That some of the sharing economy companies are not doing as well as their promoters would hope is entirely true. But from that we seem to be getting two disparate views about this. The first is that this is just great because we don't like sharing economy companies. This tends to be more prevalent at the less educated end of the left wing market. You know, the people who think that the world will come to and end if large companies aren't providing the social safety net for their workers as contractors do it for themselves instead. But there's also usually rather wiser heads insisting that this all means that the Uber model doesn't translate: and that's not true either. It may very well be true that it doesn't translate to everywhere it is being tried but that's something rather different. And there's an interesting little historical lesson we can use to divine the underlying economics of when the Uber model will translate.
To go with the less than wholly advised first:
Good riddance, gig economy: Uber, Ayn Rand and the awesome collapse of Silicon Valley’s dream of destroying your job
The Uber model just doesn't work for other industries. The price points always fail -- and that's a good thing
Fairly heart on its sleeve there, isn't it? It's a good thing that attempts to give consumers more of what they want fail. Hmm: but the piece does mention Farhad Manjoo, one of those more usually better thinkers on the point:
Investors saw Uber’s success as a template for Ubers for everything. “The industry went through a period where we said, let’s look at any big service industry, stick ‘on-demand’ on it, and we’ve got an Uber,” said Hunter Walk, a venture capitalist at the firm Homebrew, which has invested in at least one on-demand company, the shipping service Shyp.
But Uber’s success was in many ways unique. For one thing, it was attacking a vulnerable market. In many cities, the taxi business was a customer-unfriendly protectionist racket that artificially inflated prices and cared little about customer service.
Yes, there are specific things about Uber which have made it a success. But we here are about deeper economic matters, the unseen, and so it's worth detailing the economics of Uber:
One measure of that efficiency is how much time drivers spend searching for somebody who wants a ride or driving to pick them up. A new study by Judd Cramer and Alan Krueger at Princeton found that only 40% of the miles that taxis drive in Los Angeles and Seattle are spent carrying a passenger someplace the person wants to go. By contrast, for UberX the numbers are 64% and 55% for the two cities, respectively. In terms of hours worked, taxi drivers in San Francisco spend only 38% of their work hours with a passenger on board. For UberX, that number is 55%.
..,.
The efficiency of the ride-share technology also directly benefits the riders. An earlier study by Berkeley transportation researchers found that 93% of San Francisco riders using Uber, Lyft, or Sidecar spent less than 10 minutes waiting for their ride and no one spent more than 20 minutes. For people trying to get a taxi come to their home, only 35% got a ride within 10 minutes, and 23% were still waiting after 20 minutes.
To put that into the standard economic jargon. This is "increasing the Solow Residual". And it's also the holy grail of new technologies and new management and organisation techniques (although I would stoutly insist that new organisational and management techniques are indeed new technologies).
To take another step back into basic economics. Our basic and essential problem is that human desires and wants are unlimited while the resources we have to sate them are scarce. The entire point of economics is how to allocate those scarce resources so as to sate as many of those wants and desires as possible. That's the whole game we're playing, whether it's in academic economics or out here in the economy itself. Sometimes a new technology provides us with more resources (say, a new mining technique), sometimes it allows us to do something new with resources (say, using copper for telephone lines instead of paperweights). Sometimes, however, a new technology just allows us to do more with the same resources. And that's what the Solow Residual is about:
The Solow residual is a number describing empirical productivity growth in an economy from year to year and decade to decade. Robert Solow defined rising productivity as rising output with constant capital and labor input. It is a "residual" because it is the part of growth that cannot be explained through capital accumulation or increased labor. Note that increased physical throughput – i.e. environmental resources – are specifically excluded from the calculation, thus some portion of the residual can be ascribed to increased physical throughput. The Solow Residual is procyclical and is sometimes called the rate of growth of total factor productivity.
Note the real heart of that: more output with the same labour and capital input. And that is, exactly, what Uber is achieving. In this economic sense we should have waiting time as labour as well. And what Uber does is reduce waiting time, and also, on top of that, provide more rides to more people without greater use of either cars or drivers. Simply by increasing the utilisation of the car and driver time: that's an increase in factor productivity and an increase in the Solow Residual. Do note also that it's growth without any further consumption of resources. We're simply using the same scarce resources we were before but we're getting more output: more rides.
The important thing about this is that this is an increase in pure economic efficiency. And we like those we really do. Because it makes us all richer that this happens. There's more output without any inputs being diverted from other uses at all. There's thus no opportunity costs to this, we're just getting a larger economy as a result.
When this happens it means that the change can make all better off. We've not had to take anything from anyone to do this. And riders get more rides possibly at a lower price, drivers can earn more money and who knows, there might even be enough in the middle for the organiser to make a profit too. So, to a first level we might say that this is the requirement for the Uber model to work. If it really does raise the Solow Residual, whatever the new activity the model is being applied to, then it will or at least could work.
Myself I would be a little more sceptical. Because changing human behaviour takes time and the obviousness of how much better the new method is has to be, well, obvious. So I'm unconvinced that marginal improvements will manage to leap that hurdle to success (say, renting out $15 household drills perhaps). But that's just a personal observation.
What's rather more important is that we find another such organisational change somewhere in the economy which has worked. Thus we can indeed say that the Uber model translates even if it doesn't translate all the time. And there is another such area: libraries.
As I mentioned elsewhere:
All of which brings out our inner Karl Marx. Who did insist that the forces of production (ie, technology) determined social relations. And if we're to be a little more narrow about this, technology determines, or at least should, how we go about doing certain things. The economic historian Brad Delong has long pointed out that the university teaching style of a lecture is really just a hangover from medieval days. When books were vastly expensive (a scholar might hope to accumulate a library of perhaps a score volumes over a lifetime) then having one person reading that very expensive product to 200 made some sort of sense. When a copy of the book costs less than the hourly wage of the reader perhaps less so.
So it is with libraries. When books were much more expensive than they are today then increasing the Solow Residual (in exactly and entirely the manner that Uber and so on do today, the sharing economy) through reuse and lending made great sense.
That libraries are currently tax funded change this point not a whit (and before they were tax funded most countries had for pay circulating libraries). Books were expensive. Libraries meant that books were read more often by more people: there was greater output from the same inputs into printing the books. That is the Uber model: that capital asset is used more often by more people, thus reducing the cost of each use. It's also exactly that increase in the Solow Residual.
The Uber model thus does translate: even if not into every endeavour. And libraries are that very proof that it does.
All of which leaves us with our public policy question. What should we do about people attempting to set up Uber-like services and companies? The answer is get the heck out of their way. While we can set some general rules for success, the increase in that Residual must be large enough to prompt a change in behaviour, that the model worked a century ago with books and is working today with taxis tells us that we're not going to be hugely successful in predicting exactly which goods and services the model will work upon and which it won't. Fortunately, a free market has a way of dealing with this conundrum. Those that work make profits, those that don't don't. Those that don't thus disappear in usually a shorter time than any planned action could or would close them down. Thus our least risky method of testing which will work is just to let the entrepreneurs make hay with the VC's money and watch what happens.
Who knows, we might even get something as civilisation enhancing as libraries out of it instead of just cheap cab rides for people who cannot be bothered to walk anywhere.