Transaction Costs

Econ Buff Podcast #3 with Rex Pjesky

Dr. Rex Pjesky talks with me about transaction costs. We discuss what transaction costs are, why they are important, and how they define markets and firms. How transaction costs impact consumers and how they have changed how consumers view ownership is examined. We discuss what the implications of decreasing transaction costs are and how transaction costs impact decisions are the margin. We explore the nature of ownership in different markets and how Dr. Pjesky views the future of jobs.

Special note should be made that many of the ideas we discuss and examples we use in the episode were first advanced by Mike Munger.

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Show Notes and Things discussed in the show

"Tomorrow 3.0: Transaction Costs and the Sharing Economy" (Cambridge Studies in Economics, Choice, and Society) Michael C Munger

"Andrew McAfee on More from Less" EconTalk Oct 14, 2019

Transcript

Stitzel: [Aside to audience] Hey guests, its Stitzel here with the Econ Buff podcast. You're about to hear episode three with Dr. Rex Pjesky. In this episode we're covering transaction costs. We both take a lot of our ideas and examples from the work of Michael Munger. His book is Tomorrow 3.0 which we highly recommend that you check out. [Intro to podcast three]

Stitzel: Hello and welcome to the Econ Buff Podcast. I'm your host Lee Stitzel. With me today is Dr. Rex Pjesky, an economics professor at West Texas A&M and our first multi-time guest. Rex, welcome….

Pjesky: Yeah.

Stitzel:…to the Econ Buff.

Pjesky: Thanks. Thanks Lee, I’m glad to be here.

Stitzel: So our topic today is transaction costs. So this is a topic that is of increasing importance. And yet when you look backwards in time, you see people have been talking about it in the field for a long time. So Rex, define for us what transaction costs are.

Pjesky: Well a transaction cost is going to be any cost that’s incurred with an exchange. So, you know, it could be, you know, travel cost. It could be the cost of contract. So, you know, any additional cost that's incurred (by buyer's or seller's) to actually make an exchange [then] there's gonna be what economists call transaction costs.

Stitzel: So if I go and I purchase something, and I pay something for that good, [then] that's the price itself? And any other cost is transaction?

Pjesky: Yes. So you have to go, you know, if you have to go buy it, you know, [and] if you have to drive the store to buy it [and] pay shipping, [then] those are all transaction costs.

Stitzel: So one of the interesting things about transaction costs is [that] it's not just out-of-pocket. When I'm teaching econ, I always think about -- how do I get students to understand that costs are many things. You know, so for example, I'm thinking about buying the new iPhone whenever that comes out. There are a lot of transaction costs related to that.

Pjesky: Yeah exactly. I mean, when you buy a new phone you've got to transfer your stuff...

Stitzel: That’s a cost.

Pjesky:…to the new phone. I'm, if you know the iPhone is an interesting example. That's a lot easier than it used to be.

Stitzel: I remember when I bought my first smartphone, and I switched from a flip phone, and they had to take the chip out and download the data, and I'll do all that. You didn’t have to do that with the iPhones.

Pjesky: Yeah, I remember. You know, you'd listen to friends, or be on Facebook five or six years ago, and you'd have people say things like: well I just got a new phone, so I lost all my contacts [and] so please text me your contacts. You don't see that anymore. Because now it's, you know, Apple or Google or whoever you deal with --- they make that easy for you. So, you know, last time I got a new phone, I basically just went to the store and picked it up. And it took me a few minutes and it's a transaction cost. But, you know, my new phone looked like a new phone and everything was on there. When I started, all my contacts were on there and everything else. So I could have got my apps and stuff on there too. But whenever I get a new phone I always like to just start completely fresh and download what I need. I don't want it to look like my old phone or I wouldn't get a new one.

Stitzel: That's amazing. The last time I bought a new phone -- it's been a while now my phone's a couple years old -- I did the whole thing [with] all the apps all the contact everything went over. So I opened it up and it was almost like disconcerting that I have this thing (that's now slightly different shape than the one I had a minute ago), but it has all the pictures [and] all the apps in all the places that I had them. You probably had all my text message conversation seamlessly brought over. That's almost terrifying. But, yeah. No, that's absolutely. So I was thinking about this. We have transaction cost. Weigh in on this for me. Do you think that a lot of cases [that] the transaction costs are almost as big as the price of the thing that you're buying?

Pjesky: Oh I think that's -- I think that's often the case. [Reiterates] I think that's often the case. I mean, I think it certainly used to be perhaps with a phone.

Stitzel: Yeah.

Pjesky: It was. Because, you know, what's important to you about your phone are all the contacts and everything else. So when you buy a new piece of hardware, -- whether it's a new computer, or whether it's a phone, or something like that -- you know, one of your biggest concerns is this gonna work as good as my old one does? You know, especially if you're trading off something that still works...

Stitzel: Yeah.

Pjesky:…reasonably well. If you're just upgrading because you want it, [and] because you want to upgrade. But, you know, transaction costs, you know, regardless of how large they are compared to the price of something -- transaction costs on a lot of relevant margins (you know to talk like an economist) really turned out to be critical to a lot of the decisions that we make.

So transaction costs can still be relatively small compared to like, say a thousand dollar iPhone or something like that, but that doesn't mean that they're not going to be essential to our decision-making process. Because on the margin – on the margin they might be an extremely big deal even compared to the overall price of the item. So whether you're talking about consumers or whether you're talking about firms, I think transaction costs is one of the things that that goes a long way into basically explaining the world that we see. explaining the marketplace and how it exists how to exist for us.

Stitzel: Let's expand on that idea of making decisions on the margin because there's something really fascinating. So I'm sitting around and I'm trying to decide what I want to do for dinner. And I can either make myself a peanut butter jelly sandwich, or I can drive over to Chick-Fil-A. And the price of the Chick-Fil-A, relative to the amount that I enjoy, that might be pretty high. And the PB&J is fine. And then I end up making myself the sandwich because I don't wanna drive to Chick-Fil-A. So if you're not thinking about transaction cost (you look at the decision that I just made), and you were like: it's something about the price of the Chick-Fil-A [that] it's gonna cost me eight or twelve bucks or whatever. It is there that drove me to not make that decision. But really, I'm just lazy, and I don’t wanna get off the couch right now and get in the car and go deal with traffic. That's really fantastic in terms of thinking how do people make decisions. If you just look at the price [that] it's a thousand dollar iPhone [or] it's a twelve dollar box of chicken nuggets, [then] you really miss something if that's the only thing you look at.

Pjesky: Right. I mean, exactly. You know again, transaction costs are, I mean, they're pervasive, right? They have to do with everything concerning the world. So, I mean, this is a different topic. But, you know, probably the two things that explain almost everything that we see are transaction cost and price discrimination. So in, you know, price discrimination that's the other conversation that you could have with someone. But, you know, I’II think that transaction cost is something that is so important to all of our decision making purposes, especially among firms I think, you know, certainly. But, you know, when I was going through school, we didn't really talk about them very much. It was something that (at least in in the classes that I took that I remember) wasn't really mentioned a lot.

Stitzel: Bryan [Caplan cf Case Against Education] now thinks that you were probably taught it and you just forgot, but…

Pjesky: That might be true.

Stitzel:…we don’t have to go there.

Pjesky: That might be true.

Stitzel: For the listeners at home, let’s talk about what price discrimination Is really briefly, in case they don't have their econ textbook handy.

Pjesky: Okay. Well probably price discrimination would just be a seller charging different customers different amounts for the same good. So in order to price discriminate, a firm would be able to charge customers with higher demand a higher price than customers with lower demand.

Stitzel: So we draw our little supply and demand graph, and we say: oh well, the price of the prevailing market price is this or that. And then our Econ 101 students go forth from our classes and think that's how it works. And then now all of a sudden we're adding these two things on there. And those two things, especially combined, are probably as powerful as that fundamental supply and demand graph that we drew. So that's really something wild. So we've talked about transaction cost that we've kind of mentioned. What do you see transaction cost being primarily composed of?

Pjesky: Well let's talk a little bit about, you know, sort of a practical application. You know, why are, you know, why are transaction costs important? Then we can you know talk about exactly what they might be composed of. And so, you know, think about a firm, and really what defines the limits of a firm. Again, I'll use the same language I did before -- on many relevant margins is transaction costs. So, you know, a firm is an entity that does certain business, alright? That it sells certain things. But there are all kinds of things [and] all kinds of activities that make that firm go, [in] that the managers or owners of the firm can decide to do with in-house labor (for lack of a better term). You know, this is an employee that they have hired to be sort of on retainer. And then there are all kinds of things that they can contract out to various degrees. And that decision to handle things in-house for a firm, and to contract things out for a firm (to get some other firm or some other arrangement, you know, to help the firm do its business) -- that defines the limits of the firm. And those limits are almost always determined by transaction costs. So let me give you an example of how that of how that might work, you know, sort of an example that's important because a firm could very easily go either way. You know, medium-sized firm with maybe, you know, 20-50 employees would have to make the decision how we're going to keep the building clean. All right? And there's -- that they could hire custodial staff, or maybe just one custodian, if, you know, depending on the size of building. Or there are firms out there that specialize in commercial cleaning. So the manager of the firm would make that decision based on the transaction cost. Because if you hire your own custodian, all right, you've got to monitor that custodian. You know, that's sort of the disadvantage. But the advantage of hiring your own custodian is that you have the individual in-house.

Stitzel: Right.

Pjesky: All right? And you don't have to make a complicated contract with a custodian. So the custodian would just clean the things on a schedule, and to the extent of what you wanted him or her to do, all right? It's very, very easy. If you do the outside custodial service, then you've got all these complicated contracts that you have to write [such as] how often do things get cleaned. If something needs immediate attention, [then] how do you handle, you know, how do you handle that? You know, how clean are things supposed to, you know, supposed to be? So is every night the place pristine? Or is every night when it's cleaned, is it just sort of, you know, somewhat clean? So there are degrees. And, you know, custodial contractors, you know, people that do this for many different firms, they have these kinds of contracts. Well there's a cost to making those contracts. [Reiterates] There's a cost to making those contracts. And how difficult those contracts are to make will determine whether or not a firm will have an outside or an inside custodian, all right? There are other things that I think are a little bit more easy, you know, say like you and I’s job. It would make very little sense for WT to contract us as faculty members. They want us in-house, all right, so to speak, all right? They want us to be full employees of the university, all right? That way, you know, the contracts that they have -- that's very, very easy, all right? The only thing you have to do then is monitor us, all right; to make sure that we're teaching our classes the way that we're supposed to be teaching; to, you know, make sure that we're doing our doing our jobs. But, you know, if you've got an in-house faculty to teach your classes, then all of the other administrative work that you might need -- faculty to do like accreditation issues and stuff like that -- if you need help, [then] it's very easy for the firm (in this case the university) to just go grab faculty members and get that work done. On the other extreme, you know, a lot of things that firms do is completely contract it out to the point where it's not even a contract, all right? The microphones that we are talking into to do this podcast were just simply bought by the university. There's no contract involved. The university needed microphones for podcasts, and so they just went to a store, or to a catalog, or whatever Internet, or whatever and they just bought them, all right? They were delivered, all right? You know, theoretically a business could make their own microphones, could make their own furniture, could make their own computers…

Stitzel: Or could rent them.

Pjesky:…or stuff like that. Or could even rent them.

Stitzel: That would be the alternative probably here.

Pjesky: That would be an alternative here.

Stitzel: We could rent our professors, and we could rent our microphones, and then we would have an per use basis.

Pjesky: Right. So the important point here is that these transaction costs, regardless of how they manifest themselves, are going to establish the limit of the firm, all right? So you've got this big vast marketplace out there, with all of these activities -- all of these activities that happen within it. And the local that the locusts -- there are locusts or Nexus or whatever you would want to call them -- within that marketplace that we call firms, all right? So they're almost like bubbles. We're inside these firms. Activities take place, all right? So the firm, you know, provides education services, or sells insurance, or, you know, sells groceries, or whatever firm might do. And once you cross that barrier from the vaster marketplace into that firm, all right, you basically have an entity that is a command entity, right? Where you've got an ownership structure. You've got a management structure. And everybody inside that bubble basically does what they're told, all right? The firm might have a mission. And there's all of these devices to sort of (for lack of a better word) control or command. To use another economics term -- the activities of the control. So you've got a manager. And the employees, to put it really simply, just do what the manager says, all right? And that's the contract that exists in those areas. And outside that, you've got this wider marketplace where everything is governed by the price system. Inside the firm there's very little use of prices, [whereas] outside the firm there's lots of uses of prices. Well that barrier is determined by transaction costs, because the price system itself costs resources [and] cost money to use. So firms on the margin are making a decision -- do I want this activity to be done in-house, or do I want to contract it, or some other way [such as] get it from outside the firm in the larger marketplace? And that decision is again, is determined by transaction costs.

Stitzel: So fundamentally we think we could have this economy and everybody works for themselves. And they get their hands on different physical resources and different talents and abilities they have. And then we go around and we get things that we want to be made, and they somehow weave their way through this broad marketplace. But that doesn't make sense because the transaction cost it takes to organize those different resources and talents together is [that it] incurs a lot of transaction costs. Firms are a way to determine which of those things need to be grouped together to produce certain things in away that we deal with the transaction cost most effectively.

Pjesky: That's, I mean, that's exactly right. So one definition of firms -- and it wouldn't be the only definition of a firm, all right, but one definition of a firm --- would be a firm is an entity that economizes on transaction costs.

Stitzel: Yes. That's beautiful.

Pjesky: All right? So, you know, it makes the, you know, the firm makes the determination what is done in sort of a command and control type environment. And what is done using the decentralized market system -- the price system.

Stitzel: So I really want to come back around to that. But I had another idea coming back to the previous (not previous) talk about but what we're just talking about now is: we don't as a firm/ we don't want a microphone, [but] I want access to the service that a microphone provides. I don't want access to a professor who can teach classes. I want a stream of services that teaches these classes. Now it just so happens in both of those cases, it's much easier to contract them long term or to buy them outright if we're talking about the microphones. Do you have access to those resources as opposed to needing it? In theory I could organize every single lecture for every single class independently, and I could contract that out. The transaction cost would be enormous…

Pjesky: Hmm mmm.

Stitzel:…because I'd have to communicate, and I'd have to organize, and I would have to barter you know, not barter but like negotiate a contract. So that's the same as we see, sort of commonly discussed, in some of our more retail or individual consumer settings. I don't want to own a hammer, right?

Pjesky: Hmm mmm.

Stitzel: I want to drive this nail into the wall so they can hang my picture. So firms are the exact same.

Pjesky: Right. And I think that's a good transition. So, you know, what really I think, is more interesting today (and, you know, 2019, you know, today's date) is how reductions in transaction costs are changing the lives of consumers. You know, of course the flip side of that is they are introducing new opportunities for firms to exist as well. But to, you know, to sort of get there, I think, that you have to understand how transaction costs affect structures of firms. So, you know, whether or not you're a university wanting service of a microphone, or a computer, or whether or not you're a consumer wanting the services of a drill, or a hammer, or an automobile (you know, even a car or something like that, you know), understanding transaction costs, I think you have great insight into the decisions that consumers make as well. So let's take the example of a power drill. And the power drill is what's used often in the literature. So that's what we can talk about. [Reiterates] That's what we can talk about here as well. But, you know, you don't want to own a drill for the purposes of owning a drill. So you don't get you know any satisfaction hardly at all from actually owning a power drill. What you want to be able to do is drill a hole every once in a while when you need to. So almost every household in, you know, almost every household everywhere has some kind of power drill. Yeah. But, you've got one at home. I've got one at home. I probably have more than one. I probably have more than one at home. And this thing, its in my garage all the time, and it hardly ever gets used. And, you know, I can't ever find it when I do want to use it. And so that decision for me to own a power drill is not driven by my desire to own the power drill. It's driven by my desire, (again like I said before and like you said) [that] I want to be able to drill a hole when I want to drill a hole. Well right now there's no other way for me to have access to a power drill other than to own one, O.K.? And, you know, because of technology [reiterates] because of technology that might actually be changing.

Stitzel: Well, so let's before we get onto that (which is a very interesting somewhere we want to go today) I will tell two quick stories. One is -- I also own several power drills. You and I are good friends. You know where my house is. I know your house is. We're not exactly neighbors. Why is it that I don't use any of my power drills over 99% of the minutes in all of my days? You don't use yours. There's no need for both of us to have a power drill. And yet, I own at least two. You said you own multiple. Why are there four power drills between the two of us when 99% of the time there are no use for either of them in either household? And so there's -- and this is these are people that know each other. These are people that go to work in the same place every day. And so that's sort of befuddling. When I was growing up though, we were neighbors with some good friends. My dad was good friends with the gentleman across the street. We only owned one lawn mower between the two households. That presents certain kind of problems if you want to move or whatnot. But how often am I trying to mow the lawn the same time as my neighbor? Almost never. And so that contract worked out beautifully. And they were good friends, and so they alternated when they filled up. But there are all these kind of transaction costs, right? When do you need it? When do I need it? Where do we store it? How do I get it whenever I want to mow and it happens to be your garage? Who leaves the gasoline full? Or, you know, what do you do after you've used it? And these are two good friends, so they jumped all those hurdles. And there's something different apparently about my relationship with you than it is my dad's relationship with his neighbor. Those are all fundamentally driven by transaction costs.

Pjesky: Yeah, and they are. I mean, the, you know, the idea of sharing things in the way that you mention is extremely rare. I mean, a lawnmower is a perfect example of something. And you know it's I've been thinking a lot about, you know, this subject for the past, you know, past couple of months. And I've always wondered why my neighbors and I can't have a common lawnmower, you know. You could have, you know, maybe a group off four houses or six houses and, you know, you would own this lawnmower between the between the group of you. And it would just be understood, or even it could be written down a contract, that the lawnmower stays with the house, right? So or the fraction of a lawn mower stays with the house. So if I move, I lose my lawn mower. And whoever buys my house gets the lawnmower. And, you know, the perplexing thing about (to me) about why these arrangements don't happen is that it's almost certainly that if I went in with my with my neighbors (you know, three or four of my neighbors) to buy lawn mower [we would] probably buy a really good lawn mower. You know, I own a lawnmower. It's not a very good lawn mower. It's really actually awful. I don't use it very often. I have a small yard. I don't need a lawn mower. But it's a lot better. It would be a lot better if I had an extremely expensive lawn mower that I didn't have to pay for, that I shared the cost of, and we shared the use of. Now, you know, neighbors don't make those kinds of agreements very often. You just don't see that often. You know, I'd say that you're, you know, your dad and his friends [were] probably fairly unique in doing something like that. And I really don't know why, but the answer is transaction costs. For some reason it might not be monetary at all. I've just, you know, for some reason and it's just socially awkward to do these kinds of things. And I don't know why, but that social awkwardness is a large enough transaction cost to make us not mow our lawns that way. So, you know, how do we mow our lawns? We either will buy our own lawn mower and mow our own lawns, all right? Or we share lawn mowers in different ways. So, you know, like I said I mow my own lawn. But a lot of people in my neighborhood hire a service to mow their lawn. And so in a very real way, in a very economic way, the people that contract their lawns mowed -- they are sharing a lawn mower, all right? So if you're, you know, Smith Lawn Mowing Company and you do, you know, hundred lawns every summer or whatever, and you go around and you mow lawns all the time in a very real in a very economic way, [then] everyone who's using Smith Lawn Mower Company is sharing their lawnmowers, all right? They're also sharing the labor to get the lawn mowers done. And in those instances, the equipment that someone who mows a hundred lawns uses is incredibly efficient. They mow lawns really, really fast. They do a good job. They've got all of the equipment necessary to make your lawn look really, really good if you use them. So because of mysterious transaction cost that we don't really understand, all right, that's basically how the sharing arrangement (and I'm really stretching the definition of the word sharing here, I know), but that's really [and] actually what's going on. And that's basically what any firm does. So, you know, think about Kinkos. You know, Kinkos is just away for several hundred people perhaps to share a copy machine…

Stitzel: Right.

Pjesky:…and so forth. You know, the movie theater is a way for several thousand people in a community to share a great big screen to see movies with a really loud sound system. So, you know, that's another way that, you know, [reiterates] that's another way that the transaction costs define how firms behave. So, you know, when we talk about the sharing economy, you know, [like] Uber [or] whatever, you know, this is just a slightly different way of sharing things that wasn't possible before because of limits of technology. And now that technology’s changed, we have companies like Uber that provide a platform to share rides with (you know, where individuals can share their car [and] can share rides with) one another in away that wasn't possible a few years ago. So, you know, again, transaction costs are shaping the arrangements that we make as consumers and the arrangements that we make as firms. All of that is driven by/much of that is driven by transaction costs.

Stitzel: It's almost, because on the margin, I might be deciding as much -- whether I buy a lawnmower or pay somebody to mow my lawn. So I might be deciding just as much. Do I want to store this? Do I want to do the maintenance on it? Do I want to have it at my beck and call? I want to go mow at 1 in the morning. That might be a bigger decision than fundamentally the engineering that went into the lawnmower -- that the metal that and the plastics that were used to make the lawnmower. All those things are important reasons that there is a price to the lawnmower. And yet, that might be a tertiary concern by the time I get to buying it.

Pjesky: Yeah it might be. I mean in the lawnmower case, the neighbors sharing the lawn where it's almost an intermediate case, right? And maybe consumers, maybe almost everybody, wants what’s, you know, what we call a corner solution, all right? So I either what my own -- I either want my own lawn mower. Sorry. I either want my own lawn mower, all right, that I have to completely store and completely take care of. And as a result of that, I have access to it all the time. I don't have to mess with any arrangements with anybody else, all right? Or I [don’t] want to have to worry about nothing, right? Because if you use the Smith Lawnmower Company, you basically don't have to worry about anything.

Stitzel: Right.

Pjesky: You just pay them, you know, $30 every two weeks, or whatever it costs to mow lawn. if you've got the intermediate case where you share the lawn mower with three or four neighbors, [then] we/you still own a fourth of that lawn mower. So if there's maintenance, if there's storage, [then] there's all that kind of stuff that needs to be done. You still have to do that. So maybe it's not social awkwardness, you know, maybe that's causing this. Maybe it's what we would consider to be more real and traditional economic considerations that stop those kinds of arrangements.

Stitzel: So we have three things we could do. I can buy it, store it, maintain it, [and] all the things I have to deal with. We could have a collective in my neighborhood -- which you know, a minute ago you said four or six people at a time. There's no reason if I go by $250 push lawnmower. That I mean, there's dozens of people in my neighborhood. There's no reason we couldn't all use that.

Pjesky: Right.

Stitzel: There's almost no reason at all that that wouldn't be the case. Of course, part of that is like a peak-use problem, right? But that could be solved. And but still, there's transaction costs involved there. I get it, O.K. Who has the lawnmower right now? And oh, I went and built it up. There's no gas in it ‘cause they just used it. And I push all those transaction costs off onto Smith Mowing -- if I just—right? So it's almost like -- why would my dad and his neighbor have even done that in the first place? Didn't I know they could pay Smith and then not have to deal with either of those costs either?

Pjesky: Oh, who knows?

Stitzel: And [like] you, but sure, I think I don't know. I'm kind of/I kind of the argument you made about some kind of social awkwardness. There is some weirdness there. Like how -- all but the closest people to me -- would that feel a little bit awkward doing? Now is that because I fundamentally, deep down inside, understand that -- oh I can just pay somebody to mow my lawn? Why would I go through the trouble of this? But imagine proposing that. Like try this experiment when you go home. Knock on your neighbor's door and go: hey, let's buy a lawn mower together. Like they're having none of that, right?

Pjesky: No. No. they would think I was strange.

Stitzel: That would be considered strange.

Pjesky: That would be absolutely strange. But what's even weird about that Lee, is that if my neighbor came over to my to my house tonight and said: hey, could I borrow your lawnmower? Guess what? No problem whatsoever.

Stitzel: Yeah.

Pjesky: You'd say: yes, go ahead take it…

Stitzel: Yeah.

Pjesky:…you know, take it. So my lawn mowers really bad. So that would never happen. So, but I wouldn't, you know, I wouldn't be concerned about that at all.

Stitzel: The dumb thing is I own a lawn mower. And my wife gets tired of me bewailing about having to store the darn thing in this place or that place in a garage that I have too much stuff in. And the other things that I have too much of are things like power drills. So there's a space trade-off that is going very poorly [for] me in my particular house. You know, maybe the economist in me didn't make very efficient decisions or something. All this time I could have just been paying Smith to come mow my lawn. So let's talk about this a little bit. One of the things that could let me -- one of the reasons I could choose to buy a lawnmower is I'd like to have access to it anytime. And that reduces the uncertainty around when I could have the service. Is that fundamentally a transaction cost? Or is it related to how transaction costs?

Pjesky: Well, I think it's a transaction cost. So you get certainly a transaction cost, perhaps. Absolutely. Because if there were a way that you could ensure that you would have access to a service when you wanted it, all right, you would be more likely to not want to own it. Is that/ does that make sense?

Stitzel: Right.

Pjesky: So, you know, let me sort of jump in, you know, jump into this a little bit. I mean, in order for there to be a market, you basically need three things, all right? First you need what could be called triangulation, all right? So buyers and sellers need to be able to find one another, all right? The next thing that you need is you need some efficient way (it doesn't even have to be efficient) --- you need to have any way of transferring the good or service, all right? And then finally, you have to have some level of trust that that exists, O.K.? And, you know, think about, you know, [the] lawn mower is a good example. But, you know, in this context maybe a better example would be your automobile, right? You know, I don't really want to own an automobile. What I want is I want to be able to drive somewhere when I want to go somewhere, all right? So just like my lawnmower, my car sits still a lot, right? It's sitting in the university parking lot right now, not on driving. You know, somebody could be joyriding in it right now. I wouldn't know. It wouldn't directly affect me at all, because I'm not using it right now. But when I leave work, all right, it really needs to be there. So the same thing is true when I leave my house this morning to come to work. You know, what my car is doing at night doesn't matter to me at all.

Stitzel: Really.

Pjesky: But when I get up and then leave for work at, you know, 7:30 or whenever I come up here, that car better be there. And so I want it on command, O.K.? And the reason I have to own a car is because, at least right now, there is not a way for me to find a car (that I don't own and secure that car when I need it in a context) that is reliable and trustworthy for me. So, you know, now along comes Uber, O.K.? Which is sort of a first step in solving this problem. You know, Uber is a very, very interesting thing. Because what Uber does is it reduces the transaction costs for these kinds of arrangements. So it is at least thinkable now, right? I think probably 10 years ago it may not have been thinkable, all right? But it is at least thinkable. It's at least possible for me to imagine a scenario where I don't own a car, and whenever I want to go somewhere, [then] I just somehow call a car, all right? Probably twenty or thirty years ahead it might be a driverless car, which is a whole other thing.

Stitzel: Yeah.

Pjesky: But where I could call a car to come and get me and take me where I where I want to go, all right? That can't happen now, all right? That's not practical now. It's thinkable now. Ten years ago it was not even. I mean, this isn't anything I've even thought about, you know, ten years ago. But once this technology advances of Uber and Uber-like companies, all right, it's gonna be more and more possible for people to not actually own a car, right? Then you'll have more room in your garage for power drills, all right? But, you know, many people right now think of Uber as selling rides, all right? That's what Uber does. So, you know, you even use the word as a verb. Well how are you gonna get to the airport? Well I'm gonna Uber to the airport. And what that means to everybody is that you're gonna call somebody who is a driver, all right, who uses their personal car to drive people around when they're not otherwise using their car for their own personal business. So they're basically, you know, monetizing or commodifying their unused time and their unused car time. So right now Uber does that. And think about how it solves the triangulation transfer and trust problem, right? It does so in a very, very interesting way. So you have an app on your, you know, aforementioned iPhone. Everybody does, or you know, whatever kind of smart phone that you have, all right? And you can join Uber, all right? You can let them know who you are, and that you can have access to their services which provides these rides. And through that app, you can match yourself up with people who drive. So if you need to go somewhere [reiterates], if you need to go somewhere at, you know, five o'clock tomorrow afternoon, [then] you can schedule a ride. And that will match you up with someone who has a car that's also free at five o'clock tomorrow. And you can expect them to come and pick you up. The transfer is certain, right? Because there's all kinds of ways that Uber will ensure that if you schedule a ride, [they] will actually show up and take you. So it's a pretty reliable way of getting the ride. And then finally the trust is you and with Uber. This might be/ that might be the hardest thing to crack. With Uber you're able -- they have ways of actually making you trust the ride that you're getting, right? So if you're expecting, you know, you can see a picture of, you know, [reiterates] you can see a picture of your driver, all right? So, you know, what the driver looks like -- there'll be a description of the car, license plate number, and stuff like that. So if you're, you know, if you're expecting a 30-year-old red-headed person to show up and pick you up in a, you know, 2015 Honda Civic and take you to the airport and, you know, somebody shows up that's uh, you know, blond-headed person or whatever and in a car that's not a Honda Civic, [then] you probably wouldn't get in, right? So, you know, with Uber you're taking a ride with a stranger. But you're not taking a ride with a stranger. There's some kind of verification there that will support trust in the transaction, right? So, you know, something that would be absolutely unthinkable of you doing in some context -- which is getting in a stranger's car --- is something that you will do with absolutely…

Stitzel: Mundane.

Pjesky:…no thought at all because you've got a context there that that promotes trust. And, you know, we think of Uber as selling rides, but what Uber really is – is a platform that provides this kind of sharing among people, all right? And, you know, my guess is that in 10 or 20 years, people aren't gonna think of Uber as a ride-sharing. They're gonna think of Uber as something much bigger. If you'll remember, 20 years ago Amazon sold books. And it's pretty much all Amazon sold, right? But we don't think of Amazon as a bookseller anymore. Amazon is a place where you can go get anything, because Amazon never was selling books. Amazon was selling a platform, all right, that matched buyers and sellers together [and] provided an easy way of transferring the goods and services in a way that turned out to be incredibly trustworthy and reliable for the people involved. So they move very, vert quickly from selling just books to basically everything now. And I would predict that Uber probably be the same way, right? So right now they're just doing ride share, but in 10 years, you know, a company like Uber (it might not be called Uber but a company like Uber) might bring you a drill that you need, right? So instead of you and I sharing our drill, because we're friends, right, you and I might share our drills because I have a drill and you need a drill. And so, you know, some little automated Uber car drone or something like that comes and picks up my drill and takes it to you and then when you're done with it there would be some mechanism of returning the drill to me. And, you know, the same thing might be true of lawn mowers and basically anything else. And the extent of which those kinds of sharing will go will depend ultimately on the transaction costs, right? The power drill and the lawn mower, to me, seemed like really easy things; where, you know, someday it will be very, very normal for us not to own a lawnmower. But we'll have some sharing services not to own a power drill, because we'll have some sharing service for it. You know, on the other end of the spectrum would be something like a toothbrush, right? You know, even if you're very adamant brushing your teeth, you probably only brush your teeth, you know, four or five minutes a day. And so that means that basically 24 hours a day your toothbrush is sitting there idle, alright? There's probably not going to be a way to commoditize and monetize that idle time with the toothbrush. So, but the reason for that is transaction costs.

Stitzel: Well, social awkwardness if your…

Pjesky: Well.

Stitzel:…neighbor walks up…

Pjesky: Yeah.

Stitzel: and says can I borrow your power drill. You don't hesitate. If he asks if you borrow your toothbrush, you'd say no.

Pjesky: Yeah that's kind of weird. [Reiterates] That's kind of weird. But…

Stitzel: There's something different about [that] fundamentally.

Pjesky: Yeah.

Stitzel: I'm making a joke. But seriously those are personal items in a way that a power drill isn’t, right?

Pjesky: Right. That’s exactly right.

Stitzel: The end of the day -- I only care about toothbrushes in the stream of services. I don’t have any attachment to that particular…

Pjesky: Right.

Stitzel:…brush.

Pjesky: Exactly.

Stitzel: But if so, maybe the solution there's like, you know, dissolvable toothbrushes or something that I use once and throw away. But that doesn't solve anything. There’s a lot of things to unpack here. So the first thing is -- you said there are a lot of ways to define a firm. One of the ways that define a firm would be -- it's one/it's what solves these triangulation transfer and trust kind of thing. And so you said, well the trust is the hardest thing for me to solve. And in some ways it's like -- yeah I follow that argument, except I've gotten on every plane I've ever flown on. And I never have once known the pilot’s name. And half the time I [have] never even saw his or her face, and they were already in the cockpit doing their thing. I put my life [and] my family's life in the hands of these people that I never met. That’s really something powerful.

Pjesky: Yeah. This is one of the things that markets do, I think, really well is they provide a context to basically instantly build trust in certain circumstances, right? One of the, you know, --I always like to try to trap my principle students in class and tell them about you know is it ever smart to take candy from strangers, right? And of course, the immediate answer to that is, well no, you should never take candy from strangers because that’s like, you know, it's just a, you know,

Stitzel: Yeah.

Pjesky: it's just…

Stitzel: It's an axiom.

Pjesky: Yeah, it’s and axiom. And in our society but yet I tell me what we do that all the time. In certain contexts they’re very specific. You know, you might be visiting a grocery store that's handing out samples one afternoon. And if that were the case, and if you happen to have little kids, your kids might want to go have a bite of chip or, you know, whatever they're giving away. And of course in every case as a parent, you're gonna say: sure, go up to that person and take their food. And, you know, that's a stranger, right? That is in every definition of the word --- that's a stranger, all right? Even in a broader sense, when you buy a package of M&Ms that was/that's been handled by a multitude of people that you don't know. You know, in fact no one that you know probably has handled that M&M. But yet we buy it, we open it up, we eat, and we don't think anything of it. So one of the things that markets do is it provides these contexts for strangers to cooperate with one another in a way that's extremely trustworthy, all right? That building of trust is a transaction cost; where as the price of trust goes down, there's going to be more -- the extent of the market is going to go up. And we're gonna have more possibilities for exchange. That's exactly what Uber does. Among the other things that Uber does, is Uber provides a platform to build trust instantly among two strangers; because it's both strangers, right? Because you're inviting someone. If you're an Uber driver, you're inviting a stranger into your car too. So this is certainly, you know, this certainly goes both ways. So Uber provides a platform for there to be a market for that trust. And that enables us to conduct transactions that we otherwise wouldn't be able to. It's just a simple law of demand; costs go down [and] transaction costs go down, all right, [so] the number of exchanges go up. And that's what technology and innovation has given us through time. It's one of the most important and overlooked aspects of innovation. We always see innovation as something that's always coming from either science, technology, engineering, [or] something like that. But, you know, innovation can come from these kinds of arrangements to where trust is built. Of course it's a, you know, it's the technology that makes it happen. It's a smartphone that makes it happen, all right? But that's still a relatively small part of what's going on I think.

Stitzel: Well, and it's hard to see. Because I can point to: oh look -- we have wheels, and an engine, and now we have a car. The technology created that. And then you don't. Uber does not advertise that they reduce transaction costs. Yet, that’s…

Pjesky: That’s exactly what they’re doing.

Stitzel: That’s exactly…

Pjesky: That’s exactly what they’re doing.

Stitzel: That’s exactly what they do. But they don't advertise that. So it's difficult, I think, to see from the outside that these kind of innovations are just as powerful, if not more. But because they're never called that in an advertisement.

Pjesky: Well it's sneaky. It's hard to see. It's hard for us to see the value in that.

Stitzel: Yes.

Pjesky: You know, economists can, all right? But I think…

Stitzel: Even still.

Pjesky: Well, yeah. …I think a lot of it, you know, we certainly under value those kinds of innovations, all right? You know, most of the time we think of an innovation as something that's, you know, bigger or faster or something like that. So, you know, an innovation in a car would make that car go faster. An innovation in an automobile would make that car get better fuel mileage or something like that. And we would see those -- we would define those -- things very, very easily as innovations and as improvements. But a platform like Uber is also an innovation in transportation that doesn't have anything to do with the characteristics of the car, all right? But Uber makes every car that exists right now much more valuable than it was before, because they have the opportunity now to be used -- instead of sitting in your driveway, instead of sitting (in a sense instead of sitting) in your garage. And that is potentially [reiterates], that is potentially huge.

Stitzel: Yeah.

Pjesky: All right. That is potentially huge. Because, you know, we can, you know, we can have transportation much, much cheaper perhaps if this takes off.

Stitzel: So this trust thing is really important, because we just said: O.K., well don't take candy from strangers, but it's just fine to buy candy from strangers.

Pjesky: Right.

Stitzel: Seriously. And that's really counterintuitive. I think people would wrinkle their eyebrows actually if you tried to say that to them. And yet, we know that's true. And part of what's amazing about that -- and I think one of the things that economics tries to teach people that they're very resistant to learn --- is that self-interest isn't that much of a problem. And it's exactly situations like this -- if somebody comes up to you [and you] don't know them, [and] you've never seen them, and they hand you what looks like a perfectly good candy bar, [then] you’re probably not gonna eat that.

Pjesky: No.

Stitzel: If somebody comes up to you and says: here I have this tray of candy bars, and I'm trying to sell them and, you know, will you give me some money, and then pick out one of these candy bars -- you immediately know what their motivation is. Their motivation is to make some money so they can go purchase things --- that they have these candy bars, but they'd rather have something else. They want to trade you the money that they can go get something else.

Pjesky: Right.

Stitzel: And so the trust then -- it seems counterintuitive -- but when somebody comes to you and says: I want to sell you this, [then] it's probably ‘cause I want to sell you this. And you can trust them in as much as that works. So that's something that's really fascinating. Firms do that. And I think we live in a culture now that's like increasingly suspicious of firms. I think firms want to sell you money and we'd like to live in a world where everybody as everything altruistically.

That's not realistic.

Pjesky: Right.

Stitzel: And that's part of where firms are actually better than altruism in some ways, because it crystallizes your motivation.

Pjesky: Yeah I think so. And there's an interesting point. I mean, I'll buy Girl Scout Cookies and eat them, all right? But if someone came to my door and handed me a package of Chips Ahoy!, I'm not gonna eat them.

Stitzel: No way. No way. It doesn't make sense, right?

Pjesky: No. No. And that's something that's really, really bizarre.

Stitzel: You know, you even -- the other thing that I wanted to talk about is you mentioned the transfer thing. Uber solves transfer in a way that you don't think of them having solved transfer, right? You called it [that] they solve transfer reliably or credibly or something -- is what you said. But I've had this experience [where] I go and I call an Uber, and the first guy accepts it, and he starts driving toward me, and I can see on the little map here comes the car. It's seven minutes away or whatever and then he cancels partway through. And who knows why? You know, I have no idea why! Maybe he realized there's lots of traffic between you, me, and him. You don't want to do that. And Uber, without me doing anything, just reopens it [and] assigns me to another driver. And now a woman agrees to this. And then here she shows up seven minutes later. That's Uber solving transfer. It doesn't look like it, right?

Pjesky: Right.

Stitzel: Because Uber says what you care about is a ride. You don't care about which of these individuals, you know, (presuming that they're you know similar equality for whatever however) [because you care that] we measure that safety and performance of the car and whatnot. So they solved the transfer problem for me. Whereas, if I had called individual “A” and said: hey come give me a ride [and] he said: sure. And then he calls me halfway through and says: oh man, like my kid’s sick [and] I'm gonna have to cancel on you, [then] the transfer is broken, right there. Uber steps in and solves that. And that's something that's really fantastic that I don't think anybody has teased out about Uber. And it's not just solving the trust (which is amazing) it's [about] solving the transfer problem, right? And that is a traditional like brick-and-mortar firm. I think: I want to buy something. I want to buy a power drill. One thing is they solve triangulation. My first thought is: I'm going to go to Walmart, or Lowe's, or Home Depot, or whatever. I know where it is. And then they solve the transfer by holding the drill in the building…

Pjesky: Yeah.

Stitzel:…for me until I go and get it. So this way of solving triangulation, of literally going Uber knows where the car is, and it knows that I'm standing on this particular side walk -- triangulation [is] solved. And now I want to get this driver here, and he starts coming here, and he cancels, and then someone else comes and gets me --- transfer [is] solved. That's a completely different way of solving it than Walmart has.

Pjesky: Yeah. But they're doing the same thing. It just manifests itself in different ways.

Stitzel: Exactly.

Pjesky: You wanna go to Walmart, United, [or] wherever and buy bananas. And you go there and the bananas are there, right? You don't have any idea what their supply problem was, right? You don't have it --- I mean, you know, maybe, you know, maybe the company that they usually get the bananas from cancelled on them. And so they still have bananas there. So you know, they've solved that problem somehow. They always have everything. It's not like, you know, it's like all these relationships are always constant. It's very, very unusual for a grocery store, for instance, to be out of anything. So there is an entire network behind a brick-and-mortar store that solves all these problems as well behind the scenes. We don't see them, right? Now the way Uber does it, in the way your example is, that's a very dramatic way of solving it. And one of the things that's instructive about that is, that if you're in business, if you're a firm, all right, that serves the public [and] that expects to sell things to the public, you have to have the expertise to solve these supply chain problems, right? That's one of the things that firms do, right? [Reiterates] That's one of the things that firms do, right? They match up the seller with the buyer, all right? And the retail and wholesale --- they stand in between maybe the ultimate producer and the ultimate buyer. And all these problems that crop up with cancellations, bad weather, [or] whatever --- they solve these things behind the scenes, right? And that's the value that they add to that (to the economy), right? Uber does the same thing.

Stitzel: So I was thinking as we're talking this wholetime about Uber and cars. So most people pay tens of thousands of dollars for a car, and then they pay hundreds or thousands of dollars on maintenance. And I got to get tires. And put gas in it. And I have to do this, that, and the other thing. [That is] the cost of owning a car, so that I can have on-demand use of an automobile. And then I have to drive the darn thing --- is really high.

Pjesky: Those stagger.

Stitzel: It's just mind-blowing. And then I have to find a place on property near my house to park the thing. And then I'm gonna find property near where I work to drive the thing. And then I have a transaction coordination problem when I need this car. But my wife needs a car and, you know, she wants this car for that reason or the other. And then now we have to figure out --- O.K. well, Tuesday I'm gonna drive this car to work and you drive the other car. And then Wednesday we'll do it the other way, all right? There's a lot of people solve that just by owning cars that are his and hers. But there's lots of problems there. It just/it just screams for the kind of thing that could easily be solved. And so I look at Uber. Uber rides are not that cheap. And for whatever reason --- whether it's you mentioned, you know, the uncertainty of being able to call them whenever I need them --- it's really surprising/it will be surprising if we don't go down that road (and sort of eventually get everybody to renting cars all the time), then it will be if they end up keeping them just based on the extraordinary cost. We use tens of thousands of dollars a year. It's got to be lower thousands, maybe not tens of thousands.

Pjesky: But well, it depends on how expensive the car is.

Stitzel: Yeah.

Pjesky: You know, depreciation is a cost too. And that could be, you know, for a really nice car, that could easily be ten grand a year.

Stitzel: Well, I mean think about the present value of the money that you're spending…

Pjesky: Yeah.

Stitzel:…on that the depreciation of the car. Those things are related. Like that's a very high cost as well.

Pjesky: I mean, I would say stay tuned.

Stitzel: Yeah, absolutely.

Pjesky: Right? …on that because there's gonna have to be a lot of, you know, the sort of utopian world that a lot of people think about when they think about cars and not owning cars anymore, you know? It's -- you'd have driverless cars, and you'd have, you know, on-demand calling a car to come and to come and pick you up whenever you want to go somewhere. There's gonna be all kinds of problems in that. And, you know, we're having technology now that's new, right, that represents possibly an opportunity for massive change in how we do personal, you know, personal transportation. But on the other hand, you know, things aren't the way they are right now for no reason whatsoever.

Stitzel: Right.

Pjesky: So, you know, is it just high transaction costs that is causing me to own a car instead of basically somehow on-demand renting one? Is that the only consideration? I don't know. I don't know that.

Stitzel: I can think of one other thing, right? Cars are often status symbols. And so that would be something that as that erodes, because it almost certainly will in a world where we can. I don't care how fancy your car is. Like look at all the transaction costs and all the actual costs that I'm saving by being able to go and rent a car. Like you driving a nice car, and me having all my time and space and money, and that isn't gonna be a good trade. But right now it is. You know, I drive a car that's over 20 years old. So maybe I'm not the person who should be should be speaking to this. But I understand, you know, somebody comes out and [has] a nice car or something --- that is probably part of what's keeping people from renting the car all the time, right? There's…go ahead.

Pjesky: Well I mean social norms define that. You know, because if you save money on transportation needs then you can buy status other places other ways, right? If this becomes the, you know, if you save, you know, ten grand a year on cars, you know, think about the other status symbols you could buy with that.

Stitzel: Right.

Pjesky: So you have that, you know. It might be, you know, it might be the case that the social norms actually reverse.

Stitzel: Right.

Pjesky: If this becomes common and accepted, there might be a time in the future when you're actually looked down upon if you have your own car. That's almost -- it's not unthinkable to me --- but that's almost unthinkable to me. But, you know, we don't know the future. We don't know how these things are going to evolve and emerge. And, you know, the whole point of this conversation is let the listeners know that transaction costs are incredibly important components of all the change that we see around.

Stitzel: Hmm mmm.

Pjesky: They're not the only driver of these things, but they are a main driver, I think, of a lot of what we see.

Stitzel: So I want to take us in a related, but slightly different direction here. One of the things about lowering these transaction costs is [that] those are almost certain to be things that lower our deadweight loss (that are just lost to society). And parking lots would be one really obvious example of that. The number and the kind and the quality of cars, right? The number of cars in this, you know, sort of post-car ownership world probably drops dramatically, but the quality of them probably rises dramatically. We could think of lots of good ways/lots of good outcomes that would be from that. But I heard a recent interview with Andrew McAfee from MIT. And he talks about an idea called dematerialization which is --- there's been this trend in developed countries towards producing as much or more, but using fewer physical materials. Which is -- that's a miracle! And the fact that that isn't on the news every day -- I never heard of that before [but] I heard the interview --- that's mind-blowing.

Pjesky: Hmm mmm.

Stitzel: And then that's sort of a travesty of the news cycle. But that's neither here nor there. That can keep going, right? Imagine a world where there are no parking lots effectively. Because I don't own a car, and I don't drive to work. And I don't have to worry about driving and parking and storing my car, and then walking into work. So I just get dropped off at the front door by Uber. And then that parking lot now --- that's valuable space. Because parking lots are constructed near things people want to be in.

Pjesky: Right.

Stitzel: And that could lower the cost of houses. That could lower, you know, the cost of buildings. That could increase the number of businesses that we have. On and on and on all these good things that we could think of happening. And on top of that, use fewer materials to have…

Pjesky: More stuff.

Stitzel:…more and better stuff. So it's really fascinating that you can think of just sort of how broad transaction costs can be applied.

Pjesky: Yeah. And I think it's more marvelous than you even think.

Stitzel: Your saying I undersold it?

Pjesky: Yeah. I think so. I mean, I understand why you called things like parking lots deadweight losses, right? But, you know, right now parking lots [are] not really a deadweight loss.

Stitzel: No. That's right.

Pjesky: It's absolutely. It's necessary. It's absolutely essential.

Stitzel: Hmm mmm.

Pjesky: You know, my house has a garage. You know, that's not a deadweight loss for me. I actually need a garage, right? I've got to store my cars. I have to store my power drill. I have to store my/the things that I put [in] my garage --- they need to go there, right? And the reason I have a garage on my house is, again not a deadweight loss, it's because I have to store all these things that I own that I don't use very often. It's basically almost a definition of what you put in something in a garage. As these transaction costs to basically renting instead of owning go down, and I rent more and own less, then the parking lot can be released to other uses, right?

Stitzel: Right.

Pjesky: Right. Doesn't mean it was a deadweight loss before, right? If we somehow kept the parking lots, then maybe you could think of that as a deadweight loss. But, you know, my garage then can be transformed in something else. Parking lots can then be transformed into something else. And, you know, that creates a lot of really, really good things. You spend your money on something else. Spend our taxes on something else. You know, cities can be more dense without needing parking lots, without needing expensive road systems (which we might need less of if we had, you know, especially autonomous cars in some way). So everything could be made more efficient than it is right now because of the reduction in transaction costs.

Stitzel: We could live in a world where we have more for less --- is an unimaginable dream except that it’s very real. It's here. And how that isn't a primary story is beyond me. So I was thinking more of the nature of, you know, deadweight loss, not so much in terms of my garage itself, but these other kind of things that cause me to, you know, sort of unnecessarily have to store things, or search for things, or these kind of things. Could potentially be fine, and maybe I haven't thought about that very much, so maybe I need to think carefully about that. But there's something to be gained there. And then of course, this is an efficiency. That's an efficiency gain, hence why I labeled that deadweight loss. So I want to bring this in for a landing because we're over an hour now. The last thing that I want to sort of touch on is --- we've talked a lot about firms, we've talked about markets, we've talked about goods. And so we've really explored how we view ownership of goods and coordination differently. Do you think this impacts the way we eventually view jobs, employment, and income?

Pjesky: Well it almost certainly would, right? Because, you know, I mean, just with any, you know, creative destructive process --- which is what productions and transaction costs can give us --- the kind of work that we do is certainly going to change. So what do you think? Do you think this is gonna change the way we view jobs?

Stitzel: Yeah. So I'm really interested in that. Because one version of this story is [that] I own a drill and you don't own a drill. And then I make money off of owning a drill and then using Amazon's new drone flying service that flies. So that's one way. I mean, in a really extreme (and I would be loath to make this as a prediction), but like one really extreme version of this is like different resources and capital get distributed kind of evenly. And then we all kind of own different combinations of those. And then we have this income that's based on that. And then the work that we do is somewhat less important, right? That'd be an extremely radical version of the story. But like, you can picture it, right? And so one of the ways that I thought about that is: O.K. how are jobs gonna change? Well we just talked about --- where does the firm begin [and] where does the market end is in part determined by these little (you call them) bubbles that --- how can we coordinate transaction cost or minimize transaction cost? Well if we live in a world where we increasingly reduce transaction cost (in theory I haven't thought about this prediction very much so I could be very wrong about it), but in theory, right, we could see this sort of more market-type behavior and less firm-type behavior. I think a critic of me would say: well Amazon’s the biggest firm now in some ways and they're reducing transaction costs. I could be very wrong about that. But you can also see a world where when the transaction costs go down and the way that firms coordinate to reduce the transaction cost could also go down (get smaller). That's again -- I'm a little hesitant to make that as an actual prediction --- but is one way I could see jobs and the nature of work changing.

Pjesky: Oh, yes. I mean, certainly. You know, I don't think that we'd have any way to predict exactly where this will end up. You know, the world is different today than it was, you know, than anybody would have thought it was gonna be ten years ago. Anyway, you know, it’s just, you know, it's very, very difficult to see progress, I think.

Stitzel: Especially as it's happening all around you. And it's hard to put your finger kind of on how that is even happening now, let alone what it's gonna be like in the future.

Pjesky: Right.

Stitzel: So

Pjesky: Right. Excellent. So my guest today has been Rex Pjesky. Rex, thanks for being a part of the Econ Buff.

Stitzel: Thank you very much.