Is the New Economy a Democracy or a Republic?

It seems like for as long as we have had the Internet there has been talk of how it can and is “democratizing” anything and everything.  There is the “democratization of technology,” the “democratization of personal finance,” the “democratization of data,” the “democratization of retail,” and through blogs like this, the “democratization of publishing.”  So are we really seeing “The Democratization of Everything?”

Just because the Internet enables people to do virtually anything themselves rather than use a professional party, does that mean they actually will, or even that they should?  In school most of us learned about Adam Smith and the concept of the division of labor.  As a refresher, this is the idea that it is actually better for the individual and for society as a whole to specialize in a specific area.  This allows the individual to become more expert, and increases productivity individually as well as in aggregate.  This approach has been credited with spurring the Industrial Revolution, and essentially creating the modern economy as we know it.

But now some would argue the pendulum is swinging in the opposite direction.  No longer do you need a banker to focus on finance, a retailer to focus on selling goods, a taxi driver to focus on transporting people, or a hotel to focus on providing lodging.  In our Internet-enabled age individuals can and will fill all of these roles and more, not as professionals, but as part-timers.  The office worker can become a part time driver on Lyft or Uber to earn a few more dollars.  The empty nesters can make some extra money for retirement by renting their spare bedroom through Airbnb or VRBO.  You can even cut out those greedy banks by lending and borrowing directly from people just like you through LendingClub or Prosper. What is there not to like?

A recent New York Times article suggests quite a lot.  While technology has allowed for the possibility that amateurs can and will displace professionals, the reality is rarely so simple.  The “providers” in these peer-to-peer platforms often find that to really be worth their time, they have to treat it like a real job.  Even when they do, as the New York Times points out, the returns are far from certain. 

And when people don’t treat it as a full time job?  Not only do they make less, or sometimes nothing at all, but they are still taking on a significant burden.  Take for example vacation homeowners who decide to rent out and manage their homes themselves.  In theory this is great – they can save on the commissions they otherwise would have to pay to rental management companies.  In reality they have just signed up to take on all of the risk, hassle, and time commitment a professional would otherwise cover.  In fact, a HomeAway survey of homeowners using their platform shows that these owners spend 8.4 hours per week managing their homes. That’s right. Every week they are spending an entire workday doing something that a professional operating full-time and at scale can do more effectively and efficiently.

Fortunately, despite all of the “democratization” noise to the contrary, amateurs are not actually displacing professionals in droves.  For example, look at eBay, the great democratizer of retail.  Though the site started as a venue for soccer moms to sell Beanie Babies to other soccer moms, it is now a platform on which new professional retail businesses are started and grown.  This shift is so pronounced that “Power Sellers” now account for 80% of eBay’s total sales.

Or look at Airbnb, the darling of the sharing economy.  While pitched by the company as a platform where “regular people” can rent a spare room or even a couch, the reality of how it is being used is far different. A recent Skift report shows that already, much faster than the shift occurred with eBay, 40% of Airbnb’s revenues come from hosts with multiple listings, and a majority of its revenue comes from whole-home listings – not spare bedrooms or couches. 

What is actually happening is that the platform Airbnb provides has enabled the creation and growth of new model management businesses such as AirEnvy and MyVRHost, the new “Power Sellers” of the sharing economy.  Companies built entirely on the backbone Airbnb provides, but companies nonetheless.  No wonder Jason Clampet says: “The future of Airbnb is not the guy who rents out his place on the weekend. It’s the professionals who know what they’re doing, and sell rooms every night of the week.”

Even beyond these companies, despite all of the talk surrounding what Airbnb and VRBO are doing to the lodging space, it is a more traditional vacation rental management company, Vacasa that appears to be growing the fastest.  Largely by working with homeowners who have started to realize that just because they can do things themselves does not mean that they should, Vacasa was recently named the fastest growing company in the Portland area, and the 9^th fastest in the entire United States. 

All of this is to say that what may in the short term look like a Democracy is more likely to evolve into a Republic.  We will not become a society where every single person does everything for himself or herself.  However, that does not mean the business environment as we know it will remain static. Technology and new platforms enable the creation of new and disruptive business models.  In the end, though, it will still be businesses that predominate. 

And this is a good thing.  We should remember that, in the United States at least, our forefathers very explicitly chose to create our country as a Republic not a direct Democracy.  Understanding the principles of the division of labor, they knew it was better for us to elect representatives who could focus on governing full time rather than requiring each and every citizen to be involved in the writing, passing, and enforcement of our laws.  Even with this more hands off approach where we outsource the heavy lifting of governing to elected representatives, most people find it difficult to do their part and vote. With voter turnout at record lows, can you imagine if we actually had to do everything ourselves? Now there is a scary thought.