Is It Always Good to Share?

The Sharing Economy has attracted tremendous interest over the past few years: firms like Uber, AirBnB, TaskRabbit and Zilok offer people the ability to monetize assets that they’re not using all the time, or to find customers more easily than was the case pre-internet.

As a homeowner, I’ve become an enthusiastic user of AirBnB: the guests I’ve hosted at my farmhouse in Jersey have been charming, interesting and fun; I’ve used Uber a few times (though it doesn’t work that well on my Blackberry Passport) and I’d be happy to rent one of my three drum-kits using Zilok when I eventually get around to sorting it out. It makes sense: these are under-utilized assets (I really should practise the drums more); why not let someone else share them?

As a citizen of the world, I’d like to think that the Sharing Economy is good for the environment: if sharing car journeys using a service like RelayRides means fewer car journeys — or even fewer cars manufactured — then that’s got to be a good thing, right? On the other hand, if AirBnB makes accommodation so much more accessible that we take more trips, then perhaps not.

As an investor, I’m interested in the long-term impact this will have on our economy. So I’ve been reading & asking. The first piece I read was an excellent essay by Juliet Schor. She makes some very good points:

  • If a company like Zipcar simply replaces a traditional car rental firm, there’s probably not much economic impact;
  • If a site like AirBnB makes it easier to host and easier to find cheap accommodation, slippage is reduced and the economy becomes more efficient… which probably leads to more transactions occurring at a given level of GDP than would previously have been the case.

She also points to a lot of controversy over whether the Sharing Economy is basically a form of what we in financial services term “regulatory arbitrage”: AirBnB hosts are not subject to the same rules as the hotels they supplant; there’s no minimum wage on TaskRabbit. This is picked up by an article in The Economist: governments are struggling to shoe-horn decades-old legislation into working in the internet age, and it is difficult.

The part that interests me most is the bit that isn’t getting such good coverage, as far as I can tell. If durable goods like drum-kits & jet-washers are easily shared, to what extent do consumers stop buying these items, knowing they can just borrow them as required? According to the World Bank, Household Final Consumption represents close to 70% of USA’s GDP. Clearly, it makes no sense to share stuff one uses all the time (e.g. your fridge); looking at the data in a little more detail (from the Bureau of Economic Affairs) I was I admit surprised to see that fully two-thirds of the average American household’s expenditure goes on services. Of the other third (that part going on goods) two-thirds goes on non-durables. So, we’re left with ‘just’ 11% of consumption spent on durable goods. That’s a much smaller proportion than I’d have guessed and so perhaps I worry too much about the impact on GDP of everyone going out & sharing all their stuff.

I suppose the other side of the same coin is, how come there aren’t loads more internet businesses trying to help people share services, since they’re a much bigger market?

 

This article first appeared on LinkedIn 8 September 2015

Wage Inequality: How Not to Fix It

There was a great little piece on Business Insider this morning about Patricia Arquette’s acceptance speech at the Oscars. It got me thinking.

Let me start by saying that I am a firm believer in equality in all areas: male/female, black/white, whatever. Whilst there are undoubtedly differences in individuals’ capabilities that’s what makes the world an interesting place and there is absolutely no justification for discriminating in favour or against someone simply because of their gender, race or any other trait.

I’m just not at all convinced that legislation is always helpful. Take the following example. When my two sons were younger, they attended the local Preparatory School. One of the women teachers there went on maternity leave several times, returning briefly between each stint to teach for maybe a term. This is difficult for both the kids and the school to manage: they have to expend management time locating & interviewing temporary teachers to cover the role, and then even if those teachers are fantastic, they have to let them go when the original employee deigns to return. The kids likewise have to adjust to repeated changes of teacher. Like it or not, as chief executive of a business like that, wouldn’t part of you be saying to yourself (not out loud, for obvious reasons), “Why hire women [who go on maternity leave] when we can hire men [who generally don’t]?”

This is not an isolated example. In a small business where perhaps there is a single employee in a key role (say, specialist lawyer, CFO, etc) how can they deal effectively with this situation? Often, by not hiring a women of child-bearing age in the first place. I’m pretty sure this is a common occurrence – it would certainly help explain the gender pay gap.

Now, I fully support the idea of both parents wishing to spend time with their children, especially when they are pre-school age, as there’s plenty of evidence that this is a great thing from a social and educational point of view. Giving fathers the same rights as mothers to take parenting leave is all very well — but it doesn’t solve the problem, it makes it even more difficult for small businesses to know what to do.

 

This article first appeared on LinkedIn 23 February 2015

Putting the Gini Back in the Bottle

An article by The Economist on Twitter caught my eye a couple of days ago.

It shows that the wealthiest 0.1% of Americans control around 22% of the nation’s wealth — almost exactly the same proportion as the bottom 90% of citizens. This hasn’t happened since the late 1930s and the article seems to be lamenting the passing of a period where wealth was more evenly distributed.

One problem here is that there probably isn’t any really good data on income or wealth inequality going back further than the early 1900s; because I’m pretty sure that if there were, we’d see that the post-WW2 period was the outlier.

GiniMap

I’m not arguing that wealth inequality is necessarily good, just that it’s probably natural.

I’m not too concerned about the Paris Hiltons of the world…. “rags to riches and back again in three generations” comes to mind; I’m sure they’ll fritter it all away if they’re not smart enough to look after it — or their parents will follow Warren Buffet and give it all away rather than passing it to his offspring.

At the other end of the spectrum though, think about the technology sector, for example. Innovations like Apple’s App Store have made application development tremendously accessible: it’s literally now possible for a team of maybe half a dozen teenagers with a good idea and some coding skills to put together an app in a relatively short space of time that could gross tens or even hundreds of millions of dollars in revenues. Not every app is going to succeed, but how many pursuits were there in, say 1965 (when I was born) where someone potentially without any formal qualifications and with very little capital could make that kind of money?

On a slightly larger scale, look at Finnish game developer SuperCell. Following $12mn of VC investment in 2011, they developed two games, one of which was Clash of Clans — an app that grossed nearly $900mn in 2013. I don’t know how many employees they had in 2011-12 when the game was developed, but I’ll bet it was a pretty small core development team.

To me, this is a kind of democratization – literally with nothing but a laptop and an idea, it’s possible for a talented coder anywhere in the world to come up with something pretty awesome and sell it globally. Of course, if they succeed they will make a ton of money and in doing so “mess up” the Gini coefficient; but honestly, who’d want to live in a world without that possibility?

 

This article first appeared on LinkedIn 11 November 2014

Should You Pay The Ransom?

The recent surge in popularity of “ransom-ware”, along with Islamic State’s penchant for hostage-taking got me thinking about kidnapping & ransom.

In last weekend’s FT, Tim Harford reviewed the work of Reinhard Selten on the ‘Chain Store Paradox’ and it struck me that there was a strong parallel between the rational response of a monopoly chain-store owner to new entrants into the market, and the question of whether an individual should pay the ransom to a kidnapper.

As a parent (of two teenaged sons) I can of course appreciate that on a personal level, if anything happened to anyone in my family I would stop at nothing to get them back safely. Yet in doing so, I would in a small way be perpetuating the ‘business’ of kidnapping. Governments face the same dilemma and there has been much media coverage (e.g. this article in The Guardian) recently of the question as to whether some European governments are compromising US & UK’s harder stance on the issue by paying ransom to get their citizens back.

In Harford’s article he points out that Selten considered two possible extreme responses for the monopoly chain-store owner: either step aside, keep prices high and expect to lose some market share; or alternatively crush the upstart by dropping prices.

It seems to me that to have any chance at all of eradicating hostage-taking, destroying the economic model is the only way to do so. That means firstly governments agreeing not to pay ransom, ever. And perhaps it also means making the paying of ransom by individuals or corporates a criminal offence. This might seem extreme, but I think it’s probably the only way. It’s also pretty unlikely to come to pass unfortunately since even the permanent members of the UN Security Council don’t appear to be able to trust each other to keep their words on this matter.

 

This article first appeared on LinkedIn 23 September 2014

Dying on Payday

This is from the egalitarian Sweden:

“In this paper, we study the short-run effect of salary receipt on mortality among Swedish public sector employees. By exploiting variation in pay-days across work-places, we completely control for mortality patterns related to, for example, public holidays and other special days or events coinciding with paydays and for general within-month and within-week mortality patterns. We find a dramatic increase in mortality on the day salaries arrive. The increase is especially pronounced for younger workers and for deaths due to activity-related causes such as heart conditions and strokes. Additionally, the effect is entirely driven by an increase in mortality among low income individuals, who are more likely to experience liquidity constraints. All things considered, our results suggest that an increase in general economic activity upon salary receipt is an important cause of the excess mortality.”

 

This article first appeared on LinkedIn 20 August 2014