What is ‘the Shared Economy’ and Does it Work?

Source: Thinkstock

Source: Thinkstock

In an era in which many Americans are increasingly frustrated with the economy, it’s refreshing to learn about a source of economic growth, especially one that exists almost entirely between consumers with hardly a middleman in sight.

That’s essentially the idea behind the “sharing economy,” a term which economists have coined to describe the way some internet-based businesses allow consumers to exchange goods and services without overseeing each and every transaction. Examples include several successful online platforms like Airbnb, Dogvacay, Lyft, Uber, Relayrides, Taskrabbit, Fon, and more.

Nancy Koehn, a Harvard Business School professor who spoke with the Harvard Gazette, defines the sharing economy as “a socio-economic ecosystem built around the sharing of human and physical resources. It includes the shared creation, production, distribution, trade, and consumption of goods and services by different people and organizations.”

She adds that, “This is theoretical language for peer-to-peer exchange of everything from car rides to spare bedrooms to advice on buying a new television or finding a good plumber.” The sharing economy is wonderfully flexible and all-encompassing; websites ranging from Angie’s List to Etsy all fall under this category.

While experts may have only recently labeled this phenomenon, the Internet has quietly been engaging in this “socio-economic ecosystem” for quite awhile now. Case in point: Remember when eBay first jumped on the scene in 1995?

Koehn uses eBay as an early example of the sharing economy, noting that “eBay opened up a treasure trove of previously unavailable goods, almost all of which were initially being offered for sale by people seemingly just like them.” While eBay has changed a lot since then, and has even, arguably, grown antiquated in the past decade, the company did pioneer a new way of using the Internet, and it’s left long legacy.

The Hook: Why a “Shared Economy” Appeals to Americans

It would be inaccurate to say that “the sharing economy” didn’t exist before the Internet; after all, people have always found ways to avoid the middleman, and systems of barter and trade still exist in most places throughout the world. Yet it’s true that the Internet jumpstarted a new wave of “sharing,” as evidenced by the laundry list of Airbnb-esque platforms for exchange out there today.

So what’s the difference between your everyday barter and trade between consumers (newspaper ads, craigslist postings, flea markets, yard sales, and the like) and this new “shared economy?” Well, for one, Koehn says, it’s pulling in a lot of money. “Make no mistake about it, today’s sharing economy is big business, involving lots and lots of money and all kinds of players motivated powerfully by financial gain.”

In this sense, the shared economy is rather misleading. It appeals to a very real desire for increased connection in American society and yet is secretly not all too different from the big businesses America loves to hate. What makes these shared economy businesses different, in the eyes of consumers?

Koehn speculates that part of the reason the shared economy has grown so much in the past decade is that as a consumer utilizing this system, there’s a feeling that there is “more control involved in this kind of transaction than in a more traditional exchange.” This makes sense; following several years of economic instability, anything which offers up even the illusion of increased control on the part of the consumer is likely to appeal.

Koehn adds that there’s a certain “libertarian hook” about these shared economy businesses that appeals to consumers as well; she describes the widening “trust vacuum” that exists amongst American consumers, particularly young consumers who are increasingly wary of established larger businesses and governmental organizations.”Peer-to-peer selling,” Koehn says, “may be more appealing because it is not so closely associated with big business that may (or may not) have a mixed track record in their minds.”

There’s also the plain and simple fact that because there is more direct connection between consumers on these shared economy platforms, it’s generally much cheaper to find and exchange goods and services through these kinds of outlets. There’s also the fact that as a consumer, you feel like you know where your money is going to, and even, in many cases, who.

So What’s the Catch? Pitfalls of the Sharing Economy

But there is dark side to the shared economy. Airbnb, for instance, is not without its horror stories, which include trashed apartments, identity theft, stolen valuables, and reenactments of The Shining conducted on bathroom doors (yes, you read that right.) Airbnb emphasizes that the vast majority of Airbnb exchanges are very positive, and users are encouraged to utilize the tools available through the site in order to screen guests before allowing them into their home in addition to looking for positive reviews of potential tenants from other users, but still, there is a certain creepiness factor about letting strangers into your home which not everyone may be ready for.

As Wired magazine put it, “we are entrusting complete strangers with our most valuable possessions, our personal experiences — and our very lives.”

Some argue, however, that the shared economy is helping to pioneer a cultural shift toward greater trust and intimacy among strangers, and see this shift as, overall, a very positive thing. “The extent to which people are connected to each other is lower than what humans need,” argues NYU professor Arun Sundararajan, who spoke with Wired. “Part of the appeal of the sharing economy is helping to bridge that gap.”

Lyft’s founder, John Zimmer, agrees. He says that, “I think people are craving real human interaction — it’s like an instinct. We now have the opportunity to use technology to help us get there.”

Still, the sharing economy opens a can of worms that muddies more than just our cultural mores. In San Francisco, for instance, Airbnb has been blamed for exacerbating the city’s housing problems. Services like Lyft, too, have gotten flack from established taxi companies; in some cities these kinds of services have even been banned as a result of lobbying by such traditional tax firms, according to The Economist. Indeed, regulation is a huge issue in the new and seemingly ever-expanding frontier that is the sharing economy.

But the battle for (and against) the regulation of these businesses is tediously complex. The sharing economy represents a massive (and growing) grey area of exchanges and transactions which, while they primarily happen between consumers, are still hosted and facilitated by businesses (sometimes large, sometimes small), which take a cut.

The risk of too much regulation of these kinds of “sharing economy” services is liable to create a “prohibition-like” environment in which, rather than eradicating these new businesses, simply drives them underground. Most experts realize that regulation is necessary, but that a balance is required, such as subjecting Airbnb hosts to the lighter regulations that govern bed and breakfasts as opposed to those required of the Ritz-Carlton, as The Economist article suggests.

Regardless, it seems as though shared economy services like Airbnb and Lyft ought to do some rule-making of their own if it is to avoid more stringent regulations. As this Bloomberg View story points out, if these services don’t find a solution themselves, “lawmakers and courts are likely to find one,” and things could get messy quickly.

In the messy gray area that is the new sharing economy, one thing does seem clear, however. It’s not going anywhere; in the next few years, it will certainly be interesting to see how these services bend, shift, and change under regulation and increased acceptance among consumers.

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