As On-Demand Economy Grows, Professor Sees New Kind of Capitalism Emerging

By | June 16, 2016

It goes by many names: the “sharing economy,” the “gig economy,” the “on-demand economy.” Arun Sundararajan, a professor at New York University’s Stern School of Business who has been studying the phenomenon for several years, favors “crowd-based capitalism.” But he compromised for the book he’s just written, titling it “The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism.”

In the book, Sundararajan argues that online platforms that make it easy for individuals to sell products and services to others are ushering in a new kind of capitalism. I interviewed him over lunch early this month. What follows is an edited and much-abridged account of our conversation.

Fox: There’s a sense that the sharing economy has hit a wall recently. Which parts are surviving and thriving, and which aren’t?

Sundararajan: There are two different hitting-the-wall models. One is that there are many specialized labor services that may not have a workable business model, but have nevertheless gotten funded because of all the sharing-economy excitement.

A second reason some companies will hit a wall is that we’re still in the phase of experimentation. We had a well-defined notion a couple hundred years ago of markets where individuals sold to other individuals. We have a pretty well-defined notion today of a large hierarchy that produces and delivers goods and services. I see the sharing economy platforms as somewhere in between. They’re creating this new hybrid between firms and markets, and there’s still a process of figuring out how much of an organization and how much of a market you should be.

There’s a variety even among the successful ones. Uber sets its prices and has more organizational control. Airbnb is more decentralized and delegates some of the merchandising, pricing and inventory management. Etsy is very hands-off.

There are going to be companies that try models that don’t work, and may go out of business for reasons that aren’t completely their fault. They just happened to be experiments that didn’t work.

Fox: Some people argue that a lot of these services are mainly just new ways to exploit workers. How should we be thinking about this?

Sundararajan: It’s important to separate the fundamentals of the change in how we organize economic activity from the protections that have been built up over the last 60 or 70 years for people who provide labor to companies.

Fundamentally you’re in a better position if you’re a provider through a platform than if you work for someone full time. As a full-time employee, your bargaining power is a lot lower. You’re committing all of your time, your mobility is less. I think the one advantage to full-time work is that it lends itself well to the funding model for the safety net that is dominant in the U.S. today.

Every company is like a little insurance company. There’s a pooling that they’re doing. They’re paying us steady salaries and absorbing the variation in our contribution. They’re paying for our vacations and covering for us. We can come up with a better way of doing this, of providing the stability, of paying for the benefits. It’s just that it doesn’t exist now, so things don’t look as good for the independent contractor.

Fox: A lot of the areas that have proved successful for crowd-based-capitalism are ones that typically weren’t done by full-time employees: driving people around, cleaning. I guess Airbnb is an exception, because that’s something that was done for either no pay or by hotels. Still, it seems like there are certain things that will continue to be better done by a bunch of people who are committed to working together over a long period of time.

Sundararajan: I don’t expect that all of the world’s economic activity will be delivered through sharing-economy-like platforms. You’re right in your observation that the successful platforms have often been ones that take what used to be freelance offline and harness it into a more cohesive engine of delivering services. The exception, Airbnb, is simply one in which the capital-labor mix is very different. The fact that you’re sitting on under-utilized real estate capital lends itself well to the platform model because the labor component is not that big a driver of the costs.

But there are two developments that will illustrate that the sharing economy goes beyond either things that were freelance or things that are capital-intensive. One is the emergence and increasing variety of specialized labor platforms. There’s Hourly Nerd for consulting, there’s Universal Avenue for a salesforce on demand, there’s Gigster for high-end technical talent. These are going to start providing viable alternatives to being a full-time high-skilled employee.

I also think there will be technological changes that will extend the sharing-economy model to health care and energy. If you put together a combination of real estate and transportation, and health care and energy, you’ve got something approaching half the economy.

Fox: It’s clear from the book that one of your favorite companies to study is Airbnb. I don’t know that there’s anything else that so quickly transformed from “That’s a really weird idea” to “Oh, that’s the normal way to do things.”

Sundararajan: My experience with them is they’ve always thought like a really big company while being a young tech company.

The economic argument is blindingly obvious, but then there are all these constructions of personal space and fear of strangers and so on that make it unlikely. I think that’s where the genius of Airbnb in designing something that works for the host and the guest has come in. They have actually invented the experience that allows 2 million people to say “I’m willing to open up my home,” and tens of millions of others to take the leap into this unfamiliar situation of paying to stay in someone’s home instead of going to a hotel.

There’s the gift of space, like couch surfing, and then there’s the market extreme of going into a hotel. I think Airbnb has found that right balance between gift and market that has dramatically expanded the set of people who are willing to host and be guests.

One of the lessons I try to impart to newer platforms is that just because other people have tried and not been able to match the supply and demand doesn’t mean that the demand doesn’t exist. It’s often a design problem, not a find-the-economic inefficiency problem.

Fox: It’s interesting that the biggest and most prominent of all the “sharing economy” companies — Uber — doesn’t feel like it’s really about sharing.

Sundararajan: Uber is in some ways a very traditional business. It may have more in common with some of the late 19th-century or early 20th-century businesses than with Facebook, in that they’re building competitive advantage through traditional economies of scale that come from massive capital advantage. They have built an organizational machine that allows them to replicate success in one city rapidly in a new city.

If a case were to be written about Uber, I wouldn’t write about the business model innovation, I’d write about the scaling model — the way in which they have replicated and grown. There is probably a ton of innovation there.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

About Justin Fox, Bloomberg Opinion

Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.” More from Justin Fox, Bloomberg Opinion

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