Tuesday, April 15, 2008

A Coasian Democracy

Transactions costs - if they were completely eliminated, we would have pure Coasian bargaining - no searching, just pure interaction. This sounds rather utopian, but it isn't unrealistic to think we could get closer to what is called the "true demand curve". Technological advances have reduced transaction costs significantly.

The way I view it, markets need to equilibrate in order for political and economic satisfaction to be 'maximized' in a world of scarce resources. But transaction costs are present in nearly every market. The model I sketched out above shows where a market is supposed to equilibrate (A).

The bright red line - sometimes called the "true demand curve" - shows that the existence of transaction costs reduces the overall amount of action [demand, quantity supply, bargaining, etc.] And anyway, it's more apt to say the first (logically first) demand curve is the "true demand" in a world where transaction costs do not exist.

But because the cost of, say, greater government accountability is so high, we settle for the lower quantity of government accountability. Because underdeveloped countries face higher transaction costs with everything, they are underrepresented in intergovernmental bodies. Because the cost of action [bargaining, suing, exchanging] against tortfeasors and rights violators is so high, the appropriate level of "justice" does not occur either. These transaction costs apply to nearly every market, and this hampers political and economic satisfaction overall.

At any rate, this view of mine that technology can reduce transaction costs significantly enough to bring about more direct and more deliberate democracy is maybe another stupid idealism. Call it futuristic agorism if you like. But who knows, maybe that's what Ronald Coase had in mind despite his 'utilitarianism of rights' (Nozick's phrase.)


Muser said...

A very interesting, pithy post. I like the thesis. A concern, not a critique: I envisage the transaction-cost a consumer pays to a manufacturer diminishing, but then I envisage an underpaid laborer somewhere who doesn't benefit from the lower transaction-cost. What are your thoughts vis a vis transaction-costs and labor-costs?

Acumensch said...

Matt Warning in the economics department is the genius when it comes to transaction costs. But I'll see what I can muster up...

The reason I showed the demand curve going down was to point out the costs to consumers. But it also goes for suppliers (and hence labor) as well. So imagine there's two supply curves on that graph.

But an underpaid laborer would benefit more as well by lower transaction costs on the demand side, since the cost of living (or, living in a direct democracy) is lower. But maybe this is still unsatisfactory - why not get paid more too?

The Coase theorem is all about bargaining. And labor does that when it's collectively bargaining with employers. So I think there's room to say that all these lower costs to bargaining would make it easier for labor to collect more in wages.

The difficult problem with the Coase Theorem is that there are so many transactions costs that bargaining doesn't happen when it could/should. And inequality is magnified because of that.

Muser said...

Thanks. Nicely fleshed out.