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

Monty Python is one of the best illustrations of the problem of transactions cost . Not because of how they behaved but because of the skits they chose . They deeply understood transaction cost and used them in some of their set piece sketches and , for that matter , full-length movies , and you may want to go listen to get the full impact of the Monty Python genius .

I'm worried about replaying them on the podcast because that's quite a bit beyond fair use . No twedge this week , because the Monty Python skits are one long twedge . This month's letter plus book it a month and more Straight out of Creedmoor . This is Tidy C .

I thought they'd talk about a system where there were no transaction costs , but it's an imaginary system . There always are transaction costs when it is costly to transact , institutions matter and it is costly to transact

. Institutions matter and it is costly to transact . I've gotten some mail to ask that I clarify the meaning of what transactions costs are . Let me give three definitions . First , ronald Coase . Ronald Coase actually was pretty careful never to define transaction costs clearly , but you can infer it from the way he describes it .

Transaction costs are the cost of using the price mechanism , so search , negotiation , monitoring and enforcing agreements . Second , douglas North North says that transaction costs are the cost of measuring the valuable attributes of goods or services and the cost of enforcing agreements . Those costs determine institutional structures and economic performance through time .

You can tell that's from a kind of Washington school . We talked in an early episode about Joram Barzel and Stephen NS Chung , who were also at University of Washington , and that's much more of a University of Washington definition than Coase's . Third , oliver Williamson .

Williamson tried to formalize transaction cost economics by introducing the idea of governance structures , markets , hierarchies , hybrids as responses to specific kinds of transaction cost problem . Hybrids as responses to specific kinds of transaction cost problem . Those for Williamson included asset specificity , the frequency of transactions and uncertainty .

So Williamson's definition is that transaction costs are the ex-ante costs of drafting , negotiating and safeguarding an agreement and the ex-post costs of maladaptation , haggling and enforcing , or ex post recontracting in response to differences in the perceived cost of that recontracting .

Now , all three of those we're going to see in the examples that I'm going to talk about from Monty Python .

First , and in some ways the most obvious problem of transaction cost , at least in terms of real world friction , of making deals , enforcing agreements and navigating institutions , was the dead parrot . In the dead parrot sketch , a man tries to return a dead parrot to a pet shop where he bought it , but the shopkeeper refuses to admit that the bird is dead .

This is a comedic take on ex post recontracting . It's hard to enforce even a simple contract , which should be clear . There was a refund for a dead product . It was supposed to be a live animal , but it becomes a costly bureaucratic ordeal .

Williamson might have called that a failure of governance , the cost of safeguarding a simple agreement , but it spirals into absurdity . So I'm going to read a part of it .

I'm not going to try to do the accents , and for this and the other excerpts from Monty Python I will put up the actual skit if you want to listen to it , and you should , but here's the relevant part . Customer walks into a pet shop . I wish to complain about this parrot .

Well , I purchased , not half an hour ago , from this very boutique , oh , yes , the Norwegian Blue . What's wrong with it ? Well , I'll tell you what's wrong with it , my lad , he's dead . That's what's wrong with it . Oh , no , no , he's resting . Look , my lad , I know a dead parrot when I see one , and I'm looking at one right now .

No , no , he's not dead , he's resting . Remarkable bird , the Norwegian blue , isn't it ? Hey , beautiful plumage , the plumage , don't enter into it , it's stone dead . No , no , no , no , no , he's resting . All right , then , if he's resting , I'll wake him up shouting at the cage and I won't shout , but he shouts loudly .

Hello , mr Polly Parrot , I've got a lovely fresh cuttlefish for you . If you show , the owner smacks the cage . Oh , look there , he moved . No , he didn't . That was you hitting the cage . Oh , I never . Yes , you did . I never , I never did anything" . Customer yelling and hitting the cage repeatedly .

Hello , polly , testing , testing , this is your nine o'clock alarm call . Takes the parrot out of the cage and thumps its head on the counter . He throws it in the air and watches it just plummet to the floor . Customer says now , that's what I call a dead parrot . The owner says no , no , no , no , he's stunned , Stunned .

Yeah , you've stunned him just as he was waking up . Norwegian blues stun easily . Oh no , look , I've definitely had enough of this . That parrot is definitely deceased . When I purchased it , not half an hour ago , you assured me that its total lack of movement was due to its being tired and shagged out following a prolonged squawk .

Well , he's probably pining for the fjords . Remember he is a Norwegian Blue Pining for the fjords . What kind of talk is that ? Look , why did he fall flat on his back the moment I got him home ? Well , the Norwegian blue prefers Kippen on its back . Remarkable bird , isn't it ? Squire , lovely plumage . Look . I took the liberty of it .

Examining that parrot when I got home and I discovered the only reason it had been sitting on its perch in the first place was that it had been nailed there . Long pause , uncomfortable pause . Well , of course it is nailed there . If I hadn't nailed the bird down , it would have nuzzled up to those bars , bent them apart with its beak and voom .

Vroom Mate , this bird wouldn't voom if you put four million volts through it . He's bleeding , demised . Oh no , he's pining . He's not pining , he's passed on . This parrot is no more . He has ceased to be , he's expired and gone to meet his maker . He's a stiff bereft of life . He rests in peace .

If you hadn't nailed him to the perch , he'd be pushing up the daisies . His metabolic processes are now history . He's off the twig , he's kicked the bucket . He shuffled off this mortal coil , run down the curtain and joined the bleeding choir , invisible . This is an ex-parrot . Well , I was resisting doing the accents . I do encourage you to listen to it .

Notice , though , that it is a common problem . If there's a condition where you're supposed to return the money of the customer , but the business refuses to recognize that that condition has been met , your recourses are not many . It would be hard to sue , and even if you could win the suit , it would be expensive and long .

Second , the ministry of silly walkss . Now , I'm not going to read this one at all because it was mostly visual , but I do suggest that you look at the YouTube version of it , and I have to say that this is my good friend Professor Arthur Carden's favorite episodes , and he actually does a very good job of imitating the different silly walks .

So if you get a chance sometime , buy him a large sweetened iced tea and he will do the silly walks for you . That is Arthur Carden , the Ministry of Silly Walks . What they illustrate is that there's a government office that exists to fund and develop silly walks , and the bureaucrats there work pretty hard on this .

So this is an echo of Douglas North's insight Institutions , and government perhaps especially , can persist even when they're inefficient because of the high political and administrative cost of reforming or dismantling them . So it looks like inefficient things can continue on in equilibrium because the say it with me transaction cost of changing them is so high .

So we often look at government institutions and wonder

how that can possibly be . Well , the answer is transaction cost . The third Monty Python skit and I'll read just a small part of this one is the argument clinic and in this case there is a problem with contracting and clarifying the scope of the contract , that is , the specific terms .

We might think that we have a clear contract , but again , when it is difficult to decide whether the exact terms have been met , well , hilarity ensues . Guy knocks , knock , knock , knock , knock . Mr Barnard says come in , door opens . Customer says is this the right room for an argument ? And Mr Barnard the arguer says I told you once .

Customer says no , you haven't . Mr Barnard deliberate , yes , I have . Customer confused when Mr Barnard just now no , you didn't . Yes , I did , didn't I did , didn't I did . I'm telling you I did , you did not . Oh , sorry , is this a five-minute argument or the full half hour ? Customer realizing oh , oh , just the five-minute one , mr Barnard .

All right , customer clears his throat , sits down chair , scrapes against the floor . Thank you , anyway , I did tell you , customer , you most certainly did not . Now let's get one thing quite clear . I most definitely told you you did not , yes , I did . You did not . Yes , I did , didn't . Yes , I did , didn't , yes , I did . Look , this isn't an argument .

Yes , it is . No , it isn't . It's just contradiction . No , it isn't , yes , it is , it is not , it is . You just contradicted me . No , I didn't . Oh , you did no , no , no , no , no , you did just then . No , no , none nonsense . Oh look , this is futile . No , it isn't . I came here for a good argument , mr Barnard . No , you didn't .

You came here for an argument . Well , an argument's not the same as contradiction Can be . No , it can't . An argument's a collective series of statements to establish a definite proposition . No , it isn't . Yes , it is , it isn't just contradiction . Look , if I argue with you , I must take up a contrary position .

But it isn't just saying no , it isn't , yes , it is no , it isn't . Argument's an intellectual process . Contradiction is just the automatic gainsaying of anything . The other person says no , it isn't , yes , it is Not at all . Now , look , mr Barnard rings a bell . Ding ding , thank you , morning Customer . What , mr Barnard ? Cheerful now .

That's it , morning Customer . I'm just getting interested .

Sorry , five minutes is up . Well , that was never five minutes . Just now , afraid it was . No , it wasn't . And so this goes on . I encourage you to listen to it , mr Barnard . After a while manages to get the customer to pay again and then immediately pretends that he hasn't paid yet .

So , in terms of something for class , not only because this is hilarious , but it shows the problem of ex-post-recontracting and the double payment problem , or the requirement that you would need to be able to get a receipt and make sure that you are sure that the money has been paid . So I recommend it strongly .

Fourth and again I'm not going to cover it because it's much more visual is in Monty Python , in the Holy Grail , the illustration of barriers to entry and communication costs . King Arthur is constantly delayed by irrelevant legalistic or philosophical debates . The anarcho-syndicalist peasant who questions monarchy . So these are frictions in coordination and communication .

King Arthur thinks he's the king and that's it . Other people might not see it that way . So even centralized authority such as King Arthur can't bypass the need for costly negotiation and the transmission of information . I do also encourage you to look at the Spanish Inquisition .

The great thing about the Spanish Inquisition is that , even though no one expects the Spanish Inquisition , the Spanish Inquisition itself has a very difficult time deciding exactly what the rules are and what their main weapons are .

Monty Python's genius is showing how routine human interactions become just comically dysfunctional when basic systems of trust , enforcement and coordination fail . Now , that's just what Coase , north Williamson and other transaction cost theorists are trying to get across , not usually through sketch comedy , but through economic theory .

Monty Python's world is funny because the transaction costs are everywhere and people pretend that they're not . Economists find this familiar , if not always hilarious . Well , there is no separate twedge this week because ? Well , because Monty Python , I did get a letter , and this comes from DW . The letter is quite short , but it points to a website

with Swiss Air and was not aware of this . So the letter from DW was about the problem of boarding airline seats , the transaction cost of boarding airline seats , and DW points out that Swiss Air does board window seats first , at least in economy class . If you pay a higher class you can board . You just board earlier anyway .

But in economy class Swiss Air boards the window seats first . And I went and looked at Swiss Air . They have pre-boarding priority group one and two , which are the business class or the first class passengers , and then group three is economy class passengers with a window seat and if they have a companion .

Group four is economy class passengers with a middle seat and if they have a companion , and then group five is the economy class passengers with an aisle seat . Thanks , dw , I was not aware of that . That's pretty terrific and it's interesting to think about why other airlines might not do that also .

So if anyone works in the airline industry and can say why it is , it may just be that people value boarding priority too much and there's a kind of price discrimination that's going on and the money is worth more to the airline than the increased speed of boarding . This week's book is by sean mcmeakin . Was published in 2024 .

The book is to overthrow the world the rise and fall and Rise of Communism . It's published by Basic Books . It is a description of the rise both of utopian theories of socialism and the much less utopian political tactics that were the means by which socialist governments were established and perpetuated . It's actually a page turner .

The way that McMeekin writes is just gripping , so I recommend it . It is the sort of thing that's good enough that you could read it at the beach . So again , the title is Overthrow the World the Rise and Fall and Rise of Communism , by Sean McMeekin . The next episode will release on July 22nd .

It's the first of the co-produced series on Adam Smith's Wealth of Nations , and next week we'll do the overview of the Scottish Enlightenment and the influences on Smith before starting in August the actual book-by-book coverage of the Wealth of Nations .