by Simon Sarevski
What is important about the market and needs to be emphasized is that it has always existed, in one form or another, everywhere in the world. Economics and trade have always worked the same way, regardless of time and place. What has changed, however, between then and now is that transaction costs are lower now.
For any transaction to occur both parties have to gain something from the exchange, otherwise, no such transaction would take place. When transaction costs are high enough to offset the net benefit the consumers and the producers would yield, though, those possible beneficial transactions won’t happen.
In the past twenty years or so a dramatic fall in transaction costs has occurred due to technology, especially due to the internet and the smart devices accompanied by it. Hand in hand with these two variables goes the sheer amount of new people being born since then and millions more escaping poverty due to increasing wealth – that is, many people have newly entered the market. Or, to use Adam Smith’s words: the extent of the market has widened.
If the economy of yesterday and today is focused on producing and selling, the economy of tomorrow is going to be one of, as Michael Munger writes in his latest book, selling reductions in transaction costs, in turn making better use of stuff that already exists. The future will lower these transaction costs even further, to the point of forcing us, to quote Munger, to “redefine our most basic ideas of commodity and ownership, because almost anything could, in principle be rented.”
If you buy something, you have to pay the full purchasing price, which means you bear the full cost of owning the item, plus storage. The sharing economy works precisely because it enables you not to have to do that, and instead just pay the rental price. Thus, ownership costs are lowered.
For Munger, the reason the sharing economy did not emerge until recently is because of the three components of transaction costs that are hard to negotiate: “1) information about identity and location, and agreeing on terms including price; 2) a way of transferring payment and good that is immediate and as invisible as possible; 3) a way of outsourcing assurance of honesty and performance of the terms of the contract.”
What made Airbnb and Uber, the first sparkling examples of this revolution, possible, was the reduction in these three aspects of the transaction costs that helped businesses work in the marginal cost territory. Think of it this way: the new model didn’t build new items. It just matched the already existing ones, accompanied by a secure payment system. Lastly, when entering the possible transaction, both the buyer and the seller have good quality information of each other via the rating system. For such information, the only (non-expensive) tool you could rely on used to be the brand name, which put constraints on both parties and prevented many transactions from happening.
The entrepreneur plays a key role in this new age of low transaction costs as he needs to not only find the difference in costs as a simple arbitrageur but also invent and reimagine the world in this new, low-cost environment. The software, which has technically zero marginal costs after the first unit, is the key to success. By creating superior software platforms entrepreneurs can create and sell a reduction in transaction costs.
But not all innovation will be centered on software. Most of the jobs of tomorrow don’t exist yet. What the sharing economy brought first was a reduction in transaction costs for transportation and accommodation. We also have an easy time imaging how mundane things like, for instance, toolboxes and board games, could be part of this economy in the future.
There is even a possibility, regardless of how unlikely it sounds for us today, that personal use items could be shareable in the end – even, contrary to what Munger says, products such as toothbrushes. Who is to say that given the right profit incentive, the entrepreneurs of the future won’t shift the fringes, making once unshareable stuff shareable?
The opportunities of the sharing economy are vast. The sharing economy is the future. Transaction costs will further decrease rapidly. And as Michael Munger says, for the first time in history, “people will collect experiences, not belongings, and the idea of ownership will seem quaint and archaic.”
Simon Sarevski is an intern at the Austrian Economics Center. He holds a Bachelor’s degree in financial management from Ss. Cyril and Methodius, Skopje and is involved with European Students for Liberty.