“We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world,” -Eric Schmidt, Google

Credits: Chris Brignola & Amanda Fristrom

When I read politicians say that the “startup economy” is the way to reduce unemployment and increase GDP, I find it hard to believe. Typical startups do not hire more than 100 people compared to Walmart’s 400,000. Plus it’s difficult to be an entrepreneur. Starting your own business is risky and challenging at the best of times. Only people with the right knowledge, skills, backing and luck can succeed. Not everyone can be the next Travis Kalanick.

But anyone of us can be a micro-entrepreneur, including people with little experience, low education, non-technical backgrounds, youth, elderly, stay at home parents. The micropreneur economy would provide a real solution to those most affected by the macroeconomic crisis.

Micro-entrepreneurship allows anyone to dedicate themselves to growing a small venture without the need of large investment, thanks to technology connecting businesses and consumers. Take for example driving your car for Uber or Lyft, or hosting guests through Airbnb. This new economy is not just about “gigs” where you simply offer your spare room on Airbnb, its about professionalising these services where the incomes flows directly to those people providing them, with far better resource utilisation and almost no overheads since the connections happen peer-to-peer.

“This new economy is not just about “gigs” where you simply offer your spare room on Airbnb, its about professionalising these services where the incomes flows directly to those people providing them.”

In the past being a micro-entrepreneur was a lot harder. Want to be your own taxi driver? There were capital requirements for licences (currently around $1.3 million for a medallion in NYC), restrictions of what car you can drive, and the hours you need to work. Contrast that with the offerings from Uber, Lyft, and others and suddenly people have the flexibility to drive when they want, and earn more than the average wage. At the same time we are seeing these technologies changing consumer behaviour- allowing anyone to hail a cab ‘on demand’ with just their smartphone. Consumers are becoming more trusting too, more open to ephemeral collaboration with others, fostering a sense of sharing in communities.

The impact this new economy (I hate the term ‘sharing economy’ often used by journalists) is an interesting phenomena that connects people with needs, and often these needs are met on demand. When you professionalise the concept of the micropreneur, two macroeconomic concepts arise.

1. Employment

Take Spain as an example. The construction boom and bust has meant that once highly skilled construction workers have now been unemployed for more than 6 months. Their skills are not highly transferable time off work means it is harder for them to reenter the workforce. As their industry collapses so do does their career and many abandon hope of becoming re-employed. However, because these people can cook, drive, teach, and can offer many other services, there is hope.

What would happen if Spain were to re-train the 4 million unemployed?

• Unemployment would decrease, by definition.
• Income per family would increase, strengthening the economy and communities.
• Increased service supply would reduce prices for transport, food, lodging etc, bringing better prices for consumers and tourists.
• Government revenue would increase fuelled by income tax and reduction in spending on social welfare.

Meanwhile traditional businesses such as taxis would have to reduce their prices to compete with the increase in services offered by new disruptive business models . Hotels in the lower price level will also face a challenge to compete. It can be assumed that some may be forced to close, leading to job losses in those businesses although they can themselves become micro-entrepreneurs.

But is it realistic to have 4 million people working in this new economy? Undoubtedly. Services such as Uber, Lyft, KitchenSurfing are all examples of a new breed of companies empowering entrepreneurs and connecting them with consumers while cutting out middlemen and putting a price on wasted resources. Peer-to-peer markets such as Uber dynamically adjust the price based on levels of demand, therefore drivers enter the market when it is worth their time. If the price for a cab increases, drivers are more willing spend their cars- flooding the market with more drivers. This obviously can result in downward pressure on prices and the price will normalise. Simple supply and demand economics now being utilised in real time in a new market. As this new economy expands, I can see this same model being replicated in areas such as dog walking, food delivery, babysitting, cleaning, building IKEA furniture etc.

Essentially we are now witnessing a bottom up economy raising, with real time auction prices driving the efficiency of markets and reducing overheads. This new economy is a great example of the outcomes from Austrian economic thought. Labour will be efficiently distributed to where it is required, in almost realtime, without the direction from government on what people should do or how much they should make.

2. GDP

This is all good for the economy, but is it beneficial for the GDP? Where I once spent £150 a night on a hotel, I may spend £50 to rent a spare room through Airbnb. Even an Uber is about 30% cheaper than a black cab in London. Clearly the transaction value decreases in this new economy brought about by the increased use of under utilised assets. From a macroeconomic point of view, would this not lead to a decrease in GDP?With millions embracing this new form of employment, it no doubt would, but to what extent? Since the price is cheaper, I can afford to take more Uber rides, or stay more nights in a city. However the demand for hotels is more inelastic as there is a maximum number of nights that I could sleep out. It could be assumed GDP might decrease in markets where this new economy can disrupt at large scale.

The problem we are seeing now is the resistance politicians are having with these new business models and the companies rapidly deploying them. If politicians only see the accounting side of GDP, they may take Keynesian action to avoid hotel closures, fiscal incentives etc. We are already seeing the resistance of cities such as NYC against Uber and Lyft- due in part to regulation and lobbying, but also apprehension.

What is next?

This new economy is rapidly expanding, and if countries want to fully benefit from the power of micro-entrepreneurs, politicians need to make important changes:

1. Enable startups. Startups are clearly not the ones hiring people, however they serve the economy by building a collaborative economy by which all types of products and services can be exchanged. Today this is in housing and transport, in the future it will disrupt incumbent businesses in hundreds of markets. Enabling startups means lowering the barriers to entry, tax, and embracing change rather than pandering to lobbyists.

2. Legitimise the micro-entrepreneur. Today micro-entrepreneurs earn £10 here, £50 there, most of it untaxed. We are also in the early stages of this new economy and the government should seek to legitimise this profession by creating new entities of ‘micro-entrepreneur’ with tax incentives that give everyone the ability to enter employment with existing skills.

We are at the time now where digital transactions between strangers are changing the world forever. If governments embrace and legitimise this new economy, communities will no doubt be healthier for it. It’s time for administrations to be bold.