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This book is based on transaction as the basic unit of economic observation. Transaction includes price as only one of several important components; others are service, information, quality, repair, and recourse.
Transaction Based Economics by Michael Phillips
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
Contemporary economic theory is based on the exchange of goods
and services for a price as the fundamental unit of observation. The
customer's $4.17 is exchanged for the drugstore's bottle of shampoo.
With exchange as the fundamental unit of observation, much of the
theoretical structure follows deductively. Such a theory, based on
exchange, will inevitably focus on competition, the free market,
monopoly, and property ownership as its central concerns. Karl Marx
and Milton Friedman are in the same domain because they start with
the same fundamental unit of observation: exchange.
This book is based on transaction as the basic unit of economic observation.
The concept of 'exchange' has only one component of importance:
price ($4.17). This is reflected in our measurement of the Gross
National Product which is the total of all the prices of all exchanges.
The concept of 'transaction' includes price as only one of several
important components; others are service, information, quality,
repair, and recourse.
When transactions are the fundamental unit of economic theory, the
deductive consequence leads to a focus on cooperation, market
niches, economic infrastructure, and social concerns.
The transaction-based model is derived from observing the real
world of business. Business, on close scrutiny, is found to operate
most effectively in conditions of cooperation, emphasizing service to
customers rather than competition and profit maximization.
Most importantly, when economics shifts from an exchange basis to a
transaction basis, the presumed universality of economics is replaced
by a culturally specific approach. Chinese economics becomes
different from American economics because the components of the
Chinese transaction are different from the American.
Introduction to Transaction Based Economics
The great 200 year old edifice of economics is based on some very
simple observations about daily business activity. One of the most
prevalent and most self evident observations concerns the role of
competition. Competition has been viewed since the days of Adam
Smith as inherent in the nature of business. 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. Under these circumstances
competition does indeed appear to be inherent.
As this book shows, 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,
which in turn has been extended into the general structure of
It now turns out, however, that competition is not an inherent
characteristic of business. In fact, a business firm that operates on
the assumption that the business environment is competitive starts
with a self-defeating and self-fulfilling misconception. 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, as a consequence, economic thought has
been structured on top of this proposition. The mistaken assumption
leads to an entire set of specific economic values and concepts that
are now ingrained in contemporary economics. When one uses a
non-competitive model of the primary business environment, the
economic theories that evolve from that are significantly different.
Among 20 businesses that start in the United States, if 10 operate on
the assumption of a competitive model for the business the
assumption of a competitive model for the business environment and
10 assume a non-competitive model, 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.
Economists have realized in this century that scarcity of goods is not
an accurate or self-evident proposition when the good is information.
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. Just the opposite scarcity in such cases
decreases the price of each unit. This book finds a way to bring the
observations about information economics into the fundamental
structure of economic theory.
The book has four sections. 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
The second section compares traditional business behavior with the
behavior of the 650 non-competitive business. This comparison
identifies the specific differences observed in the areas of marketing,
pricing, values, costs and ownership.
The third section shows why these observed behavioral differences
are the consequence of a business environment that is truly non-
competitive. 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
The forth and last section was added at the request of several
economists; 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. Such a
National Transaction Index is offered as an example.
SECTION 1 The Database
The 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. The
businesses were unique because they were part of network that
emphasized honesty, openness, and cooperation.
The result of this empirical small business network experience
combined with economics training is a new and different approach to
economic theory. The empirical base comprises over 650 separate
small businesses observed over a 10 year period beginning in 1974.
Following is a general description of the database. The network,
which in the San Francisco Area is called Briarpatch, has other names
in other locales. The San Francisco Briarpatch at the time of this
writing had 300 active members, another 150 associate members,
and 200 former members.
The Briarpatch Network is an informal association of people and
business that believe in open account books, honesty and information
sharing. With this philosophy it has had phenomenal success on the
West Coast of the U.S. where it began in the early 1970's. Now its
ideas have gained popularity in Japan and Sweden. New networks
are also being founded in Finland and Canada.
The association takes its name from the briarpatch in the folk tales
of Uncle Remus, where the hero, Brer Rabbit, led a happy, safe life.
The gentle rabbit was protected from predators by its humble and
seemingly inhospitable home of thorns. Briar business people feel
that, likewise, by keeping their lives simple and their businesses
open and honest they will be protected from the problems of the
The Briarpatch Network in the San Francisco Bay area includes
nearly every kind of business - from high fashion clothing design to
massage table manufacturing. Mixed in the assortment of members
are a sheep ranch, an elegant $2 million restaurant, a circus, and a
unique and highly respected school which awards doctorates in
human sexuality. There are special libraries of medical information
available to the public, many holistic medical practitioners, clinics,
and schools. A Japanese acupuncturist, an Irish bar, a Mexican
weaving company, an Asian theater troupe, a tea ceremony school,
and an immigration lawyer are also members. Almost any service or
product you could possibly want is available through San Francisco
Briarpatch, plus dozens of new, fascinating, innovative businesses.
The network differs from more traditional associations because it has
few meetings and no officers. Instead, it usually has parties or
classes on how to improve business practices, and has a group of
financial, legal, and accounting advisers to help its members. All of
these activities are coordinated by one person. The coordinator also
puts businesses with common problems or questions in contact with
each other and publishes a directory of members.
The coordinator of the network in San Francisco spends a typical day
answering phone calls from Briars. One call may be about writing a
partnership agreement. The caller would be referred to a book on
do-it-yourself partnerships published by another Briarpatch
member, Nolo Press, which publishes self-help legal books. Another
call may be from a small neighborhood grocery store wanting advice
on whether to expand to an adjacent vacant space. The coordinator
would then arrange for a visit to the store by several Briarpatch
financial advisers. For this range of services, Briarpatch members
make voluntary contributions of money or services every six
months. The fees and donations support the coordinator on a part-
time basis and pay for the parties and periodic mailings.
The outwardly visible characteristics of all the people who run
Briarpatch businesses are that most are under forty-five years old
and the majority are women. Furthermore, in talking to Briars you
find their values have been heavily influenced by the ideas and
experiences of the social, political, and environmental upheavals
which occurred in the United States during the late 1960's and early
1970's. Today these successful entrepreneurs are determined to run
their businesses in a way that reflects their own views of social
Members of the Briarpatch fervently believe that business is a way
to serve others. This value separates them from many other small
businesses which exist primarily to make money. Because of their
environmental values, Briars engage only in businesses that
preserve resources and allow the owners to seek simple life-styles
and to enjoy their work. They definitely are not in business to make
alot of money. One of the heroes of the Briarpatch is Stewart Brand,
publisher of the Whole Earth Catalog. This enormously successful
book has enjoyed a net profit of over $1.25 million. Brand, however,
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. Today, Brand is also publishing the Whole
Earth Review, a Briarpatch magazine containing articles about
current ecological issues and computer software.
Another Briar, Kaisek Wong, the high-fashion clothing designer, loves
the fashion business but hates to employ and supervise people.
Wong and his mother sew all the clothes he designs. When you buy
one of his dresses, you really have an original. Even though demand
is great and the prices customers are willing to pay continue to rise
(now over $2,000 per dress), Wong will not hire anyone else to sew
for him. He doesn't believe in expansion for its own sake.
Briars keep open books. In any Briarpatch business you can ask to
see the financial statements and ask how much is paid for rent and
for supplies. You will always be given a clear, understandable
explanation. Many Briar businesses, in fact, publish their financial
statements: Whole Earth Review; Common Ground, a listing of
alternative educational and spiritual organizations; and The People's
Yellow Pages, a listing of social service agencies. Whole Earth Review
once found that after publishing its printing expenses, printers all
over the United States offered lower bids for the same job.
Most Briarpatch businesses have had similar experiences. Being
honest people running open businesses results in better
management, more community support, and an opportunity for
friends and family to actively participate in the business. Sven
Olmstead is a Briar who runs a successful building contracting
business in Stockholm, Sweden. Olmstead builds homes, offices, and
factories for a fixed contract price, and lets his customers see his
financial statements. He explains the results: "When clients see that
I have lost money on a project, they are very appreciative of the
hard work and excess effort my company has exerted to do a good
job for them. These clients always come back to me for their next
job. When I make a large profit, it is visible, and the clients also
come back. They insist that I offer them low bids because, after all,
I 'made lots of money on the last job I did for them.'"
Being open with financial information is analogous to having an open
kitchen in a fine restaurant; it is a reflection of the pride that the
chef has in his or her cooking. In an ordinary restaurant, when
patrons ask to see the kitchen, they are often told,"We are busy
right now...Our insurance doesn't permit people in the kitchen." You
may immediately assume that such a restaurant has a dirty kitchen
and uses frozen food in microwave ovens. In contrast, the open
books of the Briarpatch businesses indicate pride, a willingness to
learn, and a high degree of honesty. They want to provide quality
service to their customers.
Another descriptive quality of Briarpatch business is generosity with
each other and with people outside the network. For example, The
Down Depot, which cleans down sleeping bags, parkas, and jackets,
has helped other Briar outdoor rental businesses to clean their used
sleeping bags at a low price and on a rush basis. They have also
trained dozens of people who wanted to start similar down cleaning
stores in other parts of the United States. Another example in
Albany, California, Toy-Go-Round sells used toys and returns 50% of
the sale price to the original owners, usually children. Toy-Go-
Round's owners have gladly trained others in how to open and run
Yet the most surprising fact about the Briarpatch way of doing
business is its extraordinary success and survival rate. In the United
States the average failure rate for most companies in the first three
years of operation is 80 percent. Briars, however, experienced less
than a 10 percent failure rate in three years. These figures are
based on ten years of experience from the Network's formation in
1974 until 1984.
Briarpatch type networks are growing in small towns and large
metropolitan areas as business people find each other. 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. 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.
Because the Briarpatch way of doing business has such a successful
record of helping people run their businesses, Briarpatch networks
will undoubtedly continue to spread to many areas where there are
clusters of businesses which also value service, quality, openness,
Briarpatch is an exciting and innovative development but not many
people know about it. The reason is that Briars do not believe in
proselytizing. They strongly believe in their own values but they
don't try to convince or convert others. They look for people who
share the same values, and they support each other.
Reference: The Briarpatch Book, New Glide Publications 1978 (330 Ellis, S.F.94102)
Section II OBSERVATIONS FROM THE DATABASE
This section compares traditional business practices to those
observed in the database businesses.
The distinction is clearest in the guidelines for starting a business.
Traditional business wisdom recommends that a new business:
¥ Be established in a situation with the fewest competitors.
(Preference is given to geographic monopolies, patent protection, and
¥ Have the maximum capitalization.
¥ Strive to keep all possible trade and financial information
¥ Be serious.
¥ Aim for the largest possible profit.
¥ Pick a business and a market with maximum growth
These business guidelines are congruent with prevailing economic
theories of the free market which focus on aggressive competition,
monopoly and profit maximization.
Contrast this with the guidelines of the non-competitive database
businesses. (These guidelines are published in Honest Business
Random House 1982.)
¥ Choose a business that you love.
¥ Start with the minimum capitalization (in order to be most
dependent on customer whims)
¥ Share all information, especially financial, with anyone
¥ Have fun.
¥ Limit the size of the business to be consistent with your own
values and ecological considerations.
The experience of the database businesses, which have been
operated on these Honest Business guidelines, revealed the following:
1. Competition is a poor model of the real world. Cooperation and
'niches' are more accurate.
Among the many hundreds of businesses in the database, virtually
none of them consider themselves in competition with any other
A good restaurant knows that its clients select it for the gestalt of
what it offers; and if the customers want that particular gestalt, it is
only available in one place. While there are thousands of restaurants
within a five-mile radius (in San Francisco), all are different and the
customer has a unique set of tastes and desires that periodically
converge in selecting one restaurant. 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. A
restaurant occupies a 'niche' in the minds of its satisfied customers.
A business consultant doesn't have any real competitors. 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. Respect and trust are very hard to manufacture and
promote, and few clients have the time to do extensive testing.
Businesses usually choose the consultants from a very narrow range,
based on recommendations and occasional observations. There is no
'market of consultants'. In reality there are a few specialized niches
where clients and consultants have found each other and feel
The local firm of Alfalfa-Omega Express (A-OE),a distributor of whole
grain foods who packaged their own corn chips, recently
demonstrated the importance of niches versus competition. The
owners' wholesale supplier of corn chips, who usually sold to
Mexican restaurants in large quantities, went around them and
started marketing chips directly, at lower prices, to some of the same
grocery stores that A-OE supplied.
In response, A-OE did nothing but watch and wait. Their own sales
did not drop, and in one case increased. They offered to distribute
their wholesaler's product to their mutual clients. Before long the
wholesaler decided to stop selling to retail health food stores. The
market was too small, and the sales never grew, because retailers
had a choice and preferred to stock only the chips from A-OE, the
firm whose delivery people were fun to talk to, always helpful and
who always dealt openly and honestly. The retail store customers
also appear to have been loyal to A-OE's product.
A-OE had a secure 'niche' in that distribution business.
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. The word niche
conveys a more comprehensive business-client relationship.
2. Positive values such as honesty and openness are highly effective
in attracting customers.
Prevailing business attitudes favor greed, competition, dishonesty
wherever feasible, and personal gain whenever possible. Also
seriousness and boredom. Economics has a bias in this direction too.
On these points our database provides the most conclusive contrary
evidence. 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. Such businesses must be actively supported by
the friends, acquaintances, suppliers, employees, and customers of
the business. This support in turn is contingent on superior attention
to good service and products, human relations, and honesty.
Most readers can immediately think of counter examples, businesses
that succeed by relying on deceptive advertising (in the U.S.) and
choose greed as their way of doing business. Our database clearly
shows that this is an inferior way to do business. Such practices can
exist only in an environmental niche filled with other similar
misanthropes. When an honest business enters such a market it
readily succeeds in attracting new loyal and appreciative customers
while the misanthrope withers away.
Because acquiring new customers is a significant cost for many
businesses, access to satisfied customers who return regularly and
bring their friends is very efficient.
A long, 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, honest, fun business that has the goods and services
you want, or would you choose the greedy, manipulative one?
Unfortunately, the norm for honesty in retail business hasn't changed
enough to give most of us this choice yet.
It should be noted that most wholesale businesses, in or out of the
database, depend on high quality service, strong personal loyalties,
generosity with information and comradery among buyers and
sellers. They can't get away with much else.
3. Profit as the primary goal in business has a detrimental effect.
Profit as a bookkeeping entry is found in nearly all the database
businesses, but profit as a primary goal is found in virtually none of
This contrasts strikingly with prevailing business and financial
wisdom. But just how wise are the traditionalists? As indicated
earlier, the database businesses had a startlingly lower failure rate.
The founders of the database businesses usually loved the area of
interest they were pursuing, had the appropriate skills, wished to
serve their community, chose to start their own business to be their
own boss, and usually expected to earn enough to support their
modest life style. Profit was not among their primary reasons for
starting a business.
Failure among the database businesses is very narrowly defined: The
proprietor was financially unable to continue operating, and in most
instances went back to a salaried job. 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.
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'), and return on invested capital at
appropriate rates for that level of risk.
Most of the database businesses did not have this as a target and are
happy to earn a return comparable to a salaried job; most invested
little capital, only sweat equity, so this was never an issue after
original lenders to the business were paid off.
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. Profit in most businesses is found in
management perks, non-monetary rewards and social intercourse.
In several instances the 'profit' of the business, more accurately the
'net surplus', was passed on to customers in the form of lower prices
and to employees, and suppliers in the form of bonuses. As a result,
in several cases customers, employees, and suppliers financed the
subsequent expansion of the businesses.
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.
First, small business is very hard; it is fraught with crises and late
hours alternating with long periods of boredom. It would not be
unusual for a small retailer to face a leak that damages merchandise,
a spouse who leaves home in anger, a lost invoice, and a serious
lease problem all at 5 PM on Saturday. Only love of the business and
the support of friends will carry a person through this.
Rarely will the profit motive suffice, especially since greedy people
learn quickly that small businesses seldom lead to riches.
Second, profit is a poor guide for what a business needs to do to
improve. The goal of 'service to the customers', held strongly and
pursued aggressively, is the goal that most often works and leads the
proprietor to muster the necessary energy to improve
merchandising, marketing, and accounting controls and to pay
sufficient attention to customer suggestions, whims and desires.
In the unusual cases of a financial advisory business, a lawyer, or a
health professional, it is occasionally necessary to give a customer a
harsh, candid response that is uncomfortable to both parties but may
be in the customer's best interest. A profit motive can rarely lead to
such unpleasant advice.
None of the above should be misconstrued to mean that businesses
can operate at a loss. That is certainly not the case. Revenues in
excess of expenses is the operating rule, but it has no more to do
with the concept of profit than pedalling a bicycle has to do with the
goals of bicycling. Some pedalling is necessary to keep the bicycle
upright, but in most cases the cyclist sees pedalling as a necessity to
achieve some other objective.
4. Prices can be appropriately set with relatively little direct
reference to 'the market'.
Approximately half of the businesses in the database are pure
services with no tangible product. These range from accountants,
lawyers, healers to schools, white water rafting trips, and computer
programming firms. Another sixth have a product but the product is
primarily information or design, such as books, market research or
high style dresses. The remaining third are traditional products
including retail businesses, restaurants, typographers, and bakeries.
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. Pricing seems to be based on two different and sometimes
First is a function of the value of the good or service to the customer.
A lawyer who is expert in settling expensive divorces may set a high
price because the savings to the client can be large. Similarly, with
two nearly identical books, one may have a high price if the
customers are managers, while the other may be low for tenants'
Second is the type of customer the firm wishes to do business with.
For a psychotherapist a $90 per hour rate will result in wealthy
neurotic women with intractable problems. At $25 per hour it would
result in high turn-over welfare families as clients.
The therapist selects the type of customers and sets the prices
accordingly. The volume of clients can be large or small regardless of
the price; the quality of service is the determinant in such cases.
5. 'Social concerns' can be rewarded when included in the business
Traditional economic theory suggests that businesses, in trying to
maximize profits, will pursue policies that push 'social concerns' on
to the public. An example would be dumping industrial wastes and
polluting the air and water. Disposing of the wastes is viewed as a
cost to be reduced and the air and water are treated as someone
In fact this is probably true in most instances but it is not the
behavior of businesses in the database, and their 'contrary' behavior
is rewarded by their customers.
Small businesses that make a point of appealing to customers by
serving the 'common good' are generally rewarded by getting more
customers. Such is the case with bicycle repair businesses that train
customers to make their own repairs, with food suppliers who use
the finest ingredients and openly disclose their food handling
procedures, with health practitioners who generously and patiently
instruct their clients, with manufacturers who strive for very
durable products, and with publishers who sell up-to-date books
and allow older editions to be traded in for current editions at no
The same pattern appears to apply on a larger scale --- in the rare
instances where good research has been done. The Council on
Economic Priorities (30 Irving Place, 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.
6. Infrastructure costs are a prime determinant of final consumer
'Infrastructure' refers to institutions, practices, and resources that
are provided or imposed by the government. Examples include
highways, education, retirement benefits, tax subsidies, import
duties, etc. This point has been made effectively by Robert
Heilbroner of the New School for Social Research in New York. He
points out the great extent to which all business is dependent on
such infrastructure. He also points out the extent to which large
businesses in the U.S. find it cheaper to bribe the government to
provide a service than to do it themselves. The large unemployment
in many corporate-dominated nations is a consequence of the
corporations minimizing their internal labor costs at public expense.
In terms of small businesses the evidence is readily apparent. The
database businesses are not unique in this respect. For example, 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. In both cases the
cost of the raw materials is about 5% of the retail price. Both
products are delivered by transportation that was controlled and
subsidized heavily by government policy. The corn is produced in an
industry that has heavy direct tax subsidy to producers, 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
Two major components of the food store's costs are determined by
the infrastructure: (1)the rent which depends on local zoning
ordinances, transportation, roads, and courts to enforce lease
agreements, and (2) employees who receive most of their general
training from public education and many skills from military
experience. Sometimes the pool of employees depends on the
availability of immigrants.
7. Honesty is a major positive factor in business efficiency.
Dishonesty has negative effects and is geometrically harmful the
greater the degree of dishonesty.
Retail business has a high degree of dishonesty in the U.S. although
wholesale business has very little. The reason is simple: retailers
can get away with it. They have a large flux of strangers with whom
they do business. Wholesalers have a very limited list of customers
and potential customers, and word gets out very quickly about
A standard definition helps clarify the issue. Dishonesty is "the intent
to deceive". Honesty is the absence of such intent it. Neither word has
anything to do with truth or accuracy. Only the intent to deceive.
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.
Theoretically the dishonest party gains an advantage in such an
exchange. The advantage disappears when the relationship is ongoing
and the recipient has time to go elsewhere for future business.
The American automobile companies sold cars on a 'buyer beware'
basis for decades, and they have since been unable to regain those
customers now that an alternative is available in the form of quality
cars from Japan. The American companies optimized each exchange;
the Japanese optimized the long run relationship.
The advantages of honesty are many, but the clearest reasons are:
¥ repeat business is more economic than generating new
¥ 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
In fact, the costs of dishonesty rise geometrically. 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, 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, because dishonesty implies some
minimum degree of trust, otherwise deception isn't possible. 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
The good way to test this is to imagine ourselves in a shopping center
where we experience a dishonest act by one merchant. We may be a
little more careful in future shopping. If it happens at two separate
merchants we will become very careful, and should it happen a third
time with still another merchant in the same shopping center we will
surely go elsewhere altogether.
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, courts,
credit bureaus, locksmiths, security agents, etc.
In the U.S., the author estimates that over 8% of all labor is devoted
to protecting against dishonesty.
8. Businesses that resemble monopolies are found in 'ordinary'
circumstances where they arise from superior service.
Economic theory has frequently focused on the issue of monopolies.
It has long suggested that there are two main types: (1) 'natural
monopolies' such as power, gas, water utility companies and
telephone services, and (2) government-created monopolies. The
theory says that natural monopolies are the result of physical
economies, such as the advantage of one wire or line going to each
house or one large dam on a river.
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
One such example is Common Ground, a quarterly newspaper listing
all the health, spiritual, educational and related business and
institutions in the area. 60,000 copies are distributed in the San
Francisco Bay Area. All advertisers have the same format; a small
logo and a written description. The finances of Common Ground are
published in the front, 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.
The advantage to the suppliers is that they get to meet each other
and exchange information on how to improve each of their ads.
There is also a share of the profits that the advertisers get to use for
their common interests. The net revenue after paying all expenses is
$4-6,000 per quarter. No one has succeeded in producing anything
similar in this geographical area in ten years; the readers and
advertisers are so delighted with the service they have no need to
use another one.
Common Ground has been duplicated by other people in dozens of
other cities. Where the same complete satisfaction has been provided
to all participants there is only one publication per city.
Such ordinary monopoly conditions might well be called 'Good-Job
The evidence further suggests that 'natural monopolies' probably
aren't so natural after all, as discussed in #9 below.
9. Monopolistic conditions are sometimes the result of cultural values
and little known government policies.
Now that the U.S. phone company has been broken up into smaller
units, and many new entrants are in the field, the question is being
asked whether 'natural monopolies' might indeed be the
consequence of government policy and practice.
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,
reflecting government-enforced demand for a monopoly water
A cultural example is the retail mark-up on milk, 15-20%, much
lower than comparable products. Milk is popularly believed to be
healthful for children. On the other hand, the mark-up on wine in
most restaurants is over 170%, much higher than on food or soft
drinks. Wine still has a 'sin' connotation.
10. 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, peers and larger corporations. What they are discovering is
that a one-person business is MORE economic than a multi-person
business, because of the pressure to minimize administrative time,
the absence of supervision and the advantages of flexible self-set
time schedules. What one-person businesses need are highly
reliable, prompt, and honest peers to work with.
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.
The reason is that the independent workers are better able to
integrate their administrative time into their creative time for a
productive result. For example, the independent editor can be doing
much of the creative work while carefully interviewing the client
and preparing the invoice on the job. The employee would have to
make notes on the client information for transmittal to others and for
later review; the invoicing would be done by another department
after much paperwork and a few errors.
The experience of these one-person businesses is that they are
highly efficient and significantly more productive than their larger
counterparts in the U.S. They suggest that large clusters of one-
person businesses would be far more efficient than traditional 'office'
or factory environments.
11. Type of ownership doesn't make any difference.
The database businesses consist of many ownership forms including
cooperatives, sole proprietorships, partnerships, corporations, non-
profits (where the control is in the hands of a board of directors and
the state is the ultimate owner), and 'collectives', a special version of
non-profit where all workers have an equal vote.
All these types of businesses have similar success records, for a
simple reason. Each of these legal structures requires the same skills
and practices to stay in business. Who owns the business makes no
difference in its efficiency or its survival. There are examples of
highly efficient worker collectives and hopelessly inefficient sole
proprietors, and vice versa.
Management skill, broad-based employee decision making, and
organizational structure ---not ownership-- determine efficiency.
Economic Implications of These Empirical Observations
In this section, the observations about small business experience in
Section II are expanded to form a new economic theory,Transaction
The experiences of small honest businesses indicate that traditional
economic theory, based on exchange for a unit price, is very
The minimum unit of observation in traditional economics is the
exchange/price event. This occurs when a customer gives a drug
store $4.17 for a bottle of shampoo. The reality of business is that
price is a small component of the actual event that occurs. The event
is in fact a transaction. Since the transaction is a larger unit than the
exchange-for-a-price, a theory that is built on a unit that is too small
becomes unwieldy as the actual event becomes larger; and the ability
of the theory to describe price behavior leads to indeterminate
Traditional theory suggests that an increase in demand will raise
prices in the short run until greater supply is provided, which will
return the price to equilibrium, and vice versa. For example: 1,000
bottles of aloe vera shampoo are produced in one day and sold for $4
to 1000 people, but 500 people who wanted it were turned away
from the drug store. Economics suggests that the price will rise for
awhile above $4 until only 1,000 people come in to buy it; then, as
production facilities permit or as other producers enter the business,
more will be produced and the price will come down again.
Transaction based theory indicates that this is a highly unlikely chain
of events, just on simple principles.
Economists do have three major categories of exceptions to
exchange/price theory. One is agriculture, another is labor, and the
third is information.
In agriculture, exchange/price clearly doesn't apply. When prices are
high, farmers over-produce in the next year; when they are low they
still over-produce to keep their income up. Only draught, storms and
freezes raise prices. Of course governments intervene to buy up
agricultural surplus (like butter, cheese, wheat, and corn) and bury it
or pay farmers not to farm.
In the case of labor, 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. A $35,000 hospital worker with three weeks paid
vacation might get a raise to $40,000 and, feeling more prosperous,
take an additional one month unpaid vacation the next year. (In
technical jargon this is called a backward bending supply curve).
In the case of information, traditional theory is backwards. A few
telephones connected to each other are nearly worthless, but when
millions connect together each one is quite valuable. (Technically
this is a positively sloped demand curve).
In addition to being inappropriate for agriculture, labor and
information, exchange/price theory turns out to equally
inappropriate for Business. Raising prices can sometimes mean more
customers, and lowering prices can mean fewer customers, price and
supply are not the primary determinants.
The reality, based on 10 years of observation on many hundreds of
businesses with thousands of different goods and services, 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. Economic theory doesn't predict what will happen to
demand. Price is in fact indeterminate. Neither simple supply nor
demand will predict it.
The object of most buyer-seller interactions is not the exchange of a
unit for a price, which is very visible. In the real world
is is the transaction. The transaction includes an exchange/price
but it also includes some invisible non-price considerations.
Transactions can have a non-price component that range from 5% to
95% of the transaction. Table I shows the range of non-price factors
for a variety of goods and services in the United States.
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.S. The last line in the
following chart is an approximation. The meaning of the terms used
are as follows:
Service: Personal interactions of the buyer and seller, conveniences
such as parking, and esthetics.
Information: Written articles, training, training materials, packaging
information, advertising, manuals, and advice on usage.
Quality: Functional values, durability, appropariateness,
Repair: Convenience, timeliness, and ease of restoring to working
Recourse: Response of the seller to dissatisfaction of the buyer
ranging from gracious replacement to civil lawsuit.
Knowing that the fundamental unit of business is a transaction and
not an exchange is important. First it helps to understand what
'business' is; second, it sheds light on the error in exchange/price
¥ When a complete stranger buys a small amount of an illicit
drug in a dark alley, that is close to the traditional economic model
of exchange for a unit price.
¥ When a shopper goes to his or her favorite neighborhood
drugstore, reads the label on the shampoo bottle, pays for it, and
takes it home knowing that any problems with the product can be
remedied easily, that is a transaction.
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. Or it can have a 95% non-price
component if the store is run by friends and has an appealing
Non-price components of the chain store purchase are most likely:
good parking, accuracy of the date on the label, availability of a
refund for errors, and the certainty that a lawsuit would recover
damages if the shampoo were harmful. 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, recommendations for
alternative products and related services, warmth, happiness, and
Economists respond to this type of observation by saying that price
"can include the non-price components you talk about". For example,
they would say that the difference in price between the chain store
and the friend's store is the non-price component, theoretically.
But they are only partially right. Concerning the single transaction
price they are wrong. In many cases the friend's store has lower
prices on comparable goods. In most cases the friend's store has a
wide range of prices that it can use and never discourage the sale.
Each exchange can have a wide range of prices at which the goods
will be still be sold, which is why price is in itself indeterminate ----
because the transaction is premised on a long-term relationship.
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. The item that is determinate is the income
stream for the individual customer at an individual store. This is
very much more predictable and is one focus of transaction based
The store, 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
A rough estimate of the number of transactions for even a few
businesses over a few months is very large. I would guess that over
80% of the components in those transactions are non-price elements.
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. Therapists, health workers, attorneys,
publicists, business consultants, designers, architects, etc. charge
prices that are unrelated to any known supply costs and anyone can
find themselves overloaded with clients or starving, without any
correlation to the prices they charge.
The type of goods and services offered in the market increasingly
have a large non-price component, and traditional price theory
becomes less and less appropriate. A simple reason for this change in
the marketplace is the increasingly complex structural and technical
nature of our society. Each good and service is in fact a sub-
component of a larger system or several larger systems.
Because of the increasing economic complexity and increasing
number of sub-systems in daily life, information becomes a greater
factor in each transaction. As information becomes more vital,
service, which is related to it, becomes more important.
For example, even a simple loaf of bread is a component in a number
of consumer systems. One is the storage system. Storage for a few
days in an outdoor-rainy environment would require a wrapper,
storage indoors for a few hours before dinner requires none.
Another is a decorative system; for some holidays bread needs
specific shapes. Still another is the eating system; some bread is used
as sandwiches and is sliced, other bread is torn off and dipped in a
fondue. A very large system involving bread is 'health' in which the
ingredients play an important role.
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, as well as quality, repair, and
recourse, are increasingly more important than price. A few simple
examples will make the point.
¥ It isn't worth paying a low $100 price for a lap computer in
Hong Kong, if it has no brand name (meaning no repair service in
other cities), 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, gasoline at $.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).
When exchange/price is thrown out of economics as the relevant
minimum unit, as it should be, many of the concepts such as profit
orientation, free market, and rewards for selfishness are thrown out
Transaction based theory in economics will place price in its rightful
perspective as a small element, and the current measures of GNP,
which are based solely on price, will have to be discarded.
To base a theory of economics on a new minimum unit, called a
transaction, requires some new observations, new concepts, and new
measures. The new measures are described in Section IV. One
particularly, the National Index of Net Positive Transactions (NINPT),
is based on the creation of several underlying observation points and
The first new observation point is the transaction itself. A
transaction is an event that occurs over a period of time. A tourist
may buy a pair of shoelaces in a foreign country and take two
minutes to complete the entire transaction. For a shoelace purchase,
all the non-price elements of the transaction occur at the scene of the
purchase: service and information. The non-price elements of quality,
repair, and recourse are irrelevant in this particular transaction.
Another example, the purchase of a brand name lap computer may
have a transaction time of six years, because additional information
may be needed after the actual sale, the buyer may later need some
repair, and of course recourse remain associated with the equipment
during much of its useful life.
The second observation point is called an 'income stream'.
The income stream is a monetary record of a transaction or multiple
related transactions stretched out over a period of time. The
purchase of a lap computer is again the example. It includes the
income stream that is definably connected to the initial purchase
transaction. Such an income stream includes the purchase of an
add-on memory module, a repair visit, and the purchase of a
software manual needed to operate one of the lap computer
In both of these observation points, time is involved, which means
that the seller becomes important, (as contrasted to the simple
exchange event where the element of time is minor). Because the
final seller as well as prior sellers are participants in the transaction,
a third new unit of observation is necessary in Transaction Based
Economics. That unit is the 'bundle of income streams'.
Income streams can be bundled in two ways. One is into a Firm
bundle the other is into a Product/Service bundle.
The bundle of income streams that form a Firm can be understood
readily from the previous lap computer example. The income stream
for that transaction can occur in a number of different Firms. One is
the retail store, another may be the importer-distributor (especially
if it is a U.S. corporation with the same name as the overseas
manufacturer), and another is the manufacturer. 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, and
therefore forms an additional Firm relevant to the lap computer
transaction. A firm can be an outlet, a one-person business, or a
The other concept of a bundle of income streams is similar to the
concept of a product/service. In this case the product/service
bundle is the lap computer. The bundle of income streams called a
lap computer can be sold through many different stores or mailorder
outlets; it is distinct in some way from other style or models of lap
The bundles of income streams when grouped as Firms are fairly
easy to measure and count, when they are product/service bundles
the matter is far more difficult.
The three observation points, the transaction, the income stream, and
the Firm bundle can all be measured in numbers and in some cases
in dollars. NUMBERS of transactions are highly significant in
Transaction Based Economics but are not currently counted in
national income accounts, which are based on traditional
exchange/price economics. Presently, the total dollar value of the
shoelace sale and the lap computer sale are reported, but the number
of sales is not.
The next level of abstraction in transaction based theory, which
overlays these three measurable observations consists of
independent transaction elements. These independent transaction
elements are the specific components of each transaction such as:
price, service, information, quality, repair, and recourse in the
American economic system. These are not as easily measured as the
three observation points, but they are measurable.
Traditional exchange/price economics has similar abstract elements
such as ownership, 'the market', monopoly, the interest rate, and
import tariffs which are comparably difficult to measure.
At this point, in considering the independent transaction variables, it
is important to note that different economic systems have different
variables in their basic transaction unit. In Arab economic systems it
appears that credit worthiness, family connections, and interpersonal
power play a vital role. In an Arab transaction the buyer and seller
can spend a half-hour dealing with a shoelace sale, over Turkish
coffee, while these transaction variables are mutually (and invisibly
to the outsider) evaluated. In Slavic countries political power seems
to be the primary element. The purchaser with little power may
stand in a line for hours for the shoe lace, pay the money to a cashier
upon entering the store and then be handed a shoe lace, at a
separate counter, of the wrong color from the bottom of a mildewed
pile, and have to accept it. A politically powerful Slav may have it
delivered to his office gift wrapped with a complimentary gift
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
Because the transaction unit is fundamentally a function of time, (it
can occur over minutes or years) Transaction Based Economics has a
number of dynamic characteristics that take on an important role.
Among these are: velocity, diversity, breadth and net positivity.
These are also measurable, although with difficulty.
Velocity is the number of transactions in a period of time, diversity
is the number of different and distinct income streams, breadth is
the number of different Firms, and net positivity is an index that
combines number and dollar amounts in proportion to the
independent transaction variables (price and non-price).
Net positivity is an abstract concept that has a common-sense
interpretation. 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.
Jane's computer store handles the customer request to get a refund
or replacement with "tough luck, sue us". That situation would be
counted in Transaction Based Economics as a negative number when
measuring 'net positivity'.
The value of any theory is that it identifies observations in the real
world and then offers tools, concepts and measurements that explain
and sometimes predict the relationships between the observations.
Transaction Based Economics is therefore concerned with explaining
and, where useful, predicting the relationship between the number
of transactions that occur, their resulting income streams, and the
businesses (Firms) that are involved.
It can talk about and describe the factors that increase or decrease
the velocity of these transactions, the factors that contribute to an
increase or decrease in the national index of net positive transactions
(NINPT), as well as the mutual relations among the observations and
The author has developed an array of over 50 equations that are
indicative of these relationships. The variables in these equations
¥ primary observation units (1) transactions, (2) income
streams, (3) Firm Bundles, (4) Product/Service Bundles, and (5) price;
¥ concepts: (6-9) the non-price components of a transaction;
¥ measurements: (10) velocity, (11) diversity, (12) breadth,
and (13) NINPT.
There are several powerful statements that emerge from examining
the equations made up from these 13 variables. A few interesting
ones are offered below:
A. 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
An example is auto rental booths at airports, where prices are rarely
displayed and are almost never prominent. The reason is that
service, repair, 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
B. Recourse Is Especially Important
Income streams (a reflection of customer loyalty) are longer, and the
Firm Bundles are larger, when the non-price components of quality,
repair and recourse are positive and increasing. In this regard, the
most powerful component of all is recourse. When recourse is good
or improving, it has the greatest effect of all the non-price
Companies such as General Electric and Procter and Gamble, which
have elevated recourse to a very high level using 800 numbers for
customers to call with product problems, are experiencing significant
long-term increases in their sales and repeat transactions.
C. 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, the supply of workers seems to grow
without regard to prices or wage level. For example, in the 1970's
we saw more people entering law school while legal wages were
declining; a rapid entry of masseuses and psycho-therapists into
fields where demand was scanty, and an influx of professionals into
dense urban areas without regard to the rising demand in non-urban
Because these are sectors where niches are more significant than
price-competition, and prices are not a direct function of the market,
the supply is not closely related to the demand. What occurs is that
the increasing supply of service and information workers increases
the size of the market --- just as more telephones increase the
demand for (and the value of) each individual telephone.
D. 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. This is increasingly occurring within industries and in the
economic system as a whole. There is a corresponding increase in the
number of establishments (breadth) and number of different
products and services in the market (diversity).
As an example of the increase in diversity, one finds many different
types of telephone handsets (they are really small computer
terminals) because information about their appropriate use is great;
but one finds relatively few different types of ovens (gas, radiant
electric and microwave) because the information component is low.
Baking, broiling and heating are fairly limited functions.
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
E. 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.
As a concept in economics, it may remain appropriate in a few rare
instances such a the sale of cigarettes and candy among prisoners.
But generally it doesn't describe or predict the nature of business or
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. The 'free market' is a tiny bit of frosting on
the top surface of a cake, a veneer.
Because transactions in which price is only a small component are
increasingly the dominant part of the U.S. economy, policy concerns
should relate the intertwining effects of government and cultural
practices on final consumer behavior, rather than the current
practice of making the 'free market' a policy goal. The nature of
cultural, governmental, and market structure interactions need to
move from a minor consideration to the major consideration of
Traditional economic concepts are frequently used to advocate policy.
For example, deregulation presumably will "let the free market
work". The evidence suggests that deregulation has no predictable
effect on final consumer prices.
Social concerns can no longer be ignored "because they interfere with
the free market"; instead, economic policy should be stated in terms
of how it may affect existing market structures.
F. 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. Such is the
case where the transaction is open-ended. Education is one such
instance because general education never really ends, and the
business market cannot provide an adequate level of service to meet
this situation for the bulk of the population. The same open-ended
transaction quality is true for chronic illness, terminal illness, and
The absence of a clearly fixed time delineation for the transaction
can also be found in the cases of sewage systems, streets, highways,
and many public health areas such as water quality and epidemic
control. As a consequence, these are handled outside the business
G. 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, repair, and recourse components.
As service and information become more important, they lead to
greater breadth and diversity in the market; this means more
businesses, products and services as indicated in D. above. This in
turn, increases the need for improved quality, repair and recourse.
The former two encourage segmentation of the of the market
(niches), the latter three stimulate infrastructure such as consumer
action groups, small claims court systems, mediation and arbitration
of business problems, pressure on the civil courts, and political
demands for government-established standards and inspection.
H. 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, we can expect to find the
creation of market and social forces which increase the need for
cooperation and honesty.
Repair and recourse are generally associated with situations of stress
and therefore they are aggravated by dissembling and deceit. People
try extra hard to avoid such situations. For a customer to be
overcharged on a new car is bad and frustrating, but to have an
engine repair job done with inferior parts that makes the car run
worse, is terrible. This is reflected in truth-in-lending laws,
consumer protection institutions, consumer product and service
evaluation businesses at a local level, and a wide range of
government regulations introduced in the 1970's.
I. The More Breadth, the More Transactions
There is a correlation between an increase in the breadth of the
market and the number of transactions. Breadth is a measurement
that is distinctly related to the number of final consumer outlets and
to a lesser extent the number of firms. The more consumer outlets
the more transactions.
This is evident in comparing the number of shopping visits of rural
dwellers (few) and urban dwellers (many) and the associated
number of transactions. Similarly, the number of outlets and
transactions per capita in Hong Kong is high compared to Houston
J. 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.
Electronic appliances are a good example. 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. But the drop in price to $150 occurs when a new model with
more technology is introduced at $300. This process continues over
time so that the consumers know that in the $300 price niche they
are getting the latest technology, and in the $75 price niche they are
getting the five-year-old technology.
A similar pattern has emerged in California wines. The price niche,
$12, $8, or $4, tells the customer the quality; the abundance or
scarcity of the products in any of those niches has little or no effect
on the price level.
K. Economic Ism's Are Irrelevant
The economic descriptors of Capitalism, Socialism, and Communism
were developed over a century ago as an outgrowth of
exchange/price theory. Because price/exchange was assumed to be
universal among humans and the reality of the transaction was
ignored, it was possible to view economics in grandiose terms that
transcend cultural boundaries. The major focus of difference among
the Ism's is ownership and the interplay of the 'free market'.
With price as a minor component of transactions and simple
exchange understood to be relatively meaningless, there can be no
sweeping theory that ignores the cultural differences inherent in
transactions. New economic models will have to be culturally very
specific. An economic system where the components of the
transaction are family power, credit worthiness, and religious
integrity (Persia, for example) will form the basis for a radically
different economic infrastructure than will be found in the United
New National Economic Measures
For a new economic approach to be taken seriously these days, it
seems to require an illustration in the form of new measurements
which deductively follow from the theory.
Transaction Based Economics proposes that the most useful basic
unit of economic measurement is not the price/exchange but the
culturally specific transaction. The sum total of all final
price/exchanges is the Gross National Product. The sum total of all
transactions is the Gross National Transactions. The more relevant
aggregate measure of transaction is GNT per household because the
household is the primary spending unit in Transaction Based
Economics.( One check pays the rent for all the inhabitants and one
check is usually used to buy the groceries.)
Gross National Transactions Per Household
In 1985 there were approximately 85 billion final buyer transactions
in the U.S.; which is 811 per household, a little over two per day. Of
these, 1% are on credit cards, 10% are paid for by check, and the
balance are cash.
(IMPORTANT: Read footnote at the end on the unreliability of this data)
The following table (2) indicates the estimated change in transactions
over the past 35 years. The total is a fairly stable number showing
only a modest increase during this period. From the 1950's to the
mid-60's the factors increasing transactions were not very strong,
mostly an increase in the under-18 population and the associate
accommodations for that age group. Along with it, there were several
negative factors decreasing transactions, one being the substitution
of TV for movies, another was the decrease in public transportation
The situation changed dramatically in the mid-60's. The noticeable
factor that decreased the number of transactions was the reduction
in smoking, which accounted for several weekly transactions in many
households. The forces increasing transactions were several and
strong: the increased visits to food stores to buy fresh fruits and
vegetables, the increase in the number of working women, and
associated purchasing needs ranging from a rapid increase in the use
of restaurants to more frequent clothing purchases. There was also
the development of flea markets and garage sales, and a notable
increase in travel, particularly overseas.
All of these peaked before 1980. The past five years have been
National Index of Net Positive Transactions
Since transactions are composed of many elements that determine
their final value, it is reasonable to measure the total Net Positive
Transactions and come up with a National Index of Net Positive
Transactions (NINPT). Such a measure takes into account the
negatives --- transactions that are ultimately unsatisfying, such as
those that result in a lawsuit, 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.
Construction of such a measure requires that the values for any
particular culture, as they apply to a transactions, must be built into
In Protestant cultures today, the determinants of a satisfactory
transaction, in addition to price, are service, information, quality,
repair and recourse. In another culture, such determinants would be
A National Index of the U.S. Net Positive Transactions is based on an
examination of the aggregated data for the allocation of economic
resources. Increases in service and information have very strong
positive effects on the NINPT, as they give the buyer a wide range of
new opportunities for positive transactions. Improvements in quality
increase satisfaction while decreasing the long-term number of
transactions. Both repair and recourse are potentially negative
factors and are of particular concern in the construction of the index.
The following table (3) indicates the direction of the components.
Service has increased at a very steady rate since 1970. There has
been an increase in numbers of retail outlets and service businesses,
particularly small neighborhood ones, and a parallel increase in the
variety of products on the market. Increases in rental businesses and
public transportation have also been strong positive factors.
The information part of the index is composed of research and
development, education, and communications networks. While this
has been generally increasing, the greatest increase was during the
early 70's. 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.
Quality is measured by a number of negative elements such as the
depreciation of existing material stock and the increase in garbage
and toxins. There are some positive components such as increased
number of second-hand stores and recycling. The quality measure
was partially influenced by the declining quality of U.S. automobiles
from the mid-1950's until the late 60's when many more reliable
foreign autos entered the U.S. market.
Repairs are generally negative. When repair is used in reference to
maintenance or recycling, it clearly enhances the quality of the
original transaction. More repair shops in this sense would be
positive. However, repair, as opposed to maintenance has negative
aspects. This is particularly evident in the area of the human body
and health. Preventive maintenance is desirable but surgery, while
necessary, is not a positive event. In the area of our medical needs,
costs have been escalating at astounding rates for 20 years. This
dollar amount is not significantly offset by a comparable increase in
lifespan or decrease in death rate.
Other areas of repair are housing and automobile casualty insurance
costs that have been rising in the 1980's.
Last, there is recourse, measured by actual legal costs particularly
civil -- and the costs of the broad-based criminal system. Including
the cost of the whole criminal system in this measure has resulted in
a large negative impact on net positive transactions because this cost
has risen rapidly. However, giving this element a strong weight is
justified. After buying something, having it stolen negates the
transaction. The same negative economic impact can be applied to
many crimes of violence that are not monetized, (rape and murder)
because they consume valuable time and are emotionally disabling to
the victims and their families.
While these measures are currently in their rudimentary stage, it
may be evident that a careful measurement of these components is
feasible on the basis of rigorous thought and survey research.
Moreover the public use of such measures would generate forces in
our society favorable to small business, to open and honest
communication, and to greater social cooperation.
FOOTNOTE: DATA UNRELIABILITY
Very little of the data presented in Section IV can be substantiated from existing national account records because transactions are not presently counted. The figures used here are determined from infrequent survey samples collected and published by private survey research firms. To have reliable data will require extensive new survey work and new data collection agencies.