Category Archives: Innovation

What’s Driving the New Economy: Reviewing ‘Tomorrow 3.0’

Modernity is the most beautiful process in the world. As Deirdre McCloskey explains in great detail, since 1800 or so life expectancy has doubled, infant mortality is down more than 90 percent, incomes are up at least 16-fold, transportation is anywhere from ten-fold to a hundred-fold faster, we can instantly communicate with loved ones even if they’re thousands of miles away, and virtually the entirety of human knowledge and culture are available to nearly everyone for free or close to it, thanks to the Internet.

We truly do live in amazing times. And according to Michael Munger, who directs Duke University’s multidisciplinary PPE program (it stands for Philosophy, Politics, and Economics), we are on the cusp of a revolution that could accelerate the ongoing betterment of humankind. He makes his case in the new book Tomorrow 3.0: Transaction Costs and the Sharing Economy.

If the first major revolution in human history was the Agricultural Revolution and the second was the Industrial Revolution, Munger’s new book argues that a third, technology-based revolution is just getting underway. Imagine an economy that has an Uber for nearly everything, and renting and sharing are more common than ownership.

Munger uses the example of a power drill. Most people have a bunch of tools sitting in their garage or basement, sitting idle almost all the time and doing little more than taking up space. The average drill, for example, might have a cumulative lifetime use of a half hour, even if it’s owned for decades. This drill, along with unused cars, housing, and more, is idle capital that people could be making use of. So what’s stopping them?

Transaction costs are. A student of the late Nobel economist Douglass North, Munger observes about his old teacher that “for Doug North, it did not really matter what the question was. The answer always starts with ‘transaction costs.’” Transaction costs are the costs of doing business. In addition to the price of a good, the consumer pays, with time if not money, the cost of finding a good in the first place, waiting in line for it, verifying its quality, shopping around for a good price, and so on. According to Munger (and Doug North and Ronald Coase, no doubt, if they were still with us) transaction costs are key to understanding the third economic revolution now underway.

Going back to the drill example, Munger says, “I don’t need a drill. What I need is a hole in this wall, right here.” If you own the drill, problem solved. Just fetch it from the closet when you need it. But what about the other 99 percent of the time when the drill does nothing but collect dust? Drill-less people who need holes in their walls could be using it, and you could profit from it. Everyone would benefit.

So why don’t these win-win arrangements happen more often? Because the transaction costs are too high. The new economy being born doesn’t depend so much on making stuff as it does on lowering transaction costs so win-win deals can happen more often and more easily.

The drill owner needs to solve three problems—triangulation, transaction, and trust. Triangulation is finding a renter in the first place, and figuring out how to get her the drill. Transaction is making sure money changes hands. And trust is being confident that the other person will make good on their end of the deal. Both owner and renter have to solve all three of these transaction cost problems, or else they will never get together in the place.

Companies like Uber and Airbnb work by lowering transaction costs. If I need a ride, Uber’s app can connect me with a driver in seconds. That solves the triangulation problem, especially compared to waiting for a cab in the rain during rush hour. Uber also solves the problem of the transaction itself. It has both the rider and drivers’ credit card info, making payment so easy neither rider nor driver even need to carry a wallet. And the trust problem is solved by a ratings system that incentivizes both rider and driver to treat each other honestly and well.

In the years to come this type of business model will expand, lowering transaction costs across the economy, opening new opportunities people haven’t even thought of yet, and making life cheaper and more convenient for nearly everyone. It will also greatly reduce waste and idle capital. People won’t need as much stuff, and the stuff there is will be used much more intensively and efficiently.

It is too early to see all the positive and negative consequences this third revolution will have, but change is inevitable. Modernity is a never-ending process; people are always looking for ways to make things better. The transaction cost revolution is the next step, and it is already changing lives. With Munger’s help and a little Econ 101 knowledge, that change will be much easier to navigate.


Human Achievement of the Day: Guitars

When Human Achievement Hour rolls around each year, I make sure to do two things. One is to play an electric guitar. The other is to play an acoustic guitar.

Guitars are simple things. Stretch some thin metal wires over a plank of wood, and you’re most of the way there. Electric guitars add a few magnets wrapped in copper wire mounted underneath the strings, called pickups. This deceptively simple invention is one of the pinnacles of human achievement. Music made on guitars has brought unfettered joy to billions of people, most of whom have idea how to play one. Whether you like jazz, punk rock, flamenco, blues, death metal, or classic rock, guitars have enhanced your life. In a way, the guitar is one of the defining objects of modern Western culture.

Regular readers will likely be familiar with CEI’s “I, Pencil” video from a few years ago, inspired by Leonard Read’s famous pamphlet. Nobody can make a pencil on their own. It takes a network of literally millions of people cooperating to make something you can buy in a store for less than a dollar. The network of human cooperation surrounding guitars is arguably even greater.

For example, guitars made by Gibson, such as the Les Paul and the SG, are often made of mahogany wood, which grows mostly in Central and South America. Tennessee-based Gibson has to arrange with people more than a thousand miles away to harvest the lumber and ship it to Nashville, most of whom speak different languages and use different currencies. The fingerboards placed on top of the guitar’s neck are usually made of rosewood, native to Africa and Asia, presenting another coordination problem.

Fret wire, usually made of either nickel or stainless steel, relies on mining and smelting technologies, and requires precise math, skill, and specialized tools to install. Other hardware, such as a guitar’s bridge and nut, pickguard, and tuning pegs, present their own challenges.

Acoustic guitars use a soundboard, chambers, and soundholes in such a way that makes the instruments both loud and tuneful. Electric guitars instead use pickups, potentiometers, wires, soldering, and standardized connections leading to an amplifier powered by electricity. If a pencil is a miracle of cooperation, guitars are even moreso.

Part of the point of Human Achievement Hour is to celebrate modernity. So on March 28, sometime between 8:30 and 9:30, instead of merely leaving on the lights, I will pick up my electric guitar, plug it into my amplifier, and take in the pure, simple joy that comes with banging out distorted power chords. After that, I will pick up my acoustic and admire all the skill, elegance, and mastery of geometry and sound that went into making it. Nobody within earshot may much enjoy my point, but they will likely be thankful for two other human achievements: walls and doors.

Innovation Is Cool

Google is preparing screenless computers — imagine simply asking the wall or your lapel what you want to know and getting an instant answer.

The Year 2000

The two iron laws of modernity are 1) things are getting better, and 2) people think they’re getting worse. Or as the comedian Louis C.K. put it, “Everything is amazing and nobody’s happy.”

That’s what makes this essay by David Bauer such a good read. The year 2000 once seemed like a distant future point, almost an abstraction. It was also the setting for any number of high-tech science fiction fantasies. Then it came and went, and nobody thought much of it. Now, in 2013, the technology that we take for granted makes the year 2000 look downright primitive. No wi-fi, no smartphones, no social networking sites, no touchscreen tablets. As Bauer concludes his trip to the year 2000:

Here you are, back in 2013, where self-driving cars, 3D-printing, and augmented reality glasses excite people. All those things you missed while travelling back to 2000? Boring, everyday stuff we don’t even think about any longer.

Pessimistic bias wins again, unfortunately.

CEI Podcast for September 27, 2012: The Future of Generic Biotech Crops

Have a listen here

Senior Fellow Greg Conko discusses his new paper, “Is There a Future for Generic Biotech Crops? Regulatory Reform Is Needed for a Viable Post-Patent Industry.” Patents will soon expire for several popular biotech crops, opening the way for cheaper generic versions. But because, unlike prescription drugs, biotech crops have to be re-approved every few years, the future of generic biotech crops is very much in doubt. Conko recommends getting rid of re-approval requirements to put them on the same footing as other products.

CEI Podcast for September 6, 2012: Modernizing Air Traffic Control

Have a listen here.

America’s air traffic control system can be charitably described as an antique. Land-use and Transportation Policy Analyst Marc Scribner describes some of the problems the FAA has encountered in its attempt to move from the vacuum tube to GPS, and suggests a better path to modernization.

The Dark Ages Weren’t so Dark, and Neither Is Modernity

I’m currently reading Barbarians to Angels by Peter Wells, which is a mostly successful attempt to rehabilitate the Dark Ages’ dismal reputation. The written sources are mostly from the Roman perspective, so one understands their rampant pessimism. Wells, an archaeologist, prefers a different historiographical method: archaeology. There is more to history than mere texts.

Roman inventions such as concrete were lost, and though literacy did not disappear, it wasn’t anywhere near where it was in Roman times; there was decline. But civilization did not die. International trade stayed alive, and with it the swirling exchange of ideas, customs, religions, and inventions that accompany commerce. Artifacts from as far away as India, Sri Lanka, and China have been found in Dark Age sites in Sweden and Ireland.

The visual arts remained vibrant, even if the written arts didn’t. Of course, illuminated manuscripts such as the Book of Kells provided their own vibrancy, even if in their illustrations and not in their actual text.

All in all, Wells has not persuaded me that early medieval Europe was the technological and cultural equal of the Roman Empire. But he has certainly vanquished the myth that the Dark Ages were as dark as the popular imagination believes.

Much as I love history, the real reason for this post is to point out just how well we moderns have it. In chapter 12, Wells writes the following about one of the 8th century’s greatest scholars:

The most prominent scholar of this period was Bede, a man of Anglo-Saxon origins who was born in northern England about 672 and died in 735. At the age of seven he entered the monastery that was based at the neighboring sites of Wearmouth and Jarrow, in Northumbria, just at the time that this monastic complex was reaching its apex of cultural achievement. The library at the monastery contained some five hundred books, making it on of the most extensive in Europe at the time.

Let’s put this in context. My Kindle e-reader, which fits in my hand, can hold more books than the finest library in all of 8th-century Europe had to offer. Just imagine what a mind of Bede’s caliber could accomplish with today’s intellectual resources.

That’s not all. Now think about today’s 7-billion-strong global population, and compare it to the fewer than one billion people alive in Bede’s time. There are at least an order of magnitude more people alive today with Bede-level intellects. And most of them have access to university libraries and the Internet. What will they accomplish?

We truly live in amazing times.