The Sharing Economy Is As Old As Markets
By Dwight R. Lee
There has been a lot of excitement recently over what many people call the “sharing economy,” in which new firms such as Uber, Lyft, Airbnb and other website businesses are increasing the value of capital assets. Uber and Lyft allow people to make productive use of their cars when they would otherwise be idle by quickly connecting with strangers desiring a ride. Airbnb makes it easy for those who have unused housing space to conveniently connect with those who desire accommodations. These firms are but three of a growing number that are creating, and making use of, new technologies, providing further evidence that entrepreneurial creativity is constantly coming up with new and unexpected ways to better serve consumers. The excitement over the sharing economy is fully justified.
Indeed, the enthusiasm over the sharing economy is even more justified than many may realize. What is now seen as the sharing economy is really a continuation of a long history of sharing through markets that enriches all our lives. The sharing in markets takes place so continually and unintentionally that it is easy to take it for granted, with little thought or appreciation. The popularity of the term “sharing economy” provides a teachable moment for highlighting the pervasiveness of market sharing and why we would all be impoverished without it.
The Unintended Advantage of Market Sharing
Each of us shares a multitude of goods and services with many millions of others all over the world every day through a process that motivates those millions to reciprocate by sharing with us. This global sharing is a fundamental feature of markets, and knowing how it works is essential to understanding how markets make it possible for millions (indeed billions) of strangers to cooperate with one another in ways that make them all better off.
Every day, each of us sees prices of products that we are considering buying. The price on each product communicates information on how much other consumers value another unit of it. It is in our interest to buy a product only to the point at which the value we place on an additional unit is at least as great as the price—that is, it is worth at least as much to us as it is to others. If the price of the product increases because others want more of it, we respond by buying less, sharing more with those who now value additional units more than we do. At the same time, if we want more of a product, we can be confident that others will share with us in response to market prices.
While we benefit from the sharing by other consumers, when we want more of a product, we also benefit from the sharing by suppliers. Changes in consumer demand motivate some businesses to share productive resources with other firms. For example, as increasing numbers of consumers have found it more convenient to buy books online, the demand for the goods and services provided by brick-and-mortar book stores has declined relative to demand for other goods and services provided by other firms. In response to declining financial returns, many book stores have gone out of business; as a result, those stores share workers and other productive resources with businesses that use those inputs to provide more value to consumers. In essence, firms that go out of business in response to market forces are sharing with consumers.
This market sharing is unintentional. In fact, the unintentional nature of this sharing makes it possible for the number of people with whom each of us shares to expand to include untold millions all over the globe, and for those millions to share with us. Those who intentionally share with us are limited primarily to the people who know and care about us, and whom we know and care about. But these loved ones are far fewer than those we depend upon to make the necessary consumption and production decisions for us to receive the things we consume every day. As Adam Smith observed:
In civilized society [each of us] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons… man has almost constant occasion for the help of his brethren and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and shew them it is for their own advantage to do for him what he requires of them.1
Even if we could depend on the benevolence of countless others to share with each other, we would still be impoverished if we had to rely on benevolence as the organizing principle of the economy. Being willing to share with others isn’t the same as knowing what others value most, or knowing the relative values they place on the various things we are prepared to intentionally share with them. Without market prices, no one would know what others valued most, and even if we did know, we wouldn’t know how much to share with any particular person without somehow knowing how much others are also sharing with him or her. Also, firms in a declining industry would have no idea how much to reduce their output to share with other firms, or which firms would use those inputs to add the most value to consumers.
For more information, see the EconTalk podcast episodes Michael Munger on the Sharing Economy, July 7, 2014 and Nathan Blecharczyk on Airbnb and the Sharing Economy, September 1, 2014.
Only by responding to market prices can millions of consumers and producers share with each other in such a way that available goods and services are directed to consumers who value them most, and productive inputs are directed to producers that will employ them to make available the goods and services that consumers value most. Market prices provide: (1) each consumer the information on what and how much he or she should share when making consumption choices; (2) each producer the information on what and how many productive resources it should share when making production decisions; and (3) the motivation to use this information to best serve the interest of others.
A More Limited View of Sharing
Understandably, many people don’t think of responding to market prices as sharing. People tend to think of sharing as a benevolent act motivated by the desire to intentionally help others out of personal concern for them, while our responses to market prices are seen as motivated by self-interest. This view is reflected in comments challenging the use of the term “sharing economy.” Consider the following examples: “[T]he so-called sharing economy is more about greed than altruism.” “The sharing economy isn’t about sharing. It’s about making as many quick bucks as possible.” and “[L]et’s stop calling it the sharing economy. At best that’s intellectually dishonest; at worst it is window dressing on an ad-hoc system that has who knows how many unintended consequences.”2
The above comments reflect more than just a narrow definition of sharing. They also reflect people’s tendency to find intentionally helping others out of the goodness of one’s heart far more appealing than helping others as an unintentional outcome of pursuing private gain. For example, consider our response to barn raising, where people in a community come together to help a neighbor rebuild his barn after it has burned. This is an example of neighbors helping each other in a spirit of sharing that is universally admired, and rightly so. However, if barn raising by our neighbors isn’t a practical option, we have market arrangements that allow millions of people to share with those who suffer losses from fires or violent weather. In many ways, this market alternative is better than barn raising—it’s called insurance. Insurance is an effective means of organizing a large network of strangers for the purpose of sharing with those who suffer damages. If your house is damaged by fire, millions of people each chip in a small amount through their premiums to help you repair or rebuild it. This market alternative to barn raising has clear advantages over the real thing. It allows you to hire people who specialize in repairing damaged houses, so they are less likely than your neighbors to do shoddy work or injure themselves by hammering their thumbs or falling off ladders. Even so, barn raisings, as depicted in movies such as Witness, invoke a far more favorable response than do the commercial activities of insurance companies.
The Hope that the Invisible Hand can be replaced with Helping Hands
People’s emotional responses make it easy for them to believe in an extended economic order in which benevolence rather than self-interest motivates us to serve others. Take Jeremy Rifkin, for example. The emotional appeal of a “real” sharing economy has deceived him into believing that the benevolence of helping hands can render markets obsolete.3 Rifkin is convinced that a sharing economy based on technological advances and moral rejuvenation is in the process of eclipsing capitalism. According to Rifkin, an ever-increasing number of goods and services can be produced at close to zero marginal cost. From this, he concludes that more and more goods are becoming nearly free, which means that “profit margins evaporate, and private property exchanged in markets loses its reason for existing. The market mechanism becomes increasingly unnecessary… and capitalism shrinks to a niche economic realm.”4 Replacing capitalism, according to Rifkin, is a “powerful new economic movement [that] took off overnight, in large part because a younger generation had a tool at its disposal [the Internet] that enabled it to scale quickly and effectively and share its personal bounty on a global Commons.” This led to the birth of what he describes as a “sharing economy” in which people will experience “an expansion of empathy to include the whole of the human race as our family.”5
Nowhere in his book does Rifkin offer the slightest hint that he is aware of the limits on the expansion of empathy necessary to motivate widespread sharing or of the need for information communicated through market prices to direct sharing to where it is most needed. Of course, while we should applaud sharing based on benevolence, we should also recognize its limitations of scale, as well as the importance of the market sharing that allows millions upon millions to serve each other’s interests in response to the incentives and information that only market prices can create.
Many people react negatively to the self-interest they see dominating a market economy—whether or not it is called a sharing economy—and would prefer an economy in which sharing is motivated by our benevolent impulses. No one can deny that sharing based on personal attachments created by love and friendship is truly wonderful, or that it is much easier to appreciate than the more impersonal sharing of the market place. We would find ourselves emotionally impoverished without the sharing motivated by friendship and affection. But economists have the important job of pointing out that we would find ourselves materially impoverished without the sharing that takes place through markets. Fortunately, there is no conflict between the two types of sharing. We all benefit from both. Indeed, market sharing allows us to share more benevolently with the few we love by increasing the help we provide to the many millions we don’t.
Consider two situations. In the first, we intentionally share with our few loved ones but can do nothing to help millions of others whom we don’t know and will never meet. In the second, we are able to improve the lives of the millions we don’t know through market sharing, and, by doing so, we improve our ability to share with and provide for the few people we know and love. It is difficult to imagine anyone preferring the first situation over the second. Yet, because the reaction to intentional sharing is emotionally elevating, while market sharing is often viewed as repugnant, voters commonly vote for politicians who promise to promote a more compassionate and sharing economy, at the expense of reducing benevolent sharing and rendering market sharing less effective.6 The current interest in the sharing economy creates the opportunity to make the case that markets enhance the benefits we receive from both benevolent sharing and market sharing. It is difficult to imagine a more effective way for economists to take advantage of this teachable moment.
Smith, Adam. (1776, ) An Inquiry into the Nature and Causes of the Wealth of Nations (Indianapolis, Liberty Fund, Inc.): p. 26. See paragraph I.2.2.
These quotations can be found at Chase, Brad, “Sharing is Caring, but not the Sharing Economy” Huff Post TECH (September 24, 2014); Le Tellier, Alexandra, “The Sharing Economy isn’t ‘Collaborative Consumption,’ It’s Disaster Capitalism”, LA Times (June 5, 2014); and Nelson, Noah, “It’s Not Sharing, Stupid”, Turnstyle (January 6, 2014). Additional examples of similar comments can be found by searching “the sharing economy is not about sharing” or some variation of this.
Rifkin, Jeremy. (2014) The Zero Marginal Cost Society (New York: Palgrave Macmillan).
Rifkin, Ibid. p. 308.
Rifkin, Ibid. pp. 233-234, & 302. Interestingly, Rifkin does not mention Singer, Peter. (1981) The Expanding Circle: Ethics and Sociobiology (New York: Farrar Straus & Giroux). Singer argues with more philosophical erudition, if not any more persuasively, that the circle of those we care about, and with whom we are willing to intentionally share at some personal sacrifice, has expanded, and can continue to expand far beyond its historical size.
Lee, Dwight. (2010) “The Political Economy of Morality: Political Pretense vs. Market Performance,” Featured Article, Library of Economics and Liberty (December 6).
*Dwight R. Lee is Scholar-in-Residence at the O’Neil Center for Global Markets and Freedom, Southern Methodist University. He is coauthor with James Gwartney, Richard Stroup and Tawni Ferrarini of Common Sense Economics: What Everyone Should Know about Wealth and Prosperity, St. Martin’s Press, 2010.