My Say: Understanding the ‘sharing economy’ as drivers of freer market

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This article first appeared in Forum, The Edge Malaysia Weekly, on November 9 - 15, 2015.


THE “sharing economy” is essentially a system built around the sharing of physical and human resources, facilitating the shared creation, production, distribution, trade and consumption of goods and services by different people and organisations.

Commonly cited champions of the sharing economy include contemporary household names such as Uber, Airbnb, Delivery Hero and Malaysia’s own GrabTaxi, all of which qualify as “unicorns” in the investment industry, with their startup valuations exceeding US$1 billion. Indeed, Uber and Airbnb, the foremost darlings of the sharing economy, are “deca-corns” — unicorns valued over US$10 billion.

In effect, what the sharing economy does is that it matches people who have an unused resource that they want to share with people who want that particular  resource. For example, Uber matches people looking for rides in cars with those who are willing to share seats in their cars for an agreed-upon price.

For Airbnb, this particular resource is accommodation space, be it a room, an apartment, or even a castle! This peer-to-peer engagement of the sharing economy has led to an explosion of other such companies — now, there is an Uber for pet-sitting, mail delivery, services and many, many more.

With the growth of the sharing economy, many have begun reflecting on how it impacts both our current economy as well as the very notion of capitalism itself. Very notably, prominent economic journalist Paul Mason authored a book entitled Post Capitalism: A Guide to Our Future, where he eloquently argues that at the heart of the change from the capitalist to the post-capitalist era are things like information technology, new ways of working and the sharing economy.

In particular, he argues that the sharing economy has given rise to collaborative production and consumption of goods, services and organisations “that no longer respond to the dictates of the market and the managerial hierarchy”.

An article in The Economist stated that the key idea behind the sharing economy is that access trumps ownership and as such, “just as peer-to-peer businesses like eBay allow anyone to become a retailer, sharing sites let individuals act as an ad hoc taxi service, car-hire firm or boutique hotel as and when it suits them”. It concludes by saying, “It is time to start caring about sharing.”

I sincerely beg to differ with such comments. The sharing economy is not something new, nor is it correctly labelled; the concept is a myth. Rather, it is just the creation of new markets for goods and services that hitherto did not have markets. Therefore, rather than bringing about the end of capitalism as Paul Mason contends, the sharing economy of today — the Ubers, Airbnbs and  GrabTaxis — are really drivers of freer markets and thus, extending the reach and benefits of capitalism itself.

What Uber has masterfully done is to create a market or platform where many sellers can interact with many buyers to exchange a service (a ride) for a price. Calling Uber ride-sharing is inaccurate; to truly share a ride is to, at the most, split the cost for it as opposed to paying the driver for the ride. When I share food with my girlfriend, we may split the cost, but I do not expect her to pay me a service charge for the fries she takes or the popcorn she eats.

Similarly, Airbnb has created a marketplace for those who have spare rooms to rent to people who would rather stay in homes as opposed to hotels.

TaskRabbit, a company that matches people who offer services such as grocery shopping, deliveries, household chores and so on with people who want to purchase these services, is also a creator of a marketplace. In effect, these companies differ only from marketplace giants such as eBay, Alibaba and Amazon because their interactions are almost strictly peer-to-peer as opposed to business-to-peer. Nonetheless, they altogether match many buyers with many sellers.

Thus, when you have many buyers and many sellers and the medium of exchange agreement is a price, what you really have is, simply, a market. Alvin Roth, winner of the Nobel Prize in Economics in 2012, is an expert in market design, having designed markets for kidney exchanges (for medical purposes) in the US as well as matching markets for schools and students in New York and Boston. In his recent thoroughly fascinating book, Who Gets What — and Why: The New Economics of Matchmaking and Market Design, Roth describes the three key factors for any market to operate smoothly.

The first is thickness, defined as the number of participants in the market. The thicker the market, the more participants and hence, the more successful the market will be. The second is low congestion, where congestion is described as a scenario where markets get too thick too fast and there is not enough time for transactions to be made, accepted or rejected effectively. The third is safety, which refers to an environment in which all parties feel secure enough to make decisions based on their best interests, rather than attempt to game a flawed system.

For companies like Uber and Airbnb, it is safe to say that the market is already thick. The progress of innovation and technology — particularly with mobile technology — significantly reduced congestion in these markets. Where such markets were previously non-existent due to the inability to overcome congestion, mobile technology made sure that transactions could be executed rapidly and, hence, the particular market could succeed.

In terms of safety, the peer-to-peer rating as well as secure payment devices used by these companies ensured that people could trust the market and trust that they were not being fleeced, either by buyers or sellers of the particular good or service. Hence, these markets for rides and for accommodation were able to be successful as the thick market was made non-congested by mobile technology and made safe by quality assurances and secure payments.

In the case of GrabTaxi, the true value unlocked by it came from further reducing congestion in the taxi markets (since consumers could call cab companies such as Public Cab prior to the GrabTaxi technology) as well as ensuring the quality of the product for both consumers and drivers. This is particularly important in Malaysia given the reputation of taxis in Malaysia. While GrabTaxi did not create a new market per se, it did improve on an existing market in very substantial and valuable ways.

 All these examples simply point back to the fact that the sharing economy is,  rather, just an extension or creation of market economies. Market capitalism is not being made obsolete by these types of companies, but is being made more prominent. What of government then? Governments around the world have tried to deeply regulate these markets, to the point of banning them. Uber, for instance, faces this problem in a variety of cities, including Kuala Lumpur.

However, while it is true that some regulation is required for such market activities — for instance, those who make money off collecting rents from their Airbnb properties should definitely be taxed on those rents — it is probably best for the government to really see how they can best optimise the rise of these markets. They create jobs, increase economic efficiency and unlock value from underutilised resources.

Given the Malaysian government’s high propensity to ban things that it cannot control, I would urge policymakers against their natural inclination to ban but figure out a way to optimally regulate these markets so that the benefits may accrue to as many new and existing market participants as possible.

Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division