The Answer Is Transaction Costs

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A talk with Dr Anya Shortland about the economics of ransomware and the gray-zone institutions that let extortion markets function when nobody can truly enforce trust. We dig into how cyber insurance quietly becomes a form of governance, why data leaks change the game, and what national security risks emerge as everything gets connected. 
• criminal markets that sit between legal firms and underworld gangs 
• insurance as governance through protocols, repeat play, and incident response packages 
• why victims amplify risk when they throw money at crises 
• the origin story of early ransomware and the transaction costs that made it fail 
• step-by-step ransomware mechanics from phishing to exfiltration to encryption 
• how gangs price ransoms by reading cash flow and insurance certificates 
• leak sites, privacy regulation, and third-party liability as bargaining leverage 
• why cyber insurance is fragmented and slow to enforce security standards 
• deductibles, coverage caps, and market hardening that push better cybersecurity 
• AI-enabled phishing and the asymmetric arms race between attackers and defenders 
• state-linked ransomware, impunity jurisdictions, and critical infrastructure threats 
• efficiency versus resilience in smart cities and the Internet of Things 

Anja Shortland at Kings College London
Shortland's book, Dark Screens:  https://www.amazon.com/Dark-Screens-Hackers-Shadowy-Ransomware/dp/1541705750
Shortland's first TAITC episode: "Deals with shadows"

Links mentioned in podcast:
Alex Danco's pirate puzzle
Pete Leeson's book, The Invisible Hook
David Deutsch's book, The Beginning of Infinity

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

You can follow Mike Munger on Twitter at @mungowitz

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We connect Adam Smith’s moral psychology to the modern idea of transaction costs and argue that the biggest frictions in markets start with the cost of understanding other people. We show how sympathy, propriety, self command, and reputation turn separate perspectives into workable cooperation and why justice is the real precondition for a stable commercial order. 
• why transaction costs always exist and why institutions matter when exchange is costly 
• a brief history of the term from Coase to an early use in Scitovsky 
• transaction costs as asymmetric information and the cost of social coordination 
• Smith’s epistemic distance and why sympathy requires imaginative effort 
• propriety as social calibration through the impartial spectator 
• self command as the price of being socially intelligible 
• commerce as a practical school for restraint, trust, and predictability 
• the prudent man as a model of conduct that reduces suspicion and monitoring 
• Buchanan’s moral community, moral order, and moral anarchy as lenses on social stability 
• why society can survive without beneficence but not without justice 
• a listener’s college admissions case where interviews act as a separating equilibrium and improve aid allocation 

Links:
Liberty Fund eBook--Theory of Moral Sentiments (PAGES DO NOT MATCH UP WITH PRINT EDITION!)
TAITC with Steve Medema, on Coase and Transaction Costs
Dan Klein and Russ Roberts on Theory of Moral Sentiments
Tibor Scitovsky, 1940, Economica paper
Gustavo Dudamel’s ‘the wealth of nations’ Melds Opera and Economics - Bloomberg 
If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

You can follow Mike Munger on Twitter at @mungowitz

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We assess Adam Smith’s enduring ideas—moral authorization of commerce, division of labor, emergent order—and confront where his optimism breaks: how democratic politics and business fuse to create monopoly privilege. The result is a maintenance‑intensive commercial order that needs competition defended, not assumed.

• presumption for markets under secure property, justice, and competition
• division of labor as the main engine of productivity and growth
• invisible hand reframed as emergent order, not automatic virtue
• critique of mercantilism, monopoly privilege, and rent seeking
• limited but real state functions: defense, justice, public works, education
• motivational symmetry and public choice constraints on government
• trade clarity: buy where cheaper, specialize, gains from exchange
• competition as a public good that must be defended

Happy 250th birthday, Wealth of Nations

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

You can follow Mike Munger on Twitter at @mungowitz

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We walk through Book Five of The Wealth of Nations to map a state that defends, adjudicates, and builds wisely, then pays for it without killing growth. From militias to standing armies, fee-based courts to salaried judges, turnpikes to basic schooling, and taxes to debt, we test what holds up now.

• defense as a professional, civilian-controlled standing army
• justice as predictable law and salaried judges
• public works funded by user fees where feasible
• education to offset division of labor’s civic costs
• incentives in universities and churches
• four tax maxims and ability to pay
• why land taxes beat mobile capital taxes
• state property and monopolies as bad revenue
• debt, consols, and fiscal illusion
• Smith with Hume and public choice echoes

We do have one more episode, which is a summing up and taking stock of why the Wealth of Nations still matters today. It will post Tuesday, February 24th, 2026.

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

You can follow Mike Munger on Twitter at @mungowitz

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Smith closes Book IV by dismantling mercantilism through the lens of colonial policy, monopoly, and rent seeking, then weighs physiocracy against the system of natural liberty. We trace why colonies grew despite Europe, not because of it, and how “wealth as money” broke policy and fueled war.

• mercantilism’s definition of wealth and the balance of trade myth
• monopoly and bounties as tools for concentrated gains
• chapter 7 on colonies as a case study in institutional design
• free ports versus exclusive companies and growth outcomes
• enumeration, navigation acts, and distorted incentives
• defense costs and the arithmetic of empire
• the “nation of shopkeepers” argument and public choice
• draconian wool laws, smuggling, and consumer losses
• physiocracy’s insights and errors, sector favoritism
• the system of natural liberty as Smith’s alternative

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

You can follow Mike Munger on Twitter at @mungowitz