0:33 Intro. [Recording date: October 8, 2018.] Russ Roberts: My guest is political economist and author Michael Munger of Duke University. This is his 35th--count 'em, 35--appearance on EconTalk, which represents about 5% of all EconTalk episodes. We last heard from him in April of 2018 discussing the economics of traffic. His latest book is Tomorrow 3.0: Transaction Costs and the Sharing Economy, which is our subject for today.... Tomorrow 3.0 is a short book, which is a plus in my mind; but despite its length, its shortness, it packs a lot of intuitive economics into its pages. In a way, while I was reading, I felt like I was reading Munger and EconTalk's greatest hits. There's stuff on middlemen, transactions costs, the sharing economy, property rights, price gouging, universal basic income, division of labor, and more. So, if you are a fan of Mike's from this podcast, I think you'll like the book a lot. And you'll learn a lot, even if you're not a fan. But who isn't a fan of Mike Munger? Michael Munger: [*crickets*--Econlib Ed.] Russ Roberts: You want to try to answer that? That's our first question, Mike. Michael Munger: I got nothin'. [*laughter*--Econlib Ed.] Russ Roberts: I know. I know. Michael Munger: I hear from a lot of people. Russ Roberts: What got you to write this book? Michael Munger: You're being sort of snidely modest by saying it sounds like EconTalk's greatest hits--at least greatest Munger hits. You're absolutely right. EconTalk caused this book. I started thinking about writing it when I did a podcast with you on the sharing economy, and realized that I understood almost none of it. And then it turns out that much of what this book tries to weave together is my attempt over a period of years to try to understand that. And, in some ways, it comes from talks that I've given that try to understand different parts of it. And, I appreciate the fact that you recognize that it's a relatively short book. It's a book, after all, in some ways about transactions costs. And after I was finished with the book, I thought, 'You know, I bet I can shorten this by 40%.' So I went back through it and spent three months doing nothing but trying to shorten every sentence, every paragraph--because I'm reducing the transactions costs of conveying these ideas to the reader. Russ Roberts: There you go. That's right. Michael Munger: So it really was my objective, was to try to make it short, and yet still when you read it you think, 'Hah: that's interesting.' Russ Roberts: Yeah; it's only 153 pages. And, I love when people say, 'Oh, this book's overpriced. It's only--'. It's like: Wisdom? You are complaining about the price of wisdom? Seriously, Mike-- Michael Munger: I've literally had people complain about the dollars per page. Too many dollars per page. Russ Roberts: Yeah. I don't understand that exactly, but okay.

3:17 Russ Roberts: Let's start with an example you use which I think has a lot of value, which is: I'm standing in front of a wall in my house; I need to make a hole. I need to drill something. And I actually--I have owned a drill in the past; I can't say I own one now. But, of course, everyone out there listening--some of them have drills, some of them don't. And, if you're in that situation, what do you do now? Michael Munger: So many of the things that are important consumer durables we own because we want to have immediate low-cost access to their services. So, that's true of most tools. Most of the time, most of us--if we're professors or work in some white-collar job--most jobs, you don't constantly use your tools unless you are a contractor. And yet, somewhere in your garage or in your storage, you have quite a few tools. So, I'm standing in front of a wall. My wife has said, 'We're going to put up some pictures.' I want to drill a hole in the drywall so I can put an anchor in so it won't tear within a couple of weeks. And I could go and buy a drill. I could rent a drill. But what I is go to my garage and get one of the 4 power drills that I'm embarrassed to admit that I have. And, then drill a hole. And then she looks at it and says, 'No, not that wall. That's not the right one.' So I fill in that one and then I go and I drill a different hole. But still, I used the drill for maybe 30 seconds and then I put it back up. The question is: Why is it that we own so many things? And the Austrian economics' insight is that almost any consumer durable--your car, a suit that you have in the closet--what those actually are is not something you are going to use like an apple where you eat it and it's gone. It is a stream of services that extend out into the future. So, you have to think about the value of time; and you have to think about the value of uncertainty. Now, it turns out that power tools are particularly interesting because they've become a kind of trope of this sharing economy literature. There are 110 million power drills in the United States. If you-- Russ Roberts: Seems like plenty. Michael Munger: Yep. There are 330 million people, but there's a bunch of idiots like me that have four. And there's quite a few people that have none; but there are a lot of people who have at least one power drill. If you take the 110 million and rank them from the most used to the least used, and then look at the median, it has been estimated that the 55th-millionth power drill ranked by lifetime--lifetime--use is between 30 and 40 minutes. Because, using the power drill for 30 minutes if you are a contractor isn't much. But if I'm drilling two holes to put up a picture in the house, I use it for 30 or 40 seconds, and then I put it away. So, why is that we store these things that we only use for 30 minutes over their entire lifetime? And, I claim that it's at least possible to think of an alternative, where, instead of owning it, I share it; and I share it in a particular kind of way that economists call renting. Because, renting is just a way of sharing things with people that you don't know with one residual claimant that takes care of all of the transactions costs. So, there's one person at the middle that owns the drill; and that's the nexus of all contracts. And they oversee the sharing process and make sure that it's returned in good order and that its delivered and its available and that people actually pay for it. And for that service they take a profit that is the excess of the price that they get over the cost of providing that rental service. So, I pull out my cellphone and I go to Uber and I scroll down to power tools and I scroll down to drills; and then I just press Order. And the software knows which drill I want, because-- Russ Roberts: This is the future you are talking about now. Michael Munger: This is the future. Now, some people say I'm going a bit too far, that [?]. Russ Roberts: [?] Michael Munger: [?] Well, I'm picking something that's literally a bit too far because it is in the future. It's a bit implausible. So, I press Order. And somewhere--I don't know where--an Uber autonomous car, with no driver, picks up a power drill from--maybe it's an owner. Maybe it's a contractor who is not using it who has put it outside in a smart pod. Maybe it's a rental company that does this for a living. But the Uber car picks up the drill. It has a bunch of deliveries to make, so it solves--the software solves the travelling salesman problem: that is, making the set of deliveries in the minimum total distance and time. And, in a few minutes, my phone buzzes, because I have a smart pod in front of my house: The drill has been delivered. I go and I open up the smart pod with the security code that's in my phone; it takes no time; I just open it up. I make the holes in the wall. My wife says, 'No, no, not that wall,' and I think, 'Yeeaeey. Okay, I'll do it in a different wall.' And then I put the drill back. I've had it for about 5 minutes. It cost me a total of $2--almost no cost. The pod is smart; it knows the drill has been put back in it. It--the software--calls another Uber car that picks up that drill and then takes it to its next use. No human beings are involved in the allocation or transfer of this rental product among all of the different users. And, it's a commercial quality power drill that's better than I would have purchased. So, it's a better drill than I would have had access to. The result is that instead of having 110 million, eeehhh, adequate power drills, we have something like 10 or 12 million power drills at any given time. They are high quality, commercial power drills. They are extremely intensively used. And, maybe they get used up in a year or two, but then we make some more. The point is that the prices for being able to rent instead of own means that we are saving on the opportunity cost of the money that's tied up in the drill; and in the storage cost. Because when it comes to consumer durables, you pay for them twice. First you pay for the cost of the thing; and then you pay for the safe and secure storage of the thing so that it's available. Your closets are full of stuff. Your kitchen cabinets are full of stuff. I have, I'm embarrassed to admit, a sausage maker. I've used it twice. It's huge, and heavy. Why in the world do I have those things? Well, it's because the software world that I just talked about hasn't yet solved the transaction cost problem in a way that makes it possible.

10:02 Russ Roberts: I want to mention a couple of other factors which that story neglects. One is, in my case, I have a couple of friends who own every tool--every single one. They have every tool. For reasons that are somewhat inexplicable; but they tend to do more home improvement than I do. So, I can borrow tools from them at no charge other than that I owe them emotionally. That's-- Michael Munger: Why is that? Russ Roberts: Why do I owe them emotionally? Or why do they own so many tools? Michael Munger: Why do they let you borrow it at zero cost? Russ Roberts: Because we're friends. Michael Munger: Oh. But they could be renting it out. Suppose that there's a platform-- Russ Roberts: They could be. No, I agree. I'm just mentioning: There is a fourth possibility here, or a third possibility of literally sharing. Michael Munger: As long as there's no rental market. Russ Roberts: Correct. But even if there was, they might decide to let me use it without paying for it. They might give me a bargain. But the other--and actually, that market--the true sharing--a lot of people don't like the phrase 'sharing economy' to describe Uber or Airbnb, is because they don't really share. They charge. But, put that to the side; I'll come back to it. But, the other thing is that some people do enjoy having the physical tools. They like looking at them. They like--you know: it's just a thing. I just mention that as an aside-- Michael Munger: I was going to come back to that at the very end. Let's do it now for just 30 seconds or so. Russ Roberts: Go ahead. Or a minute. Michael Munger: I think the most interesting kind of sharing is the kind that doesn't involve markets at all. So, I started out with this very pedestrian rental transaction. I think one of the things--and we'll talk about this in a minute--that platforms make possible: Platforms are an integrated software/hardware package that facilitate these things. Platforms make true sharing possible. And so, there's this turnkey, open source software called a tool library; and you can borrow from your friends because they know you and trust you. But suppose that entrance to a tool library was just you own one or two tools that you agree to make available to other people when you're not using them. Well, that means that in effect all the 30 people in the tool library have a whole bunch of tools at their access. So, Adam Smith said that markets are limited by the extent--forgive me--division of labor is limited by the extent of the market. Well, this kind of sharing is only limited by the size of the cooperation horizon that's defined by the platform. And so, you can borrow from your friends, but you might be able to borrow from your neighbor that you don't know very well. In order to borrow tools, they need to be pretty close together. Software can handle this sharing problem in a way that opens a whole new world of actual sharing. So, the point that you just made--I sort of tried to push it away--I think that's actually the place that we should end up. And maybe we'll talk about it more, then. But, as usual you have anticipated what I think is really the most interesting question; and that is: Is true sharing possible? We needn't fetishize markets and these complicated rental agreements. True sharing is possible. So, it could be a whole new world. Russ Roberts: Yeah. And obviously the cost of acquiring the object is part of this question on whether you should share or charge, share or rent. Michael Munger: But, suppose I really like tools, but I have software that makes me pretty sure that it'll be returned if I loan it out or rent it out. Then there will be even more people who have a bunch of tools, because they like them, because they can rent them out and share them out, reducing the cost to them of possessing it. So, people are going to specialize. Some people are going to be owners. Some people are going to be borrowers and sharers. And it doesn't even--it doesn't have to follow the contours of what we now think of as market exchanges. So, way to go. Russ Roberts: Well, when I was younger, I had a rule, which was to never lend out any of my books. And the reason I never lent them out was I noticed how often they didn't come back. And, even with good friends. And it wasn't--it was just an empirical observation that I made: That, when I tended to lend out a book, two things happened. I forgot who I lent it to; and they forgot that they had borrowed it. So, I never saw them again. And so, I'd think about a book I wanted to read, or look at, or leaf through; and I'd get really frustrated because I couldn't find it. And then I was, 'Oh, yeah; I probably lent it to somebody.' And, one way people solve that is they put their names in their books and they treat it like--they put a little card in there or they create some system. That's a big transactions cost, by the way, which I never got to. And eventually I changed my--I did a 180. I lend out all my books now. And I assume I'm not getting them back. And when I lend out a book, I just go buy it again. If I care about it. There are a few books I've lent out and don't care about, and I'm happy to see them reduce my storage costs. But, often I love them, and so I am lending them. I'm telling someone, 'This is a great book. You should read it.' Now I just say that's a wonderful thing that I can give that away and I can get a book--get a used copy for under $10, often, of any, almost any book. And so, now to me--I love that gift aspect of book lending. And that decision has really helped me. But, with a power tool, it's not such an easy thing. And, by the way, I have tools in my house, right now, that I'm pretty sure came from handymen and contractors who just left them here. Like, I have a really nice drill. I don't know whose it is. That person left it. It's a shame. I feel embarrassed about it. I didn't notice it for three years. All of a sudden I'm in my basement and I see, 'Oh, I wonder what that is. It's not mine.' I wonder what to do about it. Occasionally--I have a fairly regular handyman--I'll say, 'Is this yours?' Sometimes he takes it; sometimes he says, 'No, it's not mine.' Anyway.

15:52 Russ Roberts: So, of course: you asked about anticipating questions. My question about the drill is: Why don't we have that already? And, I want you to talk about the different kinds of transactions costs and how that creates a set of limits on, potentially on what can be shared, what is unlikely to be shared because it doesn't work economically. Michael Munger: It'll take a little while to kind of get to the basics of the answer, and then we can circle back. So, I think you've probably heard this story, but it is worth repeating, because it was a big event in my life. When I was in graduate school, one of my dissertation advisers was Douglass North. And at my dissertation defense, in 1984, Doug asked a question--and your dissertation defense is pretty scary, because if you don't pass, that would be terrible. So, I was worried. And I did what economists do when they have a question the answer to which they don't know: I went to the board and started drawing equations. Finally, after about 2 excruciating minutes of silence, Doug North raised his hand and he said, in a voice that you might you use to address a not-very-bright but well-loved child, 'Michael, the answer is transactions costs. The only answer I was looking for was transactions costs.' And I later realized that it didn't matter what the question was for Doug North: The answer was transactions costs. It's the answer to every question. But then it took more years after that for me to realize that he was absolutely right. If you start out by thinking, 'What are the transactions costs here?' you'll make a--it's a good way to start to break down what the answer should be. So, one of the people who first started working on the economics of transactions costs was Ronald Coase. And, it's interesting: Coase was really careful never really to give a clear definition of transactions costs. Because, he thought that transactions costs are conditional on the particular kinds of institutions' liability arrangements and legal process in which it's embedded. So, you can talk about transactions costs, but specifically defining them with a bunch of different categories, he thought wasn't a very good idea. I think it's useful because it's a way of breaking down the problem a little bit. So, I think the three categories of transactions costs are: First, triangulation--the people who want to cooperate or buy and sell have to be able to find each other. And they have to be able to identify each other as possessing something that the other wants. Usually in economics we start with this idea that A has a widget; B has some money and wants a widget; and then they negotiate on price. Well, how did they meet? How did they know that they have a widget? Do they speak the same language? Do they have a currency that they can use to consummate the exchange? There's a bunch of things that have to happen before you get to the 'And then there's a price' part. So, triangulation involves that. The second is transfer. Transfer is: We actually deliver the product. We actually make the payment. We clear the transaction in a way that both parties agree with. And that's a big part of any transaction. Third is trust. That is: I know that you are not going to rob me. I'm not going to rob you. And we recognize that the thing that's being sold and the thing that's being used to purchase it actually are those things: There's no fraud. So, anything that solves all three of those problems, I want to call a Platform. And Platforms date way back in history. One of the first Platforms was what we now call the souk [also spelled souq--Econlib Ed.]--the bazaar. And when you think about it, it's kind of odd that these very large markets grew up. Why would it be--suppose you have worked for a year; you have three bags of wheat. That is the product of your farm. You don't have much of a farm, because it's not automated; this is 4000 B.C. and you are thinking of going to the souk in Ur [spoken as "er", short u or short e sound-Econlib Ed.]. Russ Roberts: I think it's Ur [long u sound--Econlib Ed.] For listeners who don't speak Middle Eastern. You are talking about U-r, right? Michael Munger: I am talking about U-r. It was a decent-sized city in Sumeria. It was between the Tigris and the Euphrates, and it's one of the oldest cities on earth; and that's why--I'll pronounce it right this time--if something is a very old book, we call it an Ur text: that is, it is something that is very old. So, suppose I have three bags of grain, in Ur. Well, but I'm 10 miles outside of town. Why don't I just go to the middle of a field and sell it? Why would I transport it all the way to a place where a bunch of other people are trying to sell their grain? That seems like-- Russ Roberts: [?] Michael Munger: I'm going to lose because of the competition. So, I have to transport it. And then there's all these competitors. Why don't I go to the middle of a field and sell it there? And the answer is: I'm going to be in that field a while. Nobody knows that I'm there with my three bags of grain. And, what they're trying to do is put together a caravan to go north: Nobody is going to pay the transport costs. So, I pay the transport costs, and I go to a place where there's a settled price. So, at the souk--souk, souq, depending on how--it's transliteration from Arabic meaning a place for a market. So, at the souk, there is a Platform. It hints[?] that we can find each other; we can agree on a price, because there's many buyers and many sellers. There's a way to deliver, because I know to bring it there--it reduces the transactions costs of knowing where to take it. There's a bunch of camels waiting to move it somewhere else. And we trust each other, because we're providing security just along the roads and in this concentrated area. So, we have those three things all at once; and that's why people would go to a souk and not to somewhere else. So, those kind of market arrangements, those existed for thousands of years. One of the next examples of platform that's really still quite old but interesting comes from what I think is the single best podcast that you have done on all of EconTalk, and it was the 13th one that you did, in August of 2006, with a guy named Chris Anderson of Wired and were talking about a book of his called The Long Tail. And in that podcast he talks about the Sears catalog. And I listened to the podcast again yesterday just by accident, and I realized that the Sears catalog is a platform. Sears was not selling stuff. Their job was not to sell stuff. What they were selling is reductions in transactions costs. So, some of the stuff in the Sears catalog--so, you live in a little town in Southern Illinois; there's a railroad that goes by now and then but it doesn't stop. And the only place you can buy stuff is you can go to the dry goods store, or maybe there's kind of a hardware store and they have a couple dozen items. That's the extent of the market. That's the cooperation horizon in your world. Not much specialization is possible. Not much division of labor is possible. Is there a way to deliver access that's your discretion to the wide world of labor? Well, yes, because twice a year this enormous 600-page book arrives in your mailbox--from Sears. And the print is really small. There's thousands and thousands of products that are available. Some of them are made by Sears. A few more are purchased under contract by Sears. But a lot of them are just third-party items that Sears gives space to in its paper souk. So, I can solve the triangulation problem because I can find stuff that's available--I didn't even know it existed, but I want it, I need that for my farm. I need that because that clothing is much more beautiful than anything that a local seamstress or tailor can provide me. Well, what about transfer? Sears specialized in reducing the costs of delivery and payment. Much of what Sears did was provide credit to people that had problems annually of coming up with enough money at the right time, so they would, Sears would loan out money and then they would process the payments. So, the seller gets paid; Sears would wait until the buyer could make the payments. So they were the intermediary on all these payments. And, for trust, they would give an implicit guarantee. So, if the product didn't work, they would refund it; if it arrived broken, Sears would take care of it. What that meant was that the Sears catalog and the services behind it were a self-contained platform. Now, a number of other of those have happened since, and we maybe can talk about some other examples; but let's get to the drill. You may remember that there was a company called 'Amazon'-- Russ Roberts: I've heard of 'em-- Michael Munger: that sold pretty much one product: books. Amazon sold books. And it's actually pretty remarkable, now, because you can still buy books from Amazon, but Amazon is the Sears catalog of the 21st century. Because almost everything that Amazon sells is manufactured by someone else. Amazon makes most of its money from the software called Amazon Web Services, which is a platform. I can find the product. I can identify price. I can search across different sellers very easily because Amazon is set up for these searches. I can arrange the payments, because I'm actually paying Amazon and then Amazon pays the seller. So, Amazon as an intermediary is protecting me from credit card fraud-- Russ Roberts: Takes the risk-- Michael Munger: and Amazon has a truly remarkable delivery system. And, in fact, I got an Amazon delivery. It wasn't an Amazon truck: it was a rental U-Haul truck that pulled up in front of my house and brought me a box which I had ordered on Saturday. I ordered something on Saturday; it was delivered to me today. It was a big, heavy box of dog food. And this was in a rental truck. Amazon doesn't actually own this. They are renting all of the things that they need to provide this delivery service. But Amazon's ability to deliver is remarkable. It's really unbelievable. So, the three things that come together there--triangulation, transfer, and trust--make Amazon a platform. On that platform you can buy an amazing, different array of stuff. Why not drills? Well, the answer is that Amazon is set up for ownership. It's not really set up for sharing or rental-- Russ Roberts: You can buy a drill. The question is: Why can't you rent one? Michael Munger: Right. And have it delivered. The question is: Why not? You asked about my scenario: Why isn't that possible? My scenario is something more like renting. And then you suggested, rightly, that there's other kinds of sharing; and those things, also, are not really possible yet. So, why not? Well, the answer, I think, is that we are on the verge of a new platform that's going to solve a lot of those problems. So, Amazon used to sell books; we've forgotten about that. Ten years from now, we're going to say, 'Uber used to be a taxi company.' We will have forgotten about that. Because Uber is a platform. Uber can solve the problem of triangulation, transfer, and trust for almost any product. The thing that's great is that Uber is actually set up for delivery of people. Maybe they are going to provide some kind of service. Maybe it's food. Maybe it's a drill that I then want to take back. Now, Uber at this point is still what Amazon was when they were just selling books. But, Uber soon will be able to start delivering all sorts of other things that are not just human beings: they'll be able to deliver products, services. What that means that is the big battle is not really between Uber and the taxi companies. The big battle is between something like Uber and something like Amazon for primacy. Now, why would you say--why would I say--that this primacy is important? And part of the reason is that trust is a network economy. One of the things that Amazon has that gives it a big lead is an inventory of reviews. So, when I go on Amazon, I can find hundreds of reviews of almost every product I want to look at. Anybody else who wants to enter this market somehow has to make up the shortfall that you have: at the beginning you don't have reviews of all these products. Russ Roberts: It's the trust part. Michael Munger: So, Uber has a chance of overcoming this. The reason it hasn't happened yet is that Uber has not yet moved into rental markets; and that barrier to entry on the trust part--which is absolutely crucial.

28:56 Russ Roberts: Just a footnote on your U-Haul rental: My impression is that Uber doesn't have drivers. They just--they outsource that, also. I think what you saw was probably-- Michael Munger: Well put-- Russ Roberts: an individual who delivers for lots of people and happens to have rented a U-Haul truck for him- or herself. I see people pull up in front of my house in cars. I'm slightly surprised: 'Who is visiting me at 10 at night or 7 in the morning?' It's somebody delivering an Amazon package. They don't have a uniform on. They don't look like a UPS [United Parcel Service] driver-- Michael Munger: They don't. They're renting the people, too. Russ Roberts: They're in their civvies. Michael Munger: You're right. They're renting the people, too. Russ Roberts: That's just point number one. The other question is--and you said a lot of really interesting things there, but you didn't answer the piece of the question that I'd like you to get to, which is: There are certain actual limits. So, even if Uber solves the autonomous car problem or somebody does, I'm willing to wait--I might be willing to wait half an hour to get the drill to drill the hole. I don't know if I'm ever going to borrow somebody else's jeans. Which, clothing is another example that you mention in the book. Or, just take a [?] example: I'm probably going to own my own silverware, because even though I could rent silverware for when I'm about to eat, the transactions costs of that, even though the app is seamless and fabulous and quick, I really don't even want to walk out to the curb, because the price savings on the silverware usage is so small that that time cost is going to act be large enough to keep me from doing it. So, talk about some of the ways in which those factors interact. Michael Munger: Those are both really good questions. So, I think that this sharing--I'm more confident now about calling it the sharing revolution, because I think that my earlier claims about rental are pretty short-sighted: that we'll think of better ways to do it than sort of formal renting. But, sticking with formal renting, there are many kinds of--and I'm afraid I'm going to make a sort of Coasean point. Coase asked this really great question in 1937: If markets are so great, why are there firms? And his answer was--this is sound familiar: Transactions costs. Russ Roberts: Explain the question first, though. Because a lot of people would say, 'What kind of a question is that?' We've talked about it before--it was a long time ago. Go ahead. Michael Munger: Economists brag about the ability of prices to organize decentralized distributed activities--transactions--among people that don't know each other. So, Friedrich Hayek in 1945 gives the example of tin: If the price of tin goes up, I don't need to know why. I just know that I need to economize. People who produce tin don't need to know why. They'll just make more tin. Entrepreneurs don't need to know why. They'll just figure out a way to make substitutes. So, the price system directs people to do what they would do if they had perfect information. And that's a great savings. So, prices are really wonderful. Prices organize the economic system. Coase said, 'Well, if prices are so great, why are these little command economies that we call firms embedded in them?' Because, if I work for Ford motor company, I don't put a bolt into the chassis of the Ford car and then go on e-Bay and auction it off and find the highest price, deliver it to them, and then they put on the fender. Instead, the next guy in the line just puts on the fender. Price is not operating here: I'm being ordered to do this-- Russ Roberts: [?] boss you around[?] Michael Munger: by an entrepreneur. That's the--and most people, when you ask, 'Who tells you what to do?' they don't say, 'Prices.' They say, 'My boss.' So, bosses do a lot more ordering around than prices. Coase's question was: Where is the margin? And firms call this the make-or-buy decision. So, firms make some things, but they buy other things. So, maybe for a while Ford Motor Company considered going out and making its own steel for cars, but they never grew the wheat for the sandwiches in the employee cafeteria. They always bought some things. So, that line between make or buy, Coase claimed, was based on transactions costs. It was the cost of using the market versus the cost of organizing this transaction within the company. Well, the point of--I say in the book, I think that if Coase were alive today, he might ask a question: Why is it that we own instead of share? And the answer is still: Transactions costs. The margin between owning and sharing will be determined by transactions costs. The thing is that Coase recognized that there was a dynamic component to this. That is, the size of firms, both in terms of the scope of products and the amount of products that they produce, will be determined over time by transaction cost. If it's cheaper to buy things in the market, then firms will shrink. Well, and the endogenous thing about sharing--and I think this is possibly worrisome--is that there will be a greater and greater gap between urban and rural people. So, people who live in cities are going to be able to participate in the sharing economy. You said you don't want to wait 30 minutes. If you live in a large city and there are these Uber robots that are going around delivering things, and they can go on the street and they can also go up the elevator, it might only be 4 or 5 minutes before it's delivered. Because the density of transactions is so high in a city. But that means that people who live not in a city are going to find themselves facing much higher costs of participating in the sharing economy. Either because they can borrow it from their neighbor in a tool library, or it's delivered by an Uber robot from someplace that they've rented. So, the transaction cost is going to drive more than which products are shared and which products are owned. Over time, if that claim is right, it's actually going to drive the structure of communities. Meaning that, people just like during the Industrial Revolution, are going to move from rural areas to urban areas. And the question is: How can we think about that in a way that makes it possible? The advantage is, you'll need far less storage. You won't need parking spaces. You won't need much closet space. And, yes, you are not going to borrow jeans-- Russ Roberts: Or underwear-- Michael Munger: but there's a company called--well, the example that I use in the book is toothbrush. I am an assiduous brusher of teeth. I don't brush other people's teeth. It's not creepy. I just brush my own teeth. But, I brush my teeth two minutes in the morning, two minutes in the evening. So, for 23 hours and 56 minutes, my toothbrush hangs there unused. It is hard to imagine any way of being able to commodify that excess capacity. Russ Roberts: Well, you could commodify the handle, which has--if it's an electric toothbrush. Michael Munger: The transaction costs are too high. You could share the handle; and in fact it's set up for that, for families, because you have different, separate--but that's a good point. It is set up for sharing. But, there are some products that it's unlikely transactions costs would ever fall enough that we would share them. But, if transactions costs fall, the thing is that entrepreneurs--any problem that you and I can think of is a problem that some entrepreneur is working to solve, because they can solve this problem. They can make money. They can make profits. Anything that looks like a problem is actually a profit opportunity. So, there's a company--and this is my favorite example of the sharing economy--called BlaBlaCar. And, I usually ask, if I'm giving a talk on this subject, I'll ask a young woman in the audience, 'Ma'am, do you hitchhike?' And of course the answer is always, 'No.' And I've already told them that the answer to every question is transactions costs. But, okay. I ask, 'Why don't you hitchhike?' Because, she looks horrified. And they--you would be, 'It would be creepy. It's too dangerous.' No, the answer is just transactions costs. Suppose that you had an app--and in Europe it's called BlaBlaCar, where an awful lot of people end up hitchhiking. So, all the trucks that go on the Interstate between the large cities, many cars, they just have one passenger. If you could commodify that excess capacity and solve the three transaction cost problem--triangulation, transfer, and trust--you could have hitchhiking. And so, BlaBlaCar--the app--provides 4 pieces of information. The first is where are you now? The second is where do you want to go? The third is, at what time do you want to go? And the fourth is, how much do you want to talk? So, 'blah-ha' means 'I really don't like other people very much.' 'BlaBla means enjoys a [?]. 'Blah blah blah' means rarely pauses even for breath. Russ Roberts: Eh, heh, heh, heh [*laughter*--Econlib Ed.] Michael Munger: So, you can go from where you are, where you want to go, using a completely unused seat that would otherwise be empty, at the time you want to go, and have a conversational partner that is interesting. The reviews that are available mean that both the rider and the driver can evaluate each other.

38:12 Russ Roberts: So, I love that. One of the other reasons I love that--first of all, I just want to make a point about the toothbrush. Again, it's not just that the transactions costs are too high. It also is the factor that a toothbrush is relatively inexpensive. So, you always want to compare the costs of ownership to the benefits of renting. And in the case of the toothbrush, it's a relatively inexpensive thing. Again, I don't really want to trot out to the smart pod on my--the mailbox, say--and pick up my handle for my toothbrush, and then shove my brush part into the handle and then go back down to the pod, and all that. That's the first thought I had. The second thought I want to make is that you are really imagining--and you basically said this: I just want to re-state it in a different way: We could have a smart apartment building where the whole building--and maybe the whole city, but certainly to start with the building is designed for this kind of reduction in transaction cost where the delivery part would be much more seamless than it is in a rural area. Or even in a suburb. Or even in some cities. So that's--that's very interesting. But I also want to comment: The BlaBlaCar is really a fantastic thing. Because--do they charge? Is it a free thing? Michael Munger: No. They charge. Russ Roberts: Okay. Michael Munger: There are some companies that try to arrange it. And basically it's like, it's a membership. So, sometimes you drive, and sometimes you are a rider. But the--you do actually pay. But, for BlaBlaCar, suppose I'm in Brno and I want to go to Prague. It's the equivalent of $100 to go on the train. It's $10 or $12 to go on BlaBlaCar. So, it's dramatically cheaper. Russ Roberts: And the driver is getting some of the benefit--some of that profit, I assume. Not just the platform. Michael Munger: Right. But the driver is also getting companies[?]-- Russ Roberts: No, no. It could be you pay. It could be you have to pay to be a driver. Because, they want the company, right? It's not obvious which way the payment is going to go. Michael Munger: I think the driver gets some--the driver, the owner of the vehicle gets some of it. BlaBlaCar takes a small bit. But the--since--many people would just as soon have company, particularly company that's compatible, the cost is driven down. Russ Roberts: The part I really like is that there have been a couple times in my life where, instead of renting a car on a trip--more than a couple--I don't rent a car. I just use Uber. And, but on some of those trips, I've had to take a lot of trips. It still might be worth it to me to take Uber. But, on a day where I've had 4 or 5 Uber rides, sometimes I'm just talked out. And I always--I struggle sometimes when I get an Uber, because I sometimes say to the driver, 'I'm really tired. I apologize. I'm just going to rest.' And I feel like I have let them down in certain circumstance. Of course, some Uber drivers don't want to hear me talk. Maybe all of them, actually. But, in general, I know there are some Uber drivers, the reason they are driving Uber is partly for the money, but partly to meet people. Literally. To just chat and to have an interesting day. A lot of Uber drivers I've met are retired, and they literally enjoy--one of the reasons they are driving is they enjoy meeting new people. And that's part of, obviously, what BlaBlaCar is. But what I'd love is you get to set it in advance-- Michael Munger: Yeah. They recognize that. Russ Roberts: that is [?] a brilliant idea. I love that. So fantastic. Michael Munger: It's so important that it's part of the name. Russ Roberts: Yeah, exactly. The other aspect of this, though, which I think interesting on this question of monetary aspect of true sharing versus semi-whatever you want to call it, more like rental, is Couchsurfing. So, couch surfing is--again, in a different generation, people who are older find this bizarre, but younger people find it normal--you rent out your couch; but you don't rent it out: you share your couch. And you say, I'm going to let anybody stay in my house--you can put different gender preferences and other things on the app. But I'm going to let people come spend the night on my couch. There's no charge. My son recently was on the floor in a Couchsurfing experience. So, it's not literally a couch, but it's basically different ways to spend the night under a roof. But there's no money exchanged. There's sometimes--evidently there's a gift expected. My son said he brought a 6-pack of beer as a thank you. And there's also no terminal limit on how many nights you stay. It's all up for grabs. And, of course, it's different--different providers choose how much they want to limit, or whatever. But, it's just an extraordinary change that this platform that you're talking about makes possible that couldn't be imagined. That he was staying at a stranger's house is frightening. Hitchhiking is frightening. And all of a sudden it's normal. And, because the app has solved that trust problem, along with the triangulation and the transfer. It's a fascinating thing. Michael Munger: I often do ask--and I'm sorry to pick on young women, but they are less likely to hitchhike. So, after we've all laughed and said, 'Okay, hitchhiking is possible,' I'll ask: Do you use Airbnb? And without exception she has always said, 'Oh, yes.' So, you are willing to stay in somebody else's apartment and know they have the key; but you are not willing to ride in somebody else's car. And the difference is Airbnb has normalized--and other companies, but Airbnb in particular--our sense that this is a transaction that the app can handle, and that trust, because of these reviews, tells you something about. So, Airbnb-- Russ Roberts: Well, it's not just the reviews. The fact that, if God forbid, something happens to me in that house--male or female; you don't have to be a female to have something horrible happen to you in a stranger's house--that still is--the app knows where you are. And that's huge. You don't walk up to a stranger in Times Square-- Michael Munger: Yep. It has [?]-- Russ Roberts: and say, 'You have a place to stay tonight?' Michael Munger: It has their financial information; it has their ID [identification]. Many people--and I've done this as an Airbnb host--they have an image of my passport. So, you can do quite a bit of background check. So, once we've normalized that experience, then, yes, we start to think of this as 'Eh, it's not a big deal.' You raised the question of Couchsurfing, though, which is much more like a cooperative sharing activity. So I wanted to bring up the example of a platform that people may not have thought about, and that is Wikipedia. So, Wikipedia is also a platform. The triangulation problem is that people sort themselves into groups based on their interest and knowledge. And, I don't have to go out and find people, because Wikipedia has all these different categories. The transfer is they have a protocol for 'I get to make edits,' and, I'm invited, just to make edits. And, then, the community decides whether those edits are going to be accepted or not. And in terms of trust, there are reviews. If I'm always a troll, then you can disable my ability to make changes. Now, yes, I can come back and try to make it. But Wikipedia is remarkably consistent in being able to provide the three things that a platform needs in order to have this service. But nobody's getting paid. We only pay with honor in a sense of contributing to the public good. So, it's a voluntary contribution to the public good. And it works really well. So, I think the idea of sharing, if you can reduce the transactions costs of voluntary provision of public goods, then things like Wikipedia may proliferate. And the idea that there has to be some kind of fee for service may start to disappear. There are ways of sharing that are based on honor and our sympathy for other people--our desire, if you are out there playing the drinking game, here it comes; although Russ isn't saying it--but our desire to be lovely. We want not just to be loved, but to be lovely. And so, being part of a community that's an expert on some subject that takes care of the Wikipedia entries on that subject means that I have connections with somebody in South Korea, somebody in Europe that I've never met. But we have this feeling of being part of something larger than ourselves. And that is something that software platforms can also advance.

46:29 Russ Roberts: So, I'm going to take us in a different direction now, because I think--hard to believe, but I'm going to say it next. We haven't talked about--some of what we've talked today, we've talked about before; we're talking about it in new ways. I think you and I could have a conversation every six months on transactions costs and I would learn something every time. So, it is one of those topics like the division of labor, like emergent order, that I think is so rich and so challenging to think about and keep everything juggling in your mind at once that it's very fruitful to talk about it at length and in depth. But I want to change our focus just a little bit here. Which is this idea of platforms that are for profit and platforms that are not. And, of course, actually you--we did an episode on non-profits that this is somewhat related to, I'm sure. But here's the thing I want to raise. So, I mentioned recently on EconTalk that George Stigler probably would say that Wikipedia doesn't exist, because obviously it's not going to--it can't be possible without using money to create a good encyclopedia that would be even possibly decent, forget about the fact that I think it's probably better than most printed encyclopedia in many dimensions. So, he was wrong about that. I'm using poor George as a sort of homo economicus--a little bit of a straw man.-- Michael Munger: Yeah. Those that knew him would say it's not that much of a straw man. He's [?]. Russ Roberts: Exactly. So, that was George. But he represents the way a lot of economists look at the world: they assume that people do things for money, and they need rewards; sometimes they're nonmonetary. But in general money works really well. And I think that's generally true. So, Wikipedia is an extraordinary example of how, without money, just honor, just pride, just showing off--earning a reputation for various things, returns--people have created something rather extraordinary. Having said that, it's my impression that Wikipedia is a little bit static. It hasn't quite fulfilled the promise that it had as it was growing. And it is less dynamic than I thought it would turn out to be. And, let me suggest a related challenge. So, there are a lot of apps out there that you and I might use and love. I'm going to pick one that's a big part of my life, which is Evernote. So, Evernote--it's an app that I use for just storing all kinds of information on my computer, on my phone; I really like it. A second example would be Medium. I write in Medium.com; I love--the platform is fantastic. Both those may disappear at some point. They may, just like other apps and other websites don't make it in the internet economy. So then the question is: What's going to happen to my stuff? And I've always wondered--and I've talked about this before on EconTalk, but not with you--which is: Couldn't a foundation then run the app in a nonprofit way? Couldn't it maintain? Could a foundation run Uber at some point? Could--is there a return, is there a benefit from using a nonprofit focus to run a platform? And, let me just give one more point and then I'll let you respond, which is: You say, toward the end of the book, that Uber and Amazon are in competition. Unsurprisingly. Surprisingly. Uber is not competing with cab companies; Amazon is not competing with Barnes and Noble any more. They are both competing with each other for providing stuff in ways that reduce transactions costs--not providing stuff--for just reducing transactions costs. I think it's a deep, deep insight. But it seems to me that what's going to happen is that Amazon will acquire Uber. Or, will create their own platform that solves the delivery problem on it's own--with driverless, autonomous vehicles. And then there's going to be this giant platform, which will be phenomenally pleasant, but it will have some monopoly power, because it probably will kill--if it really fulfills all the promise that we think about, it will kill all the brick and mortar stores that act now as something of a restraint on Amazon's profitability. So, I just--I wonder about the power--and a lot of people are starting to wonder about this--the power of these very broad platforms to provide sometimes information, to provide in this case goods and services. How are they going to work in a world that benefits the consumer when competition may not be what it used to be? And, one answer is, 'Well, somebody will create an alternative that isn't profit-driven.' And then the question is, when I think about Evernote, when we get to IOS-24 [iPhone Operating System]--we're at IOS-12 now on my phone--we get to IOS-24, is the foundation that runs Evernote going to be able to work with IOS-24? Because I don't really need Evernote to keep getting better. And that was my point about Wikipedia. I'd like Wikipedia to keep getting better, but it's pretty great as it is. If Evernote stayed the same, didn't add any new features, I'd be fine. But of course there's tremendous pressure on it to add new features. Because it needs to compete; and its stockholders--if it's a public company; I don't even know--they want more money, they bought at a time when it was already established, so Facebook has to keep finding new, for example, ways to generate money out of its user base. And after a while, I'm thinking, 'Maybe this would be better if it weren't profit based.' I know that's a radical thing for a hard-core free marketer like me to say, but that's my thought. So, that's a lot of rambling. Your turn. Michael Munger: You asked three gigantic questions, each of which takes a 20-minute answer. I'll see if I can do all of it--

51:59 Russ Roberts: Plenty of time. Michael Munger: I'll see if I can do all of it in three or four. Yeah. Well, the problem is they are really great questions. So, one thing you asked was about motivations that are not profit driven. And, one of my favorite Nobel Prize winners in economics and a guest on EconTalk is Gene Fama. Gene Fama has a series of papers coauthored with Michael Jensen in the 1970s, early 1980s, where he looks at the nonprofit as a form of financing that is designed to attract capital. Now, that might seem paradoxical. But, what nonprofits do, after all, is they are a particular way of arranging financial activity. And so, Fama's insight was: There's a lot of nonprofits out there, and a lot of them behave a lot like profit-making companies, because they are trying to make revenue and they are trying to maximize revenue after taking out costs. It's just that they're not equity-financed. The fact that they're not equity-financed means that people are more willing to make contributions. And those contributions may be the impulse that we have to act for the common good. So, when you do experiments, it actually turns out that people are willing to make voluntary contributions to public goods. It's not true that markets can't provide these things. Now, for-profit, price-driven markets may not be able to provide public goods. But non-profits are pretty good at providing public goods. A lot of people voluntarily give money or make contributions to the public good-- Russ Roberts: Give blood-- Michael Munger: So, they give contributions to public radio. They make contributions to the opera, to the zoo, to art museums, to children's museums. There's all sorts of things where we make contributions. [?] Now, suppose-- Russ Roberts: Voluntarily. Michael Munger: Yeah. Voluntarily. Without any coercion at all. Now, suppose that you were able to write an app that reduced the transaction cost of doing that. And suppose you live in a little community and there's a park. And we've decided that having a Public Works Department is pretty expensive: we're just going to do this voluntarily. So, what we have, is an app based on something we haven't talked about yet, the Blockchain. The Blockchain is a distributed ledger that can't be tampered with. And, the part of the blockchain that this app works on is that everybody has glasses. They have wearables. And, you can switch these glasses to have a VR--a Virtual Reality component. So, I come up by the park and I see, 'Dang, look at that. The grass is really high. Somebody ought to mow the lawn.' So, I switch on the VR component, and I see that somebody has bid to pay for the mowing of 100 yards over there. I will pay for mowing the grid right ahead of me. And so I take out my phone or whatever tool I have to connect with, and I put up a bid that then is available to everybody else. And my name is there. And, none of the bids are paid unless everybody has--unless enough people have put in bids to make sure that the park gets mowed. Well, that would reduce the transaction cost of this impulse that we now actually have. And, it can't be counterfeited because it's connected to the Blockchain ledger that makes sure that that payment that I have is now encumbered. It's in effect in escrow. As soon as someone says, 'Yes, I'll mow the park because there are a total of $45-worth of bids,' the money is transferred to the mower. He does the mowing. And we just have accomplished that whole thing voluntarily. Russ Roberts: We have that now. We have that now with IndieGoGo and other crowd-sourcing, crowd-funding--I think it's IndieGogGo, but there's others: GoFundMe. They create a minimum. It's just that we haven't gotten in the habit of doing it with public goods. We do it with--you know, designing a new suitcase, or a new kind of smartphone. Michael Munger: Yeah. But I don't think this is that far away. We have the VR, and we have this habit already for crowd-sourcing. The thing is that economists tend to make this hard line about public goods that they can't be provided by for-profit companies. Well, they don't have to be. We actually have almost all of the tools we would need to solve this problem by a kind of voluntary sharing. Instead of me sharing the tools, I'm sharing the costs. But I'm doing it in a way that really encourages other people also to share. So, you asked what is the future of sharing that's not based on profits? I think I'm not smart enough to understand or predict all of the ways that it could be changed. But I think there's an enormously rich set of connections, as long as it's tied to something like the Blockchain that solves the trust problem. Which brings me to the second question you asked, which was about monopoly. So, a big part of the reason why these companies are becoming monopolies is network economies where I want you to be able to see the picture of my dog that I put up on Facebook. And if we have different platforms, it's going to be more difficult. So, we're all going to tend to use the platform that everybody else is using. And, one of the things that confers this monopoly is having a big inventory of reviews. So, I'm worried about that kind of monopoly. I don't know--the barriers to entry of having, first, the place where everybody goes to look at pictures; and second, an inventory of reviews that means that you can't just buy that information very easily--sounds like it's going to be a problem. I think the solution is what I would say was your third question about reputation. We are probably looking at a world where instead of me having a reputation on Airbnb that I cannot easily transfer to Uber or to BlaBlaCar--what we could have is a single, universal reputation. Russ Roberts: Yeah. Michael Munger: And again, it's going to be a Blockchain app, so it can't be very usefully counterfeited. And so, you'll be able to tell whether I'm the sort of person that has the qual[?]--I haven't cheated on things. You can look at my credit report. Now that's a big problem for privacy. But that ship has sailed. We've already lost any claim that we had about privacy. And, you know, if you don't want to participate, you can already do that. You can unplug off of Facebook; you are not on Twitter; you don't use Amazon; you don't get any of the ads you don't want to see. That's a really high-cost way of doing it. But if you are plugged in and take advantage of this universal reputation, then, if I want to check, I can just go to this non-profit company that operates a Reputation App that's based on the Blockchain; and then the monopoly doesn't exist any more. Because it's something that's easily publicly available. And we would all be willing to contribute something to that, voluntarily, in order not to have companies be in charge of our private information. All we would have is some sort of summary information about trustworthiness, debt, willingness to pay. I don't know what the actual categories are. But I think there's a way around this that combines a blockchain application with universal reputation, and the ability of nonprofits to solve this problem--if you can reduce the transactions cost of participation and make it clear who has given the contribution, so that I can claim credit for it. So that, if I--if my standing in the community is raised because you can look and say, 'Well, look: they've really done a lot of good things. They've provided a lot of public goods,' I'm willing to participate more because I care about being lovely.