The Sharing Economy has its roots in the subprime crisis

The Sharing Economy has its roots in the subprime crisis

This post is about the Sharing Economy. I read triumphalist comments about collaborative consumption, access economy and peer to peer markets. They are mainly driven by the meteoric growth of companies like Airbnb and Uber, but not all the glitters is gold and a wise reader has to know it. It does not mean I’m against the Sharing Economy, which would be like standing inert in front of a tsunami wave. I just would like to add a few strings to your bow, something less obvious than what you read in the news.

I’m going to tell you why is risky to judge the effects of the Sharing Economy in the short term. I’m explaining you why the platform is more important than the product and what does it mean in the long term. I will make you notice that the Sharing Economy exploded just after corporate profits got disconnected from salaries and show you what this means from an historical perspective. I thought this post would fit well in the Disruptive Technology section of the Futurist Hub blog, although I admit this topic is more macro economy than pure technology. I hope you will forgive me about this.


It’s risky to read the effects of the Sharing Economy in the short term

The first issue about understanding the real value of Sharing Economy is that it’s not captured by conventional measures. Inadequate measurement is an issue, because it opens to speculations, evaluations made on the basis of the interests of just one party and non transparent calculations. Many of the benefits of these new activities (like renting your second house for a few days on Airbnb) are not accounted for in the calculation of GDP, in the same way that private housework and childcare are excluded. We can somehow mitigate this issue by thinking that if we are creating more value than what our indicators can capture, it’s good anyway, because it’s more value and not less value in the end. In addition to it, thanks to the Sharing Economy we are making a better use of existing assets (houses, vehicles, equipment etc.) rather than merely producing more stuff, which would be included in the GDP statistics, but won’t be necessarily good for the planet. Last but not least, the common idea, about the Sharing Economy being more egalitarian than pure capitalism and an engine of wealth redistribution is extremely intriguing. If I can offer an underused asset like my time, my car or a room to make some money on it, that cannot be negative.

The Sharing Economy has its roots in the subprime crisisThe point is that economy is about balances. And we don’t have metrics to capture if the Sharing Economy is generating a positive balance for the society as a whole. For example, Airbnb accounts for 425,000 guests per night, totaling more than 155 million guest stays annually, which makes them bigger than Hilton Worldwide. But what’s the impact to the bottom line of the hotels operating in the same places where Airbnb is present? Nobody really has an answer, but for sure the story of the underused asset here does not work anymore. Airbnb stays are not entirely incremental, they drain hotel guests, there’s a fierce price competition and if hotels’ profits drop down, there will be consequences on their investments and level of employment. I want to be clear, the problem is not the competition (the low-end, low quality hotels in direct competition with good quality private stays will exit), the problem is that if we believe the Sharing Economy model generates a positive balance by definition, I cannot be sure of it. I can continue with this example and add another interesting consideration. In a Sharing Economy environment, when I buy a house I can decide to go for 3 bedrooms, even I need only 2, because I know I can temporary rent the third one, thus mobilizing more resources on the market. And this is good in principle. But this will also generate an increase in long-term rent prices. If I can earn a reasonable extra-cash by renting a room fragmenting the daily stays to many different guests, when I rent my house for a month or a full season I’m going to ask for more than I used to do in the past. And this is happening. So a traveler spending a weekend in a place can benefit from the Sharing Economy solution and spend less than he would have spent in a hotel. But if he decides to stay for a month he’s going to spend more than in the past. Once again, it’s hard to draw a line and say if the overall effect is positive.

This kind of approach can be replicated for any category of business impacted by new Sharing Economy apps and models. Uber issue is more about regulatory items and labor rules. I’m happy to get some extra-cash with my car, but I’m just another short term contractor, having no benefits, social charges, insurance, and injuries coverage etc., compared to a standard employee. Once again it’s not clear if the sharing economy is simply bringing more wage-earning opportunities to more people, or it’s simply accelerating the displacement of traditionally secure jobs and the creation of an army of part-time and low-paid workers.


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The platform is more important than the product

Not all the Sharing Economy initiatives work. Widespread internet connectivity is an enabler. Business gurus suggest that there is a logical step from the sharing of content through social media to the rental of goods, space, and time. If social networks can manage millions of people sharing content, online platforms can easily manage millions of transactions frictionless. People ask for flexibility, customization in service delivery and low prices.

Platforms delivering these benefits work, no matter the product or the service, the rest fails. As the transaction happens directly between provider and consumer, the quality of the technology which makes it happen, is crucial. Indeed, we can comfortably say that Uber, for example, is the platform, rather than the service it sells. Its 40 billion evaluation is driven not by the products they sell, per se, but on the platform they use. TripAdvisor is similar, if it was difficult to add or consult a review, the value would be none.

The Sharing Economy has its roots in the subprime crisisOnline platforms have democratized the access to a number of services and facilities, but only providing a seamless experience win. The most successful Sharing Economy startups ended up being those that made the process as efficient and transactional as possible. All the others suffered from slow adoption and, without funds, exited the business.

Looking at the same topic from another point of view, some argue successful platforms are made of people, who are attracted and then kept in place with various incentives. So it’s not the technology, it’s about the people. This is also correct if we think that if there are more people who want to lend things than want to pay to use them, there’s no sharing at all. So if the think that the Sharing Economy exploded because there is a revamp of important cultural value behind it, like environmental consciousness, reciprocity and solidarity, freedom of access to resources etc., well it’s once again about innovation, and price into a classic demand and offer scheme.


The Sharing Economy exploded just after corporate profits got disconnected from salaries

The Sharing Economy has its roots in the subprime crisisThis is just an evidence. I’m not building causation here, but the correlation is strong. The graph shows it better than words, but obviously does not explain it.

If we go back to the seventies, we know that, at that time productivity and wages were running parallel. When companies performed, real salaries increased. The oil shock broke this mechanism. Productivity per capita continued to increase but real wages started stagnating, because companies had to recover from the shortfall generated by higher prices of raw materials, inflation and cost of other means of production.

The Sharing Economy has its roots in the subprime crisisThe solution proposed by the economic system was about debt. Something that can be simplified with “you cannot have a higher real salary, but you can borrow cash, at a reasonable price, if you need it”. It led to an increase in the quantity of people owing properties, being them land, houses, cars and other durable goods. The rest is recent history, with the liquidity crisis started in 2007, the explosion of housing bubble in 2009 that caused the plummet of the values of securities tied to U.S. real estate pricing and the subprime mess. It’s not a surprise then, what PWC says in a great report about the Sharing Economy: “43% of consumers agree that “owning today feels like a burden.” And the most compelling promise of the sharing economy is that it alleviates burden—the burden of cost, of maintenance, of choice (or lack thereof) and countless other variables.”. That’s where the Sharing Economy comes from. This interpretation also allows us to draft a couple of near future predictions about its fate. The first is the simple evidence, that if the economic system will be able to back to a situation when liquidity was abundant, controlled and well managed, there will be less need to share. The second is that, if the Sharing Economy really spreads too fast, it will undermine plenty of existing businesses and lower the protections and the cost of workers, leading, paradoxically to a greater disconnection between real wages and corporate profits and additional concentration of the wealth in the hands of a minority.


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