What Are The Limits To The Sharing Economy?

The sharing economy can be broadly defined as a set of economic activities that go beyond the traditional model where goods and services are directly supplied to consumers by specialized producers that use their own capital goods to supply them.

The emergence of its elements has been one of the biggest economic stories of the recent years. Uber, Lyft and many other start-ups have disrupted the taxi markets, Airbnb has forever changed the set of alternatives that travellers face when choosing a place to stay for their trips, crowdfunding platforms like Kickstarter have allowed people to more easily raise money for all kinds of projects. Facebook, Twitter, Youtube, Reddit, Tumblr and other social networks gave ordinary people the platforms to publish and evaluate all sorts of content.

And all this is only the beginning. The rise of major distributed technologies, i.e. blockchains (especially Ethereum) and decentralized information storage and transmission tools like IPFS may make the sharing economy greatly more powerful. The key reason for this is that the sharing economy is more vulnerable if it over-relies on bottlenecks like Uber and Airbnb, since they can be targeted by governments at the incitement of those whose economic fortunes  are temporarily diminished through progress. Blockchains and other decentralized protocols also facilitate interoperability between various devices and systems in the sharing economy, especially with regard to the Internet of Things (IoT). The most promising projects combining the aforementioned approaches include the energy-sharing project Dēmos, the smart-city Project Oaken, the computational capacity-sharing project Golem, the decentralized music-distribution platform Ujo.

Quite soon, ordinary people will probably be able to lend their bikes and even washing machines, have their cars pay for using toll roads, be able to lend their computers for graphic rendering and scientific research without moving them an inch and 3D-print various objects for other people. Even companies without the centralized structure, whose whole governance is conducted electronically, are not an impossibility, even though the first major experiment with this concept, The DAO, was an abject failure. Doubtless, there are also countless other applications that have not yet been publicized or even imagined.

“What are the limits to the sharing economy?”

Given the perceived potential of the sharing economy it is easy to exaggerate its promise. History shows us that humans are pretty good at doing that, as the example of electricity demonstrates particularly vividly. Thus, the basic question arises, “What are the limits to the sharing economy?” More precisely, one could say that this question boils down to the following three major sub-questions:

1. Could the vast majority of people one day own almost nothing and satisfy their needs through renting stuff from a few owners?
2. Could the sharing economy ultimately spell the end of large enterprises like Apple, Google, Boeing, Ford, etc.?
3. Could the sharing economy enable us to make much of government intervention much less stifling or even irrelevant?

Sharing economy and owning stuff

A skeptical attitude to consumerism makes some people imagine that the advent of the sharing economy will mean that most people will not own many things, and get by through renting many essential items from others.

Perhaps the crucial reason why most people probably will not rent everyday items like washing machines is that people have diverse preferences about things, and it is easier to best satisfy those preferences through producing things directly for various subsets of the market rather than through producing things for some people so that they both use them and rent them out to others. In other words, ordinary buyers of e.g. washing machines probably will not be prepared to correctly identify the needs of the people who could occasionally rent washing machines from them. This goes contrary to the principle of division of labor that made our societies so wealthy.

It may be appealing for a poor student living in a small studio to rent someone else’s washing machine once a week, but a wealthier person will probably find it more convenient to just buy one.

In addition to this, sharing stuff is associated with a substantial non-monetary cost in that users will tend to have to spent more time and effort for locating and picking the shared items than when they just use their own ones, even if blockchain-based solutions will minimize the need for interacting and negotiating with the owners. In other words, it may be appealing for a poor student living in a small studio to rent someone else’s washing machine once a week, but a wealthier person will probably find it more convenient to just buy one.

Sharing economy and corporate hierarchies

The example of the DAO mentioned above, the possibility of uberizing Uber and the popularity of the idea of employee-owned enterprises, makes people wonder whether large, vertically integrated enterprises will soon become a thing of the past. There are at least two major reasons why the danger for companies is significantly overstated.

To start with, there is a major theoretical reason for which firms exist that goes beyond the transaction costs explanation provided by Ronald Coase. To the extent that the sharing economy lowers the cost of transactions in flatter organizational frameworks, it may indeed promote the latter. However, there is a reason for firms’ existence that is not widely recognized but that is arguably far more important than transaction cost reduction. Quite a few people know about the economic calculation problem and how it makes socialism impractical, but this issue also has the implication that it is not just prices of both consumer and capital and intermediary goods that are needed for rational economic planning. Someone actually needs to do the calculation, and in the context of limited knowledge and real uncertainty it takes entrepreneurial alertness to find the opportunities for moving resources to better uses. Certainly, individuals or small groups are far better suited to quickly reacting to such opportunities, just imagine the chaos of, for instance, 10,000 employees deliberating about whether to create a new production line. Recent research (see, e.g. here) seems to bear out this idea by showing that the importance of individual CEOs has actually grown dramatically over the last 60 years.

The importance of individual CEOs has actually grown dramatically over the last 60 years.

In addition to the above, the sharing economy does not just empower individuals and remove intermediaries. In many cases, it can facilitate the operations of large firms, too, perhaps even to a greater degree. After all, if an individual can benefit from renting out her idle washing machine, a construction company can profit from renting out its idle construction equipment, for example. This may actually allow large companies to hold more equipment, and concentrate enterprise size somewhat.

All that said, the sharing economy does not have to flatten corporate hierarchies to contribute substantially to economic progress. If it allows to use business equipment more efficiently, for example, it will already be a big boon. It will also be very beneficial if it integrates internal company processes with the blockchain, reducing the potential for fraud, increasing the accountability of managers to shareholders, etc.

Sharing economy and government intervention

To say that sharing economy has inspired libertarians would be an understatement (see this glowing article by Jeffrey Tucker, for instance) However, the answer to the question whether it can actually in itself seriously curtail government intervention is “probably no”.

The general principle that it tends to be much easier to destroy than to create applies to the sharing economy, too. Consider that wherever governments decided to seriously confront Uber, it had to comply with their demands. In France and in Austin, Tx, Uber had to pull out its ridesharing service when forced to do so through regulation. One can of course claim that a blockchain-based decentralized Uber like Swarm City will be far less vulnerable to government diktat since there will be no executives to arrest and no corporate servers to seize. While this is true, there are still important ways for governments to marginalize such a service. For instance, they can prohibit the exchange of the cryptocurrency(ies) used by it into fiat money or institute draconian punishments for drivers using it to deal with their clients. In other words, while the sharing economy probably increases the costs of government predation, it does not fundamentally hamper it.

Technological change does not have to directly shrink government in order to undermine its reach in the longer run.

However, we should not draw a depressing conclusion from this observation. After all, technological change does not have to directly shrink government in order to undermine its reach in the longer run. The dramatic technological and organizational change that took place in the late 18^th – early 19^th century has shown to people that massive, genuine progress is possible if human initiative is liberated from the shackles of tradition, authority and rigid status structure. This resulted in rapid abolition of monopolies, guilds, slavery, tariffs, restrictions of movement and other shackles.

Especially by showing that many government-provided services can be better provided privately, be it through side-stepping copyright through projects like Ujo or rendering obsolete government-secured identity through blockchain-powered identity tools like Uport, the sharing economy can contribute to getting people to peer outside the Statrix.

Daniil Gorbatenko is a PhD candidate in economics at Aix-Marseille University in Aix-en-Provence, France, a member of Students for Liberty Aix-Marseille, and a contributor to ESFL’s blog. 

This piece solely expresses the opinion of the author and not necessarily the organization as a whole. European Students For Liberty is committed to facilitating a broad dialogue for liberty, representing a variety of opinions. If you’re a student interested in presenting your perspective on this blog, please contact [email protected] for more information. Header picture source: Flickr.