Building Tomorrow explores the ways technology, innovation, and entrepreneurship are creating a freer, wealthier, and more peaceful world.

Jun 6, 2018

In the Economy of the Future, You Won’t Own Your Kitchen

A Review of Mike Munger's "Tomorrow 3.0"

By reducing transaction costs, the economy of the future will decentralize workplaces and transform ownership of consumer goods.

Economist Michael Munger’s new book, Tomorrow 3.0: Transaction Costs and the Sharing Economy, explains how the growing ability for middlemen to sell reductions in transaction costs is transforming the way that we consume, live, and work. According to Munger, we can reduce transaction costs by overcoming 3 types of obstacles: triangulation, transfer, and trust. People who might like to “share” stuff (i.e. rent it) need to find each other, communicate, and make the money and stuff change hands — feeling comfortable and safe all the while.

The entities best able to clear these hurdles are essentially software shops, not traditional firms with fleets of traditional employees. Rather than manufacturing things, these companies exist to make connections between people using an automated and algorithmically-enabled matching process.  When these middlemen succeed, already-made things accrue genuine excess capacity that didn’t previously exist in the absence of a marketplace for these items.

This new ability to rent reduces the liabilities of under-utilization (property no longer has to be stored, maintained, etc). Some liabilities even turn into outright assets, like an often-vacant vacation home that now more than pays for itself on Airbnb. One by one, these software-facilitated transactions move things to places where they are used more efficiently, increasing the amount of goods available to consumers while the middlemen pocket their well-earned share of the proceeds.

This isn’t a futuristic daydream. Munger notes, “the future is already here — it’s just not very evenly distributed.” In fact, I devoured this book while sitting in a SoHo, Manhattan coworking space I’d accessed using an office-sharing service. Basically, you pay a monthly fee to the coworking space platform in exchange for a certain number of hours of office space. Coworking spaces that have excess capacity list themselves on the platform, making a number of seats available at any given time. Subscribers view available seats and spaces in real time on an app and verified users who’ve sent in pics of a photo ID can unlock spaces after-hours via the app.

Similar to Uber and Airbnb, platforms for coworking office space reduce transaction costs by connecting people who’d rather not work in Starbucks with spaces that office owners would rather not sit empty. So, the deals happen. For just a few bucks, I got my butt into a seat. And whoever pays for that incredibly valuable SoHo space makes their business a little more successful. Coworking spaces by their nature draw various freelance clients whose work (and subscription dollars) are transient. Maybe in some cases the extra traffic from the coworking space platform middleman makes the difference between a coworking space existing or going out of business, the way Airbnb income sometimes helps struggling homeowners avoid foreclosure.

As the primary caregiver to two little kids, it’s not hard for me to see how Tomorrow 3.0 could improve my life in a big way. Back of the envelope calculations suggest that we’re spending approximately $0.50 per cubic foot per month to rent apartment space in the ultra-gentrified hipster mecca of Williamsburg, Brooklyn (of course, most of these cubic feet must sit empty for the apartment to remain habitable).

When my first daughter was born two years ago, I bought a standard-issue baby swing from Amazon for about $150. We only used it for a few months, and I was shocked to realize, in writing this, that the storage space that swing has occupied to date cost about $126, almost as much as the swing itself!

When I took out the increasingly-expensive swing for the second baby, its first inhabitant (now a toddler) pulled on it and it broke in such a way that even duct tape couldn’t help. We tossed the broken swing into the trash (almost $300 of sunk cost) and ordered a new one. Again, it was used for only a few weeks, but I haven’t found the time or energy to cram it into the closet again, so it’s devolved into an unsatisfactory coat rack.

In Tomorrow 3.0, instead of buying a flimsy baby swing on Amazon Prime, you would use Amazon’s sharing economy service (Amazon Prime Share?) or some other app to rent a really durable one. It shows up in an Uber, or by drone, in hours or minutes. When you’re done with it, an Uber or a drone takes it to the next neighbor with a baby. No space-wasting closet full of expensive dust catchers. What’s not to love?

After all, according to Munger, we value material possessions for the “streams of services” they provide, not because owning them bears intrinsic value. At first blush, it seems like you bought a baby swing, or a waffle iron, or a bike. But what you really wanted was a few baby-free minutes to take a shower, some breakfast for your family on Sunday morning, or a way to commute according to your own schedule. In other words, according to Munger, there is no desire for ownership per se, only desires that are sometimes fulfilled (however inefficiently) by ownership. Even desires for status signaling (“showing off”) can theoretically be fulfilled by renting instead of owning.

Humans may tend to become more acquisitive under certain sociocultural conditions (i.e. in post-agricultural societies), but Munger contends it’s a malleable trait, and I’m inclined to agree. Already, certain shifts in consumption are afoot: Instagram-style minimalism, Kon Mari, spending on “experiences not things.”

This doesn’t mean change comes easily or immediately. As usual, there will probably be intergenerational differences. Grandma today has an attic full of records. Maybe grandma tomorrow has an excessively large closet full of ratty old clothing. Her granddaughters just don’t get why you’d want to indefinitely warehouse a heap of the same boring clothes, especially since you have to launder those yourself.

Homes are meant to contain both stuff and people. In the past, homes contained more people per square foot and fewer possessions. What possessions people did have tended to be highly functional (basic kitchen equipment, basic clothing, basic linens). Today, homes contain relatively few people per square foot but lots of stuff — electronics and other media, kitchen “unitaskers” and appliances, fast fashion, and so on. We might be at, or just past, peak possession.

In Tomorrow 3.0, homes will contain vastly less stuff. By definition, they continue to contain some people. As a guide of things to come, do we have any current examples of places that contain relatively little (yet durable) stuff as well as people? We do: hospitals and hotels. Many consider hospitals and hotels to be amongst the most sterile, uncomfortable places imaginable. Perhaps this, like the tendency to accumulate even useless personal possessions, is socioculturally malleable. Maybe the hollowing out of homes will actually make them more beautiful places. After all, the only possessions that provide truly continuous streams of services by their mere presence are the aesthetic ones (e.g. speakers to play music, paintings, plants). And hotel and hospital occupants are unable to choose their own decor, whereas home renters and owners easily can.

The needs that fueled expanding home size will persist in Tomorrow 3.0, but they may be satisfied differently. If transaction costs drop low enough, renting a space for a party could become a frequent occurrence instead of an event limited to special occasions. In cities like New York, kitchens are often so small as to be effectively useless. Maybe people would do without in their main home but then rent full kitchens to cook for date night or over the holidays. (But beware the Thanksgiving surge pricing!) Theoretically, people could have the right space most or all of the time instead of a space that is too large most of the time but still occasionally too small or vice versa.

As Munger repeatedly emphasizes, a capitalist economy serves consumers, not workers. Of course, many of us both consume and work. Does Tomorrow 3.0 give with one hand while it takes away with the other? Who cares that you can get any item you want delivered to you in an hour for low prices if you have no money because all the jobs you were qualified to hold have been automated and software-ified away?

We’ve already seen plenty of hand-wringing over what the “gig economy” is doing to labor markets. Lawsuits that compell sharing economy companies to treat their contractors as full-fledged employees will only forestall the inevitable transition towards a Tomorrow 3.0 economy. When some critical mass of citizens become technologically employed as matching software “eats the world,” a universal basic income (UBI) may become politically expedient, if not completely ethically convincing, in ameliorating the matter.

Imagine: homes become beautiful sites for human activity, but most of the tools and objects you need for those activities arrive via drone; in addition, you don’t work (at least, not full-time and not on-site anywhere). Will Tomorrow 3.0 mean the death of the city? Cities like New York and San Francisco have already become expensive bastions of knowledge workers. Employees in other industries (especially service industries) find it increasingly difficult to live anywhere near their jobs in these cities.

But those service sector jobs (and lower-level knowledge jobs) are going to disappear fairly soon. Why not go to the woods to live cheaply on UBI with your family or friends from the internet? A drone still arrives with anything you could ever want on the same day, even if you live in the boonies. Plus, autonomous cars and home-sharing will make recreational travel quite cheap.

In Tomorrow 3.0, living in the city might become anachronistic, like living on a farm. You can do it, but why would you want to? Cities are good for incubating ideas, but so is the internet, and cities also often incubate antibiotic-resistant disease, mental illness, and crime. Staying in what’s left of the city, and especially warehousing possessions there, will become a marker of high social class (then again, it sort of already is). Social technologies will crop up to indicate which objects are owned instead of rented — think obscure defacement of designer handbags to prove they’re not just on loan.

It does seem likely to be that Tomorrow 3.0 is more or less right around the corner for most of us. There will be less and less work, but more and more accessibility to stuff, funded increasingly by self-employment and government assistance of various kinds. Admittedly, Tomorrow 3.0 is a work of economics, not futurism. Munger’s thesis isn’t tied to any particular type of object becoming shared in the near future. Still, anything even semi-durable seems like fair game. As transaction and transportation costs decrease, you might even be able to order consumables like groceries and toiletries item-by-item for on-demand delivery; there will be no need for a pantry at all.

More people getting to use more of the stuff they want more of the time increases human happiness almost by definition. But the relationship between material possessions and human happiness is not a straightforward one. Such a rentable bounty will not arrive in a vacuum. The same changes that drive Tomorrow 3.0’s bottom-up redistribution of excess capacity will also drive technological employment that will disrupt more than just people’s incomes. For better or for worse, paid work is closely linked with self-conception for many Americans today. And I’m certainly not the first commentator to notice that meaning in life won’t necessarily arrive along with the UBI.

To the extent that UBI recipients feel freed to engage in caregiving, intellectual, or artistic endeavors, their welfare ought to be enhanced. But those who see it as an unearned “handout” will be harmed. It’s not an analytic truth that unemployed people are depressed and worthless, but we head to Tomorrow 3.0 with the cultural beliefs we have, not the cultural beliefs we want.

It will take some time to roll back the Protestant work ethic to match the emerging realities of a post-full-employment economy. New norms, institutions, and life scripts will be needed for people to guide themselves into meaningful non-work activity instead of into the NEET abyss. The provision of a UBI is perhaps a necessary condition for adjustment to Tomorrow 3.0, but it is by no means a sufficient one.

I’m not completely sold on the idea that Tomorrow 3.0 will be exactly like the agricultural and industrial revolutions in its inevitability and irreversibility. What makes Uber and Airbnb so novel is their peer-to-peer nature. Small companies have gotten in on some of the action, like the coworking space service I use, but the useful lifespan of most consumer goods is short. If people lose their incomes relatively quickly and they have nothing relatively valuable to rent either, the peer-to-peer character of the Tomorrow 3.0 shift could be diluted. Big companies will be able to buy new, more durable goods and rent them out on-demand via drone, which would be more like a high-tech furniture rental store than a paradigm shift.

Weirdly, the quicker UBI is implemented, the less likely it is that Tomorrow 3.0 will become fully-realized on the consumer side. That’s because innovations tend to trickle down. On-demand, sharing economizied consumer goods will seem very much like a luxury until they become cheap enough that most households can take advantage of them. If the UBI happens before the generalized sharing economy trickles down, it will probably not be set at a level that allows technologically unemployed UBI recipients to afford sharing economy services. As more people join the ranks of the technologically unemployed, network effects will falter. The new “welfare queens” could easily become UBI recipients who want to Uber around town instead of walking and so on.

Still, in addition to its snappy readability and appeal for both professional and lay audiences, Tomorrow 3.0 is spot-on in the way that it treats expanding consumer access as the flip side of “software eating the world.” These are often discussed separately (the “Uber of x,” “robots stealing our jobs,” etc) but rarely in tandem. Munger drives home the point that economic (and, subsequently, sociocultural) change does not usually create pure winners and losers. Instead, most of us face mixed prospects in Tomorrow 3.0. Efforts to stifle the permissionless innovation of producers will also stifle the permissionless choices of consumers and vice versa. Even if Tomorrow 3.0 isn’t literally inevitable, once the revolution starts coming in waves it will seem like it was.