the ones wherein we have DIT based empirical research to back up the claims herein. Much more could be said, as the TAITC Podcasts are rich in high quality content, and DIT can be used to make even better sense of it, but in trying to keep this short:

On Packing Out Your Empty Wine Bottle, the Trash: Munger speaks of the situation of carrying a wine bottle on a climb up a mountain, drinking the wine once at the top, in celebration, and, then deciding whether to pack the empty bottle down, for purposes of recycling it. TAITC. Using DIT to frame the research, we have empirical evidence of the contention that one might temper self-interest with the shared other-interest on recycling, sacrifice a bit of the gain in self-interest and bring the bottle back down the mountain. In fact, going Up the Mountain and considering whether to bring that empty wine bottle back, well, every consumer goes Up the Mountain every day, as regards recycling. And, yes, the transaction costs associated with recycling on path 0M, which serves mainly the shared other-interest, can be substantial. It is ultimately about the matter of buying goods with and without recycle content, finding some point on the best path 0Z, with a bit of sacrifice in both domains, with TC --- how costly it is to recycle, like readily available containers at the top of the mountain or not, affecting the balance, as made clear in the dual interest theory formulation of the problem tested on the matter in Kalinowski, Catherine M., Gary D. Lynne, and Bruce Johnson. 2006. "Recycling as a Reflection of Balanced Self-Interest: a Test of the Metaeconomics Approach." Environment and Behavior 38, 3: 333 – 355. So, yes, TAITC.

And, related to Recycling, on Marine Fisheries and the Tragedy of the Commons: Munger speaks of the tragedy of the commons problem in such things as the ocean fishery, and how TAITC. Using DIT to frame the research, we have studied this problem, with lots of empirical testing, using both surveys (including focus groups) and experimental laboratory, controlled experiments-based methods, spanning over 3-decades (for an overview, see Lynne, Gary D., Natalia V. Czap, Hans J. Czap, and Mark E. Burbach. 2016. "Theoretical Foundation for Empathy Conservation: Toward Avoiding the Tragedy of the Commons." Review of Behavioral Economics 3: 245-279). In fact, it is the empirical testing of null hypotheses (i.e., no shared other-interest influence, rejected in every test) about said problem that led to proposing dual interest theory, built as it is, on an empirical foundation. The Tragedy was examined in the context of farmers conserving water and soil, addressing both quantity (drawing too much irrigation water to damage common and public property aquifers and other water sources) and quality (downstream water quality, in particular, because farming pollutes water that runs downstream, water held in common and public property rivers and lakes, into the commons of the ocean --- it is just the way it is).

The farmer faces substantive transactions costs in providing public goods like wildlife running/living in the fields, restraining withdrawals of irrigation water from aquifers, rivers and lakes, as well as things like tempering the release of chemicals and fertilizers, animal wastes, to not adversely affect downstream water quality, and even affecting aesthetic views of well-kept farms for the passersby. So, yes, TAITC. And, well, law, too, gives content to and affects the level of the TC (transaction costs), like water law (appropriation doctrine in the western US and riparian doctrine in the eastern US, and often complex combinations of both in some US states) gives context for, partly reflects, the institution in place, which holds the TC. And, then, there all the water agencies, at local, state, and national levels, each representing overlapping shared other-interests, more TC. Try explaining that with SIT, which SIT economists keep trying to do, without success, always concluding the only solution is to privatize water, like people owning the hydrologic cycle of the Spaceship Earth, I guess: Seriously? Not, and, TAITC.

Brown M&Ms: Munger points to the case of the Van Halen rock band requiring the concert promoter in a venue to provide a bowl of M&Ms for the band, with all the Brown M&Ms removed. Well, such seemed folly and silliness (remove all the Brown M&Ms, seriously?) of a band, because of popularity, that could ask for it, well, it makes easy sense in the dual interest theory framework. Think of Figure 1 isoquants to produce lots of high-quality sound and extreme lighting at the band performance on path 0G. Said performance, said production also needs to be functional (enough electrical power, sound of good quality) and safe, as in well-designed electrical and display systems to support the extra lights and sound power defined on shared other-interest path 0M. And, because nothing is fool-proof, one must recognize there is some acceptable, tolerable, best path 0Z that carries some shared risk … a best path nudged by requiring Brown M&Ms, with a bit of sacrifice in both domains being realistic. Requiring Brown M&Ms nudges the venue to read the contract, like the point Munger makes, and to work with the band to find that jointly sought after path 0Z that works best for all reasoned people --- band, venue, and fans --- including only Brown M&Ms in the bowl. Again, TAITC.

$100 Bills on the Sidewalk: Such $100 bills are certainly picked up on path 0G, some even claiming (especially libertarians) that the norm of path 0M suggests it is both prudent and appropriate to always so pick them up, with paying attention to shared other-interest: Or, perhaps path 0G and 0M, in their libertarian mind, coincide and may even coincide on the vertical axis, in the extreme, the narcissists in the libertarian crowd. Yet, thinking of Humans (and most are not Libertarians) some of the $100 bills might be left on the Sidewalk for some time, by people who separate path 0G and 0M, with the hope that the person dropping same will come back to look for it, or, even to in effect share the wealth with the other.

I recall my farmer father not bidding/buying land adjacent to his land on one occasion --- in effect leaving $100 bills in the field --- a prime piece of land that fit nicely with his other ownings, because the young family down the road, and the Community of farmers, needed it more than did he: The Community of shared other-interest mattered. So, path 0G for my father was avoided --- he did not pick up the $100 bill --- as path 0Z worked better for both him and the community, and certainly for the young family trying to get started in farming. We further documented this shared other-interest phenomenon in the farmland pricing/market study in Siles, M., L. Robison, B. Johnson, G. Lynne, and D. Beveridge. “Farmland Exchanges: Selection of Trading Partners, Terms of Trade, and Social Capital.” J. Amer. Soc. Farm Managers and Rural Appraisers (2000): 127-140. The study was framed by the social capital construct.

Thinking back on that study, I can see how TAITC can also be associated with the notion of investment in social capital (Lindon Robison, Michigan State, who has done a lot of research on the role of Social Capital, drove the frame of this land pricing study), which is another way to think of building up a shared other-interest, with said investment in social capital likely lowering TC (albeit an empirical question). To help make sense of social capital, well, my new insight (thank you, Michael), TAITC.

Yet, the norm of looking out for oneself would also be at play, so, looking for $100 bills (opportunities, like buying adjacent farmland) laying around is totally appropriate. It is just about finding balance, and not going to one extreme or the other (my father bought land, but not all of it) … taking them all on path 0G (or in the extreme on the vertical axis), or, leaving them all for others on path 0M (or in the extreme, on the horizontal axis). It is hard, it is complex to find the best path 0Z in picking up $100 bills, yet simple to explain the challenge, the problem at hand, with dual interest theory, and, TAITC.

For more speculative commentary, not as soundly based in empirical research, see More Details.

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