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Cambridge Studies in Economics, Choice, and Society
Tomorrow 3.0: Transaction Costs and the Sharing Economy
With the growing popularity of apps such as Uber and Airbnb, there has been a keen interest in the rise of the sharing economy. Michael C. Munger brings these new trends in the economy down to earth by focusing on their relation to the fundamental economic concept of transaction costs. In doing so Munger brings a fresh perspective on the 'sharing economy' in clear and engaging writing that is accessible to both general and specialist readers. He shows how, for the first time, entrepreneurs can sell reductions in transaction costs, rather than reductions in the costs of the products themselves. He predicts that smartphones will be used to commodify excess capacity, and reaches the controversial conclusion that a basic income will be required as a consequence of this new 'transaction costs revolution'.
188 pages, Paperback
First published January 1, 2018
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Displaying 1 - 12 of 12 reviews
November 4, 2019
The Tomorrow 3.0 economy will foster permissionless innovation to make more efficient use of excess capacity. Munger dates this transformation, approximately, to 1997 with eBay: the first time we began to specialize in selling not more stuff but reductions in transaction costs for access to existing stuff. There's good economic history throughout the book, including Ronald Coase (the father of transaction costs, to Marx, Smith, and other innovations). Uber and Airbandb don't sell taxi and hotel services, they sell reductions in transaction costs. And there are three types:
1) Triangulation--matching buyer with seller, agreeing terms
2) Transfer--of product/service and payment terms
3) Trust--Honesty, performance (ratings and brands fulfill this role, among other traits).
To the consumer, all costs are transaction costs. So a reduction in the above 3 costs by 10% is the same as a reduction in price of 10%. Cars and houses are the obvious areas where there is excess capacity, but how about clothing, appliances. And what will 3-D printing allow in the future? Munger believes Uber is not a threat so much to taxis as it is to Amazon: the ability to reduce transaction costs of renting vs. buying. Provocative thought. Throughout the history, the extent of specialization has been limited by the size of the cooperation horizon, which is why a small town might have a band while a major city has a full symphony. Cities expand the horizon. So does wireless technology, the smartphone now, which more people in the world have than flush toilets. Will regulations slow some of this innovation down? Probably. Look at Uber's legal issues, and trying to ride share airplane regulations. But they can't stop it, ultimately. I loved the history of the 1896 law passed by the Pennsylvania General Assembly--a "red flag" law, found in US and England. Any self-propelled vehicle be proceeded by a man on foot walking 50 to 100 feet in advance, waving a red flag in warning. Of course, it was done to protect the people. Ha! To save all the jobs related to horses.
Finally, a discussion of Universal Basic Income. As Munger says, capitalism doesn't produce jobs; it produces consumer surplus. He thinks UBI is an imperfect and partial answer, possibly using the model of the Alaska Permanent Fund, whereby 25% of natural resource income is put into a fund, and the income earned is divided up by the residents of Alaska. He thinks this is better than minimum wage laws, mass transit, and approximately 126 other poverty programs designed to help the poor, which we spend roughly $14,000 per poor person on. He cites Milton Friedman and Charles Murray as two proponents of this type of program, though Murray does call for a Constitutional amendment.
Another provocative idea here is the difference between a job and an "identity." If you're known as the Bourbon pickle guy, selling your wares that are delivered by Uber, maybe that's how we'll handle earning a living in Tomorrow 3.0? I don't know. I do know that we humans are incredibly adaptable to any environment innovation thrusts upon us. A very worthwhile read.
1) Triangulation--matching buyer with seller, agreeing terms
2) Transfer--of product/service and payment terms
3) Trust--Honesty, performance (ratings and brands fulfill this role, among other traits).
To the consumer, all costs are transaction costs. So a reduction in the above 3 costs by 10% is the same as a reduction in price of 10%. Cars and houses are the obvious areas where there is excess capacity, but how about clothing, appliances. And what will 3-D printing allow in the future? Munger believes Uber is not a threat so much to taxis as it is to Amazon: the ability to reduce transaction costs of renting vs. buying. Provocative thought. Throughout the history, the extent of specialization has been limited by the size of the cooperation horizon, which is why a small town might have a band while a major city has a full symphony. Cities expand the horizon. So does wireless technology, the smartphone now, which more people in the world have than flush toilets. Will regulations slow some of this innovation down? Probably. Look at Uber's legal issues, and trying to ride share airplane regulations. But they can't stop it, ultimately. I loved the history of the 1896 law passed by the Pennsylvania General Assembly--a "red flag" law, found in US and England. Any self-propelled vehicle be proceeded by a man on foot walking 50 to 100 feet in advance, waving a red flag in warning. Of course, it was done to protect the people. Ha! To save all the jobs related to horses.
Finally, a discussion of Universal Basic Income. As Munger says, capitalism doesn't produce jobs; it produces consumer surplus. He thinks UBI is an imperfect and partial answer, possibly using the model of the Alaska Permanent Fund, whereby 25% of natural resource income is put into a fund, and the income earned is divided up by the residents of Alaska. He thinks this is better than minimum wage laws, mass transit, and approximately 126 other poverty programs designed to help the poor, which we spend roughly $14,000 per poor person on. He cites Milton Friedman and Charles Murray as two proponents of this type of program, though Murray does call for a Constitutional amendment.
Another provocative idea here is the difference between a job and an "identity." If you're known as the Bourbon pickle guy, selling your wares that are delivered by Uber, maybe that's how we'll handle earning a living in Tomorrow 3.0? I don't know. I do know that we humans are incredibly adaptable to any environment innovation thrusts upon us. A very worthwhile read.
May 5, 2018
What kind of a society are we likely to live in, thanks to the ineluctable march of progress? Munger's book explores the good and bad aspects of social and economic "disruption." He sides with the optimists but acknowledges the likelihood of massive negative side effects that need to be remedied by something like a basic income guarantee (aka. universal basic income).
His main thesis is both broad and surprisingly narrow. It is broad because it sees the current transformations as on par with the Neolithic and Industrial revolutions. But it is narrow, perhaps too narrow, because it explains this transformation through the economic concept of "transactions costs." Munger argues that people will find it increasingly affordable to rent rather than buy stuff, so people will want to own less stuff. This story fits the cases of Uber and AirBnB well. They are cases of "excess capacity" being monetized thanks to lowered transactions costs.
The book does a fine job explaining the beneficial effects of permissionless innovation. As the price of mobile phones and software platforms goes down close to zero, even poor people will find it easier to satisfy their desires and even to become entrepreneurs or part-time rentiers. But the corollary trend is the reduced need for routine labour, which pushes down real wages. This can potentially lead to social decay, inequality and unemployment.
Munger's book shares the utopian optimism of the "end of work" crowd from Keynes to Rifkin, but it differs from them in offering a more grounded perspective based on the economic insights of e.g. Chicago, Austrian and New Institutionalist schools of thought.
While nobody knows what the future will look like, and while the predictions contained in this book are likely to be off, the central story is impossible to ignore. As the rift between the increasingly productive sectors of the economy and the increasingly marginalized continues to grow, new solutions and new visions are called for.
Munger's book offers a good primer on what can be done to offer an alternative to the resurgence of Ludditism and atavism.
His main thesis is both broad and surprisingly narrow. It is broad because it sees the current transformations as on par with the Neolithic and Industrial revolutions. But it is narrow, perhaps too narrow, because it explains this transformation through the economic concept of "transactions costs." Munger argues that people will find it increasingly affordable to rent rather than buy stuff, so people will want to own less stuff. This story fits the cases of Uber and AirBnB well. They are cases of "excess capacity" being monetized thanks to lowered transactions costs.
The book does a fine job explaining the beneficial effects of permissionless innovation. As the price of mobile phones and software platforms goes down close to zero, even poor people will find it easier to satisfy their desires and even to become entrepreneurs or part-time rentiers. But the corollary trend is the reduced need for routine labour, which pushes down real wages. This can potentially lead to social decay, inequality and unemployment.
Munger's book shares the utopian optimism of the "end of work" crowd from Keynes to Rifkin, but it differs from them in offering a more grounded perspective based on the economic insights of e.g. Chicago, Austrian and New Institutionalist schools of thought.
While nobody knows what the future will look like, and while the predictions contained in this book are likely to be off, the central story is impossible to ignore. As the rift between the increasingly productive sectors of the economy and the increasingly marginalized continues to grow, new solutions and new visions are called for.
Munger's book offers a good primer on what can be done to offer an alternative to the resurgence of Ludditism and atavism.
June 10, 2019
Very well-researched book on how much of the new economy will be aimed at selling reductions in transaction costs (i.e. the money, time, and inconvenience required to transact or use something as well as problems involved in trusting others). Through automation of transactions, this will be facilitated by (i) software platforms, (ii) smart, portable hardware devices (the smartphone in your pocket), and (iii) wireless Internet allowing for universal and continuous communication and (permissionless) innovation. As a result, while the 'old' economy was mainly about producing new stuff, the new economy will increasingly sell cheaper access to existing stuff.
Prime examples today are Uber and Airbnb. For instance, the author posits that Uber is not a transportation company, but a software company selling reductions in transaction costs.
These developments can heavily impact the economy as consumers will own less and rent more, prices might plummet, and also increases the required quality and durability of goods. Essentially, the author argues, people don't want stuff, but want the stream of services provided by stuff, and if software can reduce transaction costs of access to that stuff significantly, this will cause people to not necessarily wanting to own stuff anymore but instead rent or otherwise buy access to that stuff.
Prime examples today are Uber and Airbnb. For instance, the author posits that Uber is not a transportation company, but a software company selling reductions in transaction costs.
These developments can heavily impact the economy as consumers will own less and rent more, prices might plummet, and also increases the required quality and durability of goods. Essentially, the author argues, people don't want stuff, but want the stream of services provided by stuff, and if software can reduce transaction costs of access to that stuff significantly, this will cause people to not necessarily wanting to own stuff anymore but instead rent or otherwise buy access to that stuff.
February 19, 2023
The book provides excellent research on the evolution of economic and societal models, described in a simple way with viewpoints from classical economists like John Keynes and Karl Marx, to contemporary thinkers such as Jared Diamond, Yuval Noah Harari, Marc Andreessen, and many lesser-known but still great theoreticians and practitioners like William Harold Hutt. The author delves deep into some topics while leaving others for the reader to contemplate.
Munger presents simple yet powerful models for thinking about the labor market, equality, the role of the entrepreneur, consumer behavior, cooperation, the evolution of society and its economic system, capitalism, and the trade-offs it entails. The book doesn't have all the answers but instead provides food for thought. It empowers readers without overwhelming them with details from all possible economic schools of thought. The book is only 174 pages long but is condensed, and you won't ask for more. Read and think deeply. It pushed me to contemplate the future of a world enriched by AI, even though it was not projected or directly mentioned in the book, making it even more interesting.
As other reviewers have mentioned, this book deserves 5 stars for "shaping" the way you look at the world.
I would definitely continue to discover books in the series:
- TERRY L. ANDERSON and GARY D. LIBECAP Environmental Markets: A Property Rights Approach
- MORRIS B. HOFFMAN The Punisher's Brain: The Evolution of Tudge and Jury
- PETER T. LEESON Anarchy Unbound: Why Self-Governance Works Better Than You Think
- BENJAMIN POWELL Out of Poverty: Sweatshops in the Global Economy
- CASS R. SUNSTEIN The Ethics of Influence: Government in the Age of Behavioral Science
- JARED RUBIN Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not
- JEAN-PHILIPPE PLATTEAU Islam Instrumentalized: Religion and Politics in Historical Perspective
- TAIZU ZHANG The Laws and Economics of Confucianism: Kinship and Property in Preindustrial China and England
- ROGER KOPPL Expert Failure
- CAROLYN M. WARNER, RAMAZAN KILING, CHRISTOPHER W. HALE, and ADAM B. COHEN Generating Generosity in Catholicism and Islam: Beliefs, Institutions, and Public Goods Provision
Thank you, Michael C. Munger, for this great work. It is very much appreciated.
Munger presents simple yet powerful models for thinking about the labor market, equality, the role of the entrepreneur, consumer behavior, cooperation, the evolution of society and its economic system, capitalism, and the trade-offs it entails. The book doesn't have all the answers but instead provides food for thought. It empowers readers without overwhelming them with details from all possible economic schools of thought. The book is only 174 pages long but is condensed, and you won't ask for more. Read and think deeply. It pushed me to contemplate the future of a world enriched by AI, even though it was not projected or directly mentioned in the book, making it even more interesting.
As other reviewers have mentioned, this book deserves 5 stars for "shaping" the way you look at the world.
I would definitely continue to discover books in the series:
- TERRY L. ANDERSON and GARY D. LIBECAP Environmental Markets: A Property Rights Approach
- MORRIS B. HOFFMAN The Punisher's Brain: The Evolution of Tudge and Jury
- PETER T. LEESON Anarchy Unbound: Why Self-Governance Works Better Than You Think
- BENJAMIN POWELL Out of Poverty: Sweatshops in the Global Economy
- CASS R. SUNSTEIN The Ethics of Influence: Government in the Age of Behavioral Science
- JARED RUBIN Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not
- JEAN-PHILIPPE PLATTEAU Islam Instrumentalized: Religion and Politics in Historical Perspective
- TAIZU ZHANG The Laws and Economics of Confucianism: Kinship and Property in Preindustrial China and England
- ROGER KOPPL Expert Failure
- CAROLYN M. WARNER, RAMAZAN KILING, CHRISTOPHER W. HALE, and ADAM B. COHEN Generating Generosity in Catholicism and Islam: Beliefs, Institutions, and Public Goods Provision
Thank you, Michael C. Munger, for this great work. It is very much appreciated.
March 17, 2019
I heard Munger interviewed on EconTalk (podcast with Russ Roberts - http://www.econtalk.org/michael-munge...) and was interested enough in the discussion to read the book. Overall, I think the podcast is better than the book, but the book is not bad.
I think Munger is right in that politicians will delay full transformation of the economy as long as possible. I think he is right that software will replace many jobs - especially white collar jobs. And I think he is right when he speculates that the government will end up with the worst universal basic income plan possible. ;) Oh, I loved his critique of the taxi business. I can think of numerous times where I have horrible taxi service, but I can't think of a single time I had a bad Uber experience.
Some quotes I found interesting:
- "People don't fundamentally want stuff. What they want is the stream of services that stuff provides."
- "But once the selection mechanism - profits must be positive, for the firm to survive -, eliminates all the firms that are losing money, it will look as if firms are seeking profits."
-"People will collect experiences, not belongings, and the idea of ownership will seem quaint and archaic by the end of this century."
-"There are two problems with Uber, or anything "Uber-like". One is fairness, and other is economic disruption."
-"Uber understands that it is not in the transportation business. It is in the business of selling reductions in transactions costs, using a software platform."
-"The sustained increase in the value of manufacturing in the US economy is remarkable." - {my comment} given the loss of jobs in the manufacturing sector. So maybe the increased value isn't real and productivity gains from technology are being measured wrong.
-"Many people who played by the rules and took jobs that required specific training are going to be stuck."
-"Switching from the current system to a basic income system would save money on the spending side, increase the amount received by recipients, and increase the liberty and autonomy of the recipients at the same time. We could do worse. And we almost certainly will."
I think Munger is right in that politicians will delay full transformation of the economy as long as possible. I think he is right that software will replace many jobs - especially white collar jobs. And I think he is right when he speculates that the government will end up with the worst universal basic income plan possible. ;) Oh, I loved his critique of the taxi business. I can think of numerous times where I have horrible taxi service, but I can't think of a single time I had a bad Uber experience.
Some quotes I found interesting:
- "People don't fundamentally want stuff. What they want is the stream of services that stuff provides."
- "But once the selection mechanism - profits must be positive, for the firm to survive -, eliminates all the firms that are losing money, it will look as if firms are seeking profits."
-"People will collect experiences, not belongings, and the idea of ownership will seem quaint and archaic by the end of this century."
-"There are two problems with Uber, or anything "Uber-like". One is fairness, and other is economic disruption."
-"Uber understands that it is not in the transportation business. It is in the business of selling reductions in transactions costs, using a software platform."
-"The sustained increase in the value of manufacturing in the US economy is remarkable." - {my comment} given the loss of jobs in the manufacturing sector. So maybe the increased value isn't real and productivity gains from technology are being measured wrong.
-"Many people who played by the rules and took jobs that required specific training are going to be stuck."
-"Switching from the current system to a basic income system would save money on the spending side, increase the amount received by recipients, and increase the liberty and autonomy of the recipients at the same time. We could do worse. And we almost certainly will."
November 3, 2018
Heard about it a few days ago (on an Econtalk.org podcast), ordered it from Amazon, got it today, and read it today. It's a quick read, and worth the time. If you're interested in what's happening in the economy, and how the nature of work, consumption (use of durable goods in particular), life itself --how all these things are going to change in the future, then get it and read it.
AirBnB and Uber are case studies that we're all familiar with in "the sharing economy." Munger's thesis--and a reasonable one it is--is that they're really just software platforms that solve the problem of transactions costs, making it economically feasible, as consumers. to get what we really want--a place to stay for the night, a ride from here to there--without actually owning the resource needed. And if we do own the apartment or the car, it's a way to lower our effective price of ownership. And it works because the problems of finding a trading partner, a trustworthy one, and transferring the agreed price are all taken care of by the software.
Once Amazon (or Uber) or.... figures out how to deliver, say, a power drill to your doorstep within a short time, why should you pay to own one, given that it's a device you'll maybe use a total of 30 minutes over a lifetime? And have to pay to store in your closet or workroom, along with all those other tools that seemed oh, so indispensable.
I've had conversations along these lines on the question of why each homeowner should own a lawnmower--why not have one for the neighborhood, with small charges for use, one person charged with keeping it running who gets to use it for no charge or some such.... much more efficient for all.
Anyway, food for a lot of thought. Tomorrow is coming our way.
AirBnB and Uber are case studies that we're all familiar with in "the sharing economy." Munger's thesis--and a reasonable one it is--is that they're really just software platforms that solve the problem of transactions costs, making it economically feasible, as consumers. to get what we really want--a place to stay for the night, a ride from here to there--without actually owning the resource needed. And if we do own the apartment or the car, it's a way to lower our effective price of ownership. And it works because the problems of finding a trading partner, a trustworthy one, and transferring the agreed price are all taken care of by the software.
Once Amazon (or Uber) or.... figures out how to deliver, say, a power drill to your doorstep within a short time, why should you pay to own one, given that it's a device you'll maybe use a total of 30 minutes over a lifetime? And have to pay to store in your closet or workroom, along with all those other tools that seemed oh, so indispensable.
I've had conversations along these lines on the question of why each homeowner should own a lawnmower--why not have one for the neighborhood, with small charges for use, one person charged with keeping it running who gets to use it for no charge or some such.... much more efficient for all.
Anyway, food for a lot of thought. Tomorrow is coming our way.
May 19, 2019
Very interesting book on economics and where we are heading. Do you buy or rent? This isn't just about houses and cars. We'll be renting stuff not storing it in our garages or closets as long as the price comes down. Software has been the game changer and reduces costs. Transaction costs are expenses including time, inconvenience, and actual payments required to use the item, and the problems involved in trusting others to deliver on their promises. The book focuses on this concept.
The prediction here is that this economic revolution we're now in will be based on innovations that focus on digital tools that reduce the transaction costs. More stuff will be rented and folks will collect experiences and not stuff. Think AirBnb, Uber and Lyft. They are software companies. Amazon doesn't sell stuff they license software. A technological unemployment is coming. We're in a gig economy. Prices and wages will decrease. Rent the Runway for clothes, and others on the way. My guess is that this will be more likely to progress once the baby boomers are out of the workforce and younger people who grew up with smart phones take over.
I was surprised to find a bunch of typos here and the wording was so small in many places that it was difficult to read. A larger font would be helpful and shouldn't be an issue as the book is only 188 pages. Please get a proofreader.
The prediction here is that this economic revolution we're now in will be based on innovations that focus on digital tools that reduce the transaction costs. More stuff will be rented and folks will collect experiences and not stuff. Think AirBnb, Uber and Lyft. They are software companies. Amazon doesn't sell stuff they license software. A technological unemployment is coming. We're in a gig economy. Prices and wages will decrease. Rent the Runway for clothes, and others on the way. My guess is that this will be more likely to progress once the baby boomers are out of the workforce and younger people who grew up with smart phones take over.
I was surprised to find a bunch of typos here and the wording was so small in many places that it was difficult to read. A larger font would be helpful and shouldn't be an issue as the book is only 188 pages. Please get a proofreader.
December 23, 2018
Mindblowing book on the Third Great Economic Revolution. The author spends much time analyzing the uber business model, which he takes as a proxy for what's to come: an economic where reduction in transaction costs (costs to provide a trusted good or service to someone as seamlessly as possible) is the new prominent business model. In the last chapter, the author discusses the likely social consequences this revolution will have, and advocates for a General Basic Income and the termination of every other social policies for the poor such as minimum wage, subsidies, housing preference. I am quite opposed to that: I believe simply giving money to the poor will make existing products/services more expensive because of the increased disposal incomes that will drive prices up (increasing the playing field), but understands his point of view. It's a short 150 page read, highly recommended.
May 8, 2018
Please note, I only give five star ratings that change the way I think about the world. Obviously, Tomorrow 3.0 does that.
Michael Munger writes about the complex topic of transaction costs with the breeze of a dime novel, yet preserves the richness of the topic. His explaining of the sharing economy goes beyond the attempts of others who posited theories on the "third" revolution in human economic history including Alvin Toffler (The Third Wave) and Joseph Pine (The Experience Economy).
Michael Munger writes about the complex topic of transaction costs with the breeze of a dime novel, yet preserves the richness of the topic. His explaining of the sharing economy goes beyond the attempts of others who posited theories on the "third" revolution in human economic history including Alvin Toffler (The Third Wave) and Joseph Pine (The Experience Economy).
May 17, 2019
Really fascinating discussion - claims a bit overwrought at times, but interesting discussion of how platforms like Uber operate mainly at the margin of reducing transaction costs and that is why the service, conceptually, is so valuable.
August 5, 2019
Pretty good narrative on how new platforms disrupt and create a new lifestyle
December 15, 2020
Eeeh, no me gustó.. creo que debió de ser un articulo largo en vez de un libro corto. Muy repetitivo en su argumento central y poco informativo a mi parecer.
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