The Economic Rent Sharing Economy

Marc Andreessen’s tweets spurred some thoughts about the Sharing Economy and income inequality.

Sounds wonderful. But macro data suggest otherwise. In the US, distribution of household incomes has become more unequal during the post-2008 economic recovery as the effects of the recession reversed. Despite Silicon Valley’s increasing contribution to the US economy.

Maybe the Sharing Economy isn’t yet big enough. Maybe Silicon Valley isn’t really making a dent in the universe. Maybe ‘traditional’ business is growing inequality faster than the Sharing Econonmy is reducing it. Unlikely.

Not every part of a CNN article (Marc called “twaddle”) makes sense. But in California, inequality is rising. The Sharing Economy creates wealth but not necessarily equally. Wealth distribution is distinct from aggregate wealth. WellDeserved’s satire (consider the definition) highlights to whom that wealth accrues.

Satire: WellDeserved

Airbnb (I’m an Airbnb host), Lyft and Uber are two-sided markets. They benefit from network effects. Their growth reduces competition, creating effective monopolies, prohibiting competing away of economic profit.

Monopolies capture value in excess of the cost of production. Akin to economic rent. Peter Thiel knows this. In Zero to One, he observes that airlines create far more value than Google but capture far less. He states:

“profits come out of customers’ wallets, and monopolies deserve their bad reputation — but only in a world where nothing changes

He correctly observes tech startups’ huge valuations relate to capture (not creation) of value. Technology facilitates value capture by smaller teams. Hence substantial rewards for successful Silicon Valley founders.

When somone earns a dollar for every dollar they enable others to earn, inequality is unchanged. When someone earns a dollar for every cent they enable others to earn, inequality rises. In both cases, overall wealth rises.

Sharing Economy firms must be honest. They create value. But by capturing more of that value (with fewer people) they raise income inequality. But inequality is not inherently bad. Capitalism requires it. Most societies have accepted since the fall of communism that pros outweigh cons.

So why are folks concerned?

Because the Sharing Economy’s raising of objective wealth might not justify its lowering of relative wealth. I suspect societies’ inequality tolerance only extends if lower relative wealth results in higher objective living standards. If firms capture so much value they lower living standards, then perhaps concerns are justified. Is overall wealth ‘good’ if it results in lowering living standards for more people than it raises? Can companies “Be Evil”?

Value Capture Continuum

If Sharing Economy companies want to do good, they could lessen value-capture to just above cost of production. That might reduce income inequality. Such benevolent dictators are unlikely. However, requiring firms to capture value below the lower living standard threshold may be justified.

Free markets maximise total population wealth. Not necessarily wealth distribution. When competition is economically limited, perhaps regulation is appropriate. Indeed, should society decide living standards trump wealth, action is likely — whether regulation or grassroots movements.

Is it possible that (for a population) the negative effect of asymmetric value distribution can exceed the positive effect of value creation? If so, will new technologies arise to reverse the effect — or must something else happen?

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.