July 2, 2023
Over in the Journal of Institutional Economics, Glen Whitman publishes one of the most fascinating papers you’ll read this year. By deploying the concept of measurement costs, Whitman explains why measurement systems take the forms they do.
As Whitman notes, earlier work, notably Yoram Barzel’s, focuses on the fact that people do measure. Scholars have devoted less attention to precisely how buyers and sellers measure—and why they measure in the ways they do.
The abstract:
“The article proposes an economic theory of customary measurement systems. The form of such systems is driven by two transaction-cost factors: minimising costs of implementation, and coordinating on shared standards. These factors combine to yield seven principles of customary measurement, supported with illustrative examples from the traditional Anglo-American, Egyptian, Greek, Roman, Chinese, and Indian measurement systems. The theory illuminates various confounding features of such systems, including ubiquitous binary patterns, frequent appearance of duodecimal ratios, and persistence of trade-specific measures.”
In other words, measurement systems emerge to mitigate unique problem situations.
Whitman:
“The purpose of this article is not to explain why measurement happens at all. The theory takes as given that transactors will often, if not always, find measurement necessary to specify what is being transferred and to affect its certainty. Shared measures also facilitate comparison across vendors, and they ease intertemporal trade by allowing clearer specification of future quantities. Swann 2009: 52, drawing upon Barzel 1982 and Akerlof 1970, further argues that measurement can help prevent market unravelling due to adverse selection. That, however, is all this paper will say on why measurement happens. The central question here is why customary measurement systems take the forms they do. The answer is that, under preindustrial economic conditions, measurement could be implemented in a lower-cost fashion if the system had certain features (such as binary ratios between units).”
The problem is more complicated than mere cost-minimization because market participants must converge on a measurement system. Coordination is required:
“However, a firm or household cannot simply pick the measurement system that would minimise its own costs. To fulfil their purpose, measures must be shared. Efforts to establish and maintain shared measures also qualify as transaction costs (in the ‘property rights’ sense of that term). The process of selecting shared measures creates a collective action problem – specifically, a coordination game (Chuah and Hoffmann 2003; Tirole, 1988: 408).”
I particularly enjoyed the connection to Mario Rizzo’s distinction between “logical” and “praxeological” coherence—a dichotomy I emphasize in my Law and Econ course.
“Logical coherence refers to the character of a system that is internally consistent in an abstract sense; all terms are well-defined and related to each other by invariant rules. Praxeological coherence refers to the functionality of a system in practice; it is concerned with usefulness, convenience, and suitability. Although logical coherence may contribute to praxeological coherence, the former is neither necessary nor sufficient for the latter.”
Plus, what other econ papers feature diagrams like this?