It has always bothered me to go to a sporting event or get on a plane and see lots of empty seats. The marginal cost of an additional spectator or passenger is basically zero; anything additional someone would pay to the airline or stadium for the privilege of attending or flying would be pure profit. Isn’t there a way those seats could be filled by people who would place more than zero value on the experience? People are earning tidy livings by reducing transaction costs.
Like most academics, I simply lament this reality and go on with my life. Fortunately, some people and firms are actually doing something about it.
As Duke University economics professor Michael Munger argues in his speech “Tomorrow 3.0,” people are earning tidy livings by reducing transaction costs. Uber doesn’t make anything. Airbnb doesn’t make anything. Lyft doesn’t make anything. These companies create value by facilitating transactions that previously would have been too costly without them.
Reducing transaction costs means we don’t have to make as much new stuff. For too long, we’ve associated prosperity and production and increasing gross domestic product (GDP) with making material things, but anyone with a junk drawer or three knows this blessing can be a curse. What GDP really measures is the amount of value added in an economy. We are, as Munger points out, on the verge of a revolution.
The Sharing Economy
The Neolithic Revolution and the development of settled agriculture increased the earth’s carrying capacity and inaugurated a more extensive division of labor.
The Industrial Revolution took us from lives that were solitary, poor, nasty, brutish, and short to lives that are connected, rich, clean, healthy, and long. One might look at the standard American diet and object to the “healthy” claim, but certainly our food is far safer, far cleaner, and far more abundant than it has ever been. Moreover, we have access to life-saving and life-improving technologies like angioplasties, beta blockers, and vaccines.
What if we didn’t need acres and acres of parking lots, garages, and driveways to store cars we aren’t using?
The revolution Munger points to involves creating value by reducing transaction costs. The growth of the sharing economy will enable us to do far more with far less.
Look around you and consider: Why are there cars everywhere?
The street my family and I live on in Birmingham, Alabama, is clogged with cars parked along the curbs. So are the surrounding streets. We’re fortunate enough to have a driveway into which we can cram both our cars, but even so, we have a chunk of what would otherwise be green space taken up by bricks and automobiles. Yet I own a car because public transportation in Birmingham isn’t great and because the transaction costs of organizing my own rides are just too high.
What would life look like if we didn’t need acres and acres of parking lots, garages, and driveways to store cars we aren’t using? Millions of cubic feet to store stuff we don’t use? Our environmental footprints would be far smaller, and we would get a lot more value out of resources like wood, copper, coal, tin, and so on.
To see the sharing economy as merely “cheaper taxis and cheaper hotels” is to miss the point entirely. Think about the reductions in food waste and resource use that would come from cheaper food delivery and greater specialization in food preparation. Would you need those cabinets full of dishes and unused spices? The fridge space currently occupied by a jar of expired mayonnaise? Would you throw away as much food?
The sharing economy will bring us to a natural next step in food consumption – indeed, restaurant delivery services like UberEATS are already solving these problems. We went from growing our own grain and baking our own bread to buying it at the store – and watching it go stale, too frequently. Soon, we’ll be having fresh, high-quality meals prepared by people with a comparative advantage in food prep and delivered regularly. Will people still cook? Yes, the same way people knit or sew today: as a hobby.
We’re going to have a lot less stuff that’s used far more efficiently.
Environmentalists and profit-seeking capitalists can agree that the sharing economy is a good thing.
Not only should environmentalists love the sharing economy because of its potential to dramatically reduce waste, but profit-seeking capitalists should also love the sharing economy because it mobilizes otherwise-dormant capital. Lower transaction costs would mean that the cars sitting in my driveway right now would probably be providing a stream of revenue as I type this.
In fact, solutions to this problem are already cropping up. There’s Enterprise CarShare at the University of Alabama, which allows students to rent cars as needed instead of dealing with the expense and hassle of owning a car on campus. In many cities, residents and visitors can rent a ZipCar for anywhere from one hour to seven days at a time.
The sharing economy doesn’t mean we’re going to have a lot of new stuff. Rather, we’re going to have a lot less stuff that’s used far more efficiently. We’re going to see things in the wrong place move to the right place, and new capacity be created by tapping previously unused resources like the empty seats in your car, the empty seat next to the driver of a tractor-trailer going from city to city, or the empty ovens and unused stoves the world over.
Reprinted from Learn Liberty.
Art Carden is an Associate Professor of Economics at Samford University’s Brock School of Business. In addition, he is a Senior Research Fellow with the Institute for Faith, Work, and Economics, a Senior Fellow with the Beacon Center of Tennessee, and a Research Fellow with the Independent Institute. He is a member of the FEE Faculty Network. Visit his website.
This article was originally published on FEE.org. Read the original article.