With Travis Kalanick stepping down as CEO of Uber this week, it is clear that the first half of 2017 has not been kind to Uber. Given that the global ridesharing company was once valued at nearly $70 billion, and that pitching startups as an “Uber for X” was once a practical necessity for accessing venture funding, it is understandable why some people are souring on the so-called sharing economy as a whole. Though Uber is a great example of how technology is changing the ways that people live and work, the economic trends that enable the sharing economy extend far beyond Uber.
Underpinning this new economy is the economic concept of “transaction costs.” Nobel Prize-winning economist Ronald Coase explains that transaction costs are what it takes to bring together buyers and sellers, exchange information, negotiate prices and enforce contracts.
The sharing economy is made possible by recent technological advances substantially lowering transaction costs. Peer-to-peer interaction over the Internet gives consumers and providers of goods and services the ability to quickly connect with and gather information about others.
On one hand, the needs served by sharing-economy companies are nothing new. There have always been people who wanted to buy a hard-to-find product, find a place to stay, access cash, eat a home-cooked meal, find assistance on a task or figure out a way to get from point A to point B. The problem was finding someone who was willing to offer the desired goods or services at a reasonable price.
Imagine what it would have been like if people went from door to door asking homeowners if they had an extra room to rent and for how much. Now, with only a few clicks, travelers can simply go on Airbnb and find a room that fits their needs and budgets. Similarly, hitchhiking — a primitive version of ride-sharing — was never a very efficient way to find rides.
The sharing economy is so effective because it drastically expands a person’s social network.
Beyond increased access, information is one of the hallmarks of the sharing economy. The rise of the Internet and the proliferation of smartphones exponentially increase access to information, giving consumers a level of power that they’ve never had before.
Consider the following change in market dynamics. Each business transaction has three distinct parts: the buying decision, which is controlled by consumers; the selling decision, which is controlled by businesses; and information about the product or service. In the past, this information was controlled, or at least greatly influenced, by businesses. Correcting this “information asymmetry” was a major justification behind consumer protection regulations. But all that has changed in today’s economy because information is now in the hands of consumers.
Online feedback systems show how the costs of finding information have dropped dramatically. Buyers frequently read reviews of products to see whether other customers were happy or unhappy with their experiences. These reviews can be produced by trusted organizations and professionals, or they can come from the vast online community of past users. Peer-to-peer online interactions are like word-of-mouth reviews — only online interactions can reach exponentially more people than word of mouth ever could.
Americans have already absorbed many of the values of the sharing economy — particularly entrepreneurship. Indeed, millennials have been called the “start-up generation.” A Bentley University survey finds that two-thirds of millennials have a desire to start their own business. And a Deloitte report shows that about seven in 10 millennials envision working independently at some point in their careers.
It’s still hard to start a business, but before these innovative changes in the economy, growing that business was even more difficult.
This was especially true for niche products that needed to reach a customer base spread all over the world. By catering to producers of niche products, online platforms like the craft shop Etsy help create widely-successful independent companies. eBay has provided a similar type of benefit to sellers since 1995. In other words, the sharing economy enables greater levels of entrepreneurship because it makes it easier for millions of people to work for themselves as independent contractors.
For the last decade, the American economy has been generating more jobs in which workers are self-employed and contract out with other companies to offer their services. While people working for companies such as Uber and Airbnb still account for a small percentage of the U.S. labor force, the individualized work arrangements that the sharing economy embraces make up a much larger, and growing, share of work arrangements.
Data from George Mason University’s Mercatus Center show that the number of 1099-MISC tax forms issued by the IRS to independent contractors increased by nearly 25 percent from 2000 to 2014, demonstrating that the shift toward independent work preceded the founding of Uber in 2009. On the other hand, the number of W-2s, the tax forms used by salaried employees, slightly decreased over that same time.
The key to understanding the sharing economy is the realization that the real driving force behind these changes is not flashy smartphone apps, but lower transaction costs.
As the economic trends that drive the sharing economy expand their reach into more industries beyond for-hire vehicle transportation, regulators will surely continue to find themselves in uncharted territory, and their decisions will have major effects on economic growth. When these regulators encounter new business models, they need to keep in mind that waging a war on lower transaction costs is the definition of fighting progress.
Uber’s struggles over the past six months do not change this reality.
The above was an excerpt adapted from the author’s new book, “How Progressive Cities Fight Innovation” (Encounter Books, June 2017).
Jared Meyer (@JaredMeyer10) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior research fellow at the Foundation for Government Accountability.
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