Does the Sharing Economy Really Have Catastrophic Impacts?

From time to time you see an article or study challenging one of your beliefs. This is exactly what happened to me when reading a recent article about ConvergEx, a brokerage firm warning its clients that the ripple effects the sharing economy could be "catastrophic."

The argument ConvergEx made was that the sharing economy can hurt the overall economy because people share and rent rather than buying stuff. This behavior shift might lead them to become more risk-averse and even think twice before getting into debt.

The crisis-sparked renting and sharing economy could have an effect similar to that of the Depression, in which the consumer psyche is morphed to constantly imagine a worst-case-scenario. The recent recession, arguably, could be fostering a generation of 'renters' and 'sharers' (as opposed to 'savers') who are wary of potentially risky investment vehicles or financial instruments.

You might wonder what’s so bad about people who are wary of potentially risky investment vehicles but it only means you’re not working for a brokerage firm.

Nevertheless, questioning the value of the sharing economy isn’t a bad thing, so I decided to take a closer look at the main claims ConvergEx makes in order to determine if they have merits.

Living within your means can have a negative impact on the economy. Is this a bad thing?

"Americans of every demographic are flocking to services like Airbnb, Taskrabbit, and Bag Borrow or Steal for one overwhelming reason: Renting and sharing allow us to live the life we want without spending beyond our means," the strategists write in a note to clients according to Business Insider’s Matthew Boesler.

I guess the authors don’t mean to say that living within your means is irresponsible, but that it can cause the economy to stagnate. In other words, consumption is an important economic engine - higher spending leads to more jobs and higher incomes, which in turn will enable people to pay back their loans.

The authors don’t distinguish between good debt and bad, but I will. First, I’d argue that recent history shows us how easily consumer debt drags down the economy rather than helping it grow sustainably (from an economic perspective). Second, I would guess that people who use the sharing economy tend to be savvier consumers because they know how to meet their needs in an economically viable way. Therefore, even if they want to buy new furniture on their credit card, they will do it more responsibly, creating "good" debt they can pay back rather than a "bad" debt that will drag them, and the economy, down.

The sharing economy poses a risk for business because people will buy less stuff

“Renting and sharing could lead to lower home sales…as well as lower auto and retail sales," the authors write. “The ripple effects could also be catastrophic: Adjusting to a consumer who does not necessarily buy, but rather rents, would necessitate a shift in production, sales, and even employment structures.”

While it’s true the sharing economy is disruptive and can hurt some businesses, the authors forget to mention that it’s also an opportunity for those businesses that innovate and adjust to the new economic landscape. In a way, it’s not very different from megatrends such as e-commerce, globalization and even sustainability, which have also been disruptive by nature, “forcing fundamental and persistent shifts in how companies compete.”

What can companies do? Deloitte’s John Hagel and John Seely Brown suggest companies consider ways to participate in the sharing economy by renting out underused assets like office space and production tools. Another way would be to design products to be more sharable or even create their own platforms to encourage users to share their products. In all, the sharing economy will create both losers and winners, not just losers as ConvergEx suggests.

The sharing economy makes you moody

"The crisis-sparked renting and sharing economy could have an effect similar to that of the Depression, in which the consumer psyche is morphed to constantly imagine a worst-case scenario," the authors write.

Optimism, as Giles Fraser explains, sells better because people want to believe that things will get better. The problem is that the sort of optimism the analysts of ConvergEx look for is not sustainable and is probably a recipe for the next bubble followed by the next recession.

What these analysts don’t understand is that what they observe as "doom and gloom" thinking is actually optimism and excitement about the answers the sharing economy offers to the challenges we face with 10 billion people that need to live within the resource limits on this planet. Learning from history, there’s a good chance the financial sector is the real party pooper here, not the sharing economy.

Undervaluing the sharing economy

This is not a direct claim of ConvergEx, but the subtext of its note is very clear – the cost of the sharing economy is greater than its benefit. Otherwise, I guess there was no place for the alarming tone of this note. The problem with this analysis is that first it ignores the externalities of the "regular" economy, the one that is supposedly threatened by the sharing economy. Adding the externalities to the balance sheet can change the whole analysis, but only few economists dare to do it.

Second, as Tim O’Reilly wrote, we tend to undervalue the economic impact of the sharing economy because we measure value captured, not value created. This is new version of Steve Baer's Clothesline Paradox, where hanging clothes on the line rather than putting them in the dryer is counted as creating zero economic value.

The same goes with many sharing practices such as DIY, using platforms like Yerdle or Freecycle to give other people stuff you don’t need, etc. Still, we all know that it’s just because the accounting framework is broken, not because they don’t create any value.

The bottom line: I think these points clearly show ConvergEx got it wrong. What do you think?

Image courtesy of Guerrilla Futures/Jason Tester]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.