A New Term: "Transactional Infrastructure"

Transactional infrastructure are networks that connect to people. They are visible in your wallet: ID cards, money, bank cards, licenses, etc..

A New Term: "Transactional Infrastructure"
Photo by Clay Banks / Unsplash

I've been studying cities lately and a big part of the city is its physical infrastructure.  These are big networks of roads, pipes, and wires that connect to plots of land.  But, another part of the city seemed to be a different infrastructure — networks that connect to people.  The connections are visible in your wallet: ID cards, money, bank cards, licenses, etc..  I wasn't sure how to group these networks together, but now I think the proper term is "transactional infrastructure".

The economy is made from transactions: we exchange goods and services for money or something else of value.  Increasingly, we need infrastructure to support transactions.  We carry that infrastructure in our wallets, our smartphones, and our heads.  I think it is important to study this transactional infrastructure, because, when that infrastructure isn't there or doesn't work, transactions don't happen and the economy sputters.  

I'm going to list some of the transactional infrastructure that I've identified and talk about how governments can maintain it to keep a modern economy operating well.

The most fundamental piece of infrastructure is the cultural definition of possession and the protocol for exchange of possessions.  It seems odd to call this "infrastructure" but everyone in a transaction must agree with what's going on.  Think of the most basic transaction, which in the USA might proceed as follows:  I enter a store, see a pile of apples with a sign saying "$1", pick up an apple, walk to the clerk, remove from my pocket a green piece of paper saying "$1 Federal Reserve Note USA", hand the clerk the green piece of paper, and walk out of the store.   This scene feels natural to any American, but a foreigner might try to give a $1 bill to the clerk before picking up the apple and confuse the clerk.  As simple as this scene is, it contains hidden subtleties.  In a state with a 5% sales tax on food, the clerk will require $1.05 before I can leave with the apple.  (This confuses people from Europe, where printed prices have tax included.)  If everyone doesn't agree on the definition of possession and the protocol for exchanging them, transactions don't happen.  

Luckily, agreement on this cultural infrastructure does not need much help from the government.  For the most common transactions, like buying food, foreigners and children usually pick up the protocols by seeing native adults do it a few times.  For complex transactions, like buying real estate or businesses, even native adults employ specialists (judges, county clerks, etc.) who tell them who possesses what and employ specialists (brokers, agents, etc.) who help them carry out all the necessary steps in the protocol.

A second fundamental part of transactional infrastructure is a common language.  I find it amazing that many basic transactions, like buying an apple, can take place without saying a word.  It is not only possible but easy to order off a menu by pointing and other simple gestures.  But more complex transactions have details that need to be spoken about and agreed to.  That requires a common language.  In fact, some industries have their own jargon for products and any new purchaser must learn it before transacting.  

Governments can support this transactional infrastructure by teaching a common language.  For those who don't speak the commercial language, translators can be employed at a heavy cost.  This friction is getting less thanks to technology like Google Translate.  Perhaps new technology, like ChatGPT, will break down the barrier-to-entry of industrial jargon by translating it into plain language.

My next example of transactional infrastructure is money.  Most transactions are an exchange of money for a good or service.  In the past, money was a physical object: coins or paper.  With physical money, the infrastructure is devoted to stopping counterfeiting.  During a transaction, the participant receiving money needs to be able to identify fake money, by its sight, feel, weight, or some other physical attribute.  So, the infrastructure has two parts: the physical money itself and the knowledge of market participants who know how to identify fake money.  

Recently, money is more informational and less physical.  When I pay for an apple, it is now done by credit card or smartphone.  I'm old enough to have seen 4 different generations of credit-card transaction technology.  The latest version uses a smartphone, with a built-in battery and wireless internet connection, to perform transactions just about anywhere.    

It is in the government's interest to maximize transactions and make sure transactions use an efficient, widely-available, reliable infrastructure.  The latest credit card system is efficient: transactions have low overhead and there is little theft by clerks.  That efficiency incentivizes store owners to stop accepting physical money, but that hurts the availability.  17% of Americans do not have a credit or debit card.  If those people cannot transact, it hurts them and the economy.  If a government wants to maximize transactions and use the most efficient infrastructure, it needs to support the movement to credit cards and/or smartphones from physical money.  Of course, the government may want to maintain physical money as backup infrastructure that is reliable when there is no electricity.  

Another form of transactional infrastructure is tax identifiers.  Stores often need a tax identifier because they collect sales tax.  Workers, when selling their labor, need a tax identifier for collecting income tax.  Transactions that take place without the appropriate tax identifier are usually accepted by courts as having taken place, but the frictions and penalties for not collecting tax make it costly not to do.  

There are 11 million residents in the USA who entered illegally and don't qualify for a tax identifier (Social Security Number or SSN).  Without those tax identifiers, transactions have more cost or more risk and, as a result, many don't happen.  If the government wants to grow the economy, this is a large problem that should be resolved quickly.

A similar piece of transaction infrastructure is the identification card or ID card.  Many large transactions require identification, so that the government can record who owns a car or piece of land.  (It should be no surprise that more valuable goods have a more specific cultural definition of possession and more complicated protocols for exchange.)  After towing my car, the police will hand it over to me only after I show them ID.  Identification is also important for credit.  My creditors want to know everything about me before loaning money to me and, after the loan, they want to know everything I possess so they can take it from me if I don't pay them back.  Like with physical money, the infrastructure of the ID card is in both the physical cards and in the knowledge to recognize fake ones.  Increasingly, smartphones are acting like identification, as websites require two-factor authentication before allowing certain transactions.

Governments often require ID cards for non-economic reasons, such as voting and border crossing.  Nonetheless, IDs are important transactional infrastructure.  As mentioned before, there are 11 million residents in the USA who entered illegally.  Without IDs, these people are limited in their ability to transact.  Governments that want a better working economy should fix this quickly.  

Yet another piece of transactional infrastructure is the delivery address.  For delivery of a physical good, this is a street address.  For an informational good, like tickets to the movie theater, the delivery address might be an email address.  

The lack of delivery address prevents many kinds of transactions.  The USA has about 500,000 homeless each night.  A large number of transactions are unavailable to these people because they don't have a street address.  They cannot order any of the 350 million products on Amazon.com.  Likewise, the 9% of Americans without an email address have a difficult time transacting on the internet.

My last example of transactional infrastructure is a license. The government prohibits transactions on many services, except when the seller holds a license.  You cannot do surgery without a doctor's license, nor practice law without a bar association membership, nor cut hair without a barber/cosmetology license, nor handle food without a food-handler's license, etc..  Like with ID cards, part of the infrastructure is the knowledge by purchasers of how to identify a fake license.  And like with tax identifiers, these transactions do take place without licenses, but the frictions and penalties make it costly if you don't comply with the law.  

The license is counter-intuitive.  The government often claims more transactions will happen by banning most people from selling particular goods or services. That is true when non-experts can do harm and it is difficult for purchasers to differentiate experts from know-nothings.  The license is a source of information on expertise.  However, many economists contend that licensing's information is imperfect (if not perverted by stakeholders) and the ban is too costly.  A better government policy might be to require insurance for delivering these dangerous goods and services.

I don't consider this list of transactional infrastructure exhaustive.  Depending on your definition, it might include anything from credit, to public transit, to restaurant reviews.  I haven't settled on a precise definition of "transactional infrastructure".  But I like the concept.  It explains a whole set of government operations that, otherwise, seem rather random.  And, like any good concept, it offers new insights and perspectives.  

The concept lets us ask interesting questions, such as "What is the relationship between a food-handler license and Yelp! reviews?".  After all, both are informational services for food transactions.  Why is one given to a person, and the other given to a business?  Why is the license given by the government while the review is given by a for-profit business?  Does it matter to the economy if Yelp! accepts advertising money from restaurants?  When is it appropriate to ban transactions, as done by the license, versus discourage transactions, as done by reviews?

The concept of "transactional infrastructure" lets us group together the problems of people disconnected from transactional infrastructure.  There are many people disconnected: those without a common language, a bank card, IDs, SSNs, bank cards, or delivery addresses.  There are more who, because of a disability, are not able to access infrastructure targeted for the majority.  Together, they make a large group.  The Gross Domestic Product (GDP), our prime measure of an economy, is a sum of transactions.  So, if we want to improve it, one of the most direct ways is to make sure the transactional infrastructure is available to everyone at all times.

And those disconnected from transactional infrastructure are not just the poor and disabled, they could be anyone.  My friend Jonathan owns multiple businesses and, while traveling, his wallet and phone were stolen.  His backup ID, a Passport, had expired.  It took him 4 days to get a new bank card, 6 days to get a new smartphone, and 42 days to get a new ID.  He had to rely on others, especially his wife and brother, because he was cut off from transactional infrastructure.