Mike Munger joins us to discuss his new book Tomorrow 3.0: Transaction Costs and the Sharing Economy. We discuss the future of the sharing economy, the role of the middle man, and the fundamental economic concept of transaction costs.
Learn more about Mike Munger here.
00:06 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus.
00:08 Aaron Powell: And I’m Aaron Powell.
00:09 Trevor Burrus: Joining us today is Michael C. Munger, he’s professor in the Department of Political Science and the Department of Economics at Duke University. His new book is “Tomorrow 3.0: Transaction Costs and the Sharing Economy”. Welcome back to Free Thoughts, Mike.
00:22 Michael C. Munger: It’s a pleasure.
00:24 Trevor Burrus: You discussed that in the beginning of the book that it rose from an EconTalk episode discussion, which I think is great ‘cause we’ve modeled this podcast somewhat off of EconTalk and Russ has been on here. In the spirit of that, what is a middle man and how did the thinking about middleman help bring about this book?
00:46 Michael C. Munger: Well, middlemen are always one of the problems in economics, because blackboard economics always starts with people knowing everything about each other’s preferences and about all the commodities that are available. All that really remains to do is make the relevant exchanges and go home. But most of the time, I don’t know what you want. I don’t know what you have and we need to find each other somehow. There’s a famous article about a World War II prison of war camp, in which the role of middleman is hotly debated, and it was… By an economist named Redford, and one of the odd things is, you’re in this horrible place. You’re in a prison of war camp. It’s in the middle of one of the worst wars the world has ever seen. And this guy, because he’s an economist said, “Look, cool prices.”
01:38 Michael C. Munger: And it turns out that the people who found buyers and sellers, who, if they could have found each other would have made an exchange, generally can’t find each other. But if all I do is charge a price for bringing two people together, it doesn’t seem legitimate because the thing that’s being sold wasn’t changed or improved by me in any way. I’m just taking a cut and in fact, eliminate the middle man is one of the pieces of advice we give to consumers or someone who’s trying to start out a new business. So middle men, we see as being evil, except that economists see them as providing an important role in the economy, because what they’re really selling is information, or as I say in the book, what they’re selling is reductions in transactions cost. The contribution of the book is to say, there’s no reason human beings have to do this. Apps or software can be middleman. And once you start to think in those terms, it changes everything.
02:34 Aaron Powell: What is a transaction cost specifically for the purpose of the conversation here? What do you mean by that?
02:41 Michael C. Munger: You’re not gonna be happy.
02:45 Michael C. Munger: I was with you until you said specifically.
02:48 Aaron Powell: We’ll go into specifics as we can.
02:49 Michael C. Munger: The problem is from the perspective of a consumer, everything is a transactions cost. I’m trying to decide whether to buy the thing or not. If I don’t buy it, I don’t pay any of those costs. So from the perspective of a seller, sometimes we try to distinguish between the cost of producing something and then the cost of contracting, negotiating, enforcing, monitoring the contract after the fact, all of those things are what economists from… I’m trying to think how far back to go. In some ways Adam Smith talked about those, in some ways Douglass North or Oliver Williamson talked about those things. Ronald Coase talked about transactions costs and Ronald Coase famously, a Nobel Prize winning economist, who first wrote in 1937 about transactions cost, he refused ever to define transactions cost.
03:44 Michael C. Munger: And so me being confused may be part of a proud tradition when I say that it’s hard to define transactions cost, but in the book, I define them this way and I use three TR words to help out. The first is triangulation, the buyer and the seller have to be able to find each other and to locate the product. Second is transfer, we need to be able to negotiate on a price and then be able to deliver the product and make the payment. And the third is trust, that we each think that the product or service is going to be delivered. You’re not going to rob me, you’re not gonna take something else where we are able to engage in the transaction without worrying about losing something else. Those three things specifically for now, triangulation, transfer and trust are the kinds of transactions cost that apps or middleman, human beings can often reduce.
04:37 Trevor Burrus: I’m a little bit confused about the inability to define this, there seems like at least sometimes there’s a pretty clear line between so classified ads, for example, is…
04:47 Michael C. Munger: Those are examples.
04:48 Trevor Burrus: There’s a kind of… There’s a very big diff…
04:49 Michael C. Munger: If you want examples I can give plenty. You asked me for a definition.
04:51 Trevor Burrus: Yes, yeah but I… Yeah, so maybe it’s hard to just sort of state it in succinct words, but if there’s a person out there who wants to sell me a guitar and I’m a person who wants to buy a guitar for a price that we’re both gonna be made better off by making the transaction, and I don’t know who they are. So we had classified ads, we have eBay, we have Craigslist. All those things are diminishing transaction costs, correct?
05:12 Michael C. Munger: Yes. Those are all excellent examples. And in fact, probably the first most important example was the Souk in Aleppo 4000 years ago. But it’s kinda odd when you think about it, why would a bunch of sellers all get together in the same place? You’d think you’d wanna be off by yourself because then you don’t have competition. Well, no, that would raise transactions cost. So what happens is a bunch of sellers all get in the same place. They accept the cost of competition over price, because buyers, when they think, “Ah, I wanna go buy something” they don’t have to know where, they just go to the Souk because you can buy everything there.
05:45 Michael C. Munger: The Sears catalog was a way of reducing transactions cost and it’s a wonderful example because it provides three things. First, when the Sears catalog gets to your house in rural Missouri, in 1890, there’s all this stuff that you can buy. And then you send the letter with a cheque in it and the thing is delivered, the payment is actually delivered to the seller so it’s very difficult to cheat. Sears provided the service of clearing the transaction, providing the delivery and providing trust. When you put all those things together, that’s an example of the three kinds of transactions cost I was talking about. The reason it’s hard to define is, it’s hard to say all the things that these examples actually take care of because we take some of them for granted. Once you take a step back, it’s actually marvelous that we’re able to have so many transactions at such low costs.
06:43 Trevor Burrus: What about something like McDonald’s and branding? Doesn’t that seem… That seems to be something too, ‘cause if you’re driving across the country and you don’t know where a good place to get a burger is, is that McDonald’s and branding is also kind of doing the transaction cost, at least the trust part of it it seems.
07:00 Michael C. Munger: Well, economists have a thing called a market failure, which is asymmetric information, when either the buyer or the seller or both don’t know enough about the other person. So one of the solutions to that is reputation. If I know you personally, I know your family, I know we’re going to have repeat business. One of the things that many businesses figured out was that you can take reputation and invest in something called a brand name, which is really just a commercial reputation. And the reason that that works is that if I have a brand name that’s valuable, people are saying, “It’s not like McDonald’s is great, but it’s not bad.” So I see Joe’s Burgers. Stop here, get gas, and I think, “Oh, I don’t really wanna go there. Maybe it’s okay but then I see McDonald’s. Ah, this will be fine. We’ll stop there.” But a local McDonald’s franchisee might have cold French fries, rotten tomatoes on the sandwiches. You have to have a way of policing the actions of the franchisees.
08:00 Michael C. Munger: So that’s what’s really is going on is McDonald’s has a depreciable capital asset, which is its reputation. It loses value if people associate it with bad products. So McDonald’s has an incentive to make sure that you always get whatever McDonald’s usually is, whether… Other people don’t like it, it’s actually remarkably good, remarkably consistent, remarkably hot and fresh. They do a fine job. That reputation then, when it becomes commercial, is called brand name. And you’re right, that’s a pretty good solution for that. But that’s pretty expensive. I would guess that a lot of times at those truck stops, one of the other four local restaurants is better than McDonald’s. You just don’t know which one. Suppose that you had an app on your phone, we could call it Yelp.
08:45 Michael C. Munger: And there, I could find out this information without having to rely on brand name. I could actually use the reduction in transactions costs that come from having other people’s direct reviews.
08:58 Aaron Powell: So we’ve had for, I mean you mentioned the early marketplaces, we’ve had for at least 4000 years people working to reduce transaction costs. We’ve been aware of this stuff. We’ve had businessmen who have built their businesses around being middlemen. So what’s different enough now to start talking about “Tomorrow 3.0”?
09:18 Michael C. Munger: This is not my insight by any means, I’m just copying what a number of other people have said. And one of the people I think recognized it first was Marc Andreessen, who in Wall Street Journal article in November 2011, so going on 10 years, ago wrote a short piece that was called Software Eats The World. And what pmarca, his Twitter name for a long time has been pmarca, what Marc Andreessen said was that, what we’re seeing is the intersection of three things. The first is these portable communication devices that are also computers and have GPS connections, we call them phones but they’re more complicated than that. On those things, we have connections to each other and to a bunch of central nodes over a network of networks, what we call the internet, but it’s actually more complicated than that.
10:09 Michael C. Munger: The new thing is a product of permission-less innovation. The third thing and that is all I have to do is write some software and make it available on one of the cellphone stores. So on the Galaxy store, on the iPhone store, and you can download a piece of software to your phone that can communicate with other phones over the internet. The connection of those three things, phones, apps, and the internet, is what has accelerated the pace of change because software can now do the things that we used to depend on human beings and brand names to do. Once that happens, it means that a bunch of exchanges that used to be business to peer can become peer to peer. So the difference is that you and I can now engage in transactions that would have been impossible before. That’s a qualitative difference. Businesses, and you quite rightly said, businesses have specialized in this for a long time. What the business was doing was selling a product because there was no way to do it peer to peer. The interconnection of those three technologies that we just talked about mean that peer to peer, sales, sharing, rentals, all of those things are now possible for the first time and it’s qualitatively different than anything that’s ever happened before.
11:25 Aaron Powell: That qualitative difference, and I guess it comes down to what we mean by peer, because how is that different from… So Yelp is still… Yelp is a brand and so part of making your app successful is getting people to trust your brand, in this case, Yelp. Yelp is still, there’s people who are providing me that service, so we’ve still got the brands and people. And so how is it… How is Yelp qualitatively different from what might look the same peer to peer of me reading restaurant reviews in the Washington Post, which happens to be another person telling me what he thinks are the best restaurants in DC.
12:05 Michael C. Munger: Absolutely. Now, that though, that’s a guy who is getting paid to write restaurant reviews. So he’s a professional. The analogy would be, suppose that you can talk to someone that you didn’t know, but that you thought you could trust about where to go for restaurants. Now, you couldn’t find that person. Where the Washington Post pays somebody to do it, that’s a business. What Yelp is selling is access to other human beings who have been to the restaurant that are not professionals. They’re just other consumers. And so that’s the peer to peer part. Nobody’s getting paid by Yelp to provide these reviews. In fact, it is the reviews themselves that are the product, and that’s why people buy advertising on Yelp. So Yelp is just providing a forum in which you and I can talk about what restaurants are good and what restaurants are bad. The Washington Post is paying a business person to have a professional informed opinion. Maybe restaurant reviews are good because they tell me something about the quality of the restaurant in an aspirational sense. But what I probably want to know is are the… Is this a good taqueria? And if a bunch of people say, “Man, those were great tacos!” they probably are. So the peer to peer part of it is, that no one is getting paid either to receive or send this signal. The people themselves are the product. What Yelp is selling is access to this forum.
13:34 Trevor Burrus: So in light of the foregoing, we’re talking about, of course, Uber is the one that is so prominent that we just sort of used the name, the Uberization of everything, the Uber for puppies and stuff. What does Uber sell? I mean it’s a transportation company, right?
13:48 Michael C. Munger: It is not. Uber sells reductions in transactions cost and I think you already knew that I was going to say that [13:56] ____.
13:56 Trevor Burrus: I set you up a little bit, yeah, yeah.
13:58 Michael C. Munger: Thank you very much, I appreciate that.
14:01 Michael C. Munger: So if I have a car and a few minutes and you need a ride, it’s gonna be pretty difficult for us to arrange that. Now, don’t ask me how I know this. But I have a black, shiny BMW 330. If I’m driving along and I see a young lady walking and I pull up and I say, “Hey, you want a ride?” She’s gonna say, “No.” In fact, she’s probably gonna say, “Look, I’m gonna call the police ‘cause you’re creepy.” And she’s right, that is creepy. But it still remains the fact, if I have a car and a few minutes and you need a ride, there should be some mutually beneficial exchange we can engage in. But the three transactions cost, being able to find each other, being able to negotiate a price and pay, and being able to trust each other, those things are gonna prevent all of those transactions from taking place. So the interesting thing is, the reduction in transactions cost commodifies excess capacity. And that’s really the bottom line, is the commodification of excess capacity.
14:57 Michael C. Munger: We have so many things that are underused. They’re less than fully used and what we do is, instead of using them more intently, intensely, we just pay to store them. So we’re paying for them several times. We’re not using them. So we’ve got capital tied up in them and then we pay to store the darn things. I think 50 years from now, people are gonna look back and say, “Not only were they selfish, they were stupid because they have all of this valuable stuff just sitting around.” All over the world stuff is in the wrong place. I could rent it out or I could sell it to someone else, but I don’t know who they are, I don’t have a way of delivering it or charging the price, and I don’t know if I can trust them. Any app that can solve that problem allows more intensive use of existing stuff. And the great thing about that is, that it reduces the environmental footprint that each of us has. We don’t have to have storage space. We don’t have to have garages, we don’t have to have parking spaces. We don’t have to have closets. We don’t have to have a bread machine in the stupid kitchen cabinet ‘cause we use it once a year. So once you start thinking in terms of the more intensive use of the stuff that we have already, that sort of peer to peer becomes less like markets and more like sharing. We’re just able to share things but to do it in a way that’s reliable.
16:13 Aaron Powell: That was what struck me as I was reading… I think it’s the first chapter, you opened with a couple of paragraphs imagining what this Tomorrow 3.0 world might look like. And you say that we don’t own this stuff and that you only pay a little bit for things, and that we kind of, we don’t even really have jobs to speak of or most of us don’t. And it struck me that it was… Back when I was in college, there were a lot of hippie leftists describing their ideal society of, everyone just shares everything, and we all just get along…
16:46 Trevor Burrus: Why do you got to own everything, man?
16:47 Aaron Powell: Why do you gotta own everything?
16:48 Trevor Burrus: What’s with the money? Come on.
16:49 Aaron Powell: And it struck me that what you’re describing is basically the incentives that exist in capitalism, creating a functional version of the world that the radical leftists have told us capitalism was preventing from coming into being.
17:08 Michael C. Munger: Right, but it’s doing it through capitalism because there was no way that it could be done just by being able to trust people because we know they’re going to act nice. And the reason is that when people do act nice that works fine, but we’ll often get someone in from outside, and then we… That’ll only work in really small communities. Is there a way to do it that’s impersonal? Can we trust someone that we don’t actually know that we may not have repeat business with? That’s the particular genius of markets. But I would say that there’s an interesting point here, which is an Austrian economics point. The institutions of economics will adapt to what transactions costs allow. And so a lot… The things that… If I buy an apple, I eat the apple and it’s gone, but a fundamental Austrian insight and, Mises said this, Hayek said this, Israel Kirzner wrote quite a bit about it. The reason that we own something that’s durable is that we want the stream of services that come to us from owning this durable thing.
18:13 Michael C. Munger: Now, the reason that we do that is that’s the lowest transactions cost way of making sure that I have it. So I don’t actually, as I say in the book, I don’t want to own a drill. What I want is two holes in this wall right now. But the cheapest way for me to get that until now has been for me to own the drill and store it just in case, “Alright, I need a drill. I’ll go get it from my closet.”
18:38 Michael C. Munger: Suppose it were easier than it is to rent, we could have something that’s much closer to sharing, and in fact we can go one more step. We might not need to rent for a price. There’s open-source software now that allow tool libraries. And so your hippie friends from when you were in school would recognize this and sort of nod and have another toke on their weed. And they would say, “Alright, all I need to be a member in this tool library is I have a drill, you have a miter saw, somebody else has a jackhammer, and all of us recognize that we can borrow each other’s stuff, and we’ll keep track on this software of whether you returned it in one piece.” And if not you’ll be excluded from the tool library; you’ll have to pay, maybe you have to post $100 bond in order to be in the tool library to begin with. We can just check this stuff out, and we can keep track of the quality with which it was returned; that’s true sharing.
19:38 Michael C. Munger: We don’t actually have to pay a marginal price for this, we can own these things collectively, provided the costs of owning them collectively are reduced. So the argument that economists have made about private property tended to be more consequentialist. There are plenty of people who have an ethical reason for private property, and that’s fine. But the Austrian economics reason for private property is that I want two holes in this wall right here, right now. And it happens that the cheapest way for me to get that is to own it. That was not handed down by God. That could change if the institutions of the market update, if they evolve to the point to make sharing less expensive.
20:20 Aaron Powell: What does this do, a world where this sort of thing is much more widespread than it is now due to product innovation? Because, so one of the reasons that Black & Decker, say, is able to produce better and better drills that are more effective, more power efficient, more powerful, but I don’t use drills enough to know what a better drill is, but I imagine they’ve gotten better over time, is that lots of people are buying drills, and so they have the income to then funnel into R&D. Plus they have economies of scale that let them produce these things at reasonable prices. But if everyone’s sharing just a handful of drills, are we gonna end up over time with drills not advancing in quality as much?
21:02 Michael C. Munger: I think it’ll have the opposite effect. Right now there’s 110 million power drills in the United States. And if you look at the…
21:09 Trevor Burrus: Have you really looked that up? Where do you find that number? [laughter]
21:11 Michael C. Munger: This is one of the tropes of this literature. It’s actually controversial enough that a number of people have looked it up.
21:21 Trevor Burrus: Okay, alright, just wondering.
21:23 Michael C. Munger: I give some sources for it in the book, it’s in a footnote. I’m a professor.
21:29 Michael C. Munger: So half of those power drills are used only 30 minutes or less, lifetime, which means that I have a 10 or 15 year old power drill that’s sitting in my closet. And power drills don’t evolve very much. Where they evolve is for the commercial use, for somebody that has a much shorter service cycle. So if I’m a contractor, I use a drill for six months and wear it out, and then the next one that I buy, that one’s gonna be better quality. That’s what they’re actually competing for. They compete for price, the producers compete using price for people like me. Well, suppose that instead of buying I could rent one and have it delivered really cheaply and it wouldn’t cost very much, that means that this drill, I would use it in the morning, you would use it in the afternoon, somebody else would use it in the evening. That drill is a commercial quality drill that’s only used for rent, it’s gonna get used up within six months or so. So I think that the result is going to be we’ll see an explosion in innovation.
22:27 Michael C. Munger: Now, the difference is, and you may be right about this, one thing we’re gonna lose is economies of scale. We’re gonna lose the inexpensive crappy drill that doesn’t last very long. I would say good riddance. What we’re gonna see is improvements in durable, long-lasting drills. There’s a myth that people on the left have that say, “You know, capitalism encourages immediate obsolescence, planned obsolescence. We all know that capitalism wants people to buy stuff more often.” That’s not true. Consumers would be happy to buy something that was more durable. It’s just that often what they want something cheap that they can throw away or not have to worry about very much. Once you’re in a rental market, then I think you will see innovation, and the myth of planned obsolescence will die, because we’ll actually care about having something that’s commercially viable as a rental, which means that it’s gonna be durable, it’s gonna last a long time.
23:22 Trevor Burrus: So what are the limits of this? You start thinking about this future where we don’t own drills, we call Uber for drills, and maybe Uber for clothes. And it seems that there are some social attitudes that would limit some of these things, where maybe we want our own clothes in our own way, and definitely our toothbrush and things like this. What are the limits of how far this can go?
23:53 Michael C. Munger: Human beings are pretty plastic for the things that confer social status. And old people like me, if you look on our Facebook page, you’re gonna see our house or our pathetic cars or you’ll see us bragging, in effect, about stuff that we own. Younger people already are starting to get away from that and some of the reason is if you live in New York, San Francisco, Washington, DC, housing is so expensive, they live in pretty small spaces. They’re looking for ways to downsize. Instead of collecting material goods, what people are doing is collecting experiences. Instead of seeing their BMW, you see them hang gliding in Nepal. I think that to the extent that we create… We socially create the things that confers status, having a smaller footprint on the environment is something that we’re gonna congratulate each other for, being able to live well with relatively less stuff, but be able to move all over the world.
24:54 Michael C. Munger: We work in Prague for six weeks without many belongings, because I can rent everything, and I can also… I can be in a WeLive. I can be in an apartment that has almost nothing, and after six weeks, I say, “Yeah, Prague was pretty great. I’m gonna to go to Buenos Aires for a while.” Stuff ties you down, and you’re right. There’s a limit, and toothbrush is well on the other side of that limit. It’s hard to think of a way of commodifying that excess capacity, but there’s an awful lot of things that I think people are going to be willing to give up because, actually, it’s a better life than being tied down to paying a lot of money to store stuff you rarely use.
25:35 Trevor Burrus: It seems like entrepreneurs factor into this a lot, because we actually don’t know the answer to that question to some degree, right? What the limits are.
25:44 Michael C. Munger: Well, the difference between a professor and an entrepreneur is at least five years. Anything that I thought of, an entrepreneur thought of five years ago and two people perfected three years ago, and they’ve gone bankrupt. Most of the time I’m wrong and someone’s proved it, and some of the times I’m right, but this product already exists. Yeah, people are constantly thinking of ways to sell new experiences, new ways of reducing transactions for peer-to-peer exchange. And in fact, there’s an app called FareCompare, used to be GoAtoB, which is Orbitz, but for ride shares. I had a brilliant idea one day where I thought, “You know, it doesn’t make any sense for me to look at Lyft and then say, “Oh well, the nearest car is 20 minutes away,” get out of Lyft and then go into Uber. There should be something like Orbitz where I can compare all the prices and arrival time.” And of course, there had been for five years because, like I said, the difference between the professor and an entrepreneur is five years.
26:46 Aaron Powell: It’s a competitive advantage right now to have economies of scale, if you have the infrastructure to manufacture at large scale, you can manufacture more efficiently and it can be harder for smaller firms to compete with that. Economies of scale disappear in this, but the value of networks goes up radically. Yelp is valuable because so many people use Yelp. And with individual products, I can try one brand of shirt and buy it, and then it’s pretty costless for me to, next time around, try a different brand of shirt, but if I’ve been using Yelp for a while and then there’s a new review thing that’s popped up, it’s only really valuable for me to test it out if all sorts of other people have also decided it’s valuable enough to test out to give value to the network. Does this kind of thing end up, I guess, locking in incumbents who have built up large networks?
27:45 Michael C. Munger: Yes, it does, and it could be a catastrophe. This is, I think, the best objection. Now, let me say one thing, economic revolutions don’t care whether they benefit us or not. They operate at a logic at the micro level, and then the aggregate consequences of them are just what they are. We can try to look ahead and see what those are. People have complained recently, Facebook has a bunch of data. We probably could do things, regulation. If you’re really worried about that, we could regulate Facebook. You can’t sell certain information. Facebook on its own is in some way saying, “Alright, we’re going to stop doing that.” The real problem is, suppose that Facebook acts really well and responsibly, the result will be that everyone will want to be on the platform for pictures and sharing information that everybody else is also on. For Airbnb… What Airbnb is selling is reputation. They have a big portfolio of properties, and I don’t want to go to somebody else’s apartment knowing that they have the key unless there’s 20 or 30 reviews. Now, if the reviews say, “Yes, this was great. It was safe,” I’m probably going to be more willing to take a risk and rent that Airbnb.
29:01 Michael C. Munger: Let’s suppose that Trevor and I come up with a new piece of software, a new app, and it’s way better than Airbnb. And we put it up, it’s for sale, and then we say we’re waiting for the new renters and the new homeowners to come and start to do business on our website, which is way better than Airbnb. Nobody ever shows up, because the renters want the homeowners to have reputations and the homeowners want the renters to have reputations. Those already exist on Airbnb. Having a better product will not allow you to overcome those network economies. I think that’s… I have no idea what’s going to happen with that. The benefit might be, and to some extent, we’re seeing this with Facebook, innovation might take the form of just different platforms all together, rather than Facebook and MySpace and several different very similar things, tt could just be something completely different, but there is a problem with the network economies that come about from having a portfolio of reputational information, no one else is gonna be able to catch up. And the advantage of the first mover is going to accelerate over time to be basically an insuperable advantage. I think that’s a very legitimate concern.
30:18 Trevor Burrus: There are also concerns, as you write in the book, about disruption. That’s pretty profound. And you discuss… So tomorrow, this is Tomorrow 3.0, but we had different times in the past where economies were disrupted and different people lost their jobs, or entire industries lost their ability to work. And that’s been part of the story with Trump, and to a lesser extent, I guess Bernie Sanders, and other political events across the world such as Brexit, that people are having their lives disrupted. And it sounds like you think it’s just gonna get quicker and more profound disruptions in the future.
30:53 Michael C. Munger: I’m trying to have it both ways, because I am after all a professor and not an entrepreneur, so I’m not very good at predicting things. But the plus idea is that the cost of many things is gonna go down. Your brand [31:05] ____ footprint that we have is going to go down. We won’t need parking spaces, or large closets, or garages in cities. It may be that small artisanal products that are individually rewarding to make. I can now have a website and have them delivered by Uber in a large city. And so I can make pickles, or I can make cheese that is pretty expensive, but it doesn’t take that big a market. It’s sort of a long-tail argument. I can have on my website a bunch of products that we don’t have to sell very many of them in a city in order to make quite a bit of money. So I may be able to just work on my own in my apartment and have my own little business. I can own a drill and rent it out when I’m not using it, and I can get enough income from that to live because the prices of everything are going to fall, because I can rent rather than own. The other side would say that it doesn’t really matter how cheap things get if you don’t have a job at all. And a lot of people are not gonna be able to take advantage of this new economy because they put everything they had into traditional jobs.
32:17 Michael C. Munger: And we’ve only had jobs for about 200 years, the fetishizing of jobs is a pretty recent phenomenon. Before that, people didn’t say, “This is how I make a living.” What they did was they patched together resources from a number of different sources. Well, that might very well happen again, but the difference is now we tend to define ourselves. In fact, if you meet someone at a party in Washington, New York, San Francisco, one of the first questions are gonna be, “Who do you work for?” or, “What is your job?” We wanna know that about each other. “Well, I don’t really have one,” means I’m gonna go talk to somebody else. Many, many people are not going to have jobs. How are we going to substitute both the sense of self-worth from producing something, in the communities of meaning that until now we have created around jobs, around the situation where people, they go to work every morning, they know other people. I’m not saying jobs are necessarily great. I happen to have a great job, but a lot of people hate their jobs. It would be fine with them not to have to work. The question is, what is the substitute, both in terms of a source of income and a source of meaning.
33:28 Trevor Burrus: And also, as you point out, sometimes, as you said, the future is unpredictable. It’s hard to make predictions, especially about the future. And ATMs were predicted to put a bunch of people out of work, but they didn’t actually do that.
33:42 Michael C. Munger: And ATMs may be an isolated example, or it may be something that’s pretty common. So the ATM example, for the listeners that don’t know it, what ATM seemed to do would be a substitute for branches. But what it meant was, that having an ATM, you could then focus on the other services that consumers actually wanted. You could have, instead of people standing in line just to cash a check or take out money, all of those people can now use the ATM, which means that you can have a branch with just one or two people, and the other services that you get at a bank is the things that you now use the bricks and mortar bank for. So the result was there was almost a doubling of the number of local branches, so the employment goes up. But it’s not necessarily true that’s going to happen in everything. So the city of Seattle not long ago raised its minimum wage, and at first it didn’t cause much problems, but then Seattle decided to raise its minimum wage again to over $13. Well, it used to be that if you go into a fast food restaurant, you look up at a board, you find some words for the foods that you want to buy. You say those words, the person behind the counter looks on their cash register for the corresponding words and presses that button.
35:01 Michael C. Munger: All you have to do is turn the cash register around. At $13 an hour, if I turn that cash register around, now the customer looks at the cash register and finds the words and presses the button himself or herself. Hundreds and hundreds of people are losing their jobs in fast food restaurants. It’s unlikely that those kiosks are going to result in an increase in employment somewhere else in the fast food industry or in the Hertz rental car business. So in all sorts of things, as Mark Andresen said, “Software eats the world,” means that service jobs ranging from working at McDonalds to being an accountant, or being a physician, where an expert system can be a pretty good substitute. A physician’s assistant with an expert system is probably better at diagnosing a lot of just first aid sort of diseases than a doctor is. Well, the result is that many, many people are gonna lose their jobs. And in some cases, those jobs are just gonna be gone.
36:02 Trevor Burrus: But that’s like buggy whips, right? The general free market answer is to say, “Create a disruption, that’s what happens,” correct? Or should we be more concerned?
36:12 Michael C. Munger: That’s the question, is this time different? And the possibility is that this time is different. The unemployment rate in the United States is not very high. Most people are employed. We seem to be doing pretty well. But it is true that in many industries that have provided large amounts of employment for relatively less well-off people, maybe it’s fast food restaurants, maybe it’s manufacturing, those sorts of jobs are disappearing. And we also have a problem with jobs that come with benefits, because healthcare is so expensive. So we’re seeing a transformation in the nature of what jobs are. I think a lot of people are going to say, “I don’t feel very secure in the sort of job that I can find, even though it’s true that I’m employed. I don’t have the sense that I’m going to work here for 20 years and then retire.”
37:07 Aaron Powell: This all seems, also seems potentially highly disruptive to our system of governance. Our system of governance right now and it’s funding mechanisms depend on people earning sizable paychecks that the government can take a large portion of and then give back to them in various ways. And so does this as we shift to a sharing economy with much lower prices and so lower income needed, do we risk running into effectively a government debt spiral where the tax base shrinks, and so we have to increase taxes on the people who do want to work. And in addition, we have to, if we have to institute like a basic income for the people who can’t find work, then we have to further increase taxes, and so that the kind of modern nation state just can’t function.
37:57 Trevor Burrus: I can see your just smiling. You’re hoping. I can tell… The look in your eyes.
38:03 Aaron Powell: I’m hopeful it could be not a smooth process.
38:07 Michael C. Munger: Well, States tend not like to die, and they have people that are at least as good at predicting as I am. And so they’re likely to try to take steps to prevent that from happening, even if we’re moving in that direction. So suppose that I was right about your hippie friends and there’s a tool library. And so at the tool library, it’s not even that there’s this rental thing that’s hard, ‘cause Amazon, people try to collect local and state taxes from Amazon. You can probably do it. If we have a tool library, it will be just check out the like the tool and share it. There’s a transaction, but it’s just the reciprocal right to use this. There’s no money exchange at all. There’s no tax revenue that comes about as a result. I think it’s going to be very difficult for a lot of governments to manage this. Airbnb is having a big consequence for a lot of governments, to the extent that it’s hard for them to collect taxes. So the sharing economy, generally, it’s gonna be hard to collect taxes, if, as you said, if we combine this with people no longer have full-time jobs. So the income taxes, and I’ve been talking about sales tax until now, if they also lose out on the income tax, what’s gonna be the alternative source of revenue?
39:24 Michael C. Munger: The third thing you said is, suppose that, as a result, we have to have some substitute form of social assistance. Maybe it’s basic income. Maybe it’s something else. Maybe it’s single payer healthcare, because the people no longer have jobs. Where are they going to get healthcare? Those things are all very expensive, and you can’t rent those things. We actually have to have some source of tax revenue to finance them. The reason that I called this book “Tomorrow 3.0” is that the Neolithic Revolution was really disruptive. The industrial revolution. Karl Marx in 1848, when he wrote with Engels, “The Communist Manifesto”, the reason that they wrote about it in 1848 was that the large cities of Europe were literally on fire. That could happen to our cities again, when people just lose any sense of hope, any sense of connection between, “I’ve worked hard. I played by the rules. I don’t see a way that I’m going to be able to raise my children in a better world”.
40:21 Trevor Burrus: Should we be concerned? A lot of people criticize Uber and other sharing economy, Airbnb to some extent, but Uber particular for worker protections, like all these thing that we’re talking about. They don’t have the ability unionize, they don’t have the ability to be protected under certain laws as employees. Do you see that as a concern for this kind of gig economy world?
40:43 Michael C. Munger: Well, let’s break your query into two. One is, are these legitimate concerns in the sense that workers are being treated badly. And it may be that they are, but it’s because the economic logic of this is just irresistible. Airbnb, I think, is actually legitimately a problem because people can buy up a bunch of apartment blocks and rent them out by the night instead of by the month. And the result is Reykjavik, Paris, a few other cities have found that there’s been a big decline in their housing stock. Now, what they might have done, they’re available housing stock for lower income people. What they might have done is say, “You know, I think that means there’s a problem with our restrictions on building new housing stock.” But instead, they just blame Airbnb, and they try to regulate… It’s easy to model those two things together. I think there are some legitimate concerns, but Uber is the symptom. It’s not the cause. Uber is just a way of giving people a chance to be able to work on their own hours.
41:48 Michael C. Munger: The taxi, the way that we thought about the taxi, that’s doomed. That’s not gonna happen. The advantage of Uber is that I can charge the marginal cost. I already have the car. I’ve already paid a lot of the fixed cost, I can just charge the marginal cost, whereas a taxi, I have to pay the full average cost. I’ve gotta pay the full amount of that taxi because it doesn’t have any other alternative use. So the logic of peer to peer transactions, I think, is irresistible. The attempt to regulate things like Uber is also irresistible from a public choice perspective, and you may have heard some of the regulations are pretty amazing. There are several places. There’s been a suggestion that Uber needs to have a 30-minute time out, meaning that between the time that I call for an Uber and I can be picked up, I have to wait at least 30 minutes. And the argument for that was that taxi suck so much that the only way they can compete with Uber is to impose that sort of 30-minute dead weight loss. Well, that’s crazy. The answer would be for taxis to suck less, not to force Uber to suck more.
42:55 Trevor Burrus: In general, we have Uber… I always say about Uber that Cato Institute could have written papers since 1977 our founding about taxicab cartels and we would have done less to expose them than Uber did in six months, ‘cause it showed people this alternate possibility. And, of course, taxis were regulated by the state and licensed by the state, and the supply was kept down and all that stuff. But it seems that the state does a lot of things that can be innovated around in this new world, some of which are meant to protect transaction costs or mitigate such as, licensing doctors or licensing lawyers. That’s about trust, to some degree. Do we need that in the new world? How much can we undercut existing state programs, licensing, things like this, via this magic device in our pocket?
43:51 Michael C. Munger: It really is interesting that the reason that we have licensing is to overcome the problem of asymmetric information. I may not be able to judge quality. Now, in some cases, if I go to a movie and I say, “This stinks,” I can post my review on Rotten Tomatoes, other people can look at it. The aggregate consequences of that is, yeah, a few people saw a bad movie, but the result is there’s no real catastrophic harm, and I can probably judge whether something’s good or bad. A doctor’s care, it’s hard to tell. Suppose I’m really sick and I end up dying. Was it the doctor’s fault? Or did I go to a really extra good doctor because I was very sick? And since I was very sick, it turns out that I still died. Only an expert could answer that question. So that’s the answer that we have for a lot of the licensing questions you’re talking about. I think something that people miss is that most of the board certification that happens for doctors, for example, is private, not public. So yes, I have to… If I apply for a doctor’s license, I have to show that I went to medical school. Maybe I have to pass some kind of test. But the board certification, those are actually private nonprofit organizations. So what we could see is a proliferation of certification boards that are not like Underwriters Laboratory.
45:17 Michael C. Munger: Underwriters Laboratory, or UL, would certify that the circuitry in your toaster was not going to catch on fire. It was not a government agency. It was a private nonprofit organization. Consumer Reports. So I think Consumer Reports sells information about quality, and they manage to do it in a way that insulates themselves from the profit motive. So a lot of nonprofit organizations, I think, are going to be able to provide this sort of certification better than the state can. The only question is whether the state’s going to allow it. And that’s the interesting part of your question, as it was from Trevor’s question before. There’s two things going on. One is, is there really a fundamental problem? Is there some kind of market failure that regulation, if it were well conceived, might solve? And the other is, regulation is often designed to protect the interests of producers, not consumers. And producers need help because they’re getting hammered. So if I go to the politician, they can legitimately say, “You know, we’re really losing a lot of jobs in your district. What are you gonna do?” It’s hard for a politician to tell the difference.
46:26 Aaron Powell: We began this conversation fairly upbeat, gee whiz, in describing stuff that sounded pretty cool and utopian. But I’ve noticed that over the course of the conversation, things have gotten a bit more grim in our predictions of how this might play out, in our predictions of how the state might respond to the problems that might come of it. So are you optimistic?
46:50 Michael C. Munger: I’m always optimistic, but that’s because as an economist, I am so used to being wrong about predictions. It’s not very satisfying. Suppose I talk to someone who used to work in a hosiery factory here in North Carolina, used to make socks or cotton clothing in the textile mill. And they say, “This county used to have 10,000 manufacturing jobs. Now it has 1,500 manufacturing jobs.” If I tell that person, “You know, things are gonna get better, because they always have.” And he says, “Well, what’s gonna happen?” “I don’t know. That’s just the way capitalism works.” Well, I sound like some kind of crazy mystic. How do you tell people who are 55-years-old, have a high school education, and 20 years experience working on a production line, what’s going to happen to help them? For that matter, what’s gonna happen that’s even gonna help their children? Is the only answer that, everybody has to go to college and learn Python and HTML? That’s not a very satisfactory answer.
47:53 Michael C. Munger: So specifically, what’s going to happen? I don’t know. Nonetheless, until now, it has always been true that if there is some benefit to specialization and exchange. And if people are free to design institutions that help them capture those benefits, those mutual benefits, it’s always happened. There are so many ways for us to be able to serve each other and make both people better off. Once you realize that exchange is not zero sum, it doesn’t mean that one person’s exploiting and the other person is being exploited. If both of us can be better off, the policy implication is always try to remove the restrictions that make it possible for us to discover, to innovate new ways to serve one another. The problem is, as a policy prescription for someone who is unemployed and has no healthcare, that’s not very helpful.
48:50 Trevor Burrus: Yeah. The interesting thing is, is the… The answer of optimism, you are optimistic, but we also don’t know. That’s the thing that fascinates me, is that, you point out, I think, at the end of the book that the 50 years in the future, I think the way you wrote it is. I imagine that’s something very like… Or there are actually people just 50 years from now, when they learn that we had expensive cars that mostly sit still in garages and parking lots, and that we had houses and closets full of things we rarely use. They will also find it hard to imagine that, in the United States at least, only the people who had jobs could obtain healthcare, but that jobs themselves are hard to obtain. They will compare the fact that many people in the 20th century worked their entire careers for one company to the practice of villeinage in medieval England, where serfs were tied to the land and could not move around without their master’s permission. That’s a pretty different world. And it seems like it might happen pretty quick, but we’re not exactly sure what the contours of it are.
49:44 Michael C. Munger: That’s right, but we can see some of them. So if I may be optimistic for a moment, there is, and I’d say this in the book also, we can see some of the contours of what might be called the gig economy, already. But it means that you have to have some specialized salable skill, but the forum where we see it already is Hollywood. There are not big production companies where you employ all of the people that work on a production. It would be too expensive to have them on retainer. So instead, there’s about 170 different disciplines in making a movie. And if you sit at the end of a movie hoping that there will be more previews, you’ll see these. So the best boy, the key grip, the gaffer… I don’t know what any of those things are, but there’s 170 or so different things. If I wanna make a movie, I wouldn’t hire a movie company. What I would do is go on LinkedIn and hire each of those 170 different disciplines. The result is that everybody would show up on the first day of the gig, the first day of the new movie, and they would all know what to do because those 170 different disciplines articulate well.
50:47 Michael C. Munger: They work together like members of a baseball team, all of whom play different positions. They know what to do. If you have people that play the different positions on the first day, you can actually play pretty well. They work together for six months, at the end of the movie shoot, they all say, “Hey, that was great,” and they all go back to their homes, then they put up their new experience and their new evaluations on LinkedIn. And maybe they don’t work for six months or nine months, but then another gig shows up. Those are pretty good jobs, if you have enough specialized skill that you can make that sort of living. John Maynard Keynes famously said a two-day work week would probably be enough if prices continue to fall. And Maynard Keynes was right about that. We should give him credit. The price of cars adjusted by quality, the price of computers, the fact that we can use Facebook, Twitter, LinkedIn, all of these things basically for free. Prices are falling like crazy. A two-day work week might be enough if you have some skill that will allow you to develop your own brand on LinkedIn and be able to work a gig every other year. I think that is an optimistic view, and it means that people are freed up from this kind of villeinage. That’s almost like debt peonage. “I have to stay in this job or I’ll lose my healthcare.”
52:07 Trevor Burrus: Thanks for listening. Free Thoughts is produced by Test Terrible. If you enjoy Free Thoughts, please rate and review us on iTunes. To learn more, visit us on the web at www.libertarianism.org.