Will the state disappear due to Transaction Cost?

Why will states end?

Every human creation ceases to exist the moment it ceases to be efficient or when something better takes its place. If the state is actually good for society, it will normally continue to exist for its own sake. The state is valid because it was useful to society, it solved major problems that arose with the advancement of civilization, and it later consolidated itself as an authority.

Note that the state is not an authority in itself, nor is it given by God, nor is it given by society itself. It was its usefulness that generated dominance, which then became authority; the population simply peacefully accepted its sovereignty.

However, new solutions are beginning to emerge that replace state action, things that previously only the state could resolve, but now there are faster and cheaper technological solutions made by third parties. It is therefore possible to believe in a future in which the state no longer has all that usefulness, its authority may even be questioned and then the state may disappear.

Some people believe that the state is a superior entity above the individual, and that it will continue to exist because that is how it is, without questioning its origin, its efficiency and its legitimacy. They do not question that a group of people who proclaim themselves to be above in a hierarchy are not in fact so, but only so through the use of imposition, coercion and, ultimately, brute force.

So, as for the continuity of the state in the future, the moment it ceases to be economically viable it tends to disappear, because if it is maintained by force alone it becomes unviable. Even if there is a force that wants to maintain itself, the strength of the sum of the rest of society that is going in another direction ends up weighing more and more and it becomes increasingly difficult for the state to maintain with an iron fist a society that wants to grow freely and without impediment.

This is what we have observed in society today. Society is increasingly emancipated without the need for state paternity, independent and seeking new directions. And the state is increasingly unnecessary, seeking to maintain its relevance and increasing the siege against the individual to maintain control of things, but its decline is certain, regardless of the setbacks along the way.

This will happen because people who ignore the existence of something inefficient and embrace the efficient solution begin to have an economic advantage over those who still follow the old method. This is the theory of Darwinian evolution, or rather, Dawkinsian, since we are not talking about the natural selection of species as Darwin wrote, but rather its counterpart, the natural selection of ideas, the memetic evolution defined by Richard Dawkins.

Those who choose the most efficient alternative create more resources and become more prosperous, and tend to have their lifestyle copied by other people who also want to be prosperous. Those who choose the less efficient alternative lose resources, become poorer and tend to become a negative example of what not to do.

Obviously there may be exceptions in all cases, but as a rule there is a clear tendency and normally the mass of the population will follow a well-defined direction. In a short time, Dawkinsian memetic evolution ensures that society will migrate to the most efficient form, no matter how much some people try to use force to maintain their privileges.

If we are right that the state is inefficient in solving society’s problems, the population will soon no longer need the state. But before we analyze exactly what this means, let’s understand why the state was necessary. How was paying taxes good for society for a long time?

Why will the state disappear?

The economist Ronald Coase was not a libertarian, nor was he part of the Austrian school. He was an economist at the University of Chicago who was very much aligned with socialism. As a socialist, he wrote the paper “The Nature of the Firm” in 1934 as a critique of classical liberalism.

The central question was: “If the free market is so good, why do firms exist?” Companies are environments in which economic decisions are not made by the free market; on the contrary, they follow the logic of central planning. You receive a certain amount for your work, which is established according to the company’s central planning. You have a hierarchical decision-making structure.

If the free market is better than central planning, why don’t companies adopt it? Why doesn’t a company that needs an employee start the day looking for the best employee at the lowest price on the market? Why doesn’t it sign a contract with the employee for just one day’s work and then look for a new employee the next day?

This would be a free market within the company and would ensure that the company would always pay the lowest price for the best possible service and would also ensure that the employee would also be paid the maximum amount according to the quality of their work, which increases over time, as the employee gains experience and new skills. In the current model, this employee has to wait for a raise from the company, which often does not happen anytime soon. Often, this expectation of being rewarded for new skills ends up hindering the optimal situation for both parties.

The free market would be the best solution economically for both parties. The company would consist of just one person, the owner, who rents the land, the factories, the machines and hires people according to the market day by day.

The reason why this does not happen is obvious: it would be too complicated to put all of this into practice in such a short time, day after day, because there are what we call transaction costs.

What is “Transaction Cost”?

Transaction Cost is a set of hidden costs that exist when two people do business. There are three elements that make up transaction costs.

The first is the cost of information. This is the cost of finding the right partner for your specific needs. To hire a good employee, you have to advertise the vacancy, review resumes, find someone who can provide the service, verify that a candidate is capable of doing the job, gather information about whether the employee is a trustworthy person, prepare a contract that is acceptable to both parties, among other things. All of this has a relative cost.

The second cost is the inherent risk of very short contracts. A long-term contract has a higher total value, which makes it easier to admit small mistakes or losses along the way. You hired a company to supply electricity today for a standard price, but today there was a power outage in the market, making the price of electricity very expensive for the manufacturer. In this case, the company that has electricity prefers not to fulfill the contract, not to deliver the electricity, because it will not be able to recover this loss later if it were a long-term contract. If, on the other hand, it were a one-year contract, it would be advantageous for the company to assume the loss today in order to maintain the contract and therefore the profit for the rest of the year.

The third cost is the state regulation itself, which imposes obligations on both parties for various purposes, outsourcing obligations that were the state’s to the parties, but mainly also facilitating oversight of them. If society were to close dozens of one-day contracts every day, the state would not be able to verify whether everything is happening the way the state wants it to happen.

Transaction Costs make the existence of large organizations economically viable. Central planning reduces transaction costs and is therefore more economically efficient than the free market.

However, there is another important point, which Coase himself calls the Cost of Administration. Since central planning deals with the assessment of future forecasts, two other types of costs arise that must be considered.

What is “Administration Cost”?

Administration Cost is the set of hidden costs that exist when maintaining a relationship between two parties. There are two elements that make up the administration cost.

The first is the cost of circulating information. The larger a company becomes, the more complex its structure becomes and the more difficult it becomes to collect accurate information about what is happening in the control hierarchy, the more expensive it is for the central administrator to have information to base his decisions on. Likewise, such decisions need to be returned to the base in the form of orders that are not always executed precisely. All of this generates a loss of efficiency in relation to small structures.

The second is the cost of the risk inherent in very long contracts. There are trends that are not mere fluctuations, they are historical and structural changes that never return. Those who invested in long contracts to manufacture typewriters in the 1980s never recovered this loss.

The central point of this theory is that any organization of people fluctuates between these two models. On one side the Free Market, on the other Central Planning. This applies to Families, to companies, to countries, etc. Any organization of people will organize itself with a bit of central planning and a bit of free market based on what is most economically viable.

Now, the question is what is the balance point: how much free market and how much central planning is the best solution? Obviously, this will vary from situation to situation, it will vary according to a countless number of external factors.

These organizations are therefore on a balance sheet: organizations that are too small have a high transaction cost and may become unviable, organizations that are too large have a high administration cost and may also become unviable. The tendency is for there to be a balance point.

However, external factors also alter this balance, and this point changes. All five factors fall significantly with the reduction in the cost of information. The cost of hiring a private driver, for example, has fallen absurdly with the abundance of information; Uber and similar companies are a reflection of this. The cost of buying things has also fallen; today there are sales sites like Amazon where it is possible to purchase practically any product within seconds.

Many people don’t realize how complicated it used to be. You had to know where a store sold a certain product you needed, you had to go there, and if you wanted to guarantee the lowest price you would have to spend days visiting different stores. Today, you can compare all of this in 30 minutes without leaving your home, so the cost of transition has dropped a lot.

But look, the cost of business administration has also fallen significantly. Today, corporate governance systems provide real-time indicators, something that would have been unimaginable decades ago. Today, the executive of a large company knows how much was sold in the last hour in each branch of his company. Management systems allow the management of large hierarchical structures.

As technology becomes increasingly widespread and cheaper, the trend is for both the cost of information and the cost of circulating administrative information to tend towards zero.

The other costs, the costs inherent to short-term contracts and the costs of long-term contracts, in this case, widespread and cheap information also reduces both costs, but reduces the risks of short-term contractors much more than those of long-term contractors.

The fact that information about past performance is available to everyone means that short-term sellers are much more likely to honor their commitments, even if it means a loss in the short term. A negative evaluation by a buyer will impact all of their future contracts. Getting just one star on Uber will make your life harder.

Long-term risk also falls, but less so because the ability to make adequate long-term predictions is much more complex and does not depend solely on current information. With this view, establishing short-term contracts becomes increasingly viable, which favors the free market over centralized organization.

This is corroborated simply by what we observe in today’s society. We see more and more micro contracts, often informal ones. In the past, you had your employment contract, your marriage contract, your mortgage, your neighborhood grocery bill, and occasionally the newspaper delivered to your house, and not much more. Today, we have infinite contracts for the smallest things we consume. Internet, telephone, mobile data, movies, music streaming, paywalls, data storage, games, home delivery, and that’s just talking about technology.

Signing contracts lasting one day is something that will still be unfeasible for some tasks, but the trend is always towards increasingly precise and shorter contracts, with smaller organizations handling a large number of assets.

Today we have Meta, Google and X, which are the largest media companies in existence and pay for your ad for each click. People advertise on social media precisely because they know they will have visibility. But look, even these few companies are relatively small and do not control everything at all. They only function with the help of thousands of people who produce content for them. These companies may even have monumental revenues, but they need to pay an entire network of content creators, otherwise the network will not survive.

Before, we had a large impenetrable media company controlled by a few who made centralized decisions. At the same time, today’s networks do not have absolute control over what happens there. Note the direction from centralization to decentralization. In the past, content creators were a few state concessions on TV. Many people’s lifelong dream was simply to appear on television.

AirBnB is the largest accommodation complex in the world, and it is also decentralized. When you make your home available, you can stop at any time, paint it any color you want, change the furniture, and do literally whatever you want. You don’t even have to use AirBnB, you can rent directly, but there are risks. See how AirBnB manages these risks with simple measures such as a reputation system, simple document requests, insurance, and an optimal solution for everyone. What is better, two or three owners of all the hotels in a country or thousands of owners renting their homes on AirBnB in a decentralized way? See how capitalism in practice is often misaligned with narratives of income concentration.

Obviously, there are still AirBnB owners, but even in terms of ownership, these companies tend to decentralize. In order to truly grow, many of them go public on the stock exchange and are part of holding companies where there are no single owners. In addition, large companies of this type usually have two or three managers so that everything is not centralized in just one person. In the worst case scenario, even the owner will one day inherit his assets.

More and more organizations are very small, oriented towards short-term contracts without long-term commitments. This trend is set to grow more and more as the cost of information becomes cheaper, organizations will become smaller and smaller and will use the free market instead of central planning.

Conclusion

The government was efficient in the past because it provided the service of endorsing legitimate businesses at a time when information was expensive, limited and centralized. It issued business licenses, permits, health inspections of products and others. It also provided a form of justice and redress in the event of broken contracts or in cases of violence against innocent people.

With the high cost of information that we lived in until the 1970s, the only way to provide these services was through a large centralized organization, but now, with the cheapening of information, all these services can be provided by private entities much more efficiently today.

Quality seals from private certification agencies are already a reality in international waters. Product quality inspections tend to be done much more efficiently by consumers themselves; checking the opinions of other consumers on the internet is much more useful than seeing if the company’s health license paperwork is up to date.

Private justice is already a reality in several areas and is only no longer used for purely cultural reasons, we have a video about this. Security is also much better provided by private security companies, we have a video about private security as well.

Absolutely any real service that the government could provide today can be done better by private companies. Thus, each person who starts to ignore the government will have an economic advantage over the others. In fact, today it has become just a matter of choice, yes, you can live in Libertaristan today without having to change anything.

As individuals, today and always we seek to escape this mafia entity, to dodge idiotic laws, abstract crimes, victimless crimes, to avoid the relativization of property rights, to avoid being robbed by mafiosos charging protection fees or taxes. Always seek freedom, welcome to Libertaristan!

Related videos:

• Private Justice
• Private Security