Accordingly, several types of costs can be distinguished. First, there are technological / transformation costs. As we have seen, people discover patterns in the natural and cultural environment (habitat and domus) through causal models, that is, knowledge. Current technological expenses reduce the uncertainty within the existing knowledge stock. But sometimes, to reduce uncertainty, it is necessary to increase the stock of knowledge, that is, to invest in technology.
In addition to technological costs, there are inevitably costs for coordinating activities and making decisions. We call them organizational and psychological costs, respectively. Organizational expenses and investments are losses caused by distrust and injustice, which require activities to create and maintain institutions and change the existing institutional framework. Psychological costs are losses caused by prejudice, false beliefs and indecision, which require actions to change the belief structure, motivate and stimulate.
Organizational and psychological costs thus differ from technological costs. In the new institutional economics, organizational and psychological costs are summarized under the term transaction costs. Although transaction costs are defined as the costs of running institutions, they also include the costs of decision-making (cf. Coase 1988, p. 6; Richter and Furubotn 2005, p. 12). In what follows, we will always keep this dual nature of transaction costs in mind.
“Residual uncertainty” that cannot be eliminated by spending and investing is the basis for irrational beliefs and profits. Uncertainty has a dual nature. On the one hand, it is a necessary condition for the existence of profit. If everyone knew everything, no one could make a profit. On the other hand, “in the presence of uncertainty—a necessary condition for the existence of profits—there is no meaningful criterion for selecting the decision that will ‘maximize profits’” (Alchian 1950, p. 212). Profits are always based on chance and their size is always random.
Profit is an uncertainty that is integrated as an inherent part in the process of self-reproduction of culture-society; therefore profit is also a meaning. Like any meaning, profit cannot always be “maximized” here and now: for its maximization, decisions by individuals are not enough, but socio-cultural evolution is required:
“There is an alternative method which treats the decisions and criteria dictated by the economic system as more important than those made by the individuals in it. By backing away from the trees—the optimization calculus by individual units—we can better discern the forest of impersonal market forces. This approach directs attention to the interrelationships of the environment and the prevailing types of economic behavior which appear through a process of economic natural selection. Yet it does not imply that individual foresight and action do not affect the nature of the existing state of affairs” (Alchian 1950, p. 213).
Hence, the self-reproduction of culture-society is built upon both certainty and uncertainty. The process of production, circulation and consumption of goods is a process of overcoming uncertainty. At the same time, as Robert Sapolsky shows, uncertainty is the very condition that makes cooperation between people possible. The prisoner’s dilemma can only be solved on the assumption that the players do not know how many rounds the game will have and therefore behave irrationally (cf. Sapolsky 2017, p. 634).
In the space between certainty and uncertainty, there arises probability (risk). Probability should not be confused with either necessity or accident. According to Keynes’s famous definition, which borrowed from Knight, an event is uncertain if there is no basis for calculating the chances of its occurrence or non-occurrence; in contrast, a probable event is an event whose chances can be calculated (see Keynes 2013, vol. 14, pp. 113-4).
Probability lies between necessity and accident. Unlike strict necessity, it is variable. However, unlike accident, it is finitely variable. Profit is an accident, while cost is a necessity. In between lies probability, or interest. Property and interest have the same root, they are interrelated results of an increase in meanings, the gradual transformation of uncertainty into risk and the division of rights and risks. In the early stages of their evolution in a traditional culture-society, profit and interest are almost equally uncertain: the amount of interest roughly corresponds to the amount of expected profit. The evolution of interest led to its decline in relation to profit. This expresses the nature of interest and property—it is part of the uncertainty that can be transformed into risk.
The transformation of uncertainty into risk and then into certainty occurs in the process of activity—that is learning and imitation, trial and error. During socio-cultural evolution, a “double adaptation” occurs: men adapt to the environment by changing meanings, and meanings adapt to the environment by changing men. The quality of this mutual adaptation is determined by the effectiveness of feedback. People learn when they receive rapid and frequent feedback on their actions—be it making things, keeping promises, or discovering new laws of nature. Learning occurs through the repetition of events and actions, the formation of stable meanings—norms or routines. The efficiency of adaptation depends on the norms that regulate the activities of the culture-society, that is, on the socio-cultural order:
“Adaptive efficiency, on the other hand, is concerned with the kinds of rules that shape the way an economy evolves through time. It is also concerned with the willingness of a society to acquire knowledge and learning, to induce innovation, to undertake risk and creative activity of all sorts, as well as to resolve problems and bottlenecks of the society through time. We are far from knowing all the aspects of what makes for adaptive efficiency, but clearly the overall institutional structure plays the key role in the degree that the society and the economy will encourage the trials, experiments, and innovations that we can characterize as adaptively efficient” (North 1990, pp. 80-1).
Culture and meanings emerged as a means of overcoming the uncertainty of the natural environment, the mutual inadaptation of habitat and protohumans. As an adaptation process, cultural evolution reduced natural uncertainty, leading to the emergence of an agrarian culture-society with its traditional order, possession and political ownership. However, the same cultural evolution has led to an increase in the uncertainty of the domus, the culture itself. The more complex the culture, the more variable it is. The more information, the higher the uncertainty: the random grows faster than the probable:
“On the other hand, a string is random if there is no short way to describe it. Of course, you can always describe a binary string just by listing it: the program that says “Print s, then halt.” That program has about the same length as s itself. Therefore, s is random if there is no shorter way than that to describe it. K(s), in other words, is about equal to the length of s: K(s) ≈ L(s). This definition of randomness has nothing to do with probability. Indeed, Kolmogorov believed that the idea of information was more fundamental than the idea of probability” (Schumacher 2015, pp. 231-2).
By multiplying meanings, culture-society raises randomness and uncertainty. The increasing complexity of human activities is a race against uncertainty. By complicating their activities, humans eliminate the uncertainty that prevents them from satisfying their needs, but in doing so they create even greater uncertainty. To eliminate this new uncertainty, they must complicate their activities even more. This phenomenon is called the “Red Queen’s Race”:
