Last week I received an email from Michel who was wondering how The Transaction Company could function in the real world:

I thought about your idea during my bus ride to work this morning. I asked myself: How can the bus driver participate in the transaction company? Should he be able to reward the technician that maintains the bus for him? Should he give him 10 Euros every time he feels like giving it him? How does he determine this value anyway. How do you determine the [credits amount] he can hand out during a period of time? [...] How do you know that employees know how to value the services of the other?

Transactions are not this complicated. Actually, they can be quite intuitive and easy to grasp.

Let’s take Michel’s example of the bus driver and create a hypothetic bus company built around internal transactions. I chose it to have five people, which should suffice to illustrate the concept:

	The boss of the bus company
	Three bus drivers
	A technician

A company normally requires material assets and people in various functions in order to operate. In our bus company these are arranged as follows:

• The boss provides the material assets. He obtained a bank loan to buy three buses and a bus garage to park them overnight. He is also responsible for the marketing and for obtaining the required bus line licenses from the city council.
• Three drivers for each bus. They also sell the tickets to their passengers.
• A technician who takes care of the buses’ maintenance. His repair shop is located in the bus garage.

How do you turn the bus company into a Transaction Company?

The recipe: Give our five little heroes the possibility to establish monetary relations with one another in order to obtain the required inputs for their jobs and then to gain from what they produce/provide. The concept does not prescribe anything more specific because the exact terms for a given transaction are best left to the interested parties to define.

The recipe for The Transaction Company is simple

A word of caution: Driven by a desire to achieve greater control, the boss (or anyone else in the company) has to be careful not to distort the recipe by insisting on transactions with employees with whom one actually has no direct work relations. This is most likely to be counter-productive, resulting in moral hazard and perverse incentives — precisely the problem, common to many conventional organisations, that The Transaction Company aims to solve. This is an important issue which I would like to write about in another article.

Let’s now apply the recipe to the bus company, together with some economic common sense in order to anticipate how the five heroes might set up the transactional relations among themselves. Here is one possible scenario:

For the three buses that the drivers need for their job, the boss agrees with them on a lease fee to be paid to him monthly. In addition, a percentage of the ticket sales is agreed to go to the boss for his administrative and marketing work. Finally, the drivers agree with the technician on a pay for his maintenance services. He, however, needs some space in the bus garage to set up his repair shop, and for that he negotiates a monthly rent with the boss.

To sum up, for any one of our heroes to identify their possible transactional relations, they simply have to ask themselves two questions:

1. “Who do I need for my job?”
2. “Who needs me?”

The following interactive diagram maps the internal transactions (among our five little heroes) along with the external ones (with the customers and the bank). The internal transactions of a company cannot be regarded in isolation from the market environment. This is a great feature of The Transaction Company that adds to the understanding of the business in its financial relations with customers, suppliers and creditors.

Now that we know how the transacting partners in the firm identify one another, the next logical step is to look into the valuation of the actual transactions. But before we discuss this, let’s remember how personal income is derived. The Transaction Company says that this is simply the difference between the inbound (money received) and outbound transactions (money paid) for a person over a period of time (here I ignore the special case when shareholder dividend is paid):

• For each bus driver, this is the money collected from the ticket sales after the bus lease, the sales percentage and the maintenance service have been paid for.
• For the technician this is the money received from the bus drivers for his maintenance services minus the amount he paid to the boss to have his repair shop in the garage.
• For the boss this is the money received from the three bus drivers and the technician minus the loan instalment owed to the bank.

Getting back to the valuation of transactions, there is a question that I often get bombarded with: “But how would the person X know how much a particular transaction is worth?” I have answered this in a previous post, but now I’ll explain it again, using the bus company example at hand.

As I mentioned above, the mantra of The Transaction Company is “give people a framework for monetary transactions, the rest they shall sort out themselves”. This also includes the pricing of transactions. Valuation is subjective, therefore I see no point in attempting to impose some “objective” rules to it.

I can’t tell for sure what strategy a particular person would choose to determine and negotiate transaction value, but here is one possible to start with. For example, it is not hard to imagine that many people would aim to earn at least the typical average for their profession (this kind of strategy is called satisficing). So, let’s assume that one of our bus drivers wants to earn at least as much as his peers, e.g. 2000 Euros per month. In order to net this amount, when negotiating the terms of his transactional relations he would have to achieve such a balance between received and spent money, so that at the end of the month he is left with minimum 2000 Euros. As a simple equation:

Sum of received money - Sum of spent money ≥ € 2000

or more specifically

Ticket sales -  Bus lease - Sales percentage - Bus maintenance ≥ € 2000

The bus driver may then notice that of the four factors affecting his pay, some are more variable than others, or that some he can influence more easily. For example, the boss may agree on better terms of the bus lease, while the technician may not accept to work for less because his skills are in high demand; or he may see a chance to increase his passengers by adjusting the timetable. In any case, our bus driver has a clear picture of the factors that make up his personal income and a direct mechanism to act upon them. Employees in conventional companies do not enjoy this kind of transparency and flexibility.

Regardless with which strategies our five small heroes set out initially, in the end they will balance out. And because the bus company is part of a larger economic system, the transaction values will have to balance not only internally, but also with respect to the market. This balance, of course, will be dynamic; it will shift as internal and external business conditions change.

Mathematically, you can represent the problem of transaction value balance as a system of equations. For our bus company of five people we will have five such equations, that is, one per person.

If we assume the following

• The three bus drivers aim to earn at least € 2000, the technician at least € 4000, and the boss at least € 7000
• The bus lease (BL) and ticket sales percentage (SP) is the same for all drivers
• TS_1,2,3 signify the ticket sales for the corresponding driver
• BM_1,2,3 signify the bus maintenance outlays for the corresponding driver
• RS is the rent paid by the technician for his repair shop
• LR is the loan repayment owed by the boss to the bank

the resulting system of equations will look like this:

TS1 - BL - (TS1 x SP) - BM1 ≥ € 2000

TS2 - BL - (TS2 x SP) - BM2 ≥ € 2000

TS3 - BL - (TS3 x SP) - BM3 ≥ € 2000pre>
BM1 + BM2 + BM3 - RS ≥ € 4000
3 x BL + (TS1 + TS2 + TS3) x SP + RS - LR ≥ € 7000

Now, I didn’t mean to scare anyone with this equation. I just wanted to demonstrate that transactions cannot have arbitrary values, but values that are balanced by the interplay of the people’s economic relations within the company and the greater market environment.

I hope this argument is going to calm Michel’s concerns that people in The Transaction Company may turn irrational (in the economic sense) and, for instance, start awarding each other exorbitant sums of money. Michel, money always has to come from somewhere in the end! The fact that The Transaction Company doesn’t have a centralised remuneration system doesn’t mean that people would have an incentive to do crazy things. Actually, it is quite the opposite — we have a robust system with transparent economic mechanisms that emphasise self-responsibility.