With AI, the Answer is Transaction Costs

I follow Dr. Michael Munger — the knower of important things — for his podcast The Answer is Transaction Costs. He uses it to explore ways transaction costs are leveraged or hidden in everyday life. One recent example on EconTalk: Starbucks' “surge” pricing. Starbucks doesn’t raise prices, but customers look at the line and calculate whether the time spent waiting plus the cost of the drink is worth it. That friction — the toil of acquiring something on top of the price of it — is a transaction cost.

The concept comes from Ronald Coase, the British economist who won the Nobel Prize in 1991. Coase argued that markets aren’t frictionless — every exchange carries hidden costs: searching for information, negotiating terms, enforcing agreements. These costs shape what gets built, what gets traded, and what ideas never make it off a napkin. Lower the transaction costs, and you unlock activity that couldn’t exist before.

We’re living through exactly that kind of unlock right now.

LLMs have dramatically reduced the transaction cost of turning an idea into something real. A colleague in another division recently shared a tool he built for a gap he identified — no project code, no kickoff meeting, no waiting for IT. He just built it. The bar for permissionless innovation has dropped considerably, and the horizon from idea to working prototype has compressed from weeks to an afternoon.

I felt this personally. I wanted to connect Obsidian, Claude, and Micro.blog in my own workflow. In the past, I’d have written a few lines of code, hit friction, and moved on — not worth the investment. This time it was a prompt, a quick read-through of the Python, and about 30 minutes with a few Homebrew installs. Done.

At work, the same energy is everywhere. Pop-up meetings, side-of-desk projects, MVPs that actually ship. There’s a real joy in moving from idea to realization without the usual toil standing in the way.

Coase would recognize the pattern. When transaction costs fall far enough, the thing that was always theoretically possible suddenly becomes practically inevitable. Right now, that thing is your ideas.