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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



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

economic theory.


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

Based Economics.


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.



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

larger society.


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

similar businesses.


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,

and sharing.


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)





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

advertising uniqueness.)


¥ 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

businesses. Why?


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

comfortable together.


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

separate considerations.


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'

rights organizers.


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

pricing structure.


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

else's problem.


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

extra cost.


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

private businesses.


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

dishonest practices.


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

aren't useful.


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

Based Economics.


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.





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.



Economic Theory


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

their prices.


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

that develop.



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

consumer behavior.


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

physical handicaps.


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

relatively stable.


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

the measure.


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.




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.