Loving your online, decentralized model may not work when you care about safe drivers, clean rooms, and other real-world issues. Claire Cain Miller brings up this problem in today’s New York Times. She points out that AirBnB and Uber are trying to follow “a religion [from] Silicon Valley: Serve as a middleman, employ as few people as possible and automate everything. Those tenets have worked wonders on the web at companies like Google and Twitter. But as the new, on-demand companies are learning, they are not necessarily compatible with the real world.” I agree. In The New Steam: On Digitization, Decentralization, and Disruption, I point out that “transactions costs related to safety, quality, property rights, contracting, and knowledge may be more acute in a digitized, decentralized world.” Ms. Cain Miller (apologies if Miller is the preferred last name), hits on some great points about the differences between the types of harms in the online and offline world. As she looks at it, the lack of humans is a problem for the reality of the services and relates to politics: “The belief that problems can be solved without involving people is probably why many of these companies did not meet with regulators and officials before starting services in new cities.” I think there is something more going on here.
Yes, the big firms in the space will engage in lobbying, but part of their story (and practice) will have to be about how they meet the issues of labor, safety, and more that they affect. As I put it:
[E]ven with digitization, economic questions will remain, but we must understand what they are and why they persist to see what the future may be. Douglass North captures a paradox that goes with transaction costs. Greater specialization, division of labor, and a large market increase transaction costs, because the shift to impersonal transactions demands higher costs to: 1)measure the valuable dimensions of a good or service; 2) protect individual property rights; 3)enforce agreements; and 4)integrate the dispersed knowledge of society.26 Standardized weights and measures, effective laws and enforcement, and institutions and organizations that integrate knowledge emerge, but the “dramatic increase in the overall costs of transacting” is “more than offset by dramatic decreases in production costs.” Digitization forces us to revisit these issues. With digitization, we are seeing an abundance of person-to-person transactions, but with the problems of impersonal transactions.
In simplest terms, AirBnB , Uber, et al. may face some rocky times, but there is a good chance they will figure out how to address the current issues and end up being the dominant firm, not the small disruptor. As Ms. Cain Miller notes, AirBnB has added hotlines and insurance. Uber has also increased its insurance requirements. If the disruptors continue to address a decent amount of the issues North calls out, my bet is that “this era of disruption and decentralization will likely pass and new winners, who will look much like firms of old, will emerge, if they have not already.”