Economics has much to teach us, as it is a discipline that transcends the boundaries of its traditional domains, offering its dazzling insights to people of vastly different professions. At least that’s what I used to tell girls. Ronald Coase, the Nobel-prize winning economist who recently passed away at the tender age of 102, may well have been a hit with the ladies during his day if he had applied his new institutionalist theories to the art of seduction. Believe it or not, there is much scope for adapting his intellectual legacies into answering the most important question of a young red-blooded man’s life: why do I keep failing miserably when I hit on girls in a night club?
Transaction costs explained
Coase may not have come up with the idea of transaction costs, but he was the first to offer a rigorous framework for its understanding. A transaction cost is essentially the cost of undertaking an economic exchange, one that is necessary to correct any market imperfection arising from that exchange. Bottled water is a fine example of this. How do you know that the water you are drinking actually comes from some natural spring in the Swiss Alps or is actually nothing but recycled toilet water? Most of us do not have a personal chemistry lab in our basement to test the purity of the water we consume; we must simply assume that the contents of the bottle are what the producer says they are. And the producer has all the incentive to cut down his costs by lying to us. Of course, consumers are smart enough to doubt the producer’s claims and will therefore not buy the bottle of water at all, thereby making such a market impossible to sustain. Continue reading