Forbes India 15th Anniversary Special

Satyajit Das: Myth-busting the gig economy

Collaborative consumption has depressed minimum wages and may not create additional overall wealth

Satyajit Das
Published: Nov 17, 2017 06:31:54 AM IST
Updated: Nov 16, 2017 05:55:26 PM IST

Satyajit Das: Myth-busting the gig economyIllustration: Chaitanaya Dinesh Surpur
On the internet these days, almost everything is for hire, giving rise to a new economic model where assets—a spare bed, a car or even an idle boat—can be rented out by their owners to borrowers, for whom access trumps ownership.

This ‘sharing’ economy—aka peer-to-peer economy, collaborative economy or gig economy—is, according to its proponents, likely to create a new culture of micro-entrepreneurs who will revolutionise the economy. This belief is at best misleading, at worst wrong.

The sharing economy is a broking service that connects users with providers of goods and services through the internet. For instance, firms like Uber and Airbnb operate platforms that have created virtual marketplaces.

To be sure, the goods and services facilitated by the sharing economy are not new—arrangements such as commercial taxis and hotels have provided the same services as Uber and Airbnb respectively. The sharing economy, however, relies on providing these services cheaply and more conveniently. It seeks to capture market share from existing service providers. It may also expand the market for these services, primarily by lowering costs.

The pricing relies on the availability of surplus hardware—houses, rooms, cars—as well as individuals with the spare time to use them as sources of income. The pricing also arbitrages existing regulations and structures which add to cost, such as licensing requirements for service providers, training and accreditation of staff and insurance.

Not What It Seems To Be

There are several problems with this arrangement. The sharing economy may not create additional overall wealth or value—Uber’s revenues, for instance, are at the expense of traditional taxis and hire cars. To the extent that it decreases costs, it reduces the overall revenue from the activity unless the same is offset by an increase in volume.

Lower costs may be the result of incorrect pricing. Providers of services and equipment focus on marginal revenue and variable costs. The full cost, especially fixed-cost elements such as capital investment, depreciation, insurance and maintenance, are rarely factored in.

Lower prices also come at a cost. Standards designed to ensure a minimum level of skill, performance, safety and security, and insurance coverage may be circumvented. Amateur chauffeurs and chefs now perform work once undertaken by full-time skilled professionals.

Proponents claim the sharing economy provides an alternative source of flexible employment and income. The use of existing surplus assets is environmentally desirable and reduces unnecessary production, they argue. And by lowering costs, certain goods and services are available to more people. There are contradictions in these assertions. As the sharing economy is merely replacing an existing service and it may, in fact, increase the demand for services such as car rides, it is unclear how this increases sustainability.

Supporters of this collaborative consumption also argue that it has positive economic effects by stimulating higher consumption and investment, it increases participation in the workforce and improves productivity, innovation and entrepreneurship. These arguments, again, do not withstand critical scrutiny.

Arrangements that cannibalise existing processes cannot increase economic activity. Lower prices reduce income. The sharing economy entails a redistribution of income and wealth. Customers pay less. Providers are penalised by the lower income and also by the need to compensate the platform providers. By utilising unused assets, the sharing economy reduces investment and purchases of new assets, at least in the short term. It also reduces the value of existing investments and infrastructure like licences.

The appurtenances of the sharing economy are costly, perhaps offsetting gains from lower prices. These include the expenses incurred on cyber security to protect data and electronic payments. There are also significant costs of lobbying and managing regulators to allow the sharing economy to operate.

Sharing economy platforms tend naturally toward monopoly or oligopoly, as evidenced by other online businesses such as Google, Facebook, eBay and Amazon. This reflects the need for huge volumes to cover substantial technology investments and low marginal cost of additional transactions. But monopoly and related economic rents may undermine the claimed benefits of the arrangements.

In the long term, the sharing economy may in fact reduce potential growth. Economist Frances Coppola terms this the ‘shabby economy’. In this world, consumption and investment is minimised, with no one buying anything unless they absolutely have to. The existing assets and capital base of the economy are denuded over time.  

Sharing The Scraps
The real reason why the sharing economy exists is simple. The traditional industries targeted by online platforms are frequently inefficient. Over time, regulations have accreted, evolving to serve narrow interests rather than maintain service standards and protect users. It has reduced competition and impeded development. This highlights the need to reform existing regulatory frameworks. It is not self-evident that replacing the existing system with non-professional service providers and substituting a new monopoly for an existing one is the optimal response.

The sharing economy has developed in response to a weak economic environment and a depressed labour market. Workers unable to find work or in need of supplemental income use these platforms. The arrangements are intended to avoid labour laws that cover minimum wages, working conditions and benefits. The sharing economy, opponents have argued, is creating a virtual ‘human cloud’ of ‘digital serfs’ that leads to a global race to the bottom for wages and benefits. This affects both unskilled and skilled workers. Professionals from eastern Europe, Asia, Africa and Latin America are undercutting peers in advanced economies. It is what financier Jay Gould once envisaged: “Hire one half of the working class to kill the other half.”

The Hippy Economy
Perhaps the most sinister aspect of the sharing economy is its pretensions. Cheerleaders frame it in lofty utopian terms. The sharing economy is not a business but a social movement transforming relationships between people in a new form of internet intimacy and humanitarianism.

Customers are not getting cheap services, but are being helped by new, interesting friends. Providers are engaged in rich and diverse work, gaining valuable independence and flexibility, taking advantage of a reduction in entry barriers to sources of work. The evidence, however, does not support these arguments.

The sharing economy alters societal relationships. Friends and neighbours have always assisted each other. The sharing economy merely widens the scope. But it also adds a monetary element to it. It exploits the circumstances of people and forces them to not trust each other but trust the platform. The exchanges are economic. Buyers are concerned about access to services at low costs rather than social objectives. Providers are motivated by money.

The major financial backers of the sharing economy are not philanthropists. They are Wall Street and Silicon Valley’s ‘1 percent’, related venture capital firms and a few institutional investors, such as sovereign wealth funds. The total amount of capital provided is substantial. Given the normal five-to-seven-year cycle for such investments, the pressure to deliver results will increase, bringing it into conflict with the social or altruistic objectives espoused.

The model—termed ‘share the scraps’ economy by former US Labour Secretary Robert Reich—is exploitative. The pricing structure requires a depressed economy, where abundant, cheap contract labourers are available at the push of a smartphone button.  

Most importantly, the underlying economic premise is false. Consumption constitutes 60-70 percent of activity in advanced economies. In 1914, Henry Ford doubled his workers’ pay from $2.34 to $5 per day, recognising that higher wages would enable them to afford the cars they were producing. Reduction of income levels and employment security ultimately reduces consumption and economic activity, impoverishing most within societies.

The technological basis and novelty of the sharing economy do not disguise the fact that it harks back to earlier times when poor, uneducated workers, many of them immigrants, took on any work to survive. Today, a new underclass provides grist for the technology entrepreneurs and investors of the sharing economy. It is desperate digital piecework labour and a coda to middle class dreams.

Satyajit Das is a former banker. His most recent book is Age of Stagnation. He is also the author of Traders, Guns and Money and Extreme Money

(This story appears in the 24 November, 2017 issue of Forbes India. To visit our Archives, click here.)