TOMORROW 3.0THE NEW MATCHING

ECONOMY

Michael Munger

Director, PPE Program

Duke University

“No one claimed that any of their possessions was their own, but they shared everything they had.” Acts 4, v. 32.

MARC ANDREESSENSOFTWARE IS EATING THE WORLD—WSJ, 11-11

More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.

Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.

WHY DO WE EXCHANGE THINGS?

BUY, RENT, BORROW, DO WITHOUT?

•Consider a widget

• A owns it, and will take any price greater than $1.

• B wants it, and will pay any price less than $5.

• What might keep this transaction from occurring?

SELLING REDUCTIONS IN TRANSACTIONS COSTS

Let transactions costs be $7. No transactions, and in fact A and B have never met and have never considered exchanging.

But an entrepreneur, E, has a piece of software that reduces transactions costs by $6, down to $1.

A transaction is now possible: B pays $4, E receives $1, $1 is lost to transactions costs, and A receives $2. A is better off, B is better off, and E is better off, by $1.

And the world is wealthier and more prosperous.

THE DIFFERENCE:ONCE WE OWNED, NOW WE SHARE,

BECAUSE SOFTWARE EATS THE WORLD

• Why own things?

• What you actually want is the stream of services that come from an item.

• But if you had access to that stream of services, why would you own?

• When I fly somewhere in the US, I rent a car. I don’t buy a car.

• But I buy a laptop, and carry it with me. Why don’t I rent a laptop, at the airport?

• “Gold” Software: No employees, except the guy who parks the car and the guy who checks IDs.

• “Laptopia”: Different levels of quality, I rent one at my destination airport. Just scan my credit card, and my laptop comes down the chute. No employees, except the ones who put the laptop into the barcoded bin

SPINLISTER

COMMODITIZE?

UBER• You need a ride

• I have a car, and some time

• It would be difficult for us to find each other, negotiate a price, have you trust that I won’t attack you, have me trust you that you won’t just rob me. And we would have to have some way for me to get paid, and for you to pay, that is convenient and prevents us from stealing each other’s identity

• Entrepreneur could start a taxi company (production), selling service directly.

• Or could write a piece of software that helps A find B, and reduces the transactions cost of having them exchange

650,000 listings

500,000 people per day

57,000 cities

192 countries

THREE ECONOMIC REVOLUTIONS (YES, A LITTLE GRANDIOSE, PROBABLY WRONG)

•Neolithic (production)•Industrial (production)•Sharing/Trans Costs (exchange)

NEOLITHIC 10,000 BCE

• shift from hunting & gathering to fixed agriculture

• Net reduction in nutrition, increase in disease on average

• Huge increase in population

• led to permanent settlements, specialization, cities, and complex language

• Numbers, accounting systems, taxation (stationary bandit) instead of plunder (roving bandit)

• Trade and exchange

NEOLITHIC 10,000 BCESpecialization: A new kind of exchange

Band of 100 nomads—a fiddle, and a guy with a needle. Everyone fights.

City of 10,000—Trained professional musicians, and people who make clothes, shoes, belts specifically. They do nothing except those things, and are supported by people who specialize in agriculture, husbandry, and security.

Hesiod: Scarcity is the cause of “sharing” (division of labor). He lived in Ascra, which he described in Works and Days as a "sorry place … bad in winter, hard in summer, never good." But the point is that extreme scarcity required cooperation, and specialization grew out of necessity. (750 BCE)

Xenophon: “In small towns the same man makes couches, doors, ploughs and tables, and often he even builds houses, and still he is thankful if only he can find enough work to support himself. And it is impossible for a man of many trades to do all of them well. In large cities, however, because many make demands on each trade, one alone is enough to support a man, and often less than one: for instance one man makes shoes for men, another for women, there are places even where one man earns a living just by mending shoes, another by cutting them out, another just by sewing the uppers together, while there is another who performs none of these operations but assembles the parts, Of necessity, he who pursues a very specialised task will do it best. (Education of Cyrus, 370 BCE)

INDUSTRIAL• Gigantic increase in labor productivity, wages for labor

• Two causes:

1. Division of labor (not artisanal specialization, in fact it kills artisanal production!)

2. Accumulation of capital (100 guys with sticks, 10 with shovels, 1 with steam shovel, and still a net increase in productivity) caused increase in wages

Costs of products fell rapidly. Clothing, machines, consumer goods all now available even to the poor.

OTOH, destruction of civil institutions, child labor, pollution, destruction of environment.

Like Neolithic, not an immediate improvement in average quality of life

INDUSTRIAL• Gigantic increase in labor productivity, wages for labor

But truly enormous “loss” of jobs, at the same time. Which country lost the most jobs in manufacturing between 1995 and 2010?

3. TRANSACTIONS COSTSSomething entirely new: multiply the number of mutually beneficial voluntary exchanges by using existing resources, capacity, and commodity much, much more efficiently.

Combination of three things:

• Stuff/Labor that is less than fully employed at highest opp cost value

• Platform to reduce costs of exchange: Access, organize, connect, handle transaction

• Mechanism for outsourcing trust

MIDDLEMAN REVOLUTION:WHAT IS BEING SOLD IS THE REDUCTIONIN TRANSACTIONS COST OF EXCHANGE

NOT PRODUCTS OR SERVICESBUT THE USE OF A PRODUCT, OR ACCESS TO A

SERVICE THAT ALREADY EXISTS

A CAUTION: TREES, AND SABOTS

A PRICE TAG HIGH ENOUGH THAT MAKES IT WORTH SHARING OR GETTING

A POWER DRILL HAS CRITICAL MASSHUGE IDLE TIME BUT NOT EXPENSIVE ENOUGH

"by the end of this decade, power and influence will shift largely to those

people with the best reputations and trust networks, from people with money

and nominal power"

Craig Newmark

Trust is the key

"transaction cost" :

Will Bitcoin Be the Path

to Anonymity, or

Commitment?