The Sharing Economy and Economic Security

Summary: The search for efficiency through the Internet of Things, in which more and more aspects of human society are connected, is leading to challenges for the role of governments and for the security of citizens, both in physical terms, for example concerning the reliability of infrastructure, and in social ones, as regard the use of efficiencies to shift risks and costs onto the weakest members of society.

We live in a world that is increasingly connected, with the emergence of regional and global communication networks that are changing the way we live and do business, and that present new challenges for governments that must set the rules under which these processes take place. First, we saw the creation of the Internet, an information network which can be accessed by all; subsequently, an even broader network has been – and is still being – formed: the so-called “Internet of Things,” which connects not only electronic devices such as computers, cellular phones and tablets, but also infrastructure, production and environmental factors, and meta-information that tracks people’s conduct.

The benefits of this evolution are evident. Take for example the electricity network. If every user is linked to a network able to not only provide energy but also to receive information on the consumption patterns of the users themselves, it becomes possible to devise a much more efficient system of production. A smart grid is devised in which to eliminate inefficiencies and match supply with demand to the greatest extent possible.

The same model applies to many other fields, in some cases to make daily life easier, and in others to deal with problems that would otherwise be too broad to manage.

One very simple example of this is traffic. Today navigation systems are able not only to determine the fastest route to get somewhere; they can also tell us when to change route due to road work or other problems such as accidents. These systems of course become more efficient the more real-time information they receive, a process which is clearly enhanced by the participation of the drivers themselves. When an accident or another problem occurs, the earlier the system can be re-programmed the more travellers will avoid inconvenience.

This is, however, clearly only a very partial response to the ups and downs of daily life. Having more information doesn’t mean solving problems, but only assisting us in getting around them. If the roads are in poor condition the navigation system can tell us which route is best, but maintenance work still needs to be done.

If an accident takes place on a main route it’s not enough to have everyone detour onto local roads, creating massive back-ups; there still needs to be rapid intervention to restore normal functioning. So the improvement of efficiency is important, but only partial; it can not replace the investments necessary to guarantee the reliability of the infrastructure itself.

Another example of this problem was seen in Italy in 2003, when the whole country (with the exception of Sardinia) suffered a long blackout due to a fallen tree in Switzerland. It’s well known that Italy has a power deficit. To simplify, we can say that due to political decisions and a lack of investment, for years a large amount of electricity has been imported from abroad, passing through Switzerland. When a tree fell on the high-tension line a series of events were triggered that led to tens of millions of people being in the dark for almost an entire day. In that case, the apparent advantage of importing electricity from abroad contributed to the failure of the system. There was insufficient redundancy, the reserve capacity to guarantee the functioning of the system in a situation of crisis.

To make the example even more obvious: it is essential for hospitals (and many other facilities) to have back-up generators, otherwise there would be a risk to people’s lives in the event of malfunction of the electricity network. A system of generators for a large facility requires a considerable investment, but it would be criminal to try to save money by avoiding an “inefficient” investment that will be used very little, if ever.

Another step forward in smart networks is that of crowdsourcing, the use of inputs from the public that allow for obtaining information in a situation where other sources are lacking. An interesting example is that of the border monitoring system implemented by the state of Texas in the U.S. in 2006. The state asked citizens to participate in monitoring the border through the use of video feeds on which they can see illegal crossings. The effect was that Texas reached a very high level of monitoring with a relatively small investment. The public sector, unable to make the investments necessary to reach its goals (regardless of one’s political judgment of the program itself) exploited a new network to increase its capacity.

It’s easy to image the problems that can arise, some of which did arise quickly in the case of the border monitoring system: the difficulty in managing a massive quantity of information and distinguishing between what is important and what isn’t, the long-term sustainability of the system, and also questions of regulation and privacy for citizens who may suffer from overzealous monitoring activity by others.

The most pressing problem, though, is that of the use of the instruments of the “sharing economy” as an economic weapon; i.e. the attempt to involve users so as to shift the costs and risks of economic activity onto them, thus reducing the responsibility of businesses, and indirectly of governments as well.

As an example of this phenomenon consider the services provided by companies such as Uber and Lyft, the popular new systems for efficient and cheap mobility that are challenging traditional taxi services throughout western countries.

There’s no doubt that these services have identified an efficient way to provide paid rides: people use their smartphone to reserve a personalized service, the price is set in advance, and payment is made electronically. The question is if this represents added value, or simply a redistribution of costs from one party to the other. The value of the mobile app is not in question; what’s worrying is the business model adopted by the companies, based on a reduction of costs for the companies. Drivers for Uber and Lyft – and there are many other examples of services that have sprung up in recent years – are not employees of the companies. They are workers without job security who take whatever jobs they can find, without any guarantees. This can also be a problem for the users, in terms of the safety and reliability of the drivers.

The New York Times wrote a series of articles in July on the sharing economy, explaining:

“If these marketplaces are gaining traction with workers, labor economists say, it is because many people who can’t find stable employment feel compelled to take on ad hoc tasks. In July, 9.7 million Americans were unemployed, and an additional 7.5 million were working part-time jobs because they could not find full-time work, according to estimates from the Bureau of Labor Statistics. […]

Uber, Lyft and TaskRabbit, for instance, do not regard the workers who provide services to their users as employees. The companies say they are simply arenas, like eBay for gigs. They require their service providers to work as independent contractors and, as such, the workers don’t qualify for employee benefits like health insurance, payroll deductions for Social Security or unemployment benefits.”

So in this case it’s not simply a network for sharing among private citizens. We see that the sharing economy is being exploited to make profits, allowing the companies and their investors to avoid the costs of social welfare. Essentially, the widespread availability of labor allows them to sidestep certain obligations under law: the workers appear in fact to be employees, but the employers avoid the costs of hiring them. As a result, it’s not surprising that among the funders of Uber we find Goldman Sachs, Blackrock and other big players, who are notoriously good at extracting financial profit from the real economy.

The question of Uber is heating up in Europe as well. In a surprise ruling, on September 2, 2014 a Court in Frankfurt, Germany blocked Uber from operating in the country, citing safety risks and the lack of oversight. This decision surprised Jeremy Rifkin, environmental and social theorist and consultant to the European Union who is one of the leading proponents of the new sharing economy. In an article published on September 3, Rifkin writes that “Uber’s success is due, in large part, to the morphing of the Internet into a super Internet of Things, allowing carsharing services and other types of enterprises to operate on a Collaborative Commons, at near zero marginal cost, undercutting the higher fixed and marginal costs of conventional businesses.“

For Rifkin the march forward of the new networks is inevitable and governments will have to find a way to adapt. The problem is that, as in the past when he trumpeted the need to entrust social welfare services increasingly to private groups and stop counting on the role of government, in essence Rifkin ends up supporting the use of efficiency through social interaction to undermine the efficacy of public regulations.

Regardless of the goals of Rifkin or others like him, the expansion of the Internet of Things poses some important questions concerning the role of governments in general, and also for the security of the population. An increase in efficiency does not always correspond to greater security. In addition to the examples cited above, just consider the outsourcing of labor: according to free-market economists the market will decide who should produce what. Not long ago, in 2008, the well-known Italian economist Francesco Giavazzi declared publicly during a conference in Milan that Europe should not produce physical goods, as it is obviously an area destined to create only services. (It seems that European governments listened to him, since they have implemented austerity policies that have sharply reduced industrial production.)

Nevertheless, the concept of national interest cannot be eliminated, which should force us to think at least twice before relinquishing control of strategic economic sectors and trusting imports from abroad – not only because this tends to produce unemployment at home, but because from energy to transport to defense and other areas, there are sectors which entail costs, but which are also essential if we intend to be a wealthy and sovereign society.

The point of this article is not to question the importance of innovation and new networks, of course. We are experiencing a wave of increases in efficiency thanks to the fact that we are increasingly connected, and that networks can help distribute services more efficiently. In some cases, however, the advancement of these processes is used in a speculative manner, both to reach undeclared political goals, and to shift costs to consumers and weaker members of society.

The efficiency of modern networks improves our lives every day. What is must not do though, is blur the difference between better organization of existing factors, and the need for investments to guarantee the economic security of the population, in both physical and social terms.