Friday, October 10, 2014

Why the Sharing Economy is Inevitable and We Need to Think Differently

by Kent Aitken RSS / cpsrenewalFacebook / cpsrenewalLinkedIn / Kent Aitkentwitter / kentdaitkengovloop / KentAitken

Last week Uber launched in Ottawa. It's a smartphone-based ridesharing platform that is structured more like a taxi-passenger relationship than a carpooling forum. Drivers got dinged with fines, Uber found workarounds, and we'll see where things stand once the dust settles.

Uber's one of many examples of the sharing economy, and it's one of the brands that has become a lightning rod for attention. For hospitality, it's Airbnb. Kijiji also fits this model, which is sometimes called collaborative consumption or the peer-to-peer economy.

Regardless of the virtues and problems people see in the sharing economy (often fairly, in both cases), here's why I think Uber and its ilk are inevitable, and why Uber is the latest in a long line of canaries in the coal mine for rethinking governance.

Information Asymmetry

Services like Airbnb, Uber, and Kijiji - connecting buyers and sellers, one-to-one - are all natural extensions of traditional markets. What we're learning is that this demand and supply always existed. What was missing was the ability to connect the two. The previous state of affairs should actually be considered a market failure: a inefficient allocation of resources resulting from people not having certain information available to others. At its simplest, "I need X" and "I have X". The digital age has started to fix this information asymmetry.

Pre-internet, hotels actually provided a significant informational service in addition to hospitality. Standards, chains, brands, prominent signage, Yellow Pages outreach, and marketing in tourism guides were all important for people looking to find a place to stay in a different city. So we paid a premium on rooms to compensate hotels for their work towards minimizing information asymmetry between sellers and buyers, which took the form of "We have rooms."

Another example might be banks. The old banks in our towns and cities are opulent, grandiose stone buildings, lined with pillars, laid with marble floors. Consumers paid a premium on interest not to create cushy offices for bankers, but for our own sense of confidence in banks, and in their reliability and permanence. Marble floors have a certain "We'll still be here next year" vibe to them, which was important for those storing their money.

Today, we can focus more so on the core value: a place to stay, money management, or transportation. Advertisement has somewhat gone from a foundational service to a differentiating factor, from the safety row of Maslow's hierarchy to the belonging, self-esteem, or self-actualization rows. That is, from "We have rooms" to "Here's the sort of person you'll be if you stay at our hotel instead of our competition's." The added value of a memorable phone number or a Yellow Pages presence has been leveled.

Weak Sustainability

The reason I think services like Airbnb and Uber are inevitable is that in the long term, it's actually a completely indefensible policy position to stop them.

Sustainability has become a loaded term, but stripped of its political connotations it simply means that an activity isn't destined to ruin by virtue of its own existence. That is, we can keep doing it. Even the cold economical view supports at least "weak" sustainability, or the maximization of value over time. The difference between this view and the environmentalist or "strong" sustainability view is that the former doesn't care whether this value comes from natural capital or man-made capital and technology. But both views have a common principle, which is using resources as efficiently as possible. If there is both demand and supply for additional uses of privately owned goods such as houses and vehicles, we'd be failing both economically and environmentally by artificially limiting that market-driven allocation.

Power tools are perhaps the good example here. A drill might get used for 20 minutes a year, yet every house on a street contains one. To bastardize a cliché: these people don't need drills, they need holes. What's emerging now is the sharing mechanism. The good news is that once the information asymmetry is fixed, the natural resources otherwise becoming drills will still get used, and the money otherwise paid for them will still get spent. Just in theoretically more efficient* ways.


The two big curveballs introduced by the increasing prominence of services like Airbnb and Uber are taxation and regulation, the latter including consumer protection and safety. The economist lens might suggest that theoretically, buyers of these services have included those reliability, safety, and recourse risks in their decisions. In reality, we know that things are much more complicated than that.

I don't know the answer. Rather, I think that we should rephrase the question. Right now it's a composite of "Should we allow this?" and "How would we ensure tax revenues and consumer safety?" It needs to become "If this is a natural extension of the entire system on which our economy is built, what does that mean?"

(With, perhaps, a degree of empathy towards those whose livelihoods are reliant on the markets that are experiencing change.)

And it doesn't matter what proportion of a hospitality or transportation market peer-to-peer services consume. Small percentages of large markets, over long periods of time, turn into large absolute figures.

The Canary in the Coal Mine

Uber is a fascinating story because it didn't need to be a shock. An analogue of what happened in Ottawa with Uber last week has been happening in New York City for the last few years with Airbnb. Scrambling regulators, consumers with no clear guidance, providers fined as though by random chance, entrenched interests lobbying and crying the wolfest of wolves.

The pressing policy questions surrounding the sharing economy deserve attention. How does government react?

However, there are more interesting questions, considering Uber as a case study, not a standalone problem. How does government understand and internally amplify signals of change?

*Yes, I am aware of the irony. If you take a completely macro view of efficiency, those long-term investments referenced in my last post become efficient as well.

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