Audio Blog: Three Way Economic Systems

I enjoyed this cast despite knowing

I enjoyed this cast despite knowing next to nothing about economics. It made sense. Very pointed, no-nonsense commentary. I will be interested to see how it came across to more knowledgeable folks.

Guys, perhaps I can offer my

Guys, perhaps I can offer my perspective: in the globalised & networked economy we live in, are not multi-party transactions the norm as opposed to the exception? I have found several organisations specifically looking to networked/partnered relations, franchises, collaborations, joint-ventures, etc for economic gain (and sometimes these do balance out the inefficiencies Mark describes).

No doubt that -- as Mark points out -- _absolutely_ there are inherent risks and difficulties in managing these. I would definitely appreciate a pod-cast on tips & trick on mastering the situation (e.g. managing stakeholder relationships, aligning the visions, discovering hidden agendas, dealing with significant power differences between the parties, maximising the own organisation's benefits, ...)

Greetings from Germany, and many thanks for the terrific shows, you guys are inspiring!

/alex

Alex- Good points, but I don't think

Alex-

Good points, but I don't think we disagree... would love for you to share an example, and maybe we can figure out how we agree and where we diverge...I think it may be vocabulary.

Mark

So you became a team lead? Here are

So you became a team lead? Here are books and podcast I recommend...

So you became a team lead? Here are books and podcast I recommend...

Hi Mark, we certainly don't disagree

Hi Mark,

we certainly don't disagree on the undisputed fact that adding additional parties to an economic transaction complicates and adds risk/cost to its potential success! Examples are consortium-run projects like the Eurofighter Typhoon military aircraft programme, where individual companies operate with reduced autonomy. (Actually this reminds me of a cast Mike and you did not so long ago highlighting the inherent inefficiencies of a matrix organisation).

On the flip side, I am sure you will agree that many business ideas cannot be executed without the capabilities and collaborative will of several stakeholders in providing financing, IP, or other resources essential to achive the goal.

All this to say -- I agree: there are risks, inefficiencies and a distortion of economic transactions, but without a little disturbance, where would all the competitive fun be? :)

Cheers, Alex

Alex- Ahhh, I can see that, yes.

Alex-

Ahhh, I can see that, yes. And, I would argue that stakeholders in one party's part of a transaction is just not in any way a three way economic exchange. it's simply one party using expertise of others on their side of a two way exchange.

More to come!

Mark

I don't completely disagree but I would

I don't completely disagree but I would like to point out that you are assuming that classical economic principals are true for all market places. Alas, this is rarely true. Third party economic systems exist for just this reason. They are the control rods on human nature that we need. Yes, they dampen the reaction and yes, it would be nice if the economic reaction could be self limiting but as you like to point out, "Embrace Reality". Much as we would like to think we have evolved over the last 150,000 years, Human beings are NOT rational creatures and markets are ruled by human irrationality. Could you imagine if we allowed our police force or fire departments to be run along strict classical economic principals?

I suspect that there is a balance that must be struck and as with all things the pendulum swings to the right and to the left.

Huh? Can you give me a few examples

Huh?

Can you give me a few examples - since my proposition is "rarely" true - where my purchases are not governed by classical economic principles and involve a third party that affects my buying and consuming practices?

The fact that fire and police are a government entity doesn't obviate the point...

Mark

Almost all two party transactions are

Almost all two party transactions are part of a larger "supply chain." I won't buy bolts from you if I don't have someone willing to buy widgets from me on the other side. That's not a three party deal. While all three parties must execute for the whole thing to work, it's two different two-party transactions.

Mark is talking about a single transaction that requires, in essence, three different signatures on the piece of paper. So we "hire" our politicians, pay them our taxes, and tell them we want fire protection. They turn around, and in a separate deal, hire firefighters.

That's very different from getting a prescription filled. All three parties have to come together: at my CVS, the pharmacist has to call (electronically) the insurer while I'm standing there, and basically all three parties have to seal the deal right then and there.

There is a big difference between a multiparty transaction and an interconnected economy (like a supply chain, or the credit markets).

John

PS: Tool, you're talking about "public goods" and while they are typically characterized by non-competitive markets, they are still subject to economic principles.

PPS: Humans may not be rational, but economic behavior (a hot field) is observable and subject to understanding.

Mike and Mark, I love this blog idea

Mike and Mark,

I love this blog idea (I actually have my own little blog and recommended you guys before...) Good work!

Now, third party transactions:

I had never given much thought before. I’ve been dealing with school bureaucracy with my kids as well as healthcare, and I think “gosh this is inefficient”.

However, every time I use my credit card, that’s a third party transaction. After all, the vender provides me a service or goods, and I pay MasterCard. If I have problems with the product and the vendor doesn’t help, I cancel the charge through the company.
This allows me to bring five-figure purchasing power wherever I go, and when I lost my wallet last month, I was only out $50. Of course they charge 2.5% in every transaction. Perhaps there IS a better way.

Secondly, I think about bonded contractors. If I pay them, and they decide not to do the work, their factor will pay me. Without this guarantee, I would be forced to hire only huge companies with their own reserves so that I can confidently sue them.

Hmm… this is a lot of food for thought.

I suppose the three party system exists to reduce risk. It trades some inefficiencies for confidence.

I will be more aware of the inefficiencies moving forward.

Thanks,

-Jim

Folks- I wasnt talking about "third

Folks-

I wasnt talking about "third party transactions." i was talking aobut three way economic systems. Using a credit card processing system that the vendor has as part of their firm is not a three way economic system.

Mark

Mark, Examples: 1. Stocks -

Mark,

Examples:

1. Stocks - Brokers buy and sell on your behalf for a cut. We loose efficiency simply because the market can't handle all the individual transactions....this however is something that needs to change because the technology is there. The current system is a legacy but has provided the lubrication for the economy for many years.
2. Car Insurance - You can't buy a new car in New Jersey without having an insurance company sign off on the transaction. What it looses in efficiency, it gains in safety for the general public.
3. Mortgage - I agree, there were way too many hands in the transaction. Correcting it is going to add the governments hand and removing all the other ones. Even the most hardcore, goosestepping free market advocates are crying now for government intervention. Additionally, mortgages are going to be much more difficult to obtain without banks being able to sell the risk.
4. Pharmaceuticals - I work in pharma. I know what it costs to make a drug. 7-12 BILLION to bring a new drug to market. The public wants safe drugs. That requires huge amounts of research, testing and regulation. So lets remove the insurance payers, the regulatory agencies and let the free market rule. Now it costs only 2 billion to bring a drug to market and we pass that cost on to the world. In the US, people are happy to have drugs that are reasonable but in Africa people are dying because they still can't afford it. Uh Oh, they just found out that the drug that cures millions of people of a chronic condition possibly causes breast cancer in 1/500,000. Those 800 people in the US collectively sue for millions each and now the drug company is out of business, the drug is not getting made and we are all worse off.

As jhack points out, third party transactions exist to reduce risk, lubricate transactions and protect the public from human nature. Yes, human economic behavior is understandable BUT it is NOT currently well understood. We spent too much time thinking of the system described by Adam Smith and not enough time on the one described by Daniel Kahneman and Richard Thaler. Economists like Thaler are studying it diligently, but we are NOT ready to take the reigns off and let the horses run free at this point. Look at the current mess for examples of how we are not ready. Those market adjustments that pure capitalism espouses involve real peoples food, clothing and shelter not theoretical abstractions. Advocating complete free market society is a rather Darwinian approach to humanity. If your blog post was to advocate for that position, I think you are wrong. If I misunderstood, sorry. :-)

PS. I am not a communist, socialist, liberal or anything else....I am a realist. Free market capitalism is a great idea. So was communism. In both these systems, human behavioral realities get in the way. They are unattainable ideals.

Mark, Mike: This audio blog is a

Mark, Mike:

This audio blog is a great idea. It the same as "Parking Lot" for ideas, so that you keep your regular casts focused. What I like about them is that they are brutally honest: don't wear darkening glasses, cut out the intermediary--they are your reputation-builders (or maintainers). See, being perceived as a source of truth is a fantastic competitive advantage. Moreover, living up to that perception is brutally impactful.

Thanks for your disciplined, relevant, critical work.
Nick

I don't agree with the blog entry.

I don't agree with the blog entry. Prices are not made by two - prices are made by the market.

That kind of economist tells you that prices are "fair" only when there are MANY producers and MANY consumers.

When there are only a few producers the prices tend to rise to some kind of extortion money; when there are only a few consumers the producers are in serious trouble.

Part of the trouble with insurance companies is that there are too few of them.