The sharing economy: Macroeconomic overview
Phuah Eng Chye (7 October 2017)
The shift in sectoral leadership from manufacturing to services represented the economic dominance of intangibility. The continued improvements in information capabilities is now taking us to another tipping point which is unleashing the information effects of speed (real-time, algorithms), size (scale) and transparency (videos, social media).
The poster child of this tipping point is sharing. In this regard, services operate in the traditional modes of ownership and exchange (buy and sell) as appropriate to a physical environment. Sharing is an important milestone marking the shift in economic value from the traditional concepts of ownership and exchange to newer modes such as access, participation and experience.
Irene C. L. Ng explains that in manufacturing, objects just need to be produced and the focus is on worth and exchange. “This turns production processes into value-creating processes, with the final product holding all the value.” The “goods-dominant logic” prizes what is visible as “firms have limited visibility on use and experience because it is after production and after the transaction” with the “natural tendency was for marketing to serve exchange value, rather than use-value”. As a result, “ownership was equal to outcomes” in manufacturing.
Irene C. L. Ng explains that as more products become connected, smart and multifunctional, “ownership is a rather ineffective idea…because creation rests in the experience, rather than the ownership or essence, of an item or service.” She explains “customer resources become essential to fulfil the value proposition. These resources are part of the experience that creates the value, and need to be considered for the design of offerings. Indeed, some of these resources by individuals themselves may become part of the firm’s value proposition, especially when they create network effects.” She notes “the outcomes arising from value in-use are not merely functional, but also emotional” and that “we don’t get our compensation when we buy. We get it when we use it.”
Sharing is thus a more expansive concept than ownership. It multiplies the number of users of an asset and blurs the boundaries separating personal from commercial use. Juliet Schor categorises sharing into four broad categories: recirculation of goods, increased utilization of durable assets, exchange of services, and sharing of productive assets.
- Recirculation of goods. Marketplaces for the recirculation of goods originated in 1995 with the founding of eBay and Craigslist which relied on software to reduce the high transaction costs of secondary markets and on crowdsourcing for reputational information to reduce the risks of transacting with strangers. Their success prompted the launch of many similar sites including those focused on free exchange and barter.
- Increased utilization of durable assets. The second type of platform facilitates more intensive use of durable goods and other assets. The innovator was Zipcar which placed vehicles in convenient urban locations and offered hourly rentals. There has since been a proliferation of sharing services for cars (e.g. Uber, Lyft), bicycles and lodging (e.g. Couchsurfing, Airbnb) as well as a revival in non-monetized and neighbourhood-based initiatives.
- Exchange of services. Service exchange originated with time banking in the 1980s. Time banks are community-based, non-profit multilateral barter sites in which services are traded on the basis of time spent. Time banks have found it difficult to expand due to the challenge of pairing users who needed tasks done with people who do them.
- Sharing of productive assets. This category focuses on sharing assets or space in order to enable production rather than consumption. Cooperatives has been around since the 19th Recent versions include hackerspaces, makerspaces and co-working spaces or communal offices. Other production sites include educational platforms that aim to democratize access to skills and knowledge and promote peer instruction.
Sharing can improve economic efficiency. In this regard, matching inefficiencies cause wastage in the form of under-utilised assets or waiting time. Sharing or real-time matching platforms address these inefficiencies through harnessing crowd participation to improve coordination and increase asset utilisation.
However, sharing has significant macroeconomic consequences. While utilisation levels and efficiency improves, sharing is potentially a deflationary force that dampens purchases or reduces the need for consumers to own assets. Hence, sharing affects output, consumption and income but the overall macroeconomic outcome depends on whether the gains from sharing in expanding new uses and demand is able to offset the loss from the consequential reduction of prices, income and purchases.
Sharing also has the effect of redistributing benefits and costs among different stakeholders. For example, sharing increases the utilisation of non-commercial assets at the expense of commercially-owned assets. Sharing-based platforms also seek to exploit the existing infrastructure and to arbitrage legacy and friction costs by bypassing regulatory obligations such as approvals, inspections and taxes. The conflicts between the sharing platforms and the traditional operators diminish the value of traditional licenses and franchises while the entrants are (momentarily) able to command high premiums from investors.
In addition, sharing and other platforms orientate society towards transience by favouring transactions (use, prices) over relationships (ownership, wages). Real-time auctions imply higher price volatility as well as potentially creates the opportunities for price manipulation as part of competitive strategies to achieve dominance. An economy run purely on auctions and prices will work in favour of the rich and increase social polarisation based on income and wealth. Hence, at the macroeconomic level, the pricing effects of sharing can be deflationary, de-stabilising and discriminatory.
Sharing and financialisation are opposing forces. Sharing is a trust-based approach that relies on transparency and profiling to facilitate coordination and exchange among strangers. Sharing thus generates social capital but the outcome is typically a reduction in the monetary elements of exchange. Hence, sharing can lead to social capital replacing financial capital. Sharing also reduces the value of the ownership of physical assets. This diminishes the value of capital and reduces the need for savings.
Nonetheless, sharing is an important stepping stone in the transition to an information society. Sharing underscores the important role of information as a tool for promoting trust, cooperation, participation and coordination to raise living standards. But it is not a panacea. A detailed assessment of the many aspects of sharing is needed to understand the public policy issues. The next few articles will explore the sharing business and the organisational challenges it poses to industry and regulators.
References
Irene C. L. Ng (2014) Creating new markets in the digital economy: Value and worth. Cambridge University Press.
Juliet Schor (October 2014) “Debating the sharing economy”. Great Transition Initiative. http://www.greattransition.org/publication/debating-the-sharing-economy.
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society. http://www.amazon.com/dp/B01AWRAKJG
Phuah Eng Chye (29 July 2017) “The significance of information effects”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/the-significance-of-information-effects/