Should we love Uber and Airbnb or protest against them?

An angry mob attacked Uber cars with bars and rocks outside Mexico City’s airport, the latest in a series of global protests against the ride-sharing app. More than 1,000 taxi drivers blocked streets in Rio de Janeiro a few days ago, and the service was restricted or banned in the likes of France, Germany, Italy and South Korea. Protests have also been staged against Airbnb, the short-term accommodation rental platform.

However, neither platform is showing signs of weakness. Uber is available in 57 countries and product hundreds of millions of dollars in revenue. Airbnb is available in over 190 countries and has over 1.5 million rooms.

Journalists and entrepreneurs have been quick to coin terms that attempt to capture the social and economic changes associated with these platforms: sharing economy; them economy on demand; them peer-to-peer economy; etc Each captures perhaps one aspect of the phenomenon, but fails to make sense of all of its potentials and contradictions, including why some people love it and others would smash it to pieces.

What Mexican taxi drivers think of the sharing economy.

Economic sociologists believe that markets are always based on an underlying infrastructure that allows people to know what goods and services are on offer, to agree on prices and terms, to pay, and to reasonably expect the other party honors the agreement. The oldest example is the personal social network: merchants hear what is offered by word of mouth and only trade with those they personally know and trust.

In the modern world, we can also do business with foreigners because we have developed institutions to make this reliable, such as private property, enforceable contracts, standardized weights and measures, and consumer protection. They are part of a long historical continuum, from ancient trade routes with their customs, to medieval fairs with codes of conduct, to state-imposed trading laws at the start of the industrial age.

Natural selection

Institutional economists and economic historians theorized in the 1980s that these gradually evolved into ever more efficient forms through natural selection. People are turning to cheaper, easier, safer and more efficient institutions as new technologies and organizational innovations make it possible. According to the theory, old and cumbersome institutions fall into disuse and society becomes more efficient and economically prosperous.

It is easy to frame platforms as the next step in such a process. Although they do not replace state institutions, they can fill gaps. For example, enforcing a contract in court is expensive and cumbersome. The platforms offer cheaper and easier alternatives through reputation systems where participants rate the conduct of others and view past ratings.

Uber does this with government-approved taxi infrastructure, for example, addressing everything from quality and discovery to trust and payment. Airbnb offers an equally comprehensive solution for short-term home rentals. The sellers on these platforms are not only consumers looking to make better use of their resources, but also businesses and professionals who are turning away from state infrastructure. It’s as if people and businesses are abandoning their national institutions and migrating en masse to Platform Nation.

Disadvantage or advantage?

The theory of natural selection argues that the government should not try to prevent people from using Uber and Airbnb, nor impose its obviously less efficient standards on them. Let people vote with their feet. But is this an oversimplification?

If buyers switch to new institutions, for example, sellers will have no choice but to follow. Even if taxi drivers don’t like Uber’s rules, they may find there’s little business to do outside of the platform and change anyway. Ultimately, while market shifts can be boiled down to power over choice.

Even when everyone participates voluntarily, the arrangement can be bad for society. He could harm third parties, for example, such as Airbnb guests inconveniencing their neighbors due to noise, traffic, or unfamiliarity with local rules. In the worst case, a platform can make society less efficient by creating a “free rider economy”.

Airbnb protest in New York in January.

If these kinds of conflicting interests are reconciled, it is through the political institutions that govern the markets. Social scientists can often learn more about a market by examining its political institutions than by comparing its efficiency. Take the hotel industry. Local governments attempt to balance the interests of hoteliers and their neighbors by limiting hotel activity to certain areas. Airbnb has no such mandate to treat the interests of third parties on an equal footing. Perhaps because of this, 74% of Airbnb properties are not in the main hotel districts, but often in ordinary residential blocks.

Of course, government regulators risk being captured by incumbents or, at the very least, creating rules that benefit incumbents at the expense of potential future participants. An example would be taxi licensing systems which strictly limit the number of taxi operators. Whatever quality assurance this offers to customers, among the main losers are excluded potential drivers.

In this context, platforms can look like radical reformers. For example Uber intended to create 1 million jobs for women by 2020, a commitment that would likely not be possible if it met government licensing requirements, as most licenses are owned by men. That said, Uber’s definition of a “job” is far more precarious and entrepreneurial than the conventional definition. It is not a question here of taking sides, but of showing that their social implications are very different. Both possess flaws and redeeming qualities, many of which can be traced to their political institutions and those they represent.

What kind of new economic institutions are platform developers creating? How effective are they? What other consequences do they have? What interests are they supposed to represent? These are the questions that bureaucrats, journalists and social scientists should ask themselves. I hope we can discover ways to leverage the old and the new and create the infrastructure for an economy that is as fair and inclusive as it is efficient and innovative.

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