The Answer Is Transaction Costs

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

• Michael Munger

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Mike Munger explores how Monty Python brilliantly illustrated transaction cost economics through their legendary comedy sketches. The British comedy troupe's most famous routines provide perfect, hilarious examples of the frictions that make economic interactions costly and complicated in the real world.

• Three definitions of transaction costs from Ronald Coase, Douglas North, and Oliver Williamson
• The Dead Parrot sketch as an illustration of ex-post recontracting problems and contract enforcement
• Ministry of Silly Walks demonstrating how inefficient institutions persist due to high reform costs
• The Argument Clinic depicting problems with contract scope and definition
• Monty Python and the Holy Grail showing barriers to entry and communication costs
• Spanish Inquisition sketch revealing coordination failures

The five MP sketches mentioned here:


Letter:  Swiss Air's efficient window-seat-first boarding policy

Book'o'da'week: To Overthrow the World: The Rise and Fall and Rise of Communism, by Sean McMeekin

Next episode releases July 22nd, beginning the co-produced series on Adam Smith's "Wealth of Nations" with an overview of the Scottish Enlightenment.


If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Speaker 1:

This is Mike Munger, the knower of important things from Duke University. Monty Python was a comedy troupe from England took advantage of the need that the BBC had for programming no concern for ratings. Since it was a government-owned television station and since it was shown late at night, there were few restrictions on racy content. 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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

Remarkable bird, isn't it? Squire, lovely plumage. Look. I took the liberty of it.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.

Speaker 1:

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.