Adam Smith never heard of it. Nor did Karl Marx and John Maynard Keynes. The great 20th century economists such as Paul Samuelson, Milton Friedman and Ken Arrow never wrote about it. But practically every Millennial knows about the “sharing economy.”
The “sharing economy” is the name given over the past decade to a wide range of online services—from Uber to AirBnB to WeWork and perhaps even to various online dating services—that match buyers with sellers or renters of unusual or one-of-a-kind assets.
No one knows exactly to whom to attribute the moniker “sharing economy,” but it was likely neither an economist nor a linguist. “Share everything” is the first lesson in Robert Fulghum’s 1980s work All I Really Need to Know I Learned in Kindergarten. Five-year-olds share; they do not, and should not, pay for a cookie, or a turn on a swing, or a chance to play a game. Sharing does not involve payments. Resources are allocated based on a first-come, first-served basis. When toys are broken or cookies exhausted, one waits for the teacher—deus ex machina—to replenish them.
Sharing, the reduction of property rights to exclude others, may work well in a kindergarten setting, a communitarian paradise where nothing tangible is produced and where no individual child owns or can exclude others from the toys or snacks. Kindergarten students learn manners, altruism and other social skills in the sharing classroom.
Real life is different. All of us have assets, even humble assets such as the clothes on our back or the breath in our lungs, which we do not share with others. If a stranger—or even a friend or even the government—were to ask to share our home, or clothes, our bank account or anything we hold dear, we would almost certainly say “no.” Our assets are not to be shared except with our closest loved ones. Our homes are not kindergarten classrooms; our bank accounts are not kindergarten cookies; our clothes are not toys to be shared. If we lived in a society where our assets were actually shared by others, our incentives to work, or even to get out of bed in the morning, would be greatly diminished.
The underlying economic nature of “sharing economy” services is neither new nor based on “sharing.” Uber is a contemporary version of a biblical caravan. Food and lodging have been available to travellers since Biblical times. Then, as now, the purveyors of food and lodging did not renounce ownership of their assets. Rather they exercised their property rights to exclude those who did not pay to purchase food or lodging.
The Uber driver who drives us to town does so not out of the generosity of his heart but only because he expects he will be paid. “He does not “share” his car except to the extent we pay for it. So too the AirBnB apartment owner rents us access to her apartment only in expectation of payment. As Adam Smith explained in the Wealth of Nations, a system of payments between willing buyers and willing sellers makes everyone better off.
What distinguishes the “sharing economy” from the Biblical economy or even the 20th century economy has nothing to do with sharing. The technological difference, made possible by the Internet, is the dramatic reduction in transaction costs. Economists such as Nobel Laureates Ronald Coase and Oliver Williamson recognized the importance of transaction costs in limiting efficient market outcomes. A driver with a car in 1990 might gladly have taken $10 in exchange for driving a stranger 2 miles, but the transaction cost of the driver finding the rider—and the rider finding the driver—were prohibitively high. Today, thanks to Internet technology, Uber provides the match between driver and rider by reducing the transaction costs and the search costs for both the driver and the rider. Uber has effectively reduced transaction costs for the market for rides to near zero.
The absurdity of the term “sharing economy” is immediately evident in the realm of online dating services, which use software similar to that of Uber to match interested persons. It is semantically false—but not offensive—to speak of Uber as a ride-sharing service. It is both semantically false and offensive to speak of dating services as “sharing.” Individuals are not shared or shareable. It may sound unromantic, but from an economic perspective, online dating services simply reduce the search costs for dating. At least that is likely how Ronald Coase would describe them.
With the exception of a few sites that give services and assets away free of charge, most of the online economy has little to do with sharing. Instead, online sites make markets more efficient by dramatically reducing transaction and search costs. By making markets more efficient, the Internet paradoxically increases the value of clear property rights and reduces the social need for sharing. Popular culture may label much of the online economy as a “sharing economy.” But many economists will continue to call it what it more accurately is: a more efficient economy.