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Small Business Lessons for Economics Theory
Other Books by Michael Phillips The Seven Laws of Money Honest Business* Citizen Legislature* Mental Snacks Simple Living Investments Baby Boom 2 Marketing Without Advertising*
Transaction Based Economics
by Michael Phillips
Clear Glass Publishing
62 Stanton St. San Francisco 94114
Copyright © 1984 Michael Phillips
All rights reserved under International and Pan-American Copyright Conventions. Published in the United States by Clear Glass, San Francisco . Third Edition 1986
2nd Printing 1987
Library of Congress Cataloging in Publication Data Transaction Based Economics: What Small Business Experience Teaches us About Economic Theory 1. Economics 2. Business 3. Title
Library of Congress #84-72560 ISBN # 0-931425-04-2
Dedication To Dr. Peter Sherrill of San Francisco who was the first person to recognize that a transaction is the smallest relevant unit of business activity. I learned this from Peter in 1977.
17 is exchanged for the drugstore's bottle of shampoo. and recourse. Such a theory. This book is based on transaction as the basic unit of economic observation. .Summary C ontemporary economic theory is based on the exchange of goods and services for a price as the fundamental unit of observation. based on exchange. This is reflected in our measurement of the Gross National Product which is the total of all the prices of all exchanges.17). With exchange as the fundamental unit of observation. The customer's $4. Karl Marx and Milton Friedman are in the same domain because they start with the same fundamental unit of observation: exchange. others are service. repair. quality. much of the theoretical structure follows deductively. monopoly. and property ownership as its central concerns. information. The concept of 'transaction' includes price as only one of several important components. will inevitably focus on competition. the free market. The concept of 'exchange' has only one component of importance: price ($4.
Most importantly. when economics shifts from an exchange basis to a transaction basis.2 Transaction Based Economics When transactions are the fundamental unit of economic theory. economic infrastructure. the presumed universality of economics is replaced by a culturally specific approach. . on close scrutiny. and social concerns. The transaction-based model is derived from observing the real world of business. Chinese economics becomes different from American economics because the components of the Chinese transaction are different from the American. Business. the deductive consequence leads to a focus on cooperation. emphasizing service to customers rather than competition and profit maximization. market niches. is found to operate most effectively in conditions of cooperation.
Under these circumstances competition does indeed appear to be inherent. that competition is not an inherent characteristic of business. It now turns out. In fact. This view has been derived from observing traditional business behavior and the daily language of businessmen combined with the additional proposition that all physical goods are scarce. the narrow focus of the early industrial business environment of Adam Smith and Malthus made the exchange of goods and services for a price the fundamental unit of economics. One of the most prevalent and most self evident observations concerns the role of competition. which in turn has been extended into the general structure of economic theory. Competition has been viewed since the days of Adam Smith as inherent in the nature of business. a business firm that operates on the assumption that the business environment is competitive starts with a self-defeating and self-fulfilling . however.Introduction to Transaction Based Economics T he great 200 year old edifice of economics is based on some very simple observations about daily business activity. As this book shows.
The first is a narrative description of a group of 650 businesses that were started and operated on the assumption that the business environment is non-competitive. This is treated as the database for a new economic edifice called Transaction Based Economics. One phone book or one telephone will not be more valuable by themselves than when they are part of a system of millions of phones and phonebooks. if 10 operate on the assumption of a competitive model for the business Among 20 businesses that start in the United States. Economists have realized in this century that scarcity of goods is not an accurate or self-evident proposition when the good is information. the empirical evidence shows that only two of the first 10 will still be in business three years later while 9 of the second 10 will be. This book finds a way to bring the observations about information economics into the fundamental structure of economic theory. economic thought has been structured on top of this proposition. Among 20 businesses that start in the United States. Just the opposite scarcity in such cases decreases the price of each unit. When one uses a non-competitive model of the primary business environment. It is this empirical observation that has led the author to look more closely and find the fundamental role of the transaction in business activity. Starting a business with assumptions about the existence of a competitive business environment has been the basis for actual business practices in most of the Western world for the past few hundred years and sadly. if 10 operate on the assumption of a competitive model for the business environment and 10 assume a noncompetitive model. The mistaken assumption leads to an entire set of specific economic values and concepts that are now ingrained in contemporary economics. . the economic theories that evolve from that are significantly different. The book has four sections. as a consequence.4 Transaction Based Economics misconception.
it explores how economic measurements based on transactions instead of exchanges will result in a national economic index significantly different from the Gross National Product. pricing. Such a National Transaction Index is offered as an example. costs and ownership. In this section the concept of transactions is introduced to explain the non-competitive nature of the business environment and to form the groundwork for new implications in economic theory. This comparison identifies the specific differences observed in the areas of marketing.Introduction 5 The second section compares traditional business behavior with the behavior of the 650 non-competitive business. . The third section shows why these observed behavioral differences are the consequence of a business environment that is truly non-competitive. The forth and last section was added at the request of several economists. values.
The empirical base comprises over 650 separate small businesses observed over a 10 year period beginning in 1974. The San Francisco Briarpatch at the time of this writing had 300 active members. which in the San Francisco Area is called Briarpatch. and 200 former members. The Briarpatch Network is an informal association of people and business that believe in open account books.I The Database T he author has an unusual backround with graduate training in economics that went unused for 20 years and a business consulting practice that focused on a unique group of small businesses. and cooperation. honesty and information sharing. The result of this empirical small business network experience combined with economics training is a new and different approach to economic theory. openness. The network. has other names in other locales. With this philosophy it has . The businesses were unique because they were part of network that emphasized honesty. another 150 associate members. Following is a general description of the database.
clinics. fascinating. where it began in the early 1970's.8 Transaction Based Economics had phenomenal success on the West Coast of the U. a circus. innovative businesses. led a happy. The gentle rabbit was protected from predators by its humble and seemingly inhospitable home of thorns. The caller . The association takes its name from the briarpatch in the folk tales of Uncle Remus. Almost any service or product you could possibly want is available through San Francisco Briarpatch. Briar business people feel that. Instead. likewise. There are special libraries of medical information available to the public. safe life. Mixed in the assortment of members are a sheep ranch. The network differs from more traditional associations because it has few meetings and no officers. legal. The coordinator of the network in San Francisco spends a typical day answering phone calls from Briars. an Asian theater troupe. an Irish bar. One call may be about writing a partnership agreement. it usually has parties or classes on how to improve business practices. a Mexican weaving company. where the hero. The coordinator also puts businesses with common problems or questions in contact with each other and publishes a directory of members. plus dozens of new. New networks are also being founded in Finland and Canada. Now its ideas have gained popularity in Japan and Sweden. and a unique and highly respected school which awards doctorates in human sexuality. and accounting advisers to help its members.S. a tea ceremony school. Brer Rabbit. by keeping their lives simple and their businesses open and honest they will be protected from the problems of the larger society. and has a group of financial. A Japanese acupuncturist. All of these activities are coordinated by one person. and schools. The Briarpatch Network in the San Francisco Bay area includes nearly every kind of business .from high fashion clothing design to massage table manufacturing. many holistic medical practitioners. an elegant $2 million restaurant. and an immigration lawyer are also members.
Today. which publishes self-help legal books. political. Furthermore. Briarpatch members make voluntary contributions of money or services every six months. Briars engage only in businesses that preserve resources and allow the owners to seek simple life-styles and to enjoy their work. Today these successful entrepreneurs are determined to run their businesses in a way that reflects their own views of social justice.25 million. created a board of directors to give the money to worthwhile environmental and political causes relevant to the issues discussed in the Whole Earth Catalog. One of the heroes of the Briarpatch is Stewart Brand. The fees and donations support the coordinator on a part-time basis and pay for the parties and periodic mailings. . Another call may be from a small neighborhood grocery store wanting advice on whether to expand to an adjacent vacant space. For this range of services. and environmental upheavals which occurred in the United States during the late 1960's and early 1970's. Nolo Press. Because of their environmental values. however. The outwardly visible characteristics of all the people who run Briarpatch businesses are that most are under fortyfive years old and the majority are women. They definitely are not in business to make alot of money. Members of the Briarpatch fervently believe that business is a way to serve others. a Briarpatch magazine containing articles about current ecological issues and computer software. publisher of the Whole Earth Catalog. The coordinator would then arrange for a visit to the store by several Briarpatch financial advisers. This value separates them from many other small businesses which exist primarily to make money. Brand. This enormously successful book has enjoyed a net profit of over $1. in talking to Briars you find their values have been heavily influenced by the ideas and experiences of the social.Database 9 would be referred to a book on do-it-yourself partnerships published by another Briarpatch member. Brand is also publishing the Whole Earth Review.
Briars keep open books. and factories for a fixed contract price. Common Ground. more community support. Most Briarpatch businesses have had similar experiences. When I make a large profit. Wong and his mother sew all the clothes he designs. after all. Olmstead builds homes. Sweden. you really have an original. He explains the results: "When clients see that I have lost money on a project. Sven Olmstead is a Briar who runs a successful building contracting business in Stockholm. they are very appreciative of the hard work and excess effort my company has exerted to do a good job for them.10 Transaction Based Economics Another Briar. offices.'" . Even though demand is great and the prices customers are willing to pay continue to rise (now over $2. printers all over the United States offered lower bids for the same job. a listing of alternative educational and spiritual organizations. He doesn't believe in expansion for its own sake. publish their financial statements: Whole Earth Review. a listing of social service agencies. These clients always come back to me for their next job. and lets his customers see his financial statements. When you buy one of his dresses. and an opportunity for friends and family to actively participate in the business. it is visible. the high-fashion clothing designer. and the clients also come back. loves the fashion business but hates to employ and supervise people. I 'made lots of money on the last job I did for them. Being honest people running open businesses results in better management. They insist that I offer them low bids because. Wong will not hire anyone else to sew for him. Many Briar businesses. In any Briarpatch business you can ask to see the financial statements and ask how much is paid for rent and for supplies.000 per dress). Kaisek Wong. understandable explanation. and The People's Yellow Pages. You will always be given a clear. in fact. Whole Earth Review once found that after publishing its printing expenses.
the open books of the Briarpatch businesses indicate pride. They want to provide quality service to their customers. These figures are based on ten years of experience from the Network's formation in 1974 until 1984. In an ordinary restaurant. California. They T\ave also trained dozens of people who wanted to start similar down cleaning stores in other parts of the United States. In the United States the average failure rate for most companies in the first three years of operation is 80 percent. and a high degree of honesty.Database 11 Being open with financial information is analogous to having an open kitchen in a fine restaurant. Toy-Go-Round sells used toys and returns 50% of the sale price to the original owners. Toy-Go-Round's owners have gladly trained others in how to open and run similar businesses.. has helped other Briar outdoor rental businesses to clean their used sleeping bags at a low price and on a rush basis. it is a reflection of the pride that the chef has in his or her cooking. a willingness to learn. usually children. they are often told. when patrons ask to see the kitchen."We are busy right now. For example.. In contrast. The Down Depot. parkas. experienced less than a 10 percent failure rate in three years. which cleans down sleeping bags. Another example in Albany. Another descriptive quality of Briarpatch business is generosity with each other and with people outside the network.Our insurance doesn't permit people in the kitchen. however. Yet the most surprising fact about the Briarpatch way of doing business is its extraordinary success and survival rate. and jackets. Most of the networks that have been started outside of San Francisco have been founded by Briars who have moved from the Bay Area or spent time in San Francisco. Briarpatch type networks are growing in small towns and large metropolitan areas as business people find each other." You may immediately assume that such a restaurant has a dirty kitchen and uses frozen food in microwave ovens. . Briars.
Reference: The Briarpatch Book. 94107 . and sharing.101 Potrero. S.12 Transaction Based Economics These people feel lonely without others to share their excitement about business and their concerns about social issues so they get together and form new networks. They strongly believe in their own values but they don't try to convince or convert others. quality. The reason is that Briars do not believe in proselytizing. Because the Briarpatch way of doing business has such a successful record of helping people run their businesses. They look for people who share the same values. openness. New Glide Publications. Briarpatch networks will undoubtedly continue to spread to many areas where there are clusters of businesses which also value service. and they support each other.F. 1978. Briarpatch is an exciting and innovative development but not many people know about it.
• Aim for the largest possible profit. (Preference is given to geographic monopolies. • Pick a business and a market with maximum growth . • Strive to keep all possible trade and financial information secret.) • Have the maximum capitalization. and advertising uniqueness. • Be serious. The distinction is clearest in the guidelines for starting a business.II Observations From the Database T his section compares traditional business practices to those observed in the database businesses. patent protection. Traditional business wisdom recommends that a new business: • Be established in a situation with the fewest competitors.
(These guidelines are published in Honest Business Random House 1982. virtually none of them consider themselves in competition with any other businesses.) • Choose a business that you love. The experience of the database businesses. Cooperation and 'niches' are more accurate. Competition is a poor model of the real world. Contrast this with the guidelines of the non-competitive database businesses. which have been operated on these Honest Business guidelines. • Limit the size of the business to be consistent with your own values and ecological considerations. • Have fun. Among the many hundreds of businesses in the database. especially financial.14 Transaction Based Economics potential. • Start with the minimum capitalization (in order to be most dependent on customer whims) • Share all information. monopoly and profit maximization. These business guidelines are congruent with prevailing economic theories of the free market which focus on aggressive competition. While there are thousands of restaurants within a five-mile radius (in . and if the customers want that particular gestalt. with anyone interested. it is only available in one place. revealed the following: 1. Why? A good restaurant knows that its clients select it for the gestalt of what it offers.
Businesses usually choose the consultants from a very narrow range.Observations 15 San Francisco). Respect and trust are very hard to manufacture and promote. always helpful and who always dealt openly and honestly. and in one case increased. A-OE did nothing but watch and wait. Before long the wholesaler decided to stop selling to retail health food stores. because retailers had a choice and preferred to stock only the chips from A-OE. A business consultant doesn't have any real competitors.a distributor of whole grain foods who packaged their own corn chips. at lower prices. who usually sold to Mexican restaurants in large quantities. Their own sales did not drop. The local firm of Alfalfa-Omega Express (A-OE). A restaurant occupies a 'niche' in the minds of its satisfied customers. went around them and started marketing chips directly. all are different and the customer has a unique set of tastes and desires that periodically converge in selecting one restaurant. and few clients have the time to do extensive testing. In reality there are a few specialized niches where clients and consultants have found each other and feel comfortable together. . the firm whose delivery people were fun to talk to. The owners' wholesale supplier of corn chips. There is no 'market of consultants'. In response. based on recommendations and occasional observations. The retail store customers also appear to have been loyal to A-OE's product. The marketing problem is not "how to be heard over the din of the competitors" but how to remind our friends and former customers of a previous good time. recently demonstrated the importance of niches versus competition. The market was too small. They offered to distribute their wholesaler's product to their mutual clients. and the sales never grew. to some of the same grocery stores that A-OE supplied. Each one is selected by a client because of the respect and trust conveyed to the prospective client by the consultant's peers based on previous experience.
Such practices can exist only in an environmental niche filled with other similar misanthropes. acquaintances. Also seriousness and boredom. Our database clearly shows that this is an inferior way to do business. businesses that succeed by relying on deceptive advertising (in the U. suppliers. Most readers can immediately think of counter examples.16 Transaction Based Economics A-OE had a secure 'niche' in that distribution business. and personal gain whenever possible. dishonesty wherever feasible. 2. The word niche conveys a more comprehensive businessclient relationship. On these points our database provides the most conclusive contrary evidence. Positive values such as honesty and openness are highly effective in attracting customers. Prevailing business attitudes favor greed. . Such businesses must be actively supported by the friends. human relations.S. The niche concept that works for the database businesses is appropriate because none of them consider low price to be the singular component that appeals to their customers. Economics has a bias in this direction too. When an honest business enters such a market it readily succeeds in attracting new loyal and appreciative customers while the misanthrope withers away. For a small business to grow and be healthy in the environment of our database it must provide goods and services that are appreciated by the buyer and generate word-of-mouth recommendations.) and choose greed as their way of doing business. competition. employees. This support in turn is contingent on superior attention to good service and products. and honesty. and customers of the business.
The founders of the database businesses usually loved the area of interest they were pursuing. and usually expected to earn enough to support their modest life style. elaborate review of the data might be convincing on this point but it is simpler to ask the reader whether you prefer to deal with an open. manipulative one? Unfortunately. or would you choose the greedy. Profit was not among their primary reasons for starting a business.Observations 17 Because acquiring new customers is a significant cost for many businesses. fun business that has the goods and services you want. Profit as the primary goal in business has a detrimental effect. depend on high quality service. honest. the database businesses had a startlingly lower failure rate. But just how wise are the traditionalists? As indicated earlier. A long. Profit as a bookkeeping entry is found in nearly all the database businesses. wished to serve their community. in or out of the database. . generosity with information and comradery among buyers and sellers. chose to start their own business to be their own boss. They can't get away with much else. strong personal loyalties. It should be noted that most wholesale businesses. 3. the norm for honesty in retail business hasn't changed enough to give most of us this choice yet. but profit as a primary goal is found in virtually none of them. had the appropriate skills. access to satisfied customers who return regularly and bring their friends is very efficient. This contrasts strikingly with prevailing business and financial wisdom.
Profit in most businesses is found in management perks. more accurately the 'net surplus'. nonmonetary rewards and social intercourse. so this was never an issue after original lenders to the business were paid off. and suppliers financed the subsequent expansion of the businesses. . employees. in several cases customers. Other reasons for closing a business that were not counted as failures were loss of interest by the proprietor or sale of the business in order to start another one. and suppliers in the form of bonuses. and return on invested capital at appropriate rates for that level of risk. As a result. only sweat equity. Most of the database businesses did not have this as a target and are happy to earn a return comparable to a salaried job. Profit as defined in economics is the net revenue to the proprietor after all expenses have been paid including reasonable salary compensation (at 'market rates'). was passed on to customers in the form of lower prices and to employees. The experience of reading thousands of financial statements for small businesses suggests that profit is a very elusive concept when applied to the real world. most invested little capital.18 Transaction Based Economics Failure among the database businesses is very narrowly defined: The proprietor was financially unable to continue operating. In several instances the 'profit' of the business. The two most serious problems with profit as a primary business goal are: (1) it isn't sufficient for most human beings to survive the difficulties of a small business. and (2) it leads to incorrect decisions. and in most instances went back to a salaried job.
a lawyer. Rarely will the profit motive suffice. . Only love of the business and the support of friends will carry a person through this.Observations 19 First. it is occasionally necessary to give a customer a harsh. Some pedalling is necessary to keep the bicycle upright. small business is very hard. held strongly and pursued aggressively. or a health professional. whims and desires. Second. candid response that is uncomfortable to both parties but may be in the customer's best interest. and a serious lease problem all at 5 PM on Saturday. is the goal that most often works and leads the proprietor to muster the necessary energy to improve merchandising. That is certainly not the case. A profit motive can rarely lead to such unpleasant advice. Revenues in excess of expenses is the operating rule. profit is a poor guide for what a business needs to do to improve. but in most cases the cyclist sees pedalling as a necessity to achieve some other objective. The goal of 'service to the customers'. a lost invoice. None of the above should be misconstrued to mean that businesses can operate at a loss. and accounting controls and to pay sufficient attention to customer suggestions. marketing. but it has no more to do with the concept of profit than pedalling a bicycle has to do with the goals of bicycling. It would not be unusual for a small retailer to face a leak that damages merchandise. a spouse who leaves home in anger. In the unusual cases of a financial advisory business. especially since greedy people learn quickly that small businesses seldom lead to riches. it is fraught with crises and late hours alternating with long periods of boredom.
Prices can be appropriately set with relatively little direct reference to 'the market'. The volume of clients can be large or small regardless of the price. . A lawyer who is expert in settling expensive divorces may set a high price because the savings to the client can be large. Pricing seems to be based on two different and sometimes separate considerations. white water rafting trips. Approximately half of the businesses in the database are pure services with no tangible product. such as books. and bakeries. lawyers. market research or high style dresses. and computer programming firms. The remaining third are traditional products including retail businesses. These range from accountants. Another sixth have a product but the product is primarily information or design. Second is the type of customer the firm wishes to do business with. the quality of service is the determinant in such cases. typographers. healers to schools. one may have a high price if the customers are managers. restaurants. Similarly.20 Transaction Based Economics 4. Pricing in almost all these cases is not very closely related to costs because costs of supplies are nominal and the price of labor is highly variable. At $25 per hour it would result in high turn-over welfare families as clients. First is a function of the value of the good or service to the customer. For a psychotherapist a $90 per hour rate will result in wealthy neurotic women with intractable problems. with two nearly identical books. The therapist selects the type of customers and sets the prices accordingly. while the other may be low for tenants' rights organizers.
will pursue policies that push 'social concerns' on to the public. Small businesses that make a point of appealing to customers by serving the 'common good' are generally rewarded by getting more customers. with manufacturers who strive for very durable products. Traditional economic theory suggests that businesses. Disposing of the wastes is viewed as a cost to be reduced and the air and water are treated as someone else's problem. with food suppliers who use the finest ingredients and openly disclose their food handling procedures. An example would be dumping industrial wastes and polluting the air and water. The Council on Economic Priorities (30 Irving Place. In fact this is probably true in most instances but it is not the behavior of businesses in the database. with health practitioners who generously and patiently instruct their clients. Such is the case with bicycle repair businesses that train customers to make their own repairs. and with publishers who sell up-to-date books and allow older editions to be traded in for current editions at no extra cost. and their 'contrary' behavior is rewarded by their customers. The same pattern appears to apply on a larger scale — in the rare instances where good research has been done. 'Social concerns' can be rewarded when included in the business pricing structure.Observations 21 5. New York 10003) has done extensive research on this issue and found many times that even large corporations which pursue socially beneficial policies in pollution control and employment practices are the most profitable. in trying to maximize profits. .
Examples include highways. transportation. find it cheaper to bribe the government to provide a service than to do it themselves. Two major components of the food store's costs are determined by the infrastructure: (l)the rent which depends on local zoning ordinances. retirement benefits.22 Transaction Based Economics 6. In both cases the cost of the raw materials is about 5% of the retail price. Sometimes the pool of employees depends on the availability of immi- . Infrastructure costs are a prime determinant of final consumer prices. practices. He points out the great extent to which all business is dependent on such infrastructure. etc. Both products are delivered by transportation that was controlled and subsidized heavily by government policy. For example. and (2) employees who receive most of their general training from public education and many skills from military experience. education. The database businesses are not unique in this respect. the toothpaste comes from an industry that specializes in using radio and TV advertising which in turn is dependent on the generous government allocation of electromagnetic radio and TV waves to private businesses. roads. and resources that are provided or imposed by the government. This point has been made effectively by Robert Heilbroner of the New School for Social Research in New York. in a retail food store you find a can of corn on a shelf to your left and a tube of national brand toothpaste to your right. 'Infrastructure' refers to institutions. In terms of small businesses the evidence is readily apparent. tax subsidies. and courts to enforce lease agreements. He also points out the extent to which large businesses in the U. The corn is produced in an industry that has heavy direct tax subsidy to producers. The large unemployment in many corporate-dominated nations is a consequence of the corporations minimizing their internal labor costs at public expense. import duties.S.
Neither word has anything to do with truth or accuracy. Only the intent to deceive. The American automobile companies sold cars on a 'buyer beware' basis for decades. Honesty is the absence of such intent it. Theoretically the dishonest party gains an advantage in such an exchange. The advantage of dishonesty in business is that the dishonest party can provide less of the product or service to the recipient for the same amount of revenue as would be used in an honest exchange. and word gets out very quickly about dishonest practices. Wholesalers have a very limited list of customers and potential customers. Dishonesty has negative effects and is geometrically harmful the greater the degree of dishonesty. Dishonesty is "the intent to deceive". the Japanese optimized the long run relationship. 7. . Retail business has a high degree of dishonesty in the U. and they have since been unable to regain those customers now that an alternative is available in the form of quality cars from Japan.Observations 23 grants. The American companies optimized each exchange. The reason is simple: retailers can get away with it. They have a large flux of strangers with whom they do business. A standard definition helps clarify the issue. The advantage disappears when the relationship is ongoing and the recipient has time to go elsewhere for future business. Honesty is a major positive factor in business efficiency.S. although wholesale business has very little.
and should it happen a third time with still another merchant in the same shopping center we will surely go elsewhere altogether. but the clearest reasons are: • repeat business is more economic than generating new business. We may be a little more careful in future shopping. courts. if 10% of the time its fifty units and if it occurs 20% it's one hundred units. . No society can have much more than 20% dishonesty. If it happens at two separate merchants we will become very careful. otherwise deception isn't possible. etc. In a situation where more than one out of five statements or actions are deceptive it is easier to assume that ALL are deceptive and act accordingly. In fact. credit bureaus. the costs of dishonesty rise geometrically.24 Transaction Based Economics The advantages of honesty are many. The good way to test this is to imagine ourselves in a shopping center where we experience a dishonest act by one merchant. Society as a whole pays the cost of dishonesty in the form of a segment of the work force that spends its time checking on other members and protecting against future incursions: prisons. If dishonesty occurs 1% of the time the cost might be one unit. but if it occurs 5% of the time the cost is ten units. locksmiths. because dishonesty implies some minimum degree of trust. security agents. • a wider range of people will participate in the decision making and advising of an honest business thus allowing greater business wisdom and relevant feedback (how many people want to help a greedy person?) • the costs of personnel to protect against dishonesty are very high.
There is also a share of the profits that the advertisers get to use for their common interests.S. the . Economic theory has frequently focused on the issue of monopolies.000 per quarter. 60. The net revenue after paying all expenses is $46. The theory says that natural monopolies are the result of physical economies. All advertisers have the same format. One such example is Common Ground. spiritual. and (2) government-created monopolies. The advantage to the suppliers is that they get to meet each other and exchange information on how to improve each of their ads. such as the advantage of one wire or line going to each house or one large dam on a river. The finances of Common Ground are published in the front. 8. a quarterly newspaper listing all the health. gas. the author estimates that over 8% of all labor is devoted to protecting against dishonesty. a small logo and a written description. educational and related business and institutions in the area. Businesses that resemble monopolies are found in 'ordinary' circumstances where they arise from superior service. No one has succeeded in producing anything similar in this geographical area in ten years. The database evidence suggests that there is another kind of monopoly: an 'ordinary' one where the business does such a complete job of serving customer needs that other businesses in the same field aren't useful. and every quarter when the printing is finished the final copies are brought to a large space where a party for advertisers is held and each one takes a bundle to distribute.000 copies are distributed in the San Francisco Bay Area.. water utility companies and telephone services.Observations 25 In the U. It has long suggested that there are two main types: (1) 'natural monopolies' such as power.
26 Transaction Based Economics readers and advertisers are so delighted with the service they have no need to use another one. Such ordinary monopoly conditions might well be called 'Good-Job Monopolies' The evidence further suggests that 'natural monopolies' probably aren't so natural after all. An example of government monopolistic policy was observed when people who wished to drill wells for water in the city of Berkeley during a recent drought found countless laws prohibiting it. Monopolistic conditions are sometimes the resuit of cultural values and little known government policies. Where the same complete satisfaction has been provided to all participants there is only one publication per city. the question is being asked whether 'natural monopolies' might indeed be the consequence of government policy and practice. and many new entrants are in the field. . phone company has been broken up into smaller units. Now that the U. 9. Common Ground has been duplicated by other people in dozens of other cities. A cultural example is the retail mark-up on milk. the mark-up on wine in most restaurants is over 170%. Milk is popularly believed to be healthful for children. much lower than comparable products. On the other hand.S. as discussed in #9 below. 15-20%. reflecting government-enforced demand for a monopoly water supplier. Wine still has a 'sin' connotation. much higher than on food or soft drinks.
and honest peers to work with. . What one-person businesses need are highly reliable. The employee would have to make notes on the client information for transmittal to others and for later review. the absence of supervision and the advantages of flexible selfset time schedules. The experience of these one-person businesses is that they are highly efficient and significantly more productive than their larger counterparts in the U. For example.S. Very small in business may be especially beautiful. Increasingly the prevalent form of small businesses in our database are one-person businesses working in a contractual relationship with suppliers. because of the pressure to minimize administrative time.Observations 27 10. They suggest that large clusters of one-person businesses would be far more efficient than traditional 'office' or factory environments. What they are discovering is that a one-person business is MORE economic than a multi-person business. the invoicing would be done by another department after much paperwork and a few errors. The author estimates that four independent editors (or graphic designers or programmers) working on their own can produce more work for the same money than seven working as employees if all the administrative costs for the employees are accurately calculated. prompt. the independent editor can be doing much of the creative work while carefully interviewing the client and preparing the invoice on the job. The reason is that the independent workers are better able to integrate their administrative time into their creative time for a productive result. peers and larger corporations.
All these types of businesses have similar success records. Type of ownership doesn't make any difference. sole proprietorships. Each of these legal structures requires the same skills and practices to stay in business. for a simple reason. . and 'collectives'. Management skill. a special version of non-profit where all workers have an equal vote. non-profits (where the control is in the hands of a board of directors and the state is the ultimate owner). broad-based employee decision making.28 Transaction Based Economics 11. and organizational structure —not ownership— determine efficiency. Who owns the business makes no difference in its efficiency or its survival. The database businesses consist of many ownership forms including cooperatives. and vice versa. There are examples of highly efficient worker collectives and hopelessly inefficient sole proprietors. corporations. partnerships.
is very inappropriate. the observations about small business experience in Section II are expanded to form a new economic theory. This occurs when a customer gives a drug store $4. a theory that is built on a unit that is too small becomes unwieldy as the actual event becomes larger. The event is in fact a transaction. The minimum unit of observation in traditional economics is the exchange/price event.Ill Economic Implications of These Empirical Observations I n this section. The reality of business is that price is a small component of the actual event that occurs. Since the transaction is a larger unit than the exchange-fora-price. Traditional theory suggests that an increase in demand will raise prices in the short run until greater supply is provid- .17 for a bottle of shampoo. based on exchange for a unit price. The experiences of small honest businesses indicate that traditional economic theory. and the ability of the theory to describe price behavior leads to indeterminate results.Transaction Based Economics.
Of course governments intervene to buy up agricultural surplus (like butter. exchange/price clearly doesn't apply. (In technical jargon this is called a backward bending supply curve). In the case of information. another is labor. When prices are high. A $35. storms and freezes raise prices. exchange/price theory turns out to . A few telephones connected to each other are nearly worthless.30 Transaction Based Economics ed. which will return the price to equilibrium. and corn) and bury it or pay farmers not to farm. For example: 1. Transaction based theory indicates that this is a highly unlikely chain of events. wheat.000 and. and vice versa.000 people come in to buy it. more will be produced and the price will come down again. In the case of labor. farmers over-produce in the next year. Economists do have three major categories of exceptions to exchange/price theory. but 500 people who wanted it were turned away from the drug store. In agriculture. then.000 bottles of aloe vera shampoo are produced in one day and sold for $4 to 1000 people. when they are low they still over-produce to keep their income up. economists have found that raising the price paid to labor will often mean less work because the workers with higher wages often choose to spend their time doing other things than working. In addition to being inappropriate for agriculture. as production facilities permit or as other producers enter the business. Only draught. One is agriculture. traditional theory is backwards. (Technically this is a positively sloped demand curve). but when millions connect together each one is quite valuable. and the third is information. just on simple principles. cheese. take an additional one month unpaid vacation the next year.000 hospital worker with three weeks paid vacation might get a raise to $40. Economics suggests that the price will rise for awhile above $4 until only 1. labor and information. feeling more prosperous.
based on 10 years of observation on many hundreds of businesses with thousands of different goods and services. The last line in the following chart is an approximation. The transaction includes an exchange/price but it also includes some invisible non-price considerations. and advice on usage. and lowering prices can mean fewer customers. advertising. is that a seller has a wide range of freedom in setting the price on any particular good or service and on the whole set of goods and services offered. Raising prices can sometimes mean more customers.S. In the real world is is the transaction. and esthetics. packaging information. price and supply are not the primary determinants. . manuals. which is very visible. The object of most buyer-seller interactions is not the exchange of a unit for a price. Table I shows the range of non-price factors for a variety of goods and services in the United States. Information: Written articles. Price is in fact indeterminate. TRANSACTION COMPONENTS FOR THE UNITED STATES Using survey research it is possible to estimate the components of transactions for the adult population of the U. Neither simple supply nor demand will predict it. training training materials. Transactions can have a non-price component that range from 5% to 95% of the transaction. The meaning of the terms used are as follows: Service: Personal interactions of the buyer and seller.Implications 31 equally inappropriate for Business. Economic theory doesn't predict what will happen to demand. The reality. conveniences such as parking.
Repair: Convenience.** ** ** N $ $ $ "J |f ->ioi/:j&J Natural Food Store Table 1 . maintainability. Purchase Office Copier Lawyer Fine Restaurant t $ $:$if? $ ® if" /H " $" Refund Refund sum*: $$$"JH h ' •>' -:. and ease of restoring to working order.32 Transaction Based Economics Quality: Functional values. Recourse: Response of the seller to dissatisfaction of the buyer ranging from gracious replacement to civil lawsuit. timeliness.>' <ICDl »» Bgfi $$~M rJS. appropariateness. % ^ $ Average US. durability.
warmth. Non-price components of the chain store purchase are most likely: good parking. The transaction can have a 5% non-price component in it if the store is a giant chain where the shopper knows no one and dislikes the merchandising and smell of the store. First it helps to understand what 'business' is. • When a complete stranger buys a small amount of an illicit drug in a dark alley.Implications 33 Knowing that the fundamental unit of business is a transaction and not an exchange is important. In many cases the friend's . availability of a refund for errors. reads the label on the shampoo bottle. Economists respond to this type of observation by saying that price "can include the non-price components you talk about". and takes it home knowing that any problems with the product can be remedied easily. pays for it. For example. Concerning the single transaction price they are wrong. But they are only partially right. The non-price components of the transaction at the store run by friends are far more numerous and include a large component of good advice. happiness. accuracy of the date on the label. they would say that the difference in price between the chain store and the friend's store is the non-price component. Or it can have a 95% non-price component if the store is run by friends and has an appealing environment. and fun. that is a transaction. • When a shopper goes to his or her favorite neighborhood drugstore. and the certainty that a lawsuit would recover damages if the shampoo were harmful. second. it sheds light on the error in exchange/price analysis. theoretically. recommendations for alternative products and related services. that is close to the traditional economic model of exchange for a unit price.
The store. Some of the most visible transactions that involve high prices and very high proportions of non-price components are in the service and information domains. attorneys. business consultants. They are partially right because the income from a series of transactions can reflect the non-price components over a sufficiently long period of time. which is why price is in itself indeterminate — because the transaction is premised on a long-term relationship. The type of goods and services offered in the market increasingly have a large non-price component.34 Transaction Based Economics store has lower prices on comparable goods. architects. without any correlation to the prices they charge. or what we refer to here as the 'Firm' (since it can include a one person business or a giant shipping company) is viewed as a bundle of 'income streams' which in turn are made up of individual transactions. designers. A simple reason for this change in the marketplace is the increasingly complex structural and technical nature of our society. publicists. charge prices that are unrelated to any known supply costs and anyone can find themselves overloaded with clients or starving. etc. I would guess that over 80% of the components in those transactions are non-price elements. This is very much more predictable and is one focus of transaction based economics. In most cases the friend's store has a wide range of prices that it can use and never discourage the sale. Each good and service is in fact a sub-component . health workers. A rough estimate of the number of transactions for even a few businesses over a few months is very large. Each exchange can have a wide range of prices at which the goods will be still be sold. Therapists. The item that is determinate is the income stream for the individual customer at an individual store. and traditional price theory becomes less and less appropriate.
becomes more important. service. repair. information becomes a greater factor in each transaction. • It isn't worth paying a low $100 price for a lap computer in Hong Kong. gasoline at $. as well as quality. storage indoors for a few hours before dinner requires none.60 a gallon in Mexico would be a meaningless bargain if you were about to fill the gas tanks in your single-engine airplane and didn't know the octane level (information) and were worried about the water content of the gasoline (quality). which is related to it. other bread is torn off and dipped in a fondue. Another is a decorative system.Implications 35 of a larger system or several larger systems. for some holidays bread needs specific shapes. if it has no brand name (meaning no repair service in other cities). For example. One is the storage system. Still another is the eating system. Storage for a few days in an outdoor-rainy environment would require a wrapper. All goods and services are components in larger systems and as a consequence the transaction components of information and service which explain and deliver these goods. even a simple loaf of bread is a component in a number of consumer systems. some bread is used as sandwiches and is sliced. A few simple examples will make the point. and has no information to tell whether it is compatible with your home computer (unless you are an engineer and plan to take it apart for analysis and repair it yourself)• Similarly. . are increasingly more important than price. As information becomes more vital. A very large system involving bread is 'health' in which the ingredients play an important role. Because of the increasing economic complexity and increasing number of sub-systems in daily life. and recourse.
as it should be. and rewards for selfishness are thrown out too. requires some new observations. because additional information may be needed after the actual sale. The first new observation point is the transaction itself. The non-price elements of quality. the buyer may later need some repair. which are based solely on price. . Another example. A transaction is an event that occurs over a period of time. will have to be discarded. is based on the creation of several underlying observation points and concepts.36 Transaction Based Economics When exchange/price is thrown out of economics as the relevant minimum unit. For a shoelace purchase. A tourist may buy a pair of shoelaces in a foreign country and take two minutes to complete the entire transaction. the National Index of Net Positive Transactions (NINPT). repair. new concepts. and new measures. and the current measures of GNP. free market. Economic Theory To base a theory of economics on a new minimum unit. many of the concepts such as profit orientation. The new measures are described in Section IV. and recourse are irrelevant in this particular transaction. The second observation point is called an 'income stream'. One particularly. Transaction based theory in economics will place price in its rightful perspective as a small element. and of course recourse remain associated with the equipment during much of its useful life. the purchase of a brand name lap computer may have a transaction time of six years. all the non-price elements of the transaction occur at the scene of the purchase: service and information. called a transaction.
a third new unit of observation is necessary in Transaction Based Economics. it is distinct in some way from other style or models of lap computers. . corporation with the same name as the overseas manufacturer). In both of these observation points.S. another may be the importer-distributor (especially if it is a U. The bundle of income streams called a lap computer can be sold through many different stores or mailorder outlets. a repair visit. The other concept of a bundle of income streams is similar to the concept of a product/service. which means that the seller becomes important. a one-person business. Such an income stream includes the purchase of an add-on memory module. The purchase of a lap computer is again the example. One is the retail store. The income stream for that transaction can occur in a number of different Firms. The landlord of the retail store may also have some tiny component of the transaction (a percentage of sale price) in its bundle of income streams. (as contrasted to the simple exchange event where the element of time is minor). It includes the income stream that is definably connected to the initial purchase transaction. Income streams can be bundled in two ways. In this case the product/service bundle is the lap computer. time is involved. Because the final seller as well as prior sellers are participants in the transaction. and therefore forms an additional Firm relevant to the lap computer transaction.Implications 37 The income stream is a monetary record of a transaction or multiple related transactions stretched out over a period of time. That unit is the 'bundle of income streams'. A firm can be an outlet. The bundle of income streams that form a Firm can be understood readily from the previous lap computer example. and the purchase of a software manual needed to operate one of the lap computer programs. or a company. One is into a Firm bundle the other is into a Product/Service bundle. and another is the manufacturer.
These independent transaction elements are the specific components of each transaction such as: price. In an Arab transaction the buyer and seller can spend a half-hour dealing with a shoelace sale. information.38 Transaction Based Economics The bundles of income streams when grouped as Firms are fairly easy to measure and count. quality. the total dollar value of the shoelace sale and the lap computer sale are reported. in considering the independent transaction variables. The three observation points. and the Firm bundle can all be measured in numbers and in some cases in dollars. the interest rate. 'the market'. which overlays these three measurable observations consists of independent transaction elements. Presently. it is important to note that different economic systems have different variables in their basic transaction unit. service. while these transaction variables are mutually (and invisibly to the outsider) evaluated. At this point. NUMBERS of transactions are highly significant in Transaction Based Economics but are not currently counted in national income accounts. In Slavic countries political power seems to be the primary element. but the number of sales is not. In Arab economic systems it appears that credit worthiness. These are not as easily measured as the three observation points. . the income stream. but they are measurable. over Turkish coffee. when they are product/ service bundles the matter is far more difficult. repair. and interpersonal power play a vital role. and recourse in the American economic system. the transaction. monopoly. The next level of abstraction in transaction based theory. which are based on traditional exchange/price economics. family connections. Traditional exchange/price economics has similar abstract elements such as ownership. and import tariffs which are comparably difficult to measure.
Among these are: velocity. (it can occur over minutes or years) Transaction Based Economics has a number of dynamic characteristics that take on an important role. and net positivity is an index that combines number and dollar amounts in proportion to the independent transaction variables (price and non-price). Jane's computer store handles the customer request to get a refund or replacement with "tough luck. These are also measurable. and have to accept it. Net positivity is an abstract concept that has a commonsense interpretation. breadth and net positivity. A politically powerful Slav may have it delivered to his office gift wrapped with a complimentary gift attached. Velocity is the number of transactions in a period of time. of the wrong color from the bottom of a mildewed pile. diversity. although with difficulty. Each economic system has different components of the basic transaction and consequently the income streams and bundles of incomes streams (product lines and Firms) have very different characters.Implications 39 The purchaser with little power may stand in a line for hours for the shoe lace. Suppose a buyer selects a lap computer for $400 from Jane's computer store and two weeks later finds that it doesn't work with the printer and software that the buyer already owns. breadth is the number of different Firms. That situation would be counted in Transaction Based Economics as a negative number when measuring 'net positivity'. diversity is the number of different and distinct income streams. Because the transaction unit is fundamentally a function of time. concepts and measure- . pay the money to a cashier upon entering the store and then be handed a shoe lace. at a separate counter. The value of any theory is that it identifies observations in the real world and then offers tools. sue us".
(12) breadth. and the businesses (Firms) that are involved. Price Competition Is the Exception Price is such a small component of many common transactions that it should be increasingly common in retail service business to find many outlets physically close to each other with none displaying their prices. and (5) price. (3) Firm Bundles. (2) income streams. predicting the relationship between the number of transactions that occur. Transaction Based Economics is therefore concerned with explaining and. where useful. A few interesting ones are offered below: A. the factors that contribute to an increase or decrease in the national index of net positive transactions (NINPT).40 Transaction Based Economics ments that explain and sometimes predict the relationships between the observations. and (13) NINPT. The author has developed an array of over 50 equations that are indicative of these relationships. The variables in these equations are: • primary observation units (1) transactions. There are several powerful statements that emerge from examining the equations made up from these 13 variables. (11) diversity. their resulting income streams. • measurements: (10) velocity. (4) Product/Service Bundles. . • concepts: (6-9) the non-price components of a transaction. as well as the mutual relations among the observations and variables. It can talk about and describe the factors that increase or decrease the velocity of these transactions.
it has the greatest effect of all the non-price components. which have elevated recourse to a very high level using 800 numbers for customers to call with product problems. in the 1970's we saw more people entering law school while legal wages were declining. B. the supply of workers seems to grow without regard to prices or wage level. For example. C. a rapid entry of masseuses and psycho-therapists into fields where demand was scanty. In this regard. . When recourse is good or improving. where prices are rarely displayed and are almost never prominent. repair. are experiencing significant long-term increases in their sales and repeat transactions. Recourse Is Especially Important Income streams (a reflection of customer loyalty) are longer. and the Firm Bundles are larger. repair and recourse are positive and increasing. and recourse are very important to the customers renting cars and the sellers don't want to attract the 'low price' shoppers who tend to increase the seller's repair costs with their carelessness. the most powerful component of all is recourse.Implications 41 An example is auto rental booths at airports. The reason is that service. and an influx of professionals into dense urban areas without regard to the rising demand in nonurban areas. The Supply of Workers Is Unresponsive to Price in the Service and Information Sector In sectors of the economy where service and information are major components of transactions. Companies such as General Electric and Procter and Gamble. when the non-price components of quality.
the supply is not closely related to the demand. This is increasingly occurring within industries and in the economic system as a whole. and prices are not a direct function of the market. broiling and heating are fairly limited functions. As an example of the increase in diversity.just as more telephones increase the demand for (and the value of) each individual telephone. .42 Transaction Based Economics Because these are sectors where niches are more significant than price-competition. An increasingly complex economic society has more outlets to provide the service and information required and geometrically more products and services to fit the increasing variety of niches that develop. D. but one finds relatively few different types of ovens (gas. radiant electric and microwave) because the information component is low. Baking. one finds many different types of telephone handsets (they are really small computer terminals) because information about their appropriate use is great. We Can Expect More Businesses and a Greater Variety of Products-Services as the Price Component in Transactions Declines Niches become more relevant as the information and service components of transactions increase and the price component declines. There is a corresponding increase in the number of establishments (breadth) and number of different products and services in the market (diversity). What occurs is that the increasing supply of service and information workers increases the size of the market — .
deregulation presumably will "let the free market work". governmental. As a concept in economics. . and market structure interactions need to move from a minor consideration to the major consideration of economics. economic policy should be stated in terms of how it may affect existing market structures. Traditional economic concepts are frequently used to advocate policy. But generally it doesn't describe or predict the nature of business or consumer behavior. The evidence suggests that deregulation has no predictable effect on final consumer prices. The 'free market' is a tiny bit of frosting on the top surface of a cake. it may remain appropriate in a few rare instances such a the sale of cigarettes and candy among prisoners. economy. Looking at any particular good or service at the point where it is offered to the final buyer. and examining its costs as a cumulative total of infrastructure costs and subsidies reveals the deterministic nature of infrastructure.Implications 43 E. policy concerns should relate the intertwining effects of government and cultural practices on final consumer behavior. The nature of cultural. For example. instead. rather than the current practice of making the 'free market' a policy goal. a veneer.S. Because transactions in which price is only a small component are increasingly the dominant part of the U. Social concerns can no longer be ignored "because they interfere with the free market". The 'Free Market' Is Not Meaningful The so called 'free market' championed by American economists and by a large part of the body politic is in fact the by-product of infrastructure subsidies and policies.
44 Transaction Based Economics F. products and services as indicated in D. highways. increases the need for improved quality. Education is one such instance because general education never really ends. repair and recourse. and the business market cannot provide an adequate level of service to meet this situation for the bulk of the population. streets. G. As service and information become more important. these are handled outside the business market. The same open-ended transaction quality is true for chronic illness. This in turn. and many public health areas such as water quality and epidemic control. the latter three stimulate infrastructure such as consumer action groups. Such is the case where the transaction is openended. this means more businesses. pressure on the civil courts. Interaction of Non-Price Components Is Increasingly Relevant to Market Structure There is a dynamic relationship between the increasing importance of the service and information components of transactions and the need for more of the quality. above. The absence of a clearly fixed time delineation for the transaction can also be found in the cases of sewage systems. and political demands for government-established standards and in- . small claims court systems. As a consequence. Some Transactions Are Inappropriate for Business In some instances the nature of a transaction is so unusual that little can be predicted about its effect in the business market. they lead to greater breadth and diversity in the market. terminal illness. and recourse components. The former two encourage segmentation of the of the market (niches). mediation and arbitration of business problems. repair. and physical handicaps.
The more consumer outlets the more transactions. we can expect to find the creation of market and social forces which increase the need for cooperation and honesty. I. People try extra hard to avoid such situations. Similarly. the More Transactions There is a correlation between an increase in the breadth of the market and the number of transactions. This is reflected in truth-in-lending laws. Repair and Recourse Are Related to Issues of Social Cooperation In instances where we find a decreases in the level of the repair and recourse components of transactions. Repair and recourse are generally associated with situations of stress and therefore they are aggravated by dissembling and deceit. The More Breadth. consumer product and service evaluation businesses at a local level. is terrible. Breadth is a measurement that is distinctly related to the number of final consumer outlets and to a lesser extent the number of firms. This is evident in comparing the number of shopping visits of rural dwellers (few) and urban dwellers (many) and the associated number of transactions. .Implications 45 spection. the number of outlets and transactions per capita in Hong Kong is high compared to Houston Texas. but to have an engine repair job done with inferior parts that makes the car run worse. consumer protection institutions. H. and a wide range of government regulations introduced in the 1970's. For a customer to be overcharged on a new car is bad and frustrating.
$8. Electronic appliances are a good example. The price niche. it was possible to view economics in grandiose terms that transcend cultural boundaries. K. and Communism were developed over a century ago as an outgrowth of exchange/price theory. tells the customer the quality. . Because price/ exchange was assumed to be universal among humans and the reality of the transaction was ignored. Socialism. Consumers find that a new technology (such as a Sony Walk-man) is introduced at $300. then a few years later the same object sells for $150 and still later at $75 or less. the abundance or scarcity of the products in any of those niches has little or no effect on the price level. But the drop in price to $150 occurs when a new model with more technology is introduced at $300. and in the $75 price niche they are getting the five-year-old technology. This process continues over time so that the consumers know that in the $300 price niche they are getting the latest technology. or $4. The major focus of difference among the Ism's is ownership and the interplay of the 'free markef. A similar pattern has emerged in California wines.46 Transaction Based Economics J. Economic Ism's Are Irrelevant The economic descriptors of Capitalism. $12. With price as a minor component of transactions and simple exchange understood to be relatively meaningless. Product Price Niches Are Emerging and Are Unrelated to Scarcity Just as prices in the service sector determine the quality of service rather than the other way around (see the description of this phenomenon in Part 4 of Section II) the same is beginning to occur in regard to products.
Implications 47 there can be no sweeping theory that ignores the cultural differences inherent in transactions. New economic models will have to be culturally very specific. . credit worthiness. for example) will form the basis for a radically different economic infrastructure than will be found in the United States. An economic system where the components of the transaction are family power. and religious integrity (Persia.
1 9 .
in addition to price. Improvements in quality increase satisfaction while decreasing the long-term number of transactions. In another culture. A National Index of the U. Increases in service and information have very strong positive effects on the NINPT. repair and recourse. particularly small neighborhood ones. are service. it is reasonable to measure the total Net Positive Transactions and come up with a National Index of Net Positive Transactions (NINPT). Net Positive Transactions is based on an examination of the aggregated data for the allocation of economic resources. information. quality. as they give the buyer a wide range of new opportunities for positive transactions. as they apply to a transactions. and a parallel increase in the variety of prod- . must be built into the measure. Both repair and recourse are potentially negative factors and are of particular concern in the construction of the index. such as those that result in a lawsuit. such determinants would be different. Service has increased at a very steady rate since 1970. There has been an increase in numbers of retail outlets and service businesses. or those where the customer is so dissatisfied that he/she would never return to the same business or the product has a shorter than expected lifespan. Such a measure takes into account the negatives — transactions that are ultimately unsatisfying.52Transaction Based Economics National Index of Net Positive Transactions Since transactions are composed of many elements that determine their final value. the determinants of a satisfactory transaction. In Protestant cultures today. The following table (3) indicates the direction of the components. Construction of such a measure requires that the values for any particular culture.S.
Measures 53 ucts on the market.and the costs of the broad-based criminal system. The information part of the index is composed of research and development. In the area of our medical needs. is not a positive event. However. The quality measure was partially influenced by the declining quality of U. and communications networks. When repair is used in reference to maintenance or recycling.S. Quality is measured by a number of negative elements such as the depreciation of existing material stock and the increase in garbage and toxins. automobiles from the mid-1950's until the late 60's when many more reliable foreign autos entered the U. This is particularly evident in the area of the human body and health. the greatest increase was during the early 70's. as opposed to maintenance has negative aspects. it clearly enhances the quality of the original transaction. repair. Other areas of repair are housing and automobile casualty insurance costs that have been rising in the 1980's. there is recourse. Preventive maintenance is desirable but surgery. market. More repair shops in this sense would be positive. While this has been generally increasing. education.S. Including the cost of the whole criminal system in this measure has resulted in a large negative impact on net . Increases in rental businesses and public transportation have also been strong positive factors. This dollar amount is not significantly offset by a comparable increase in lifespan or decrease in death rate. Repairs are generally negative. Last. measured by actual legal costs particularly civil . while necessary. It has been quite restricted in the 1980's as access to higher education becomes increasingly difficult and more R&D resources are used by the military. costs have been escalating at astounding rates for 20 years. There are some positive components such as increased number of second-hand stores and recycling.
it may be evident that a careful measurement of these components is feasible on the basis of rigorous thought and survey research. (rape and murder) because they consume valuable time and are emotionally disabling to the victims and their families. to open and honest communication. However. The figures used here are determined from infrequent survey samples collected and published by private survey research firms. Moreover the public use of such measures would generate forces in our society favorable to small business. While these measures are currently in their rudimentary stage. and to greater social cooperation. To have reliable data will require extensive new survey work and new data collection agencies. having it stolen negates the transaction.54Transaction Based Economics positive transactions because this cost has risen rapidly. After buying something. FOOTNOTE: DATA RELIABILITY Very little of the data presented in Section IV can be substantiated from existing national account records because transactions are not presently counted. giving this element a strong weight is justified. . The same negative economic impact can be applied to many crimes of violence that are not monetized.
Measures 55 Index 8J0 750 700 1950 I960 Table 3 1970 1980 .
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