Filippo Gaddo, Managing Director at Alvarez & Marsal, SPE Councillor and host of the Econ Thoughts SPE Podcast, spoke with Michael Munger, Professor of Political Science, Economics and Public Policy at Duke University, about transaction costs, regulation, the sharing economy and the continuing relevance of Adam Smith.

The conversation begins with one of the central themes of Michael’s work: transaction costs. Drawing on the insights of Ronald Coase and Douglass North, Michael argues that the cost of economic activity goes well beyond the cost of producing a good or service. Consumers also face the “toil and trouble” of finding what they want, arranging an exchange and establishing sufficient trust for the transaction to take place. Michael summarises these challenges as “triangulation, transfer and trust”. Technological progress and entrepreneurship increasingly create value not simply by reducing production costs, but by removing these frictions and making exchange easier.

The discussion then turns to regulation and economic growth. Michael distinguishes between uncertainty about what future rules will be and the direct burden created by existing rules. Both can raise transaction costs and discourage long-term investment. Regulatory uncertainty, changing tariffs and unpredictable policy can shorten investment horizons, while complex planning, permitting and administrative requirements can make worthwhile projects prohibitively slow or expensive. The challenge, he argues, is therefore not simply to choose between “more” or “less” regulation, but to design rules that achieve legitimate objectives while minimising unnecessary duplication, delay and cost. Filippo and Michael also explore the economics of platforms and the sharing economy, themes developed in Michael’s books Tomorrow 3.0 and The Sharing Economy. Platforms such as Uber lower transaction costs by allowing people who have something to offer to find people who want it quickly and reliably. In doing so, they can reduce the need for ownership and long-term contractual relationships, potentially allowing conventional firms to become smaller. But there is a paradox: while platforms decentralise economic activity, the platforms themselves can become extremely large because of network effects, economies of scale and the accumulated reputations of their users.

The final part of the conversation marks the 250th anniversary of Adam Smith’s The Wealth of Nations. Michael argues that The Wealth of Nations should not be read separately from The Theory of Moral Sentiments. Smith’s account of commercial society depends not only on self-interest and exchange, but also on trust, reputation, sympathy and our concern for the judgement of others. These moral foundations themselves reduce transaction costs and make complex economic cooperation possible. For Michael, this also points to a weakness in how economists have sometimes defended markets and free trade. Economics has too often emphasised aggregate gains while paying insufficient attention to those who lose from economic change. Trade and the division of labour can increase overall prosperity, but they create the potential for everyone to be better off rather than guaranteeing that every individual will benefit. Recovering Smith therefore means reconnecting the extraordinary productive power of commercial society with the moral concerns at the heart of his wider intellectual project.

Michael Munger is Professor of Political Science at Duke University, with joint appointments in Economics and Public Policy, and holds the Pfizer/Pratt University Distinguished Professorship. His research focuses on markets, regulation, political economy and government institutions. He received his PhD in Economics from Washington University in St Louis and previously worked as a staff economist at the US Federal Trade Commission. He is a former President of the Public Choice Society and currently President of the Philadelphia Society. His books include Choosing in Groups, Tomorrow 3.0 and The Sharing Economy, and he hosts the podcast The Answer is Transaction Costs

You can find us on Spotify or Apple podcasts.

Sorry: IE8 cannot display our video content.