Merchants, exchange and international trade

ByIngemar Bengtsson*

May 18, 2023

Abstract

This paper explores the role played by merchants, in real world trade as well as in theory, with a special attention to international trade and the corresponding theory of international trade. A framework for structuring our understanding of the merchant is provided. The main argument is that merchants (a) assist consumers in their pursuit of a large opportunity set, and (b) reduce transaction costs which arise because of the sequential character of most transactions.

It is further argued that our understanding of the differences of economic success between countries will benefit if we include the conditions for merchants in that analysis.

JEL classification numbers: B52, D23, D82, F1, F4

Financial support from Torsten och Ragnar Söderbergs Stiftelser is gratefully acknowledged.* Ph.D. Ingemar Bengtsson, Real Estate Management, Faculty of Engineering, Lund University, P.O. Box 118, SE-221 00 LUND, Sweden, email: ingemar.bengtsson@nek.lu.se

1

Summary

This paper explores the role played by merchants, in real world trade as well as in economic theory, with a special attention to international trade and the corresponding theory of international trade. A framework for structuring our understanding of the merchant is provided. The main argument is that merchants (a) assist consumers in their pursuit of as large as possible opportunity sets, and (b) reduce transaction costs which arise because of the sequential character of most transactions.

It is further argued that our understanding of the differences of economic success between countries will benefit if we include the conditions for merchants in our analysis. A natural way to proceed would be to complement de Soto’s analysis of the importance of formal property rights with an analysis of the conditions for exchange, which has to focus on the conditions of merchants since almost all exchange is in fact handled by merchants – at least in the richer countries, which is a telling fact.

Merchants, exchange and international trade ..................................................................................... 1

I INTRODUCTION..................................................................................................................................4

I.1 THE MOTIVE BEHIND THE PAPER AND ITS PURPOSE.........................................................................5

II MERCHANTS AND INTERNATIONAL TRADE.....................................................................................6

II.1 THE HECKSHER-OHLIN THEOREM...................................................................................................7

II.2 HOW DOES TRADE ARISE?...............................................................................................................9

II.3 EXCHANGE ON THE INDIVIDUAL LEVEL........................................................................................10

II.4 MICROECONOMICS AND TRANSACTION COSTS..............................................................................12

III A THEORY OF MERCHANTS AND EXCHANGE...............................................................................15

III.1 THE ENTREPRENEURIAL MERCHANT AND PATH DEPENDENCY....................................................16

III.2 THE OPPORTUNITY SET................................................................................................................17

III.3 THE TRANSACTION.......................................................................................................................20

IV CONCLUDING DISCUSSION AND SUGGESTIONS FOR FURTHER RESEARCH.................................25

IV.1 FUTURE RESEARCH: THE INSTITUTIONALIZATION OF MERCHANT PROCEDURES..........................27

References .............................................................................................................................................. 29

I INTRODUCTION

This is a paper about trade, or exchange (or transaction) as we usually name it on the individual level. This circumstance - that we have two different concepts for what in fact must be the same action - is part of the motive behind writing this paper. Roughly, we use the term exchange either when referring to exchange between two persons – individuals or firms – or when describing exchange in a metaphorical sense, as in mainstream microeconomics, i.e. when utility functions are exchanging with production functions. Trade, on the other hand, is predominantly applied in connection to studies of exchange from an aggregate perspective, as in studies of international trade. Indeed, the strain of economics named trade theory is in fact a theory of international trade rather than a general theory of trade. Furthermore, we have to comment the term international trade, which refer to cross-border trade, i.e. international does not have the same meaning here as it has in e.g. political science where international refer to action between two or several nations. In political science as well as in politics, the agent is the State, as a representative for the nation. That particular coherence between theory and reality is absent in the field of international trade, as in the theory of international trade the analysis is outlined in terms as if States were the agents, while in fact agents are mostly individuals and firms. The possible implications of said metaphorical usage of language within the field of trade theory are one of the things that will be studied in this paper.

The paper is part of a tradition that emphasizes both agents and action. The overwhelmingly dominating view in economics, the neoclassical paradigm, was originally disturbingly absent of both action and agents. In the place of agents were utility and production functions and as substitute for action were optimizing algorithms. By the time, however, economics became more reasonable; some examples are Coase who introduced the firm, Schumpeter the entrepreneur, Olson the collective, Buchanan and Tullock the politician and Niskanen the bureaucrat.

This paper will try to travel along on this route by highlighting the merchant. He is evidently out there, but what function does he perform? At one level, the answer is obvious; the merchant conduct business, he trades different things for each other – presumably at a profit - and he is ever-present throughout the history of catallactic society. The question is rather why he is there; what does he produce; why do consumers and producers choose to trade through a merchant

rather than directly with each other? The merchant makes a living by buying things to one price and then selling them to a higher price. Since he does not necessarily add anything to the physical presence of the product, we may conclude that he supplies an intangible product. The nature of this product will be the focus of this paper.

I.1 The motive behind the paper and its purpose

The intention of the paper is to contribute to the just mentioned tradition of putting agents and action into economic theory, now by focusing on the merchant. This will serve two purposes, it will help us better understand and appreciate the merchant’s role in the market, and once there we can use this knowledge about the merchant to shed some more light on economic issues of more general character, such as the classic one: why are some countries rich when others are poor? This question is central throughout the history of economics, from the title of Adam Smith’s classic and onwards. Of particular interest to us, this question is central to trade theory. Trade theory aims at explaining patterns of international trade, which is a question closely related to the issue of the wealth of nations. Economists within the institutional or neo-institutional tradition are most often addressing microeconomic issues but I certainly think that institutional economics has a lot to offer also to every other field of economics. This belief is part of the reason why I choose to focus on the lack of merchants in trade theory, and not just in microeconomics. Exchange is exchange whether the two counterparts live in the same country or not. Economists have presumably a lot to gain if they could stop the process of fragmentation of their science, and perhaps even reverse the process. The present paper is an attempt to contribute to such a reversed process.

In the following analyses, trade theory will be represented by the Hecksher-Ohlin theorem, which have been, and still is, a cornerstone in the best known stories about the deciding forces behind the patterns of international trade. In short, those stories explain the observed trade from differences in production possibility frontiers between nations; the assumption is that (a) quasi-rents exists because of differences in production possibility frontiers and (b) those quasi-rents are exploited through international trade. This is where the present paper fits in; the paper will address the questions which are omitted from the conventional story: (a) how do quasi-rents arise, and (b) how are they realized? While the conventional story perhaps appears satisfactory when considering trade in crude

oil, timber, some agricultural products and sun trips, it is much less so when considering more complex products; i.e. the question why there are differences in productions possibility functions or how those are exploited are highly relevant questions that nonetheless is left unanswered and in fact unasked as well.

The purpose of this paper is to ask those questions and particularly to ask the question what role the merchant plays in determining the pattern of international trade. The reasons for focusing on the merchant is twofold; that the question is still to be explored and that merchants are in fact involved in almost all international trade, as well as non-international trade. We have a theory of international trade in which merchants play no role at the same time as we observe that virtually all trade are handled by merchants. Still, it could be that merchants do not affect the pattern of international trade and it would thus be justified to omit them from the analysis. But then again, if they do have a decisive influence over the pattern of trade, we ought to include them in our analysis of international trade.

II MERCHANTS AND INTERNATIONAL TRADE

The conventional theory of international trade focuses on phenomenon on the aggregate level, such as exchange rates, protectionism and supply of capital and natural resources. When we look at reality though, we find merchants involved in most transactions. Supposedly, the way those merchants function should be a significant factor to consider when trying to explain international trade.

Before getting ahead with our analysis, we ought to elaborate a bit on our definition of merchants and on the activities we count as merchant activities. As always, one should of course be aware that definitions are made for our convenience and that they never correspond exactly to reality and thus, there will always be some questionable demarcations. Anyway, we will count as merchant anyone who in commercial purpose buys and sells a good without changing it physically in a crucial way. That is, the merchant may well give it a new wrapping or a new brand name, but he does not change its physical characteristics. According to this definition, most retailers and wholesalers become merchants. Moreover, there are many firms that are not exclusively merchants but still act as merchants in important aspects of their business. In this group, we find for example parts of the clothing industry. Those firms act like merchants in that they intermediate between producers and consumers of clothing, but they do often take on also design, which makes them more than

merchants. Obviously, if we take this reasoning too far, in the end, all firms would be merchants since they all, in some way, intermediate between producers (i.e. employees) and consumers. We have a small problem here of drawing the line somewhere. When a firm is buying from another firm it should obviously be included in the merchant category. However, I also include firms whose "selling side" buys from its "producing side" in a market-like fashion. It is not only a matter of ownership; it is also a matter of how interchangeable the production units are. That is, the fact that a merchant becomes a producer by vertical integration with its suppliers does not change the fact that it is in an important aspect still a merchant.

In our definition, many multinational firms of today are in important aspects merchants. The already mentioned clothing industry, for instance, hosts many international merchants; they buy the clothes from producers in Asia and sell them in Europe or in the US. Those fashion houses, as e.g. the Swedish H&M, have their comparative advantage in the combined ability of understanding the demand for fashion in Europe and the US and contracting producers in Asia for producing their clothes.

Within economics, the theory of international trade has developed its own branch, under the somewhat deceptive heading of trade theory. Obviously, it is not a general theory about trade, which is rather the core subject of economics, ever since Adam Smith. In trade theory, the merchant is nowhere to be found, as I will soon illustrate. The theory is rather an offspring from conventional microeconomics as it stood before the work begun to bring in the agents as mentioned in the beginning of this article, and as such it is lagging behind in the process of the rediscovery of agents. As in microeconomics, differences in production possibility functions are taken as given and they are supposed to result in exchange without incurring transactions costs. In the following, an account will be given on how mainstream trade theory explains the pattern of international trade and how this compare with some casual facts of historically important international trade flows.

II.1 The Hecksher-Ohlin theorem

Eli Hecksher and Bertil Ohlin may represent the conventional theory of trade. Their theorem is still a cornerstone in standard textbooks on the subject of why countries trade with each other, as is seen from the quotation below from one such textbook. Krugman (1994, p. 80) states ‘A country that has a large supply of

one resource relative to its supply of other resources is abundant in that resource. A country will tend to produce relatively more of goods that use its abundant resources intensively. The result is the basic Hecksher-Ohlin theory of trade: Countries tend to export goods that are intensive in factors with which they are abundantly supplied." [Krugman, P. 1994: 80]’

Before exploring the theorem further, we have to interpret it. Taken literally, the theorem appears to apply to a very small share of world trade. If countries are to be understood as nation-states, the theorem seems applicable mostly to trade with some military equipment since the great part of world trade in all other branches is trade between individual firms. However, this is not the way it is normally understood – it is rather read as ‘people and firms in countries which are abundantly supplied with certain factors tend to export goods that are intensive in those factors’. That is, the theorem is intended to explain the whole pattern of world trade – or cross-border trade - rather than just trade between governments.

Hecksher and Ohlin were of course not the first to notice that people tend to sell what they have plenty of and buy what they have little or nothing of. On the contrary, this must be one of the oldest truths in economics; well actually, it is much older than economics itself. Among economists, Adam Smith for one, made use of this fact and developed his theory of division of labor around this observation. However, while Smith’s theory is dynamic in the sense that individuals are assumed to actively develop some particular skills in order to be able to produce something others would demand, the Hecksher-Ohlin theorem is a static statement. The central problem with the theorem is that it takes the endowment of factors of production as given. This is partly justified for raw materials as oil wells, forests or a pleasant climate. But how do you explain that Finland exports a lot of cell phones, is it because they are abundant in cell phone production facilities? There is something trivial about the theorem; of course a country that is abundant in certain factors tend to sell products which production process uses those factors intensively; that is the whole idea of creating the particular factors in the first place. It is not a mere coincidence or state of nature, on the contrary there is someone who has figured out that he could make a profit by producing those goods or services. The abundance in some resource is not a result of some exogenous event; it is the result of past action. Thus, the abundance in resources is an explanatory factor only in a trivial sense. It is like

saying that the reason a house is burning down is that it is on fire. It is true of course, but we are perhaps more interested in knowing how it was set on fire.

Consequently, the theorem could be interpreted in both a valid and an invalid way. It is of course legitimate, though not particularly daring, to state that you should expect to find a correlation between the factors with which a country is well supplied, and the goods it exports. It is not legitimate, though, to state that a country’s export is caused by its endowment of factors of production; both the export of those goods and the abundance of those factors of production are caused by action taken by someone, who sees a possible source of profit. Nonetheless, this is exactly how the theorem has come to be used, as we may illustrate with another quotation from the same textbook we quoted above, Krugman (1994: 87) ‘The productive capacity of an economy can be summarized by its production possibility frontier, and differences in these frontiers give rise to trade.’ This sentence clearly states that the Hecksher-Ohlin theorem is thought to explain the pattern of world trade rather than being a more modest statement about statistical correlation.

II.2 How does trade arise?

As already said, while the endowment story could be acceptable when talking about natural resources, it is harder to accept when thinking about more advanced production.1 In one way or the other, the question of why the production capacities were developed must be addressed. This has long been recognized in the literature of trade theory, e.g. by Linder (1961: 87) who has proposed an adjustment of the Hecksher-Ohlin theory to better understand the pattern of trade in manufactures. He suggests that it is a necessary condition for a product to be a potential export product that it should be consumed in the home country, i.e. that there exists a domestic demand for the product. At first, this seems intuitive, but it does not stand up well against the facts. It is, for example, not the case that people in Sweden buy summer clothes manufactured in a warm climate and winter clothes manufactured in a cold climate; they are all made in a quite warm climate and if it were not for trade policies they would all come from southern Asia. The point is that e.g. India does export clothes for which there can be no domestic demand.

If we focus more on the merchant, we can better understand such observations. Linder advanced three reasons in support of his proposition, which

1 Not even natural resources is really comparable to “endowments”. Some action has to be taken in order to exploit them.

all had to do with the problems for entrepreneurs to identify either the need abroad or the product that would suit it. This would make sense, if export were always initiated by the producer. However, this in not the case, export is in many cases a result of an international merchant who buys abroad and sells at home. This is patently clear when considering some classical historical examples of trade flows, such as gold, slaves and spices: it was not the case that some Inca entrepreneur saw the possibility to export gold to Spain; it was not the case that some African entrepreneur saw the possibility to export slaves to America; it was not the case that some South-East Asian entrepreneur saw the possibility to export spices to Europe. It was in fact entrepreneurial activities by merchants in the importing countries that initiated the trade. Those examples make it perfectly clear that we need to include the merchant in our analysis if we are to understand the determinants of patterns of international trade. Allowing the merchant to figure in our theory of trade also implies that we will have some considerable path-dependency to deal with; it is not because the Spanish people love gold more than other people that Spain imported so much gold from America, it is because Columbus happens to sail under the Spanish flag.

In this section we have highlighted two possible troublesome assumptions underpinning conventional trade theory: a) quasi-rents are treated as given and b) the mere existence of quasi-rents is assumed to result in trade. Obviously, transaction costs are not considered. Trade theory has this friction-free view of the world in common with mainstream microeconomics. Thus, in the next section, the search for the merchant will continue on the micro level.

II.3 Exchange on the individual level

We are now going to interpret the picture of trade provided by trade theory on an individual level and try to point out the microeconomic foundations of trade theory. The subject of microeconomics is to explain individual behavior and action and thus, microeconomics should be helpful to us for understanding why almost all trade is intermediated by middlemen of some sort. The question is why consumers prefer to trade with merchants rather than directly with the producers. However, textbooks in microeconomics are seldom very useful, since they do not involve any transaction costs, instead exchanges are supposed to materialize if at least one party is better of and the other indifferent, or better off too. All trouble with finding out one’s opportunity set, physically finding the goods and then contracting with the counterpart are thereby excluded from the

analysis. Basically, the aim of introductory microeconomics is to show how people who are different, either in preferences, abilities or in their possessions, will be better off if they engage in trade. It does not explain either (a) how and why people differ or (b) how they actually trade with each other. Not many would argue it to be a serious shortcoming of the theory that it does not offer an explanation of how people differ in various aspects. That is, microeconomics does provide good arguments to why people should specialize in order to develop and make use of comparative advantages, but it does not provide a theory that could explain each individual’s choice of specialization. Though trivial as it might seem, this observation is of some interest to us since the microeconomic equivalent to the Hecksher-Ohlin question of why particular countries export the goods they export rather than some other goods, indeed would be to ask why particular individuals are employed in the profession they are rather than in some other profession. Microeconomists do in fact not propose theories that are assumed to answer this question. In fact, many people would find it ridiculous even to suggest that such a theory would at all be imaginable. Almost everybody would agree that it is practically impossible to come up with a theory that is able to explain all individuals’ choices of occupation; there are simply too many variables. Not all, but many – this author included - would also agree that it is even logically impossible to construct such a theory; there is no determinate structure to uncover.

If it is not possible to explain, with a general theory, why individuals have the occupations they have, how could it be possible to explain, with a general theory, why a population of individuals is engaged in the kind of production they are? One would think that the latter theory would be more complex than the former. Indeed, if we can not explain why individuals produce what they do, we can not possibly explain why groups of individuals produce what they do.2 A general theory of the pattern of international trade is impossible - that is what is basically wrong with theories of international trade. If the theory is an attempt to provide a generally valid explanation of the pattern of international trade, it will necessarily fail. The reason is that some of the decisive factors behind the current pattern of trade are factors of historical coincidence, factors of path-dependence. A general theory could never account for Spain being the main importer of gold in the period following the exploration of America; a general theory could never explain

2 We are here concerned with a causal explanation, i.e. to understand a nation’s production rather than predict it with a tolerable accuracy. It could well be the case that it is easier to predict the production of a group of individuals than predicting each individual’s production.

why Sweden exports cars while Denmark or Norway does not. If, on the other hand, the theory would include all those factors that explain the current pattern of international trade, it would not be general, i.e. it could for example not explain how the currently decisive factors have arisen.

While we thus conclude that trade theory has ambitions which have no counterparts in microeconomics, trade theory and microeconomics share the lack of interest in the issue of how trade is conducted. Just like microeconomics, trade theory presumes that quasi-rents will be seized without considering who makes this possible. The implicit assumption of free and perfect information from introductory level microeconomics is carried over to trade theory. Obviously, trade theory provides no suitable framework for understanding the role of the international merchant. This is the minor problem though, since this is not part of the purpose of trade theory. A more serious problem is that neglecting how opportunity sets are created and how transactions are made, the predictions of trade theory are of highly uncertain value outside the hypothetical world without transactions costs. We thus conclude that trade theory suffer from two shortcomings; it aims to explain patterns on the aggregate level for which there are no explanations on the individual level; it is founded on a microeconomic view of exchange that is unsuitable for studying trade since it does not consider transaction costs. In the following, we will turn our attention to microeconomic explorations that do consider transaction costs.

II.4 Microeconomics and transaction costs

We have seen that there is no place for merchants in the introductory textbook presentation of microeconomics and that it is so because that framework does not take transaction costs into account. Without transaction costs it is impossible to incorporate merchants. Nevertheless, since Coase wrote “The Nature of the Firm”, transaction costs have been to an increasing extent taken into account in microeconomics. One of the most recognized and analyzed kinds of transaction costs are information costs. Unlike the assumptions in basic microeconomics, in the real world information is less than perfect. The distribution of information is asymmetric and information is thus to a considerable degree private. In exchange situations, private information is valuable and there is thus an opportunity for mutually beneficial exchange when the information is less worth to the possessor than to some other agent. For example, a merchant could produce reliable information about his merchandise by investing in a close

scrutiny of the goods when he purchases them. The reason for the merchant to make the necessary investments is that he believes that he can sell the information to consumers at a profit, i.e. that the information is more valuable to the consumer than it costs the merchant to produce. Information is in this regard no different from other goods or services. Although transaction costs are not restricted to information costs, we will start by focusing on information costs as a rationale for merchants. A reason for this is that information costs are the kind of transaction costs which is best incorporated in mainstream microeconomics today. We will here account for two papers that find a role for the merchant as a producer of reliable and valuable information. Neither of the papers has the purpose to analyze the rationale for merchants but still manages to sketch a framework in which the merchant has a function to fulfil. Later, we will build on to the ideas in those papers when outlining our framework for understanding merchants.

Akerlof

In his famous 1970 article, George Akerlof explored the combined effect of differences in quality and asymmetric knowledge about the quality of a particular good. In many instances, he argued, the seller knows more about the quality of the good than do the prospective buyer. Akerlof states (1970, p. xx) ‘There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller.’ As a result, the quality of the goods sold will be lower and the size of the market will be smaller than it would have been if the buyers could more correctly assess the quality of the goods. Akerlof made his point by applying it to the market for used cars, which also gave the title since bad quality cars in the US are known as “lemons”. However, the idea is applicable to a wide range of other areas and in his article, Akerlof (1970, p. 496] discussed a few of them, including the merchant: ‘In our picture the important skill of the merchant is identifying the quality of merchandise’. In addition to the ability to identify the quality, the merchant needs the skill to communicate this knowledge to the prospective buyer in a trustworthy way. That is, a successful merchant is someone who is good at identifying and assuring the quality of some good; that bundle of services is what he produces.

Later in the paper, Akerlof states that institutions arise to counteract the effects of quality uncertainty and mentions the examples of guarantees and brand-names, which both work to shift the risk of bad quality from the buyer to the seller.

Alchian

Alchian (1977, p. 133] introduces his seminal paper on money by stating its purpose in the following way. ‘Ignorance of availability of goods and of their terms of trade and attributes will provoke efforts to reduce that ignorance in order to achieve more trade. Several institutions have evolved to reduce costs of reducing that ignorance: money; specialist middlemen who are experts in assessing attributes of goods, who carry inventories, and whose reliability of assurance is high; specialized marketplaces; and even unemployment. This paper concentrates on the way in which that ignorance leads to the use of money and how money requires concurrent exchange with specialist, expert, highly reputable middlemen.’

The unique contribution in Alchian's paper is the finding that it is only in combination with certain middlemen that the advantages from the use of money can be fully utilized.3 Though in his article the discussion of middlemen is somewhat residual to the discussion of money, we are here more interested in what Alchian has to say about middlemen since some of them are obviously what we here call merchants.

Alchian (1977, p. 135-136) counts middlemen among the institutions that has evolved to reduce transaction costs: ‘It will cost a novice less to trade with an expert than to trade with another novice, if the novice who buys the product from the expert will rely on the expert’s word. The expert’s word will have value if he develops a reputation for honesty and reliability in his assessment. The expert will then sell his knowledge at a price lower than the cost for a buyer to get such information in other ways.’ Alchian’s expert is our merchant and we see that one of the services he produces is knowledge about the merchandise he sells. This service consists of two parts, first he has to acquire the knowledge, and secondly he has to develop a reputation of trustworthiness. This is a very similar conclusion to that of Akerlof; the merchant produces knowledge and assurances of the overall quality of different products.

In accordance with the analysis of Akerlof and Alchian, we can conclude that the merchant makes a profit by reducing transaction costs. It is important to

3 Cf. also Bengtsson (2003).

note, however, that the merchant’s services are not all about logistics, or even mainly about logistics. Merchants do take on logistics but it is not what distinguish them from other agents in the economy, in particular logistics specialists. On the contrary, if logistics were all merchants did, there would be no merchants; if you had reliable knowledge about a product, you would contract a logistics firm to bring it home to you. We do not claim that merchants do not engage in the transportation of goods, all we say is that that is not the distinguishing feature of the merchant. There are other kinds of transaction costs that the merchant is uniquely capable of reducing.

Common to Akerlof and Alchian is that both stress that the merchant produces knowledge of the quality of the products in which he trades and that this involves two parts, to acquire the knowledge and to acquire a reputation for honesty. The second part is perhaps the more interesting since it involves an inherent possibility of conflict. Picturing the transaction between a merchant and a novice - consumer - as a one shot game, certainly it seems tempting to the merchant to cheat when marketing inferior goods. This is indeed the way Akerlof approach the merchant; he discovers a situation of critically asymmetric information and continues to explain firstly why it should be expected to produce a market failure and secondly that institutions have evolved that facilitate the market to overcome the problems and to produce a significantly better outcome than the one predicted by the simple neoclassical analysis. Alchian approaches the merchant in a slightly different way in that he never mentions the possibility of market failure. From his point of view, to discuss such states of market failures is almost a contradiction of words; it is practically unavoidable that someone has already explored the possibility to make a profit by solving the underlying problem. Alchian’s (1977, p. 133) opening sentence speaks for itself: ‘Ignorance of availability of goods and of their terms of trade and attributes will provoke efforts to reduce that ignorance in order to achieve more trade.’ Although they have different starting points, Akerlof and Alchian arrives at similar conclusions, implying that the merchant is an institution that has evolved because it provides a comparatively efficient way to reveal the seller’s private information to the buyer, about the qualities of the product. In this paper we interpret their conclusions as that the merchant develops methods to make his information about the product more trustworthy in the eyes of the buyer, than similar information from a non-merchant. We will make use of this finding in our analysis

and come back to the issue of how merchants make their information trustworthy.

III A THEORY OF MERCHANTS AND EXCHANGE

The conclusion that both Akerlof and Alchian reached - that institutions evolve to reduce the costs of transaction due to a lack of trust between seller and buyer and that merchants are among those – will be our point of departure and part of the hypothesis on which the theory we will sketch rests. However, costs associated with trust-related problems are not the only kind of costs that merchants help to reduce. Before any transaction is even thinkable, the consumer has to be aware of his possibilities to consume, i.e. his opportunity set. Here, we will argue that an important characteristic of the merchant is that he creates quasi-rents by making it possible for producers and consumers to exchange. To make this happen involves several steps, which we will analyze under two headings. First, consumers (and producers) need to know their opportunity set, which involves knowing which products are available where and to what price. Knowing their opportunity set, the consumers are able to decide which product to buy. Having decided which product to buy, the next problem is to make the transaction, without being cheated. We will discuss those questions under the two headings “the opportunity set” and “the transaction”.

III.1 The entrepreneurial merchant and path dependency

A pervading characteristic of our exposition is that we see the merchant as an entrepreneur, both in creating opportunity sets for consumers and producers and in creating transaction possibilities with a low waste of quasi-rents. From this perspective, we interpret the current distribution of the relevant factors behind the pattern of trade as partly the result of past entrepreneurial activity. Entrepreneurial activity is per definition impossible to account for in general terms, just like it is impossible to predict a particular innovation; if it were possible, it would not be an innovation/entrepreneurial action. In our view, the pattern of international trade is crucially path dependent in that when a certain industry once is established in a country, this industry will stand for a relatively important share of a country’s exports.4 Furthermore, since we see the establishment of an industry as decisively influenced by acts of entrepreneurship,

4 In this situation, modern trade theory developments as gravity-theory-models have a lot to offer. However, they start when production possibilities are already differentiated. Thus, they can not help us when we are trying to find out what initiated the process.

we see no possibility for explaining the pattern of trade without reference to those particular acts of entrepreneurship, or in other words: a blackboard theory of the pattern of international trade is impossible. To understand the pattern of trade, we need to understand entrepreneurship and the one kind of entrepreneurship we focus on here is the entrepreneurial merchant, though of course the entrepreneurial producer is just as important, as well as entrepreneurs in other fields, as in religion or politics and violence. Trade is embedded in a social context, without which we can not fully understand the pattern of trade.

By acknowledging the path-dependency behind the current pattern of trade, we will be able to understand more about international trade. Perhaps even more interesting, we will also be able to understand the trade that we do not observe, i.e. why some countries fall behind in a way that factors-of-production theories are unable to explain. To take a simple example, the communist experience in Russia has left effects that affect economic performance today, which are impossible to account for with a strict factors-of-production reasoning. The communist era has left Russia (and other post-communist countries) without much of both the tacit and the institutionalized knowledge of doing business that the West has accumulated over a long period of time. A merchant in Russia has a more difficult task than a merchant in the West, he can for example not necessarily count on legal assistance in defending the property right to his goods – a lesson Mr. Chodorkovskij is currently learning the hard way. Obviously, if the merchant has to perform more functions himself, he will be less profitable and consequently he will only engage in the trade with the highest quasi-rents, leaving more quasi-rents on the floor than he would in the West.

III.2 The opportunity set

One apparent source of transaction costs consists of costs for determining your opportunity set and the resources you must spend to increase this set. That is, you face a trade-off between increasing your opportunity set on the one hand, and keeping costs for searching and transportation low on the other.

In reality, the opportunity set is not given as it is in economics textbooks; it is affected by several factors external to the individual as well as by the effort a person puts into determining it. Obviously, if a society is to realize all potential quasi-rents, a necessary, but not sufficient, condition is that its citizens have full knowledge of their opportunity sets. It is a necessary but not sufficient condition because once you know your opportunities in terms of which products are

available where, you still have to arrange the exchange, which involves the additional problems of ensuring that the product you will receive actually has those properties that you expect. Obviously, your counterpart has similar worries about your trustworthiness as buyer.5

In concrete terms, the costs for determining the opportunity set consist of efforts to find out where to buy (or sell) and comparing the quality and price of different goods. If we conjecture a world without merchants, it would be an impossible task to determine even a fraction of the opportunity set an average person in the West handles quite comfortably today. One of the more apparent accomplishments of merchants is to help the consumer to both expand and determine his opportunity set. Supplying a wide range of items at one location and at more or less fixed prices is of course of a tremendous help to the consumer.

Marketplaces and marketing

By marketplaces we refer to everything from fairs and bazaars to modern shopping malls and even web-shops. Common to them all is that they facilitate expansion and determination of individual's opportunity sets. They all contribute to determination by communicating the characteristics of products and their terms of trade. Supplying a lot of items at the same location or through the same distribution channel, they obviously contribute also to the expansion of consumer’s opportunity set. In this respect, the peddler is another example of a marketplace; by literally bringing the goods to the prospective consumer, he creates a range of new consumption possibilities for his customers.

Metaphorically speaking, marketplaces bring producers and consumers together, making it possible for them to exchange goods for money. Taking the metaphor one step further, we can interpret marketplaces as bringing different producers together and helping them to exchange their products. The trained economist will be familiar with this last representation of the exchange, since this is close to the standard representation in microeconomic textbooks. That is, neither merchants nor money is involved, producers simply exchange their stuff for other stuff from other producers, and every consumer is also a producer.

Literally speaking, on the other hand, producers sell to merchants who create marketplaces and then sell to consumers. Literally, it is not correct to say that merchants help consumers and producers to exchange; obviously, merchant do

5 Cf. Alchian (1977) and Bengtsson (2003) for analyses on the use of money as a way to overcome problems of trustworthiness.

perform a function without which it would had been necessary for consumers and producers actually meeting each other to be able to exchange. However, producers and consumers exchanging directly is in most cases not the alternative, the alternative is instead no exchange at all. We can not think away the merchant because producers would not have specialized in the first place, were there no merchants to sell the stuff to. Only in very rare cases could a specialized producer find a sufficiently large demand from consumers he actually is able to meet. Thus, specialization and division of labor could not develop if there were no merchants willing to buy large quantities of the same product from the same producer.6

Marketing amplifies the effect of marketplaces in helping the consumer to determine his opportunity set. We could express it as that marketing makes the consumer aware of his opportunity set of marketplaces. He does not have to actually find and search through the different marketplaces himself, already at home he could select which marketplace or marketplaces to visit. Marketing is a way to spread information, about the function of the product, its price, and the conditions of the purchase, which constitute the different dimensions of the opportunity set. Marketing is transaction costs reducing since the cost for the seller to spread the information about the available products and the conditions of purchase is lower than the sum of costs that would result if each and every consumer would find out the information himself. That is, the consumer is more than content with buying the information from the merchant rather than finding out the facts himself. We can thus interpret marketing as an example of efficient division of labor. There are basically two reasons why it is more efficient that the merchant spread the information rather than the consumers finding out for themselves. Firstly, the merchant is an expert in the goods he handles and obviously also in the conditions of purchase. Furthermore, producing and spreading information involve large fixed costs relative variable costs and the marginal cost for spreading the information, once produced, is thus quite low.

Discovering or creating needs?

While economists tend to see marketing as something that brings mutual benefit to both seller and buyer, in popular debate it is frequently claimed that marketing persuades us as consumers to buy things we do not need or even want. The issue

6 Alchian (1977) showed both why consumers trade with merchants rather than producers and why they use a medium of payment instead of barter, though both practices have a cost. The point is that although the number of exchanges rises, the total sum of transaction costs decreases.

of how rational humans really are has become one of the more debated within economics over the last couple of decades. However, we are not going to add to that particular discussion, but suggesting another perspective on how marketing might actually influence not only our decisions but in some sense even our needs.

Our point of departure is in accordance with the conventional understanding of rationality, which in this case means that marketing can never make us purchase things we ex ante do not want. That we ex post may regret the purchase is entirely a different matter; ex post we have information that we could not have had ex ante and thus our ex ante decision cannot be evaluated with reference to our ex post knowledge. Still, marketing might persuade us to buy things we ex ante marketing exposure did not know we needed/wanted. Merchants could thus be said to create consumer needs. An alternative way to express it would be to say that merchants discover and satisfy latent needs of consumers, needs which the consumers themselves was not previously aware of. However, this latter interpretation implies a view of human needs that is quite odd; how do we grasp the conjecture of needs that we are not aware of? To need or want or desire something is very much an active and conscious state of mind, and thus it seems an awkward language to talk about passive and latent needs. The primary reason to use the first expression is, however, that we want to underscore the entrepreneurship of the merchant: without the merchant’s action, those needs would never be felt. The point is to understand that the merchant creates his own business opportunities and at the same time creates additions to the consumer’s opportunity set.

III.3 The transaction

As both Akerlof and Alchian suggest, a source of transaction costs is the uncertainty about the counterpart’s honesty. In small groups, those costs could be very small because the members of the group have good reason to trust each other.7 In exchanges with strangers though, there are a real potential for fraudulent behavior. How crucial this risk is depends on the character of the intended exchange. For goods that are easy to physically exchange and which qualities are easy to assess, costs are relatively lower. Markets where goods with immediately recognizable quality and value are traded have been categorized as self-enforcing markets. These markets require nothing more than the potential

7 I discuss this matter at length elsewhere, cf. Bengtsson (2003) and references therein.

gain from exchange and the physical possibility for exchange. Olson (2000, p. 174) states ‘The argument here is that some types of markets regularly emerge whether or not the participants have anything in common, and sometimes even when participants have antipathy toward one another. These markets emerge spontaneously and some of them are literally irrepressible. I call them self-enforcing markets.’ These markets do not have to exclude transaction costs. On the contrary, the transaction costs can be quite high. Nevertheless, if there is enough to gain from an exchange, i.e. if there is a sufficiently high quasi-rent to appropriate, it will take place. Neither is it true that these markets are independent of institutional arrangements; they will be different under different sets of institutions. The point is that they need no supporting institutions to emerge.

Not many markets qualify as self-enforcing, only those with the highest quasi-rents. For other markets, transaction costs have to be reduced before trade becomes possible. As we have already said, merchants are an important vehicle for transaction costs reduction. In the following, we will sketch the role of the merchant with reference to the duration of transaction, i.e. we explain transaction costs as a result of the fact that many transactions are impossible to execute on the spot – instead, transactions are sequential.

Dimensions of sequentiality

We will define two concepts of sequentiality which are helpful for understanding the role of the merchant, in relation to problems of hidden information and hidden action.

By sequential transaction we understand transactions in which either payment, quality evaluation or both are completed only after a period of time have elapsed from the moment of exchange. Durable goods, for example, are typically evaluated only after some time of use. That is, the sequentiality is intrinsic to the traded goods, or services.

A sequential contract, on the other hand, is constructed by deliberation, i.e. that one or both parties agree to take on post-transaction responsibilities. In this case, the sequentiality is a result of design rather than a necessity of nature. It is not farfetched to think that such deliberately created sequentiality is part of a solution to problems of trustworthiness.

Sequential transactions are potentially costly because there might be an incentive for hidden information or hidden action. Here, we will discuss two basic principles of solutions to this problem: (a) to eliminate the sequentiality from the

transaction and (b) to balance the asymmetry in sequentiality. First, however, we need to concretize the just-mentioned concepts of hidden information and action. Problems of hidden information or hidden action are associated with the presence of asymmetric knowledge. Asymmetry in knowledge between the counterparts is the normal case in transactions in any post-autarchic society and follows from the division of labor. Under certain conditions, however, agents might have incentive to use the asymmetry in knowledge to their own advantage and to the counterpart’s disadvantage, in which case we call it hidden information or hidden action.

Hidden information refers to situations where the agent who has the better knowledge deliberately chooses not to reveal certain information that the counterpart would have been better off knowing. Typically, the seller has better knowledge of the goods than the buyer, and if he knows that it has certain below-par properties but keeps quiet about these, it would be a case of hidden information. It was this kind of adverse selection in the markets for used cars that Akerlof was analyzing in the article referred to above.

Hidden action refers to situations where one agent changes his behavior after the deal is struck in a way that is unfavorable to the other part of the contract. That is, his action ex post differs from the ex ante negotiated action, and his counterpart is unable to observe or verify which action he takes. This kind of moral hazard is analyzed at length in the literature of the economics of insurance and in the literature of corporate governance.

Now, rational consumers are aware of their weak position concerning knowledge of the overall quality of the goods, and they will take measures to decrease the risk of making a bad buy. One way of doing this would be to refuse to pay for more than low-quality-goods, as Akerlof suggested, and another would be to take on substantial measures of evaluation of the goods. Either way, transaction costs would be sizable and considerable amounts of quasi-rents would be wasted. Wasted quasi-rents implies a lose-lose situation, and both parts would benefit if those transaction costs could be reduced. We will look at two ways to overcome the problem of sequential transaction, which both involve the merchant.

Eliminating the sequentiality

Obviously, if we could eliminate the sequentiality from a transaction, transaction costs would be reduced. The most obvious example is the use of payment techniques rather than barter. I have elsewhere argued (Bengtsson 2003) that a

critical problem for any system of extended barter is that many exchanges are impossible to fulfil on the spot. For instance, it is evidently the case when two individuals would like to exchange services. The consequence is that the one who performs first has to trust the other to perform his part of the deal; by performing first, you make yourself vulnerable to fraudulent behavior. In this context, to use a payment technique is a way to minimize the time between the two agents’ respective performances. The one who performs the service does not have to wait for a service in return but is compensated immediately through payment.

Merchants contribute to the elimination of this kind of sequentiality by being an important and indispensable part of the payment system. As Alchian pointed out 1977, the full benefit of using payment techniques, as money, can only be captured if both money and middlemen are available.

Balancing sequential transaction with sequential contracts

A fundamental characteristic of merchants is that they have a positive expected net present value from future sales, which means that the immediate gain from cheating in one transaction now is more than outweighed by the loss of a stream of small, but steady profits from trustworthy sales (i.e., if the cheat is detected by the consumer). How should the merchant act to be trustworthy in the eyes of the consumer? The key is to provide the consumer with the possibility of retaliation in case he is not satisfied with the merchant’s performance. The importance of retaliation is conditional on both the possibility for the consumer to detect the cheat and to punish the merchant in case he has cheated. If the transaction concern goods or services that are regularly bought, easily evaluated, and for which there are other suppliers, the consumer possess the possibility to punish a merchant hiding crucial information about the goods simply by stop buying from him.

The general idea is that there is an ex ante mutual desire of an ex post enforceability of contract. That is, both parts would gain if it were possible to ensure that all terms of the contract would be honored. At the same time, the seller has an ex post incentive to cheat if the consumer lacks means to punish the seller. However, since in those cases no trade would take place, the seller prefers to provide the consumer with means to retaliate.

Generally, we can put it as a way of balancing a sequential transaction with a sequential contract, i.e. as a way of balancing the sellers’ possibilities to hide information with means for the consumer to punish the seller afterwards, as he

gains knowledge about the quality of the goods. Thus the possibility to act on asymmetric information is neutralized by the buyer’s possibility to retaliate.

(a) Goodwill and brand names

A merchant who has accumulated a reputation of honesty can profit on this reputation. He can, in contrast to less reputable merchants, charge the full price of high-quality goods and furthermore, he can also operate with slightly higher margins. The reason that only a reputable merchant should be able to sell high-quality products is clearly seen in Akerlof’s discussion about the market for used cars. The reason he should be able to sell his merchandise at a slightly higher price than his less reputable competitor is that he, in addition to the merchandise in itself, sells reliable information about the merchandise. The consumer appreciates this information and is willing to pay for it. Without this information he would have had to make efforts himself to gain necessary knowledge about the merchandise, or he would have had to accept a higher risk of ending up with goods with lower quality than he has paid for. In either case, the consumer would be prepared to pay for reliable information about merchandise’s quality.

The positive value of a good reputation we have just discussed is usually known as goodwill. To put efforts investing in goodwill, which would be destroyed if he were to be exposed as not trustworthy, is a way for the merchant to achieve ex post enforceability of contracts when there is no outside power to rely on. To invest in goodwill is in this context the same as refraining from cheating even though cheating would maximize profits in the short run. Thus, each honest transaction adds to the value of goodwill. By consistently operating under the same name, the merchant is able to accumulate the value of goodwill in its brand name. The merchant can further enhance the effect on trustworthiness by making direct sunk costs investments in its brand name, e.g. through marketing expenditures directed at brand-building. The more valuable the brand name becomes, the more would it cost the merchant to be exposed as dishonest.

(b) Guarantees

The importance of goodwill differs between different product categories. For often-bought products with readily assessable quality, the goodwill effect is strong since each consumer can punish an untrustworthy seller himself, just by stop buying from him. For more durable products, which are bought less regularly, a single consumer who is unsatisfied with his buy cannot punish the seller by stop buying, but has to rely on that other consumers stop buying from

that particular seller as well. For this to happen, the unsatisfied consumer must take steps to make this information public. However, ex post he has no economic incentive to do so, since the only one who would gain would be other consumers. Those other consumers have an incentive to find such information but face a difficulty in finding it without incurring to high costs in the process. The spreading of information is better for some products, like e.g. cars for which there are numerous magazines and organizations making consumers’ experiences publicly available.

The seller, be it a merchant or a producer, can provide the consumer with a better opportunity to punish the seller, by providing some sort of valid assurance about the features of the product. Durable goods as refrigerators or dish washers are, for example, often covered by warranties. This use of sequential contracts is a technique to neutralize the asymmetry in knowledge of the quality of the product. Naturally, sequential contracts are of more importance when the sequentiality of the transaction is high. To an honest seller, the warranty is quite cheap to offer while it would be costlier to a seller who market inferior products. Before leaving the subject, we have to make two qualifications. Firstly, the example might seem confusing since today it is most often the producer and not the retailer who provide the warranty. Secondly, warranties are not only used to signal high quality, it is also used as a vehicle for an efficient risk allocation. Even for high quality goods, there will be some instances of malfunction. For this kind of risk, it might well be the case that the seller is the more efficient risk bearer. Whether it is the producer or the retailer that issues the warranty does not really matter to us; the problems it is intended to solve is still the same. Who issues the warranty depends on the relative value of brand names of the producer and the retailer, on their respective possibilities to control the quality and possibly also on pure coincidence and path dependence.

IV CONCLUDING DISCUSSION AND SUGGESTIONS FOR FURTHER

RESEARCH

In the introduction of the paper, we stated the purpose to be twofold, to help us better understand and appreciate the merchant’s role in the market, and once there to use this knowledge about the merchant to shed some more light on economic issues of more general character, such as the classic one: why are some countries rich when others are poor? To what degree have the purposes been fulfilled?

To understand the merchants’ role in the market, a framework is provided. We have argued that merchants act like transaction costs reducing entrepreneurs; they help, in a metaphorical sense, producers and consumers to meet and trade with each other. In our framework, the merchant reduces transaction costs of two fundamental classes. One is costs for determining the opportunity set and one is costs for handling the transaction. It is argued that it is important to see the entrepreneurial character of merchants; they actually create larger opportunity sets for consumers, resulting in more quasi-rents to exploit for all. By creating market places and by performing a variety of marketing activities, they provide consumers with cheap information about which products are available where and on which terms, as well as the help consumers to develop new needs. Picturing the merchant’s role in handling transactions, we start from the analyses of Akerlof on the market for used cars, and from Alchian’s analyses of the question why we use money. We then argue that the problems associated with transactions can be summarized as problems of sequentiality. The fact that many, if not most, transactions are sequential in the sense that the buyer need some time with the product before he can evaluate its quality implies the buyer will have to trust the seller’s word. This might be troublesome since it might provide the seller with an incentive to cheat the buyer, using his superior information about the product. In the paper, it is argued that the merchant is a specialist in handling this problem. The merchant develops methods of supplying the buyer with the possibility to punish the merchant, which we describe as a way of balancing the sequential transaction with a sequential contract. We find that the use of goodwill, brand names and guarantees are all methods to overcome the problem of sequential transactions by balancing them with sequential contracts.

Our second purpose was to trying to add to our understanding of international trade and the wealth on nations. To this matter we have argued that explanations of the pattern of international trade which are based on factors of production are either trivial or wrong. They are not capable of explaining why different countries have different production possibilities frontiers. Those kinds of theories can not help us understand why some countries are rich while others are poor. Instead, it is argued, we should take the empirical fact that almost all trade is handled by merchants as our point of departure. The conditions for merchants to conduct their business are very different between nations. If we could capture the institutional conditions for merchants in a measurable way, we should be able

to explain more of the differences in wealth between nations. What we suggest is that the conditions that merchants face should be included as one among the explanatory variables when trying to model the wealth of a nation. Here, we find similarities with the approach to understand poverty developed by Hernando de Soto8, as well as with Mancur Olson’s9 approach to understand why some countries prosper more than others. It should be fruitful to complement de Soto’s focus on formal property rights with our focus on the conditions for exchange. As we have argued, an analysis of the conditions for exchange has to focus on the conditions for merchants, since almost all trade is handled by merchants. At least this is true for the rich world. It is an undisputed fact that the division of labor – i.e. using comparative advantages – is a crucially important factor behind economic growth. To make extensive use of comparative advantages it is a prerequisite that people/firms/countries do specialize in production. However, for it to be rational to specialize, it must be possible to trade in an efficient way. That is, without efficient merchants, firms would not find it rational to specialize in production and the benefits to all from a large-scale division of labor would be unattainable. Perhaps we have focused too little on this condition in the past.

IV.1 Future research: the institutionalization of merchant procedures

We end this paper with a suggestion for future research. The suggestion is that in the economically more successful societies, important institutions have been shaped to assist the business of merchants. To illuminate the idea, we focus on the arguably most fundamental invention for the catallactic society, i.e. the institution of property right. It is true that there is no private property without a government. As Olson (2000, p. 196) states, ‘There is no private property without government - individuals may have possessions, the way a dog possess a bone, but there is private property only if the society protects and defends a private right to that possession against other private parties and against the government as well. If a society has clear and secure individual rights, there are strong incentives to produce, invest, and engage in mutually advantageous trade, and therefore at least some economic advance’ Nevertheless, before the government can create private property, the idea of what private property would mean must exist. The concept of private property must be coupled to something already existing in reality. This is where the merchant enters the picture; it is through the enterprises of the merchants that it becomes possible to imagine what private

8 Cf. e.g. The Mystery of Capital (2000).9 Cf. Power and Prosperity (2000).

property would be like. Rights are not given by nature, but nor are they invented by governments.

A concept of ownership based on possession might be good enough for the simplest forms of trade, such as on the spot exchange. However, it rules out all kinds of sequential transactions; it is insufficient to allow joint ventures or any kind of financial business. Actually, I would think that there is a mutual interdependence between a catallactic society and the institution of property rights: as is well known, the catallactic society would not function if there were no property rights, but I conjecture that this relation holds the other way too, i.e. that property rights would not be needed if there were no need for extensive trade.

The concept of property disentangles ownership from possession. The property concept enables ownership of a much wider range of objects than the concept of possession enables. We need to consider the question to who is this important. As long as you have no intention to exchange your possessions, you have little use of the improved concept of ownership that the property concept brings. To own your hunting tools or other equipment, the ownership concept based on possession is good enough. Even in simple barter possession might be sufficient, i.e. when you exchange two goods more or less simultaneously. Who needs private property? The answer is those who wish to engage in voluntary (i.e. mutually beneficial) exchanges, i.e. transactions. As a contrast, for those who wish to take what others have produced, private property is rather an obstacle.10

Arguably, merchants are particularly dependent on the possibility to make voluntary exchanges since exchanges are what they produce. Thus, it does not seem farfetched to suggest that the concept of private property is one of the innovations developed by merchants in their daily strive to reduce transaction costs, in order to increase profits.

The subject of the origin of the institution of private property is tremendously exciting, but also way to huge to be handled satisfactorily in this paper. Without trying to find and evaluating actual historical facts, we confine ourselves to suggest as an intuitively appealing conjecture that private property can be derived from norms and conducts that evolved as a result from people’s -

10 Cf. Olson (1993). Following Olson and portraying the forerunner to the state as gangs of roving bandits who settles down permanently at one location, it appears unlikely that those early states would have initiated the idea of private property. It is hard to see what use this kind of state would have of a concept of private property.

specifically merchants - efforts to exchange one thing for another in a peaceful manner.

Along the same line of thought, we could analyze consumer protection laws as the institutionalized form of goodwill, brand names and guarantees. We could analyze contract law as the institutionalized form of a merchant code of conduct.

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and the Market Mechanism, Quarterly Journal of Economics. 84: 488500.

Alchian, Armen A. (1977). Why Money, Journal of Money, Credit, and Banking, 9: 130140.

Bengtsson, Ingemar (2003). Central bank power: a matter of coordination rather than money supply. Lund: Department of Economics, Lund University.

Krugman, Paul & Maurice Obstfeld. (1994). International Economics: Theory and Policy. New York: HarperCollins.

Olson, Mancur (1993). Dictatorship, Democracy, and Development, American Political Science Review, 87: 567–576.

Olson, Mancur (2000). Power and Prosperity – Outgrowing Communist and Capitalist Dictatorship New York: Basic Books.

Soto, Hernando de. (2000). The Mystery of Capital – Why Capitalism Triumph in the West and Fails Everywhere Else, New York: Basic Books.