Sponsored by Greenhaven Road Capital, finding value off the beaten path.
Michael Munger has a new book out, Tomorrow 3.0 and he’s talking to people like Russ Robert and groups at Duke about the ideas on those pages. In his walk through the economic woods, Munger found a Chesterton Fence and wonders if it’s falling down.
It might be.
We might be transitioning from an age of middlemen to an age of sharing. Like with our study of Pixar, we should keep in mind that middlemen aren’t bad/stupid/unnecessary. They’re a product of the system. They exist because they were an improvement over whatever they superseded. In that same way, the sharing system may supplement the middlemen one.
“What’s being sold is access to excess capacity.” We have a lot of stuff and it’s not often used. “I think 50 years from now people are going to look back and find it remarkable that we spent so much time and effort to ensure that the stuff that we had but were not using could not be used by anyone else.”
We literally lock it up. This may change.
Economics, Munger explains, is the voluntary exchange where providers earn profits and consumers earn a surplus. We choose to buy iPhones and Apple earns money and we listen to podcasts. It’s a win-win. Hampering this system are permissions and transaction costs. In 2017 Munger talked with Roberts about permissions. In 2018 he’s talking about transaction costs, which are “like frictions in a physical system…and prevents many otherwise beneficial voluntary exchanges.”
Munger wants to know if we can “commodify the excess capacity which can then be bought and sold on the market.” We can’t for a toothbrush but we can for a car and “Somewhere between those lies most of the profit opportunity in the new economy.” The best opportunities are “where transaction costs are high but reducible and excess capacity is high.” Think apartments, not apples.
We’ve been working on this system for a while, usually using physical systems. “When I travel for business I make it a point to never buy a car, I always rent one.” Munger uses the ‘platform’ known as ‘airport’ to rent a seat on a plane (rather than buy the plane) and rent a car once he deplanes (again, rather than buy one).
“All over the world stuff is in the wrong place, but it’s never been commodified because we don’t think of this being a commodity, that it can be bought and sold.” If we reduce transaction costs we can get Wendy a Widget from Warren with everyone being better off. “The world is a wealthier place even with the same amount of widgets.”
There are 3 obstacles to this; finding counterparts, paying counterparts, and trusting counterparts. Munger calls them the three Ts; triangulation, transfer, and trust. Middlemen can solve for this, but data can too, and data has a much lower marginal cost. Reviews are “a way of outsourcing trust that’s extremely cheap but that provides assurance in a way we used to have to rely on reputation or brand name.” Crowds are wise when people are independent, non-coercive, and have some expertise.
It’s the information connection revolution.
We used to solve the 3Ts using physical platforms like farmer’s markets or libraries, now we can have digital ones. Ride-sharing works because they come to you, not because you go to them.
“Why does every house in a suburban neighborhood have a crappy lawnmower that’s hard to start and gets used 45 minutes once a week? There’s no reason not to share these things except that sharing is difficult.” Here Munger skipped over a nuance of the issue, but in an hour-long talk, he has to.
Transaction costs are a hurdle for commodified products. “The reason we own things is that we want the stream of services that come from the item.” It’s not that we want to own a drill, but that we want holes in our walls. Sharing works well for services that vary slightly; rides to the airport, holes in walls, apartments to stay in. But some things are more difficult to commodify.
I live in an HOA with a lawn care service. I walk my dog through the neighborhood with an HOA that has lawn car service. I talk to neighbors as I walk my dog through the neighborhood that has law car service. Law care has not yet been commodified. What local companies need is what Airbnb got with better photos; more details and more tiers. It’s not about commodifying once, it’s about commodifying to at least three levels of customer needs; good, better, best. Munger lived this nuance. He stayed in Paris for two weeks in August. A ‘good’ time to be in the country.
Getting there will take some work. Should we have platforms for infidelity? “Ashley Madison sells the reduction in transaction costs of meeting other married people who want to have an affair.” What about taxi licenses? When we remove middleman, Munger wonders, are we taking a full account of the promises that have been made? What about jobs? If we do more with less what does that mean for workers? The last time this happened was the Industrial Revolution. How will society handle that? How will young people? Is it The End of Jobs?
Munger thinks the answer to these questions will emerge as Amazon or Uber takes the lead. “Uber is not a taxi company. Uber is a delivery company, and right now it happens that it mostly delivers human butts.”
And “Uber is set up for delivering rentals. Amazon is set up for delivering ownership products. The way that fight works out is what is going to determine much of the economy in the future.” Though maybe it’s not a fight so much as a land grab. If we think of a barbell, Amazon can dominate the end of ownership and Uber the end of rentals.
If you liked Munger on EconTalk give his YouTube presentations a try, he’s quite funny.