Send us a text

Chris Cornette, a longtime securities trader who grew up in the business, reveals how the most important innovation that made US capital markets preeminent in the world was the exchange itself.

• Cornette's father worked in the P&S (Purchase and Sales) department on Wall Street, eventually becoming the controller of an American Stock Exchange specialist unit
• The original Buttonwood Agreement from 1792 created exclusivity among traders that helped establish trust in the market
• Exchange specialists subsidized trading in small-cap stocks using profits they made from large-cap stocks
• The phrase "your word is your bond" wasn't just a saying but the foundation of the trading system. Exclusion from the exchange was enough of a threat to discipline bad actors
• Specialists would ensure market liquidity and "continuity" in pricing, preventing wild price swings
• The transition to electronic trading and decimal pricing in the late 1990s fundamentally changed market dynamics
• High-frequency trading firms don't have the same ethical obligations that floor traders did
• The number of publicly traded companies has declined significantly since the move to screen-based trading
• Self-regulation through the exchange helped create trust that made markets function effectively. Not perfectly, but effectively.

You can follow Mike Munger on Twitter at @mungowitz

Send us a text

Corruption persists not because people like it, but because it becomes embedded in the incentive structure of the state, creating feedback loops that reinforce themselves and resist reform.

• A prebend is a type of benefice historically given to clergymen, now a useful concept for understanding corruption in developing nations
• Douglas North extended Coase's concept of transaction costs to explain why institutions matter in economics and politics
• Bad institutions create feedback loops through rent-seeking, patronage, and corruption that redistribute resources to entrench elites
• Mental models - our imperfect cognitive frameworks - resist change because belief systems are costly to abandon
• Lock-in occurs when early institutional choices create path dependencies that make reform nearly impossible
• Officials in corrupt systems treat public offices as prebends (sources of personal income) rather than public service positions
• In Nigeria, prebendalism meant officials used positions to enrich themselves and distribute benefits to their ethnic communities
• Russian corruption intensified post-Soviet era when state salaries plummeted and bribes became survival mechanisms
• Reform typically requires massive shocks, external enforcement, or exceptional leadership willing to impose significant costs on corrupt officials

The schedule is changing, because summer is over. Going forward, we'll have two episodes each month until January - one on Wealth of Nations and one interview. The next interview will be Tuesday, September 9th, and the next Wealth of Nations episode will be Tuesday, September 23rd.

Some links:

• Previous episode on corruption: Shruti Rajagopalan
• Richard Joseph and "Prebendal" Nigeria
• Douglass North and transaction costs/lock-in
• Douglass North on Institutions
• Denzau and North, "Shared Mental Models" (Kyklos)

Books o'da'week:

• Johan Norberg Peak Human: What We Can Learn from the Rise and Fall of Golden Ages
• Guy Gavriel Kay A Brightness Long Ago

• California's gigantic political theft of money for "High Speed Rail"

You can follow Mike Munger on Twitter at @mungowitz

Send us a text

Adam Smith's "The Wealth of Nations" developed from decades of lectures on jurisprudence, examining how market exchange creates prosperity through division of labor and specialized skills.

• Two core observations drive Smith's thinking: humans seek approval from others and have a propensity to "truck, barter and exchange"
• Exchange is Smith's key concept—not just for goods but for ideas, sentiments and social coordination
• Division of labor dramatically increases productivity through specialization, increased dexterity, and tool development
• Smith's famous pin factory example shows how 18 specialized workers produce thousands of times more than individuals working separately
• The extent of the market limits division of labor—larger markets allow greater specialization
• Smith argues that differences between philosophers and street porters arise from "habit, custom, and education" not innate capacity
• While profit is legitimate, Smith criticizes how powerful interests manipulate government to restrict competition
• Justice (respecting person, property, and promises) forms the essential foundation for any functioning commercial society
• Smith's work intended as a handbook for lawmakers, not ideological advocacy
• The Wealth of Nations represents applied moral philosophy addressing how societies become prosperous

Join us next time when we'll examine Book Two of Smith's masterpiece.

You can follow Mike Munger on Twitter at @mungowitz