Expanded trust made the sharing economy: “It creates the possibility of getting into a stranger’s car”

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The so-called “sharing economy” – the term applied to Airbnb, Uber, Lyft, TaskRabbit, and other platforms – has changed the lives of many urbanites. It’s made it easier to get around, to vacation, to get household work done. But what else has it done? Have non-brick and mortar platforms like these, which are often barely regulated, contributed to New York congestion, made apartment buildings louder, and put people out of work?

New York University professor Arun Sundararajan, who teaches in the Stern School of Business, has considered the issue from all angles, and has just published, with MIT Press, “The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism.” Sundararajan is an optimist, for the most part, but not a blind one: He’s considered a huge amount of data, and thought about the criticisms of the new arrangement. Still, the British economist Christopher May, writing in the LSE Review of Books, describes him as part of “a long history of technological utopians who either willfully ignore, or have little interest in, the actual economic relations they are examining.”

We spoke to Sundararajan from Toronto; the interview has been lightly edited for clarity.

So has the new sharing economy developed because an older economy has ended, or is in the process of ending?

I think it’s an evolution of the 20th century economy of industrial capitalism converging with the new technology. But I wouldn’t say that industrial capitalism has ended. What I call crowd-based capitalism, what others call the sharing economy, will co-exist with some form of industrial capitalism for many decades to come: It will sit aside the traditional organization of full-time employees and industrial capitalism.

It will be in real estate accommodation, mobility/ transportation, health care and energy sectors: There will be dominant companies that have a sharing economy models – but the transition will be slow. Many forms of economic activity will still be organized the way they were in the 20th century.

So in some sectors, the old style of capitalism is fading out –why is that happening? Did it become less efficient? Was it never efficient?

The fundamental underlying reason is the progress of technology. We now have a greater set of choices in how we organize our economic activity. We have a greater set of choices as to how consumers use things. The constraints that we faced with 20th century capitalism no longer exist.

Another key driving factor: Every time a society invents a new way for the population to feel trust, that enables economic activity in different ways, and in different kinds. It used to be we would trade only with people we knew really well, in our villages, because those were the only people we could trust. The government became a source of trust: If you called it milk, it had to be milk, if you say it weighs 10 pounds, it had to weigh 10 pounds, and that expanded your commercial possibilities. Many countries created institutions – the ability to own property, to go to court, to sign a contract – that separated social trust from economic exchange.

And over the last 50 years we’ve relied on brand-based trust for most of our everyday economic activities. You let your kid ride the roller coaster at Six Flags but not at the park by the side of the road. You feel comfortable drinking a Coke in a foreign country…;

Now we are digitizing a lot of social capital, learning from the experience of others. And with that infrastructure comes new peer-to-peer commercial activity.

In your book you call it, I think, the “digitalization of trust.” That creates more economic possibilities.

Yes. It creates the possibility, for example, of renting a room in a person’s home instead of going to a branded hotel. It creates the possibility of getting into a stranger’s car and driving to another city rather than taking the train.

You’ve had this for 20 years, starting with eBay, but the trust infrastructure was fairly thin. The stakes are a lot higher when you get into a stranger’s car or rent out your apartment.

Is it fair to call this “the sharing economy?” In what ways does it make sense? In what ways doesn’t it?

These models are at their heart trying to share access or capital or labor more efficiently. Airbnb is about sharing assets; to some extent Uber and Lyft are about sharing mobility.

There’s another reason: Over the 20th century, as we got good at managerial capitalism, it seemed we have taken out some of the social and intimate aspects. There’s a personal sense to being in someone else’s home, there’s a connection you form when you sit beside someone and get a ride with Lyft. Which is very different from sitting behind a barricade with a credit-card machine in a taxicab. Capitalism evolved in the 20th century in a manner that really de-personalized commercial exchange. Part of what this new generation of peer-to-peer is doing is re-integrating some form of connectedness into an economic system.

So even though people know that the exchange is commercial and that the Uber driver is getting paid, there’s something personal about it. I think that’s part of the reason the term “the sharing economy” has stuck. It’s not a great term – this is commercial activity.

Yeah, it’s not sharing blocks at the playground or something.

This is part of the reason I favor the term “crowd-based capitalism.”

Your book documents some of the good things about the sharing economy – the efficiency, the convenience, and so on. But what are some of the externalities and destructive things about it? And how do we resolve or remedy them?

When on-demand mobility through Uber and Lyft and Didi becomes affordable and convenient and high-quality, this may shift people away from using the subway and mass transportation. This introduces an externality. There’s an adjustment period we’ll have to go through as the lines between personal and professional blur. We’ve developed from the industrial era the notion of residential and commercial zoning, and we’re starting to create new forms of mixed-use residences, mixed-use transportation (sometimes personal, sometimes transporting other people). For those people who still see the apartment building as a personal space, they may see an externality being imposed, as commercial activity comes into their personal space.

The resolution of that is going to be buildings deciding if they’re going to be Airbnb-friendly or Airbnb-free. Too much handing down of rules about things like that from a city or state government…; What’s going on in New York is really unfortunate at this point. Airbnb is something incredibly well-suited to New York, and I haven’t seen any strong evidence of a detrimental effect.

But there is a different set of society concerns: A central tenet of managerial capital was the full-time employment model. And 85 percent of the U.S. workforce was employed full-time…; I believe that the crowd-based model, the relation between the individual and the institution, is superior, fundamentally. A full-time employee is labor; a sharing economy provider is in some small way an owner of the means of production. There’s a range here: The Uber driver is less of a small-business owner…; But the construct is fundamentally shifting from labor provider to part owner.

Full-time employment doesn’t look the same today as it did 100 years ago: It looks a lot better. There have been unions, labor laws, which have wrapped a whole bunch of protections and a funding model and other good things. And now we’re faced with the independent-provider model which offers none of those protections, and for which we have no stability plan.

And things like healthcare and retirement plans and other things were part of that arrangement.

So we’re going to have to figure out rapidly, over the next decade – and it’s not hard – what’s the new funding model. The old funding model was you dedicated yourself to one company, and they paid you the same amount every month, no matter how much work you did. They ensured your income flow with a certain contract.

Now, we don’t have an equivalent model for the independent provider. It’s likely we’ll come up with a more efficient one, which spreads the risk around more people. But it’s not there yet, and the funding model isn’t clear yet, and the government laws aren’t there yet. So for someone who is an independent provider today, things don’t look as good as they do for a full-time employee, and they bear a cost that is unfair, to my mind.

Most independent contractors who want to be a full-time employee don’t want the employment model, they want the good things that go with it. So for me, the challenge comes from saying, How do we attach the good things that come with the full-time employment model to the independent-provider…;. Figure out which ways they were attractive, and replicate them in the new world of work. So you have a happy and protected workforce in the future.