Economic growth often involves new factories manufacturing more goods for us. But new forms of economic activity also contribute to prosperity. Ongoing innovations in the sharing economy can increase our standard of living without providing more goods.
The best known firms in this new sector are ride- and home-sharing services Uber, Lyft, Airbnb and Home Away. These companies enable people to provide rides or lodging using their own cars or residences in exchange for payment. The use of existing cars and homes is the element of sharing.
Many successful businesses have long facilitated sharing. The Uber and Airbnb examples show us that taxis, car rentals, and hotels all represent businesses built around sharing. Lawn services, bowling alleys and libraries also involve sharing. A lawn service uses its mowers to mow one lawn after another. By contrast, the mower you own and use sits in the garage most of the time.
The new forms of sharing typically employ new technology, including the internet, smart phones, and social media. Technology is reducing transaction costs, which are the costs of carrying out buying, selling, and trading. Transaction costs often go unnoticed in the retail sector, but only because many innovations have routinized shopping at grocery or department stores, or now shopping online. Commerce-facilitating innovations include department stores, brand names, advertising, and credit cards.
Many economists overlook transaction costs. But economists Douglas North and Oliver Williamson won Nobel Prizes for studying transaction costs. Some economic historians now view transaction cost reducing institutions as the fundamental source of modern prosperity.
The market for used books illustrates how lower transaction costs make new trades profitable. The great challenge for exchange here is for sellers to find buyers interested in their books. Used bookstores offered a place for buyers to go to find a decent selection of titles. The excitement of discovering books you really wanted, however, really highlighted the limits of the process. Today anyone can buy or sell almost any book on Amazon Marketplace or eBay.
Many new forms of sharing take the rental model. Social media allows the borrowing of tools, cookware, and trucks among a wider circle of friends. Extending borrowing circles is crucial in allowing people to find needed items.
Sharing economy businesses are facilitating trading. And different modes of sharing exist. Uber offers rides by others, while Zipcar and Car2go rent cars owned by these companies for people to drive. Zipcar used technology to automate the rental process, allowing cars to be parked near where customers live. Most sharing economy businesses are really marketing innovations that reduce transaction costs. Airbnb’s background checks and rating systems, for example, increase the number of people willing to rent their homes, or pay to stay in a stranger’s home.
Wise sharing will allow Americans to own less stuff, and the self-storage industry illustrates how valuable this might be. Today over 55,000 facilities nationwide have 2.5 billion square feet of space and earn annual revenues of $27 billion. About 10% of households rent a unit, and 65% and 47% of customers already have a garage or an attic – and still pay for more room.
Sharing will let people tie up less of their wealth owning things that they rarely use. A University of California study found that each Car2go vehicle reduced the number of cars operated by residents of a city by 7 to 11. Essentially this means that one shared car can replace up to ten. Sharing allows people to avoid car payments, insurance, and parking, instead renting only when needed.
A University of Massachusetts study estimates that many households could benefit $275 per year, which could rise to $1,000 with really extensive sharing. These savings will increase our prosperity, primarily by allowing peoples’ incomes to go further. We will instead have new and less expensive ways to access things we want to use.
Innovative uses of technology constantly improve our lives, often by reducing transactions costs. The sharing economy is doing this today, providing an example where less is more.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.