About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

The Myth of the ‘Sharing Economy’

Published in The Edge Malaysia, 9 - 15 November 2015, as "Understanding the 'Sharing Economy' as Drivers of a Freer Market".

The ‘Sharing Economy’ is essentially a system built around the sharing of physical and human resources, facilitating the shared creation, production, distribution, trade and consumption of goods and services by different people and organisations. Commonly cited champions of the ‘Sharing Economy’ include contemporary household names such as Uber, Airbnb, Delivery Hero and Malaysia’s own GrabTaxi, all of which qualify as ‘unicorns’ in the investment industry, with their startup valuations exceeding $1 billion dollars. Indeed, Uber and Airbnb, the foremost darlings of the sharing economy, are ‘deca-corns’ – unicorns valued over $10 billion dollars.

In effect, what the sharing economy does is that it matches people who have an unused resource that they want to ‘share’ with people who want that particular unused resource. For example, Uber matches people looking for rides in cars with those who are willing to ‘share’ seats in their cars for an agreed-upon price. For Airbnb, this particular resource is accommodation space, be it a room, an apartment, or even a castle! This peer-to-peer engagement of the sharing economy has led to an explosion of other such companies, with there now being an Uber for pet-sitting, an Uber for mail delivery, an Uber for services and many, many more.

With the growth of the sharing economy, many have begun reflecting on how it impacts both our current economy as well as the very notion of capitalism itself. Very notably, prominent economic journalist Paul Mason authored a book entitled, “Post Capitalism: A Guide to Our Future,” where he eloquently argues that, at the heart of the change from the capitalist to the post-capitalist era are things like information technology, new ways of working and the sharing economy. In particular, he argues that the sharing economy has given rise to collaborative production and consumption of goods, services and organisations “that no longer respond to the dictates of the market and the managerial hierarchy.”

In The Economist newspaper, it is stated that the key idea behind the sharing economy is that access trumps ownership and as such, “Just as peer-to-peer businesses like eBay allow anyone to become a retailer, sharing sites let individuals act as an ad hoc taxi service, car-hire firm or boutique hotel as and when it suits them.” Furthermore, the article concludes by saying, “It is time to start caring about sharing.”

I sincerely beg to differ with such comments. The ‘Sharing Economy’ is not something new, nor is it correctly labelled. The concept of the ‘Sharing Economy’ is a myth. Rather, the ‘Sharing Economy’ is actually just the creation of new markets for goods and services that hitherto did not have markets. Therefore, rather than bringing about the end of capitalism as Paul Mason contends, the ‘Sharing Economy’ of today – the Ubers, the Airbnbs, the GrabTaxis – are really drivers of ‘freer’ markets and thus, extending the reach and benefits of capitalism.

What Uber has masterfully done is to create a market or platform where many sellers can interact with many buyers to exchange a service (a ride) for a price. Calling Uber ride-sharing is inaccurate; to truly ‘share’ a ride is to, at the most, split the cost for it as opposed to paying the driver for the ride. When I share food with my girlfriend, we may split the cost, but I do not expect her to pay me a service charge for the fries she takes or the popcorn she eats. Similarly, Airbnb has created a marketplace for those who have spare rooms to rent them to people who would rather stay in homes as opposed to hotels. TaskRabbit, a company that matches people who offer services such as grocery shopping, deliveries, household chores and so on with people who want to purchase these services, is also a creator of a marketplace. In effect, these companies differ only from marketplace giants such as eBay, Alibaba and Amazon because their interactions are almost strictly peer-to-peer as opposed to business-to-peer. Nonetheless, they altogether match many buyers with many sellers.

Thus, when you have many buyers and many sellers and the medium of exchange agreement is a price, what you really have is, simply, a market. Alvin Roth, winner of the Nobel Prize in Economics in 2012 is an expert in market design, having designed markets for kidney exchanges (for medical purposes) in the United States as well as matching markets for schools and students in New York and Boston. In his recent thoroughly fascinating book, “Who Gets What – and Why: The New Economics of Matchmaking and Market Design,” Roth describes the three key factors for any market to operate smoothly.

The first is thickness, defined as the number of participants in the market. The thicker the market, the more participants and hence, the more successful the market will be. The second is low congestion, where congestion is described as a scenario where markets get too thick too fast and there is not enough time for transactions to be made, accepted, or rejected effectively. The third is safety, which refers to an environment in which all parties feel secure enough to make decisions based on their best interests, rather than attempt to game a flawed system.

For companies like Uber and Airbnb, it is safe to say that the market is already thick. The progress of innovation and technology – particularly with mobile technology – significantly reduced congestions in these markets and hence, where such markets were previously nonexistent due to the inability to overcome congestion, mobile technology made sure that transactions could be executed rapidly and hence, the particular market could succeed. In terms of safety, the peer-to-peer rating as well as secure payment devices used by these companies ensured that people could trust the market and trust that they were not being fleeced, either by buyers or sellers of the particular good or service. Hence, these markets for rides and for accommodation were able to be successful as the thick market was made non-congested by mobile technology and made ‘safe’ by quality assurances and secure payments.

In the case of GrabTaxi, the true value unlocked by GrabTaxi came from further reducing congestion of the taxi markets (since consumers could call cab companies such as Public Cab prior to the GrabTaxi technology) as well as ensuring the quality of the product for both consumers and drivers. This is particularly important in Malaysia given the reputation of taxis in Malaysia. Thus, while GrabTaxi did not create a new market per se, they did improve on an existing market in very substantial and valuable ways.

Thus, all these examples simply point back to the fact that the ‘Sharing Economy’ is not really a sharing economy, but rather just an extension or creation of market economies. Market capitalism is not being made obsolete by these types of companies; rather they are being made more prominent. What of government then? Governments around the world have tried to deeply regulate these markets, to the point of banning them. Uber, for instance, faces this problem in a variety of cities, including Kuala Lumpur.

However, while it is true that some regulation is required for such market activities – for instance, those who make money off collecting rents from their Airbnb properties should definitely be taxed for those rents – it is probably best for the government to really see how they can best optimise the rise of these markets. They create jobs; they increase economic efficiency; they unlock value from under-utilised resources. Given the Malaysian government’s high propensity to ban things that they cannot control, I would urge policymakers against their natural inclination to ban, and towards figuring out a way to optimally regulate these markets so that the benefits of these markets may accrue to as many new and/or existing market participants as possible.

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