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Monday, March 19, 2018

How the Online Sharing Economy Is Making Everyone Richer (and More Equal)

Online agencies like Uber and Airbnb open up opportunities for services once only available to the rich.

The sharing economy is an equalizing economy. On the supply side, it more easily allows people who own such property as houses and cars to earn income. Of course, wealthy people also own houses and cars, but these items are a much smaller portion of their assets than for most people. Earning money from Airbnb, for instance, also provides non-wage income that rich people get mostly from securities. Thus, it is a form of diversification which is valuable even beyond the dollars earned, because it is not perfectly correlated with other risks, like the danger of being furloughed for a few days or having hours cut.

The sharing economy is also an equalizing economy on the demand side because the online agency created by the sharing economy creates consumption that redounds to middling classes. The essence of the sharing economy is that it uses online agency to ease entry into markets in such areas as short-term housing and transportation.

Of course, the rich can make use of that supply as well, but the additional supply is not as likely to be on the very high end. Agency costs tend to be relatively fixed for a particular good or service. Thus, those costs constitute a larger share of the total value of the exchange for less expensive goods or services, inhibiting markets. Before Airbnb, it was practically impossible to rent a room in someone’s house for a day or two because of the search and trust costs that online agency helps solve.

An Equalizing Trend

The substitution of online agency for physical agency itself is also an equalizing trend.

Moreover, the rich can already afford high-end goods, like pricey hotels. Airbnb, in contrast, makes it more affordable for people of modest means to visit expensive cities both because it provides lower-cost accommodations and permits people to earn money from their own empty homes when traveling. Travel, of course, was once mostly the province of the rich. Home-sharing services are another step in its democratization.

The substitution of online agency for physical agency itself is also an equalizing trend. Ronald Coase long ago pointed out that one result of high transaction costs is that corporations have many agents on the payroll. It makes economic sense to perform many services internally when transaction costs with outside contractors or suppliers are high.

But now online agency offers a substitute for servants.

Similarly, one of the defining features of being rich through the ages has been employing people within the household to avoid the transaction costs that inhibit the market. For instance, it is often hard to be sure of obtaining instant and reliable transportation by relying on a spot market for transportation. But by hiring a chauffeur, the rich could enjoy quality on-demand transportation services.

But now online agency offers a substitute for servants. Summoning a car with a smartphone anytime, anyplace is a lot more like have a chauffeur than hailing a taxi in the rain or even calling up a generally unreliable radio car service. (Their unreliability in San Francisco is actually what sparked the idea for Uber.) Online agency allows one to make effective searches for just the right hotel or other product that the rich always had secretaries to do.

In short, the sharing economy is another example of how the dematerializing nature of the world can be a boon to the middling classes. We need to account for such equalizers before concluding that the world is experiencing greater material inequality.

Reprinted from Law & Liberty.

  • John O. McGinnis is the George C. Dix Professor in Constitutional Law at Northwestern University. His book Accelerating Democracy was published by Princeton University Press in 2012. McGinnis is also the coauthor with Mike Rappaport of Originalism and the Good Constitution published by Harvard University Press in 2013 . He is a graduate of Harvard College, Balliol College, Oxford, and Harvard Law School. He has published in leading law reviews, including the Harvard, Chicago, and Stanford Law Reviews and the Yale Law Journal, and in journals of opinion, including National Affairs and National Review.