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The Sharing Economy Increases Economic Growth While Lowering Consumption

Raz Godelnik headshotWords by Raz Godelnik

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The Rise Of The Sharing Economy

We usually talk about the sharing economy on three levels – the company, the sector and the “change.” On the company level, we generally analyze specific companies like Airbnb or Zipcar and how they disrupt the markets they operate within. On the sector level, we look into evaluations of the size and potential growth of the sharing sector. The “change” level includes mostly qualitative observations on the extent to which the sharing economy can revolutionize our lifestyle and change the business landscape.

Today, I’d like to focus on a fourth level - the economic system. On this level, we try to evaluate not just the impact of one successful company or another, or how much the sector can grow, but the overall impact of the sharing economy on two important economic issues – consumption and growth. More specifically, we will try to figure out if the sharing economy can increase economic growth while lowering consumption, which for many seems to be a win-win outcome. On a following piece we’ll check if this outcome is actually what we should be looking for.

My first instinct when thinking about the impact of the sharing economy on consumption is that sharing reduces consumption. After all, we’re talking about better usage of underutilized resources like swapping clothes we don’t use anymore, carpooling, using a neighbor’s car, renting a room in someone’s house for the weekend, bartering, bike sharing, and so on. All of these activities seem to reduce our consumption, right?

Before answering the question, let’s make sure we know what we’re looking at. In terms of economic accounting, we refer here to household consumption expenditure as measured for calculating the Gross Domestic Product (GDP), i.e. “the market value of all goods and services, including durable products (such as cars, washing machines, and home computers), purchased by households.”

Some of the sharing activities mentioned above either have zero market value (swapping clothes or bartering for example) or a lower market value comparing to the ‘business as usual’ option – for example, renting a bike once in a while instead of buying one.

Yet, in some sharing activities the outcome might be completely different. Take, for example, Airbnb. The company reported last year that its contribution to San Francisco’s economic activity is estimated at $56 million a year. Given that an Airbnb user spends more than a hotel guest ($1,100 vs. $840 respectively) and that 14 percent of the users said they would not have visited the city if not for Airbnb, we can say that in this case, a sharing activity increased the total consumption expenditure of households.

There are also some cases where the relationship between sharing and consumption gets more complicated. Take peer-to-peer car sharing. You might expect that this sort of activity would reduce the need of families to buy a second car, which might still be true on the demand side, but not so much on the supply side. Shelby Clark of RelayRides told Tim O’Reilly that people are buying a second car just for sharing. Now, it’s not clear if the net impact here is positive or negative (i.e. whether households buy in total more or fewer second cars as a result of car sharing), but it goes to show you the complexity in the relationship between sharing and consumption.

In addition, let’s not forget that the money saved by people using the sharing economy also might go to consumption…of other stuff. Zipcar asked people in a survey what they would mostly spend the $6,000 a year they could save by not owning a car on. Interestingly, only 20-30 percent would go, according to the responders, toward spending money on things like travel and buying a house, while the rest would go to savings (40-50 percent) and paying debts.

So, can we argue that the sharing economy reduces consumption? My guesstimation is that the answer is somewhat yes on a personal level, although given the examples above the total net impact of the sharing economy on consumption might be smaller than we tend to think.

In any event, those who fear (or hope) that the sharing economy would hurt growth shouldn’t be too worried (or hopeful). There seem to be three good reasons why even though the sharing economy can reduce consumption on the personal level, it will still enhance growth.

First, this is an innovative space and if we can learn from similar innovative sectors (open-source software for example), there’s a good chance to see a real economic value created by the sharing economy. Second, there’s the local multiplier effect that helps generate more economic activity from the hundreds of dollars a month people make for renting their car on Wheelz or $50-$100 a month others make from renting their bike on Liquid. Last, but not least, even if each of us consume a little bit less due to the sharing economy, there will be more of us and in this kind of contests scale usually wins, so aggregate consumption will rise and hence we’ll see more growth in the GDP.

So should we be happy because it seems like the sharing economy can boost the economy while reducing consumption to some degree on a personal level? Isn’t it the win-win strategy we were looking for? It is if you believe growth is key to prosperity. It isn’t if you believe growth is mistakenly synonymous with well-being. Can the sharing economy become a good fit for the latter and not just the former? In the next piece, we’ll try to figure it out.

[Image credit: Liquid]

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