Tag Archives: Michael Munger

Sharing Apps and Market Benefits

24 Saturday Jun 2017

Posted by in Markets, Transaction Costs

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Transaction costs prevent lots of trades. So many that we often aren’t aware of their potentiality. Michael Munger asserts that transaction costs are so prohibitive that we tend to accumulate a lot of stuff that we could otherwise do without. That’s what he says in “Why we can’t break up with our stuff — yet“.

Transaction costs of all kinds have fallen dramatically over time. One of the greatest innovations in “transactions technology” was the avoidance of barter with the broad acceptance of a medium of exchange (money). Without a medium of exchange, trade requires a “double coincidence of wants”, which often makes the effort to engage in trade impractical. No less important was the establishment of secure property rights such that the integrity of a contract or transaction was protected, whether enforced by possible repercussions from other traders or through the police power of the state. Secure property rights and the use of money facilitated the development of markets and pricing that conveyed better information about scarcity. Other historical developments that reduced transaction costs include better transportation, communication, packaging, and more efficient distribution and supply chain management. In a variety of complex transactions, such as real estate, standardization of contracts has reduced transaction costs.

Those costs have been reduced dramatically of late by new communication and computing technologies. The size of these reductions is difficult to quantify in such prominent examples as Uber ride-sharing and Airbnb home-sharing, but there is no question that the new supplies of rides and accommodations would not have materialized absent the enabling on-line “apps”. The ease, low-cost and minimal risk of these transactions is incredible.

Suppose that hotels in Soho average $400 per night for a suite and that Airbnb rentals in Soho average $300. It’s fair to say that the average Airbnb host in Soho, without Airbnb, faced transaction costs in arranging for qualified occupants of at least $100 plus Airbnb’s fees. Probably much more. Now, it’s true that the hotel suites and the Airbnb rentals are fundamentally different “products”, but they are alternatives for meeting a particular need.

Similar reductions in transaction costs are occurring across a wide variety of sectors besides transportation and vacation rentals: trading in new and used goods, handymen, concierge services, snow plowing, home-sitting, food delivery, and hook-ups are but a few examples.

Munger’s twist on this story is that dramatically lower transaction costs will mean we’ll all need to own much less “stuff” on average, because we can “share”, or at least buy what we need at minimal transaction cost. Or, what we have will be used more intensively because we can share it profitably.

Munger mentions the high cost of owning an auto that he uses for about 5 out of 168 total hours in a week. The costs include dedicated “storage” space, both at home and at work, and sometimes the extra cost of “storing” it in airport parking. He could certainly afford to arrange alternative forms of transportation. Is owning the auto worthwhile because the transaction costs of the alternatives are too high? Well, Munger owns a nice car and he probably likes to drive it, so there is more to it than transaction costs. Still, if we mention the “convenience” of having a car at one’s disposal, that is really an expression of transaction costs avoided via ownership.

If the cost of arranging an acceptable and ready alternative is minimal, why own a car? This decision is very real in certain congested locales with costly real estate (e.g., parking New York City). In short, Munger believes even fewer individuals will bother to own personal autos, or that those cars will be less idle (rented to users), as technology reduces transaction costs:

“Why do I pay to store my car rather than let other people use it and collect rent? Transaction costs. …But we are living in the beginning of a pivotal era that will transform our relationship to ‘stuff’ (we’ll need less of it) and to each other (we’ll share more). For all of human history until about 1995, the desire to reduce transaction costs was tied to the desire to sell a particular product. Now, entrepreneurs are combining three things — mobile platforms, software apps, and internet connections — to sell reductions in transaction costs with no product attached. And that combination will change everything.“

Will that also mean fewer personally-owned kitchen appliances? Home furnishings? Clothing? Power tools? Stereo components? Probably not. Even if it’s easy to find a willing renter for my power tools or stereo components from time-to-time, I might not want to bother with the required exchanges (at pick-up and return). I use power tools from time-to-time, but I won’t want to shlep back and forth to rent them from someone when I could own them myself at relatively low cost. Perhaps I’ll rent a tiller or a power washer, but not a power drill. Maybe I could hire a gopher on the Air-gopher app to get the tools I need and return them when I’m done, but that adds back to my transaction costs. So there are certain limits to how far this can go in reducing our “stuff”.

Nevertheless, there is no question that there will be many new trades and competitive opportunities to exploit as transaction costs fall, and that implies more choice, lower prices, and less waste in the larger allocative sense. Those, I believe, are the major benefits of sharing technologies. For example, if you enjoy cooking but are the sole member of your household, imagine an app that allows you to sell your extra preparations to other individuals, or to give them away at a minimal transaction cost. Or, if you are able to perform odd jobs but prefer to take them at your convenience, you will likely be able to bid for projects of your choice. If you have a talent for teaching guitar, you could solicit business and even provide the lessons remotely through an on-line app. The major impediment to the development of such market innovations is potential interference by government or other entrenched interests who wish to prevent competition. Licensing laws and various forms of regulation and taxes could easily smother or eliminate the benefits of sharing technologies, and that would be a shame.

I’ll close with a digression on Munger’s hypothesis: why do I own or keep a lot of “stuff? It’s not all about transaction costs. Most people harbor nostalgic feelings for their “stuff”. I hate parting with my old shirts, old drivers licenses, theater programs, and ticket stubs. Most of those things have approximately zero market value. Some people believe it’s just plain wasteful to pitch something that can be put back into working order, like an old lawnmower. Transaction costs might be to blame, but the failure to junk the mower in the first place may be driven by a depression-era instinct for penny-pinching. The hoarder might simply underestimate the benefits of a new mower, or perhaps they deserve credit for undertaking a restoration project they enjoy.

I find myself hoarding all kinds of things that I think might be useful to me somehow, someday. Particularly things like miscellaneous nuts & bolts, sundry pieces of hardware, wire, old fixtures, pieces of lumber, and my late Dad’s old tools. I’m certain I won’t ever use 95%+ of these items, but it’s reassuring to have the inventory. Then again, every time I need an odd item, I find myself in my basement work room searching through all that stuff. Invariably, I end up on my way to the hardware store to get what I need. So much for minimizing transaction costs. What would it cost me to pitch all of it? An afternoon of painful evaluation… yet that too represents a transaction cost!

Dogma, Intolerance and The Decline of Inquiry

11 Wednesday Feb 2015

Posted by in Marketplace of Ideas

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confirmation_bias

Bias in academic research is more common than most people realize. Some recent posts on this topic by Lee Jussim on the Psychology Today Rabble Rouser blog caught my eye. In “Psychology’s Political Diversity Problem“, Jussim shows the abstract of a paper he coauthored on the decline in political diversity among psychological researchers, and the nefarious effects that decline has had on the scope and quality of research. From the abstract:

“This lack of political diversity can undermine the validity of social psychological science via mechanisms such as the embedding of liberal values into research questions and methods, steering researchers away from important but politically unpalatable research topics, and producing conclusions that mischaracterize liberals and conservatives alike;”

Similar phenomena can and have corrupted other areas of research, such as climate science, in which outright fraud has been committed (East Anglia, temperature records) amid a   breakdown in the integrity of the peer-review process. The destructive mechanisms, according to Jussim and his coauthors,  are “self-selection, hostile climate, and discrimination” against researchers holding minority views. I would add that research often will be colored when future funding is perceived as contingent on the nature of the findings.

Jussim follows up with another post on the Rabble Rouser blog entitled “Liberal Bias Distorts Scientific Psychology (and Education)“. In this post, he links to a “disclaimer” essentially stating that his conclusions are NOT a condemnation of the personal morals, competence, or fair-mindedness of so-called liberals in his profession (I disagree with his use of the term “liberal”– these are leftists, not real liberals). He also elaborates on the article he coauthored and provides links on various dimensions of the topic, such as this post by economist Michael Munger entitled “Our higher education system fails leftist students.” From Munger:

“Our colleagues on the left could choose to educate their liberal students, but since education requires ‘collision with error,’ that is no longer possible. That’s because the faculty on the left were themselves educated by neglect, never confronting counterarguments, in a now self-perpetuating cycle of ignorance and ideological bigotry.”

Of course, none of this is new. Bryan Caplan, who is a big fan of the Jussim article, confronted the same topic ten years ago as it pertained then (and still does) to academic economists:

“Even if we control for quality of publications, the gatekeepers – journal editors and referees – also feel virtually no financial cost of rejecting articles they find ideologically distasteful. So there is probably more discrimination against right-wingers than the data suggest, not less. …

If there is no discrimination, how does it happen that Alex [Tabarrok] and I and half the other staunch libertarian economists in the world are all in the same department? Segregation is the predicted effect of worker-on-worker discrimination. And that’s what we see.”

These are the lamentations of some extremely talented academics, not amateurs or pseudoscientists. This is not sour grapes; they are all engaged in a principled fight against bad odds. More importantly, they marshall powerful arguments that their respective fields of study suffer greatly from the effects of “monoculturalism”. After all, differences and argument are the essence of vibrant research and, ultimately, truth-seeking.

There Oughta NOT Be a Law

11 Thursday Dec 2014

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We have too many laws and too many busy-bodies wishing to force others into conformity with their own moral and  behavioral strictures. It is more excessive in some jurisdictions than others, but the unnecessary criminalization of harmless behavior is a spreading canker. The death of Eric Garner  in New York City exemplifies the horrible consequences, an aspect which sets it apart from the death of Michael Brown in Ferguson, Missouri. Last week, Mark Perry posted links and summaries of three essays on Garner’s death “and what it teaches us about over-criminalization, government force, police brutality, the regulatory superstate, and the violence of the state.”

Both the Brown and Garner cases involved tobacco products, a primary target of busy-bodies worldwide. Garner was choked to death by police who restrained him for violating a law against selling individual cigarettes (“loosies”). Brown, then a suspect in a strong-arm convenience store theft of Swisher cigarillos, was shot by an officer claiming that Brown charged him in the street after a physical altercation moments earlier. Both incidents are said to have involved excessive force by police toward African Americans, but grand juries refused to indict the officers in both cases. Whether excessive force was used against Brown or Garner, or whether racism was involved, a major contrast is that the Garner case involved the enforcement of a law that seems ridiculously petty.

The three links provided by Perry are from:

    • J.D. Tuccille, who argues that over-regulation of behavior not only leads to conflict but also encourages corruption in law enforcement.
    • Randy Soave, who discusses the incentive structure faced by police and the extent of over-regulation, “from cigarettes to sodas of a certain size, unlicensed lemonade stands, raw milk, alcohol (for teens), marijuana, food trucks, taxicab alternatives, and even fishing supplies (in schools)“.
    • Jonah Goldberg, who elaborates on a simple truism: if you pass a new law, it must be enforced. Enforcement means force, and force is what government is all about. Therefore, if you insist on more detailed control over others, you can expect some violence.

Michael Munger makes the same point, condemning both the left and the right for their failure to understand the simple but far-reaching flaw in our polity:

“The left is outraged that the state is not doing exactly what the left expects from an idealized, unicorn state. In fact, the state is actually made up of actual human-style people, and people are flawed. The left wants to rely on abstract systems, and then be perpetually astonished when things go really wrong. It’s not bad people that are the problem. The THING, the thing itself is the abuse, folks…. The right is just denying that there is a problem, the system is working, the jury has spoken, etc.”

In “Worse Than Racism,” Eric Raymond discusses Garner’s death in the context of Alexis de Tocqueville’s  “soft despotism,” our penchant for promulgating rules for others “all justified in soothing ways to achieve worthy objectives. Such as discouraging people from smoking by heavily taxing cigarettes. Eric Garner died in a New York minute because ‘soft despotism’ turned hard enough to kill him in cold blood.”

Raymond presses hard:

“Every one of the soft despots who passed that law should be arraigned for the murder of Eric Garner. They directed the power of the state to frivolous ends, forgetting – or worse, probably not caring – that the enforcement of those ‘small complicated rules’ depends on the gun, the truncheon, and the chokehold. 

But we are all accessories before the fact. Because we elected them. We ceded them the power to pass oh, so many well-intentioned laws, criminalizing so much behavior that one prominent legal analyst has concluded the average American commits three inadvertent felonies a day.”

Finally, here’s an interesting connection: research  advocating high taxation of cigarettes  was published in 2008 by none other than Jonathan Gruber. Yes, the architect of Obamacare who often gloated on camera at academic conferences about the clever lack of transparency in the health care law and the stupidity of the American voter. He was also busy providing a rationale for the morality meddlers to more heavily tax and regulate “unacceptable” behavior. It is fitting and ironic that such an infamous elitist as Gruber has a connection to the soft despotism that led to the death of Eric Garner.

Unicorns, The State and Sustainability

15 Friday Aug 2014

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Unicorn-meat

Every time someone says “the government should …,” ask them to replace the “G word” with “politicians I actually know, running in electoral systems with voters and interest groups that actually exist.” Does the speaker still think “the government should?” It’s a good test suggested by Michael Munger in his article “Unicorn Governance.” His point is that nearly all calls for state intervention really profess a kind of belief in unicorns. So let’s remove the unicorn from the argument. He says:

My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA.

But their solution is, without exception, to expand the power of “the State.” That seems literally insane to me—a non sequitur of such monstrous proportions that I had trouble taking it seriously.

Along the same lines, Don Boudreaux at Cafe Hayek offers a quote from Matt Ridley’s book, The Rational Optimist:

Economists are quick to speak of ‘market failure’, and rightly so, but a greater threat comes from ‘government failure‘. Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue the inflation of their budgets rather than the service of their customers; pressure groups form an unholy alliance with agencies to extract more money from taxpayers for their members. Yet despite all this, most clever people still call for government to run more things and assume that if it did so, it would somehow be more perfect, more selfless, next time.

Finally, Boudreaux has a recent piece in which he proposes a little Platitude Test. Is the speaker offering up a platitude? Well, “ask yourself if you can imagine a normal human adult believing the opposite.” If so, then there is truly something of substance at issue. Boudreaux notes that this is usually not the case when the word “sustainability” is trotted out:

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p style=”padding-left:30px;”>You’ll discover, of course, that you can’t imagine anyone seriously supporting ‘unsustainability.’ Therefore, you should conclude that mere expressions of support for ‘sustainability’ are empty. And they can be downright harmful if they mislead people into supporting counterproductive government policies. Substantive issues involving sustainability invoke questions that have non-obvious answers. For example: At what rate must the supply of a resource fall before we conclude that continued use of that resource is unsustainable?

Ultimately, market mechanisms are fabulous guardians of real sustainability, since they price scarce resources so as to allocate them efficiently across time and space, providing incentives for conservation, to bring forth new supplies of the resource, and to develop rational substitutes. Unicorns and the state don’t do nearly as well.

NOTE: I apologize for the haphazard formatting in this post. I cannot seem to get the editor to cooperate tonight. I had similar problems last night but resolved them, though not in a fully satisfactory way. Tonight the issues seem worse.