Saving the World Through the Sharing Economy

Two American economists extol the upsides of the explosive growth in ride services and short-term room rentals, while acknowledging the pain of cabbies and hoteliers.

A user scans for an available vehicle using the Uber Technologies Inc.'s app on an  iPhone.
Bloomberg

In an episode of South Park broadcast in the United States last month, the world of transportation is revolutionized. Timmy, the disabled kid in the town, establishes a new business: a “car service” app a-la Uber, through which he carts the townspeople around riding a wagon pulled by his motorized wheelchair. His app becomes a huge hit as users discover that it’s cheap, efficient, environmentally friendly and even enables other people to drive the wheelchair themselves and make some money on the side.

But his success threatens another set of people – taxi drivers, whose expensive services are suddenly no longer required. They join forces with organized crime (in the shape of another boy) and the founder of Tesla, Elon Musk, who suddenly discovers that people prefer to use travel-sharing apps rather than buy electric cars. At the height of the episode, the “bad guys” band together to eliminate Timmy’s new service.

Naturally, the South Park plot is an excessive satire, but it draws inspiration from real conflicts in recent years about successful apps like Uber, Lyft, Airbnb and more. Their success has turned them into symbols of the Sharing Economy, in which millions of people around the world rent out rooms in their homes, their cars, objects and other services, sometimes for money and sometimes as barters for other services, all via the Internet.

From something that had been mainly the fief of activists with ecological concerns, the Sharing Economy has become a giant industry turning over billions of dollars. More and more tourists scorn hotels; they don’t hire taxis from regular stations and don’t rent cars from the big companies.

The Sharing Economy has clear advantages for its users, but it has its controversial aspects.

Uber and Airbnb have incurred regulatory wrath in the last couple of years; there have even been protests against their services, technically based on claims that they break the law and encourage tax evasion. In New York, for instance, housing activists complained that Airbnb was reducing available housing in the city’s already expensive and tight housing market, and that thousands of “affordable housing” apartments were being exploited as illegal hotels.

Homeowners renting out rooms and drivers who rent out their cars don’t pay much money for licensing to do so, if any, and pay no tax on their profits. Hence they have an unfair advantage in that their costs are much lower, say opponents: The upshot is that they endanger jobs of people like taxi drivers and hotel workers.

Why buy when you can use?

So, do the advantages of the Sharing Economy outweigh the disadvantages to society?

In September, 40 influential economists were presented with that very question by the Initiative on Global Markets institute at the University of Chicago. Their categorical answer was “yes”: Asked if it would benefit consumers if transportation services like Uber and Lyft could compete with taxi companies without price or route constraints, while obeying safety and insurance regulations, 60% said “yes, very much” and 40% said “yes.” None chose “not sure” or disagreed.

Prof. Oliver Hart of Harvard University, one of the economists responding to the IGM survey and a candidate for the Nobel Prize in economics, explained his position to TheMarker: When somebody comes up with a new service, or a new method of providing a service, “as a typical economist, I tend to say to say myself, ‘That’s what a laissez faire economy is all about.’ If I have a better way of doing something, the presumption is that I should be allowed to do it, if people are willing to buy it at the price at which I am willing to sell it,” Hart says.

Barring a clear counter-argument, Hart says, “my first reaction is there’s no reason to stop it. That’s my starting point. Then we have to consider if there are negative aspects to it. But the externalities, the sort of thing economists normally focus on as reason why a certain activity is bad, don’t seem to apply here.”

He is, however, quite sympathetic to the argument about the vendors of these services breaking the law. “I don’t think these people should be tax advantaged compared to traditional operators,” Hart elaborates. “I’m not in favor of the Wild West.

“On other hand, the people who bought these licenses are not going to be happy. What do you do about it? Do you say ‘tough luck,’ or do you compensate them? When it comes to that question we have to ask: The people who bought these licenses – are they especially poor members of society, or just unhappy that they made a wrong decision?” Hart says.

“I’m not sure that government should compensate people who made mistakes. I believe the gains to the winner will exceed the losses to the losers.”

The consumer gains when a new service become available or a new supplier enters the market, because choice becomes wider, Hart explains. “There’s also a knock-on effect, as existing suppliers have to respond by improving their service or lowering prices. One would assume that consumers would be better off.”

That’s the economic theory and it’s also what happens in practice, he says.

“There can be a concern that an innovator can be so effective that it drives out everybody else and becomes perhaps too big, a monopoly. That can be true too, but I don’t think that’s going to happen here. Uber is unlikely to become the only taxi operator in the world.

“Basically the point is there can be winners and losers. The argument for all these things is that the gains for the winners exceed the losses to the losers.”

Who needs a car?

Duke University professor Michael Munger is also an ardent supporter of the Sharing Economy, and sees few downsides in this new economic phenomenon. A major benefit is that a lot of wasteful excess capacity is going to actually be used, he explains.

“In cities we have too many cars, too many unused spaces. I get up in the morning and my car was in my garage all night. That’s a lot of space and the car hasn’t moved. If I have a long commute, I drive 45 minutes or an hour and put it in a parking space where it sits for nine hours, occupying space that could have been used for something else, and then I drive 45 minutes or an hour home, and put the car back in the garage. I have used the car in total for two hours a day, and yet the garage space and the parking space are used only by me.

“Whereas if I have something like Uber, I don’t need a garage, I don’t need a parking space and I don’t need a car. What I want is the services of the car. I don’t want the car itself. In big cities especially this could make a huge difference,” Munger says.

He too, however, professes concern about legality aspects. “I am a little more worried about those [price benefits] because some of the price advantages may come from getting around property rights regulations,” he says. “In the U.S., for instance, you have to buy the right to drive a taxi. You purchase a medallion, basically a license. This can pretty expensive. It’s not like a monopoly, more like a patent. Only the people who have these things can drive taxis.

“People in good faith bought those believing the state will defend them. And then Uber just avoids having to pay that cost. So their price is lower, but the reason is they’ve avoided playing by the same rules as everybody else,” Munger explains.

“So it’s not clearly a benefit. I’m worried that this is the Wild West period of the Sharing Economy, where we haven’t settled what the property rights are.”

The same applies to Airbnb, Munger says. By law, hotels have to have sprinkler systems and particular kinds of sanitation systems. Adherence to regulations costs them money, but none of that applies to personal homes that compete with the hotels on Airbnb.

If he were a taxi driver, says Munger, he’d be pretty angry that he played by the rules and paid for his medallion, and is now told that it has no value.

The Uber software isn’t by nature confined to private cars, the professor continues. “Taxis could use it. The advantage of Uber is much lower transaction costs. It’s the software that’s important, not the Wild West part of subverting regulations.”

Cost of transaction, not product

For the most part, Munger elaborates, Uber reduces the transaction costs of the exchange – the costs of consummating a transaction – which is not price of the thing itself.

“What happens is that you get a lot more transactions. Most people, for instance, have a power drill in their house. The average power drill is used 10 minutes during their whole lives, otherwise it just sits on a shelf. I can only rent it for maybe a dollar – no one’s going to pay much for it. I’d rather you’d rather rent it to me for a dollar, you’d rather rent it to me for a dollar, but it might cost us two dollars or even up to five dollars to negotiate this exchange, so there’s no point. The transaction costs dwarf the value of the transaction,” says Munger.

“But imagine we can reduce the transaction costs with something like Uber’s new delivery service. Once you start reducing transaction costs, a bunch of transactions we never thought of become valuable.”

In terms of disruptive capacity, Munger feels it’s comparable to the Industrial Revolution, he says. “People might be tempted to sabotage the Sharing Economy, but it will be not be effective because it’s inevitable. It’s unstoppable. The benefits are too large.”

Some may complain that it does harm too: “But what it means is that all of us can live a lot more cheaply and simply, and better,” he sums up. “We tend to think of the economy as something that produces jobs, but what if instead, the economy is something that produces satisfaction and leisure? Maybe I only have to work 10 hours a week. I won’t have very much income, won’t own much stuff, but I also won’t be putting such a drag on the environment. It could be a tremendous boon. It could be the solution to global warming.”