If markets are so great, why do firms exist at all? To a non-economist, that might seem like a bizarre thing to ask. Yet the growth of the misleadingly named “sharing economy” is making it one of the most important questions for understanding the future economic structure of our world.
We have traditionally thought that these islands of planning (firms) – with their hierarchies, staff oversight, HR departments, and standardised contracts – exist because there can be significant transaction costs to buying in labour on an ad hoc basis as opposed to employing staff permanently. But changing technology is enabling entrepreneurs to find ways of lowering these costs, leading to a future in which there is a lot more renting and a lot less buying.
This fascinating development is outlined in detail by professor Mike Munger in the IEA’s recent book Forever Contemporary: The Economics of Ronald Coase. The essential insight is this: we buy many products or services not because we want ownership of them per se, but because we want access to the service they provide. Many people own a drill, for example, so that they can make a hole in the wall to put up a picture should they need to. Most of us (though not all) own cars as vehicles to get from A to B. Firms want workers to undertake a particular role.
Until recently, in order to access these services, we would have bought a drill, bought a car, and permanently hired the worker. We would have sought to own rather than rent these services because the cost of transacting each time we wanted them would have been too high. We might not have had the information or the mechanisms in place to ensure that we trusted that the product, service or labour we were renting was of good quality, or might have lacked the ability to undertake the transaction quickly and cheaply.
Now entrepreneurs are solving these problems for us. Despite the protestation of taxi drivers, ride-sharing apps like Uber are not just successful because of a lighter regulatory regime – but because they give us options and price information instantly, provide trust mechanisms through ranking systems and driver identity features, and allow for immediate payment without even having to open your wallet. In short, they make it more efficient to rent services. And what is true of Uber, Airbnb and others is increasingly applying to renting drills or finding freelance or “gig” workers.
The implications are profound. As Munger outlines, this revolution is not so much about the production of new goods or services, but about using what we already have more intensely. Apps and entrepreneurs that lower transaction costs could lower the number of drills, properties, cars or even full-time contracted workers that we require to undertake services. Production of goods like drills might plummet as a result, as middle-men find ways for us to use a smaller number of goods or services more efficiently, releasing labour and resources for other pursuits. And as these mechanisms exist for workers too, the whole idea of the firm in many sectors might dissipate – replaced with the hiring of workers for specific tasks.
Of course, not all markets will evolve in the same way. We simply do not know what all the implications will be. That is why it is crucial that, as far as possible, we leave a free economy to find the most productive uses of resources according to consumers’ wants and needs, and allow different organisational structures to provide them most effectively. As Tim Knox of the Centre for Policy Studies has observed, over-regulation is a threat to this happening, particularly regulatory capture. Existing players in markets have incentives to lobby governments to erect barriers to entry to these new rental-enhancing technologies.
Yet these new entrepreneurial ventures also make the traditional regulation versus deregulation debate outdated. By their very nature, the totally new models of doing business and the within-market regulation many of these technologies facilitate will usurp the need for state-based regulation, which will eventually be superfluous. Whether the regulators are willing to give up those powers and resist meddling is another question.