Mike Munger on non-ownership

You can watch the podcast at Cato (I watched it live yesterday, so the link may be different). The book is Tomorrow 3.0: Transaction costs and the sharing economy. It can be summarized by a remark from one of my commenters.

The commenter writes,

Ownership is a form of market failure:

– Your car being parked 23hrs a day just to ensure that it’s there when you need it.
– Transaction costs of selling/buying your house tying you down and decreasing efficiency of your human capital.

This reminds me of my line to my high school students that “Do It Yourself is market failure.” I had an economist friend who built a deck for his house to “save money.” I pointed out that if he could get paid his economist’s wage rate while working more hours and then paid someone to build the deck, then that would have saved a lot more money. His inability to get paid for marginally more hours worked as an economist was the market failure.

Transaction costs and agency costs related to land are fundamentally important. In theory, the best way for me to own land is to include a well-diversified mutual fund that invests in real estate as part of my portfolio. In practice, transaction costs make me want to stay in a particular dwelling much longer than might otherwise be optimal, and agency costs make it more likely that a property will be well cared for by an owner than by a renter. Overcome those sources of market failure and you make it feasible to own a diversified real estate portfolio instead of being stuck with one home.

30 thoughts on “Mike Munger on non-ownership

  1. You guys are kind of insane. Taking pleasure in owning a car or a house, taking joy in security and convenience and emotional attachment is apparently inconceivable to you.

    • Or the insecurity inherent in not owning a car under present transit modes is a failure.

      But yes, there is a ‘kind of insane’ that suggests everyone should be completely diversified across the entire economy in the ideal state because it reduces variance (ie. risk). It ignores subsidiarity and the first principle of geography (‘things that are near impact each other more’). It treats them as forces that can be overcome, rather than forces that exert themselves on the sly when apparently defeated in a frontal assault.

  2. The “illiquid and idle capital problem of private property” argument used to be popular among old-school Socialists, but it tends to be highly exaggerated. With perhaps the exception of real estate, pretty much everything ordinary consumers own only gets used a tiny fraction of the time of its existence, but the depreciation of which is more due to use than age. The “reliable option to use immediately without transaction and interaction costs” is worth a lot.

  3. Or one could increase one’s personal skills capital by application to the work of building a deck, and incorporating those learnings into other aspects of life. Not to mention diversifying life skills so as to reduce risk dependence on primary occupation skills.

    • The question is why people that wouldn’t build someone else’s deck for pay will build their own deck “to save money”. Part of the answer might be that one would hire oneself, even if one doesn’t have any experience or references, because one trusts oneself more than others would. But, that could be characterized as an information cost.

      • People pay money to pick apples, something the poorest do for slave wages. Manual labor done outdoors is enjoyable provided it is self directed in the right conditions.

        • This is how I view mowing the lawn, why pay for a gym membership when I can get exercise working on my lawn?

  4. Transaction costs and agency costs are integral features of all markets. The existence of these costs does not mean that the market has “failed.”

    • Market failure is perhaps the most abused concept in economics. Like “health” of an ecosystem, it is often a way to smuggle moral judgments into what is supposed to be science.

  5. I’m always confused by the people who claim that there is a lot of savings to be had by keeping cars moving 24/7. The vast majority of cars are already driven enough to depreciate based on mileage, not time. If you add in a whole bunch of extra miles to get the car from one user to the next, you’ll increase the cost per passenger mile, not decrease it!

    That’s before you account for gasoline and congestion, both of which are also per-mile much more than per-day costs. Then you put the agency and transaction costs on top…car sharing really only makes sense for people who live in dense cities and don’t move around much, only where storing a car gets expensive enough to be relevant.

    • There’s also the peak load issue: the times your driving your car are the same times that everyone else is driving theirs, so opportunities for sharing are more minimal than you might think, at first.

  6. Arnold Kling says: “In practice, transaction costs make me want to stay in a particular dwelling much longer than might otherwise be optimal, and agency costs make it more likely that a property will be well cared for by an owner than by a renter.”

    Taking relevant costs into account isn’t market failure, it’s rational decision-making.

    I am very surprised by this post. It’s a rare departure from Kling’s usual incisiveness.

    • +1….These don’t sound like market failure but everyday simple economic decisions.

      The other issue is there are a lot of actors and not everybody has the resources to own multiple real estate and large portfolio. If everybody was a millionaire who would work for Wal-Mart for $12/hour? (I believe the US has hit the Japanese low wage decreasing labor supply.)

      One aspect of ownership is a lot to do with personal marginal cost. My retired parents have lived in the same house in SoCal since 1983 and they find the marginal cost of moving simply too big for them to get out of house that is way too big for them. Or I may have a paid off 17 year car that runs 4,000 miles a year which has lower marginal cost (maintenance is $1000/year) and compared to the high cost not having a second car.

  7. I am imagining a world where none of us own anything and we all have to rely on the whims of the people who own crap like twitter, for instance, to be allowed to rent a roof over our heads. What could go wrong? This is liberty right?

  8. “His inability to get paid for marginally more hours worked as an economist ”
    No.

    In most work, like most things, there is a decreasing marginal pleasure in doing more of that. The deck maker was using his unpaid leisure time to save money, rather than comment on or write blogs. I wish I spent more time making stuff, rather than the easy reading & commenting, but here I am…

    The commenter (One of the Dudes) is wrong about cars — the security benefit of ownership is part of the market solution basket of benefits, which varies by individual and by situation. For many New Yorkers, the cost/benefit of owning a second car rather than just taking taxis is such that two or four taxis a day is cheaper. Few in LA see the same cost/benefits.

    With increased density, and higher prices for parking, garage, etc, the cost/benefit Business Model calculations change. So mostly or occasionally rational human decision makers change from deciding to buy another car (or first?), and instead rely on the less secure public transportation.

    Neither more nor less reliance of non-owned transport is market failure, it’s merely Business Model adjusting. By humans. Who exist. The “market” doesn’t — it’s actually just an abbreviation for “humans making economic decisions about what to buy & consume, and produce & sell; and how to sell to buyers”. Those human decision makers are not failing, they’re changing their cost/benefit calculation results.

  9. I suspect your concern on ownership, market failures and rational choices is citizens tend to support more free market capitalism when the majority of the population seems to benefiting from the fruits of economic growth. Nothing makes young person more capitalist/conservative (Republican) than working a career, owning a home, being married and having children. (Daughters have more conservative effect here) I remember the Republican base from Reagan to Bush was suburban home owners. (Soccer moms for Bush in 2000 and 2002.)

    So the support of socialism was probably at a lowpoint in the years of 1963, 1989, or 1999 when most families were able to consume more and more people were able to own more property. And in the post Financial Crisis, this does not seem to be happening as much with the free market as it is taking younger generation longer time to achieve married/family life and home ownership.

  10. As a salaried employee I don’t get paid more to work nights and weekends, so watching some youtubes and repairing my own washer or car or deck really is like finding money lying on the ground.

    One might argue that spending that time brown-nosing the boss at the golf course would net me more long term. But I think not.

    • “As a salaried employee I don’t get paid more to work nights and weekends”

      Right. And the fact that you can’t decide to work (and be paid for) a few more hours whenever you feel like it is not a market failure. Having the ability to seamlessly substitute paid work for leisure (or vice versa) is a hard state of affairs to achieve. It’s something that is possible with rather a small set of occupations, and when it is possible, it becomes one of the most attractive aspects that particular job. What’s probably the best thing about being an Uber driver? Isn’t it the fact that drivers can work only when they feel like it?

      On the other hand, seamlessly shifting DIY task time and leisure time back and forth is possible for everyone — and that’s not to mention that some DIY tasks actually count as leisure (at least in part). I suppose there are very few deck- building hobbyists, but there are definitely wood-working hobbyists and the fact that there are the latter but not the former probably has more to do with logistics (decks are large and permanent) rather than differences in the activities themselves.

  11. W.H Hutt’s book The Theory of Idle Resources (1939) discusses in what sense something like the car used an hour a day is idle. The book is both a criticism of certain Keynesian ideas and a reflection on ownership and subjective utility in a market economy.

  12. I don’t think we should underestimate the impact of taxes and regulation. If one builds one’s own deck, or lives in one’s own house, one doesn’t pay taxes on the imputed income and rent. Marginal tax rates could be as high as 50% if one counts state and payroll or self-employment taxes. I think it’s quite plausible that price differences of 50% can affect consumption choices.

    If one builds someone else’s deck for pay, one might need licenses and to pay other fixed costs to comply with regulations. Those fixed costs might be prohibitive unless one plans to build many decks.

    If taxes and regulation lead to more do-it-yourself and ownership, then that’s not market failure. That’s government deadweight loss!

    • But taking a tax regime as a given political factor, saving 50% is just smart decision making.

      I don’t understand for instance why people making less then $20 an hour pay anyone to do anything. Going to work but paying daycare all your after tax earnings is the strangest to me.

      • Not at all. Sitting around doing nothing but taking care of your kid reduces your employment value. Working, but paying daycare at minimum maintains it, probably increases it.

        • That’s true of people with careers. However, I’m mostly thinking of wage labor in the lower half of the distribution. Is there that big of an employment skills hit to staying home a few years?

          • No matter what your job choice, a recent work history is better than no work history.

            Besides, if your job doesn’t make enough to pay daycare, you are almost certainly on welfare.

            So this decision is made mostly by couples where the wife currently isn’t making much money. And in every single case, she’s better off working.

            Harder is a married couple where one (usually the man) makes a lot of money and the wife also makes a decent income and they have *two* kids.

            I still think the woman should work, but that’s a less clear issue. Might be financially better to take five years off and then go back.

  13. So when did libertarianism.gov start arguing against ownership (sometimes known as property)? You guys do realize what you sound like when you go on on about the efficiency of someone’s car sitting idle for 22.366666… hours, or whatever, right? As if the the purpose of our lives is to minimize the glorious ErrorFunction()!

  14. Consider this stylized example:
    World A:
    1,000,000 individuals owning 1,000,000 cars, driving them 1 hr/day at 50 mph.
    Assume the mileage life for a car is 200k miles.
    World A cars last 11 years, with the average car on the road 5.5 years old.

    World B:
    The same 1,000,000 individuals share cars, driving them 10 hrs/day at 50 mph. Cars would last 13 months until reaching 200k miles,
    World B needs 100,000 cars (and correspondingly fewer parking spaces), with the average car on the road 7 months old.

    Annual production is the same at about 91,000 cars/yr.

    If you take into account innovation, a world with 7-month old cars is better than a world with 5.5y old cars.
    World B is also likely to experience faster innovation, with information about new designs more rapidly revealed due to more intensive use.

    As an owner of Cali real estate with a low Prop 13 tax base I can testify that my freedom of economic choice is meaningfully distorted (I no longer live in California).

    Arguments about Uber and other sharing innovations representing socialism or other -isms seem somewhat off the mark, but going into the issues of identity and values on the internet seems fairly futile.

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