You don’t just pay for Uber when you use one, your taxes subsidise the service too

Technology and innovation are seen as the key driver of future growth and employment. One much cited example is the “sharing economy”.

It is, at least according to its believers, likely to create a new culture of micro-entrepreneurs that will revolutionise the economy. This belief is incorrect and misleading.

There are definitional disagreements regarding the sharing economy. The rationale is providing cost-effective temporary access to services or goods as needed without the need to own the means of production. The sharing economy focuses on transport, short term accommodation, small tasks, grocery shopping services, home cooked meals, on-demand delivery services, pet transport, and rental of cars, boats and tools.

In essence, the sharing economy is a broking service which matches users and providers of these services or goods. The industrial logic is that of monetised exchanges using commercial peer-to-peer systems. Platforms create virtual electronic marketplaces, using the ubiquitous Internet, improved broadband connectivity, smart phones and apps. This allows buyers and sellers to complete the exchanges. Firms like Uber and Airbnb operate these platforms.

The underlying goods and services facilitated by the sharing economy are not new. Traditional commercial arrangements, such as taxis and hire cars or hotels and serviced apartments for short term rental, have performed these functions.

The sharing economy relies on providing the same services at a cheaper price 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 the cost.

The pricing relies on the availability of surplus hardware or facilities, such as houses, rooms, cars or tools, as well as individuals with the spare time to use them as sources of work and 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.

There are several problems with the arrangements.

The sharing economy may not create additional overall wealth or value. Uber’s revenues are at the expense of traditional taxis and hire cars. To the extent that it decreases the cost, it reduces the overall revenue from the activity unless offset by increases in volume.

Uber is just one of many companies which operate using this business model. The lower cost 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 properly factored in.

The lower prices are not without cost. Standards designed to ensure a minimum level of skill, standard of performance, safety and security and insurance coverage may be circumvented. Amateur chauffeurs, chefs and personal assistants now perform work once undertaken by full-time professionals.

Performance safeguards are distinctly Orwellian. Accountability relies on the parties to transaction rate each other. Inadequate performance can preclude future participation. Like all online reviews and rating systems, they are not a substitute for independent evaluation and oversight. Unfair poor reviews, predicated on ulterior motives or malice, exclude individuals from a source of future work “deactivating” them (in the parlance). Like the scarlet letter in Nathaniel Hawthorne’s novel, every evaluation may affect the rest of people’s lives, without a reliable, independent mechanism for redress.

Proponents claim the sharing economy provides an alternative source of flexible employment and income. The use of existing surplus assets is environmentally desirable, reducing unnecessary production and consumption. By lowering costs, it increases access to certain goods and services to a wider range of people. There are internal 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 use or travel, it is not clear how this increases sustainability.

The sharing economy’s effects on economic activity are equivocal. Supporters argue that it has a positive effect stimulating new consumption and investment. It increases participation in the workforce and improves productivity. It promotes innovation and entrepreneurship. The arguments do not withstand critical scrutiny.

Arrangements which cannibalise existing processes, in the main, cannot increase 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 but also by the need to compensate the platform providers.

By using 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 licenses. To the extent that the state compensates existing providers, such as taxi and hire car licensees, for the diminution of value, the sharing economy is effectively subsidised by taxpayers.

Benefits are overstated. The appurtenances of the sharing economy are costly, perhaps offsetting gains from lower prices. These include the expenses of 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 business such as Google, Facebook, eBay and Amazon. This reflects the need for high volumes to cover substantial technology investment and low marginal cost of additional transactions. But monopoly and related economic rents may undermine the claimed benefits of the arrangements.

In the longer term, the sharing economy may actually reduce potential growth. The replacement of skilled professionals by amateurs and generalists deskills the workforce. Economist Frances Coppola termed this the “shabby economy”. In this world, consumption and investment is minimised, with no-one buying anything until they absolutely have to. The existing assets and capital base of the economy is denuded over time.

The model itself may be opportunistic. To the extent that it relies on the continued availability of surpluses in the pool of labour and unused assets, the sharing economy, by definition, must be limited as these resources logically must ultimately be exhausted.

Satyajit Das is a former banker. His latest book is 'A Banquet of Consequences' (published in North America as The Age of Stagnation to avoid confusion as a cookbook). He is also the author of Extreme Money and Traders, Guns & Money.