Sharing Economy Is Opposite of Servant Economy

In a bleak take on the sharing economy, Atlantic writer Alexis C. Madrigal says it has created a “servant economy,” where sharing economy platforms provide “low-paying work that deliver on-demand servant services to rich people.” He likens this to the domestic service prevalent before the Second World War. This take gets things almost completely backwards.

Part of the argument seems to be simple nostalgia that ignores economic realities. For instance, Madrigal says that in the sharing economy, “Instead of taking a number off a bulletin board in a coffee shop and calling Eric to walk Rufus, you hit a few buttons on your phone and Eric comes over.” The trouble with this argument is that it ignores transaction costs. Economic transactions don’t happen if the transaction costs—the costs associated with researching and managing the transaction—are too high.

It is economic transactions that create wealth, by moving resources from a lower-valued to a higher-valued use. Thanks to the transaction costs of going to the coffee shop and finding that bulletin board, very often you didn’t call Eric at all, so no amount of wealth was created, however small. You walked Rufus yourself, taking up time that you could have used to do other things.

The genius of the sharing economy, however, is that it reduces transaction costs on both sides. Eric doesn’t have to spend time going around to coffee shops pinning up notices and making sure that those he put up last week are still there—he simply registers with the app.

Moreover, there was always a risk associated with hiring Eric to walk Rufus. Perhaps Eric was a puppy-snatcher using a false name. The coffee shop certainly didn’t vet Eric’s trustworthiness. In the sharing economy, people offering their services normally get rated on their performance. This reduces the costs associated with the problem of trust. Again, assuming Eric isn’t a puppy-snatcher, he is more likely to get the dog-walking gig, and plenty more besides. The well-known issue of finding a trustworthy mechanic for your car perhaps explains why there are at least four live apps providing car repair services.

Another part of Madrigal’s argument is that the gigs are low-paying. Yes, some forms of labor aren’t worth much, but the magic of valuation is that it is subjective, so whereas I might not pay Eric a cent to walk my dog, preferring to do it myself to get some exercise and fresh air, someone else will. The sharing economy apps do create some wealth as a result of that labor where previously there may have been none by connecting people who would not have been connected before.

But the biggest problem with the article is the assertion that these gigs are akin to servitude. That’s actually the problem with what we call employment. Under the legal definition, employees are in a “master/servant” relationship with their employer. The employer buys the employee’s time, and the employee is generally expected to do what the employer wishes. That’s why vicarious liability exists, where the employer is sued when an employee does something bad as part of his or her duties on the company clock. Some people call this “wage slavery,” and although they are wrong on the slavery part (in a free society, people can tell the employer to take the job and stuff it), it is certainly much more like servitude than sharing economy work.

Sharing economy workers, by definition, set their own hours. They often set their own rates for the job (although of course in a competitive market, they will have to take account of what others are asking). In cases where the app algorithm sets the price, they may choose not to turn on the app until rates are high owing to “surge pricing” or the equivalent. They may be responsive to challenges, such as “do five tasks in a weekend and get a bonus,” but this is all their choice. As independent contractors, they bring their own tools, their own approaches, and their own responsibility to the work. This is anything but servitude.

Moreover, the allegation that sharing economy apps are primarily used by the rich is open to question. The maids and handymen app Handy, for instance, appealed to millennial renters. Uber and Lyft are well known to the female college student desperate for a safe ride home at night. I often ask Uber drivers if they use the service themselves, and many of them do. In fact, the prevalence of sharing economy apps for relatively low-cost services suggests that it is simply the division of labor at work, now that transaction cost reductions have made it competitive with do-it-yourself.

This is why those of us who champion the sharing economy see it as something different and worthwhile—a chance to set the old “boss economy” aside, realize the ambition of many to work when they like, how they like, and to recognize that the division of labor, specialization, and exchange are our friends.

Yes, there will be challenges along the way (check out Duke Professor Michael C. Munger’s book “Tomorrow 3.0” for discussion of many of the likely ones) but the promise of the sharing economy is probably the promise of a fairer, freer society. It is regulation that threatens to derail that promise.