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Will Crowd-Based Capitalism Replace Managerial Capitalism? (Full Transcript)

The full interview transcript of the conversation between Arun Sundararajan and Peter Leyden is available below. The transcript has been edited lightly for clarity.

Peter Leyden: Welcome to the “Future of Sharing,” the series where we’re looking hard at how to make the sharing economy work for everyone. I’m Pete Leyden and I am the Founder of Reinvent. And today we’ve got coming in from New York, Arun Sundararajan, who is the author of the awesome book actually, “The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism”. He’s also a professor at NYU Stern School of Business and we are very very fortunate to have him coming in across the web here from his office in NYU. Thanks for coming.

Arun Sundararajan: Delighted to be joining you Peter.

We’re immersing here at Reinvent a lot of the different aspects of the sharing economy and I can honestly say this book is about the best overarching comprehensive way to really wrap your head around the sharing economy that I’ve actually come across. I think you did an excellent job on this thing.

Thank you.

And it’s also quite positive though, forward-looking, but can-do and positive which is something we kind of like and it’s part of the series here that we’re really promoting. So one of the things I’d like to just get nailed on a few basics and then as we move towards what the real focus of this conversation is going to be about how can we make it work better, how do we kind of deal with some of the issues that are coming up around the sharing economy. 

You used the word crowd-based capitalism but on the other hand, we talk here about the sharing economy. So do you want to just talk a little bit about when you talk about the sharing economy, what is it bounded by in your world? How big is it essentially, or where are we now? The boundaries in your mind of what we’re talking about.

I mean that’s a great place to start, because the term sharing economy seems to refer in people’s minds to a lot of different things. I see it as part of a broad shift in how we organize the world’s economic activity and I use the term crowd-based capitalism because it seems to be the most precise label for this transition in organizing the world’s economic activity that platforms like Uber and Lyft and Airbnb are a part of.

I bound it in the following way: in the 19th and 20th centuries, we built organizations of increasing size and complexity that took us away from the Adam Smith 18th century economy of individuals selling goods and services to other individuals and towards a model in which a large organization would accumulate resources. It would hire employee’s full-time. It would raise capital. It would build buildings, build factories, and cohesively produce goods and services for millions of customers.

The shift is away from that centralized model and towards one where you still have an intermediary, you still have an entity, that is coordinating the interaction between the sources of these resources and the consumers who are getting the goods and services. But this entity—many of the sharing economy platforms are good examples of this—is drawing on resources from the crowd as and when it needs it.

And so Airbnb will draw on a particular host who has particular sort of real estate assets and hosting skills to facilitate the provision of short-term accommodation. A number of different ride-sharing platforms will call on the resources of an independent driver who has a car to provide transportation service. A peer-to-peer car rental company will facilitate the rental of cars by consumers but from owners instead of using a dedicated fleet.

A city-to-city transportation network like BlaBlaCar in Europe will facilitate the selling of empty seats in other people’s cars when people are driving from one city to another. But it’s drawing on these resources as and when it needs it instead of building a centralized infrastructure with full-time employees and dedicated capital and resources.

And so what this transition is doing is it’s blurring the lines between the personal and the professional in the provision of commercial services. It’s bringing things that we used to do with our friends—giving them rides to other cities, letting them stay in our houses, cooking them meals, lending them money, picking them up from the airport—and it’s bringing those into the commercial realm but the providers are largely not full-time professionals.

It’s blurring the lines between casual labor and full-time work and it’s shifting us in some ways back to that 18th-century economy where there is a lot more peer-to-peer exchange, except that it’s sort of Adam Smith’s market economy on steroids, because the platforms are enabling this kind of peer-to-peer exchange in a way that isn’t constrained by geographic boundaries and this machine of capitalism is dramatically scaling the peer-to-peer behaviors.

So “going back” sometimes implies, “uh-oh, we’re sliding backwards,” but you see it as a positive forward motion that’s building off that 18th, 19th, 20th-century model into potentially an economy that works better by reconnecting with some of those old rhythms. Is that fair to say?

Absolutely. It’s sort of a heavy hybrid of the 18th-century market and the 20th-century corporation in a way that has a number of positive effects. It’s decentralizing the ownership of the economy out of the hands of large corporations and making it more evenly distributed. It’s shifting the role of the individual away from being a provider of labor for a salary and towards being some form of micro-entrepreneur and there are different flavors for this that depend on the platform that you’re interacting with. Some are more employee-like. Some are more independent.

But the fundamental contract between the individual and the institution shifts from labor provider to small business owner, and so it’s dramatically expanding the set of people that other people may trust for commercial exchange. But it comes with its challenges. It comes with the challenges of transitioning from a world in which a majority of the workforce in a number of countries have gotten used to this idea of having a full-time job at institutions that support them. And we’ve got to reinvent the things that are wrapped around this model of work in a way that makes sure that we don’t in fact slip backwards.

I love that framework. Now, just a couple of things, because we’re talking to people through this series who are really just trying to get their heads wrapped around the phenomenon and you’ve kind of structured it there. Like how big or how significant is this part of the economy would you say now compared to the overarching economy? And kind of talk a little bit about its growth rate. Is it still kind of on the edges of the core economy, or is essentially breathing life into the future of what the entire economy will be? I’m just curious on how big is it now, and growth rates, and how much it’ll essentially take over other parts of the older economy of today.

At this point, the sharing economy as sort of most people define it, which is the platform mediator to peer-to-peer commerce of the kinds that we were just talking about, is a relatively small fraction of the economy. But it’s growing very rapidly, and as it grows, it’s also changing the models of consumption and usage of many customers in a way that makes me believe that it will be a significant fraction of the economy in the decades to come.

If we take some specific industries, so in the provision of short-term accommodation, by a number of metrics, Airbnb is already the largest single provider of short-term accommodation in the world. It has four times as many listings as the world’s largest hotel chain has rooms. It accommodates more people per day probably in the revenue sense. Very soon it will be the world’s largest provider.

Uber and Lyft and Didi Chuxing and Ola and GoJak and Grab, all of the different platforms that are facilitating point-to-point urban transportation in cities around the world have already gotten to the scale where they will soon be a lot larger than the taxi industry, but they are still a relatively small fraction of the broader transportation industry.

All of these platforms are betting on a future where a significant fraction of the population stops buying cars for their own exclusive use and instead starts to think of mobility as an on-demand service. Buying mobility packages the way that you buy mobile phone minutes today and having on-demand vehicles come and fulfill these transportation needs. And once that transition starts to occur, this model will represent a significant fraction of the transportation industry.

We’ve seen very early stage examples of crowd-based capitalism in the provision of healthcare and in the provision of energy. I think we’re a few years away from seeing the big shift in energy. The battery technologies for storing solar power have to get to the point where you can reliably store the solar power that you generate and once you do that, then the fundamental economic advantages of generating solar power will kick in and you’ll start to see local peer-to-peer distribution networks really pose a challenge to the centralized energy production companies.

And so if you put all these industries together: accommodation, real estate, transportation, energy and health care, you’re talking about half of the GDP of many countries. And so while the footprint is extremely small today, some of the big players are getting to a scale that is comparable to the industry leaders in the industries that they are challenging, and all trends suggest that in the next 20 years crowd-based capitalism will sit aside managerial capitalism as the dominant way of organizing the world’s economic activity.

Wow. Very powerful way to frame that. Maybe just one other elaboration on that. There’s often a phrase in Silicon Valley here where we are that it’s the Uber of this or the Uber of that or it’s the Airbnb of this and that. Do you see that these models are cracking a kind of platform-based peer-to-peer system that essentially people will just start popping into areas that wouldn’t necessarily have been areas that you’d consider applying those kinds of models?

Well, I’ve seen the application of the basic platform model of real world goods and services to a dizzying array of industries over the last two or three years. Some of which are well-suited for the model, and some of which it just represents sort of momentum and excitement and wishful thinking from venture capitalists. But more importantly, it’s also revealing that some of these behaviors, some of these forms of exchange already exist in the economy. It’s just that they aren’t too visible and they aren’t organized systematically in a way that allows them to scale.

So there’s been a lot in the news recently about food-sharing platforms. Platforms that allow individuals who prepare food at home to provide it commercially to other individuals as takeout. I grew up in India where this kind of thing is really widespread but it’s not organized through a platform, it’s organized through local networks. The platforms that are doing it in the United States are tapping into a network of providers who either are doing this on a small scale or who always wanted to do it but couldn’t find the channel.

And so that’s certainly an industry in which I think that there will be growth. There’s a range of farmer to consumer models that again, we’ve always had through the local farmer’s market, but which has the inefficiencies of not knowing what’s going to be available and not getting what you want and getting used to the idea that fruit doesn’t look as bright and shiny as the ones that you see in Whole Foods. There are platforms that are trying to introduce some efficiencies into matching the farmers who grow the produce or the fisherman who do the fishing or the people who are actually creating the food to the people who want to consume it.

And so I’m not predicting that in 10 years everything will be peer-to-peer. The transition will be very gradual and probably slower in the food industry and the energy industry than in the transportation or accommodation industry. But yeah, there’s a lot of excitement that leads to a lot of innovation. By definition, when you have innovation, you will have a lot of failure but what will be left behind is a set of platforms that have not just identified that there’s an opportunity to organize economic activity differently but have thought carefully about designing an experience that works well for both the provider of the goods and service and for the consumer.

Totally. So there’s not really an inevitability but clearly there’s this growth. If you’re running a city, which is a lot of the people that we’re talking to in this series, you’re watching it coming and you’ve got to deal with it. Let’s talk a little bit more about the positives and then for sure what I’d really like to spend the bulk of the time on is talking about the challenges and some of the solutions around it. But people, when they first kind of confront it, it’s like, wait a minute, is this a good thing? Maybe it is inevitable. Maybe it’s taking over more and more, but is it positive? And you made some reference earlier in the conversation, but can you give people a little bit of a better sense of why you see this as a good development, and maybe highlight some of the things that you know that are superior even from the system that we’re kind of got used to in the 20th century.

Okay. So let’s start with why the fundamental economics of crowd-based capitalism are inherently superior to the managerial capitalism that preceded it. First of all, at the core of the model is a more efficient use of resources. It’s a more efficient use of space. It’s a more efficient use of transportation resources. You’re sort of revealing the hidden resources that exist and providing a way for them to be utilized through a market. And so there’s an increase in the efficiency with which we use capital, assets, labor, and generally an increase in that kind of efficiency leads to an increase in productivity, which is good for an economy and accelerates the pace of growth of an economy.

The second economic fundamental that is positive is that there’s an increase in variety. And so if you can trust what’s available in Airbnb with even the most innovative hotel chain, clearly the variety on Airbnb is just fundamentally vastly greater. Sometimes there’s an increase in quality as well. If you think about the immediacy with which you can get transportation today relative to five years ago. And when you increase variety and diversity and quality, what ends up happening is that people consume more rather than less. Economists tend to disagree about most things but if there’re two things we agree about, one is that productivity growth leads to economic growth, and the other is that, increases in consumption lead to economic growth.

So those fundamentals are clear and it’s good for the economy on those two fronts. My research suggests that it will also have an equalizing effect on the economy. It will start to decentralize the ownership of the means of production, so to speak. I’m not a Marxist by any means—I know that using the term “means of production” comes with all the weight and history associated with it.

But what I mean is that, think about a hotel chain and contrast it with Airbnb or think about a retail operation and contrast it with Etsy. In the case of Airbnb or the case of Etsy, what you’ve done is, yes, you’ve created a multi-billion dollar platform, but you’ve also created millions of micro-entrepreneurs. People who actually own genuine businesses that they are running and so they have started becoming small owners or owners of a tiny fraction of the capital of society. They are setting prices, they’re managing inventory, they’re doing customer relationship management, they’re building a brand through a reputation system. And when you decentralize ownership of the capital, that in the long run equalizes things.

Thomas Piketty and his book, ‘Capital in the Twenty-First Century” a couple of years ago made this argument in 600 pages but the core of his argument is that people who own capital see faster rates of income growth than people who receive wages. And so when we shift the model away from individuals as providers of labor for wage and towards individuals as owners of businesses, we’re going to distribute the ownership of capital in society more evenly and this will have a long-run equalizing effect.

There are other benefits as well. Because of the peer-to-peer nature of crowd-based capitalism, there is a positive impact that it can have on the levels of trust in society in general. If you look at the trends in the United States for example for how much people trust each other, they have been declining steadily since the early 70’s where the general social service started measuring this and they’ve been declining most acutely among young people.

Now, if the youth of today who have grown up reading Yelp reviews and Amazon reviews and who have this sort of familiarity with digital interaction, start to have repeated interactions with people they don’t know that are positive—which is a vast, vast, vast majority of the sharing economy interactions—this increases the extent to which people perceive other people as being trustworthy even if they don’t know them.

There’s a greater level of connectedness that the sharing economy form of goods and services inherently has in it. If you contrast staying in a hotel with staying in an Airbnb, there’s an intimacy associated with staying in an Airbnb. Even if you’re renting the entire apartment or entire home, it’s someone’s personal space. You see the choices that they’ve made.

Maybe you see their wedding pictures. There’s a form of connection that forms. If you stay in their spare bedroom, you actually have a more connected short-term accommodation experience. You sit in the front seat with your Lyft driver. You fist bump when you get out—I don’t know if you do that anymore, but you used to fist bump when you get out. The people who use BlaBlaCar, the city-to-city ridesharing platform that I’d mentioned, overwhelmingly seem to do it because they like the personal nature of traveling with someone in a car rather than the somewhat individual nature of traveling in a train.

And so over time, as we start to integrate some form of connectedness into our everyday economic activities, we may end up with a less lonely and more connected society.

Wow. Those are awesome. I love your macro kind of way of distilling these positives. Now, that said, and we could kind of go more there, but let’s shift to the challenges. So anytime you shift like that, there’s going to be disruptions to the old ways of doing things. What I thought your book was exceptional at doing honestly was really looking at that transitional piece, talking explicitly about regulations and different ways to approach this. Let’s just talk in general about your framing of that and then I would like to go through some of the specific things you’re talking about.

For example, you talk about regulation being pushed more back on the companies themselves, but from a bigger picture point of view, where do you think we are in the evolution of the sharing economy? That there’s a lot of positives, it’s moving in the right direction, but there are disruptions and there are issues that are arising. What’s your kind of idea of where we’re at and what we should be doing in general in this kind of space?

Well I think the challenges fall into two big buckets. I think the first bucket is the regulatory challenges and not surprisingly, many of the large sharing economy platforms have faced a number of challenges fitting the new way in which they’re providing a good or service into the old regulatory boxes. And I say that this is not surprising because what the sharing economy by and large represents is new ways of providing familiar things. And so the familiar things have pre-existing ways of being regulated. That expect a professional provider. That expert a certain level of working full-time. That expect a certain scale. And when you inject Uber drivers or Lyft drivers or Airbnb hosts into this picture, the new model doesn’t fit into the old regulatory boxes.

And so there’s a process I guess first of a change in the regulatory culture of cities and states where they stop to transition from thinking of themselves as having to do everything on the regulatory front towards thinking about platforms as actually being able to share the burden selectively. Then there’s the reframing of the rules themselves and both of these are challenging processes because many city governments justifiably feel—for example, take taxis—they’ve been regulating it for 50 years, taxis in New York City wouldn’t have worked without metered fares, inspected cars, screened drivers 25 years ago. I mean the guy with a board sort of saying, do you need a ride to the airport?

That’s clearly not something that was viable and so you needed regulation of the time. But now you’ve got new intermediaries who can do a lot of the things that the regulator was necessary for and so we have to transition out of the way of thinking that says, we have to do everything, and actually embrace the idea that the government can focus on what’s really important. What really requires centralized intervention to make sure that society gets to the place that it needs to be and to leave a lot of the rest of the responsibility to the platforms themselves.

And so we’re at a very early stage in this transition. I think that many of the platforms today in some ways are creating a public good by clearing the path and laying the groundwork for future companies to come in with a more accommodating regulatory landscape. But regulatory change is a slow process, as it should be, and I think it will be 5, 10, maybe more, years before things actually settle down and we have a clear idea of how the world’s economic activities should be regulated for the new paradigm.

The second front is protecting labor or creating a new social contract. That’s perhaps one of the biggest challenges that the United States, Western Europe and many other modern societies are going to face in the next two decades. Because we’re transitioning from an economy of full-time employment to one in which an increasing fraction of the workforce is going to be making a living as tiny business-owners. And while this is empowering, it also hits up against the fact that we have corrected some of the deficiencies of the full-time employment model over the last hundred years. We’ve reduced the imbalance in bargaining power between the institutions and the individuals through labor unions, labor laws, minimum wage. There’s a whole bunch of progress that has been made and we’ve constructed a funding model for someone wanting to feel safe and stable in their lives, that is contingent on full-time employment.

So you want the same amount of money every month. You want health insurance. You want to be protected when you retire. Paid vacations are desirable. The fact that people below a certain age should not be employable is also desirable and all of this law has been created and these founding morals have been created but for the full-time employment model.

Now when we create a new model of engagement between the individual and the institution, one of micro-entrepreneurship, we have to reconstruct both the bargaining power balance and the funding model. So if you look at independent contractors or micro-entrepreneurs today, things don’t look as good as full-time employment and people sometimes mistakenly think that this means that the full-time employment model is better. But the full-time employment model plus 100 years of progress, plus a good funding model, plus all of that stuff is better but inherently, the micro-entrepreneur versus provider of labor, the micro-entrepreneur is a more empowered model. You just have to wrap the protections around it, change labor law, change the funding model, in a way that gives people stability, security, predictability. We just have to wrap that around the micro-entrepreneurship model as well.

Wow. Both are huge. You broke that into two pieces. They’re both awesome insights. But let’s go to the one that you’re talking about the shifting boundary of who’s responsible for what regulation. Because I think what you’re raising here to a lot of people would be controversial. It’s like you’re saying, oh gosh. Let the companies do more of the regulation, but that’s like the fox in the hen house kind of thing.

Yeah.

I know what you’re getting at here but explain it for someone who’s trying to wrap their head around that. Why that is, why that would work and why that’s desirable over a more centralized framework that we’ve become used to from the center of government.

Okay. Well, every successful society has realized that some form of government is good. And that we need to give government a monopoly over certain things. So most modern successful societies give government a monopoly over violence. Many of them in past have given government a monopoly over surveillance. And these are things where we’ve realized that there are some things that we only want the government to do. But every society has also realized that there are other things where we want the government to be the coordination mechanism. We want them to collect money but then delegate the responsibility to someone else.

So there’s a whole host of stakeholders in any society that are non-governmental that are doing the collective work of society. There’s a long history of self-regulatory organizations in different kinds of industries, ranging from chemicals to cotton to financial services to nuclear power. This dates back to the medieval guilds who would set standards in a government-neutral way. And not all of these have been successes but they’ve taught us some valuable lessons about what makes self-regulation work.

It’s important to put this in the context of, while certain things about hotels or about taxis or about food safety have in the last 50 years been dominantly regulated by government, the idea that someone else participates in the regulation is not new. It’s just new for certain industries, and so drawing these boundaries is an iterative process because it’s in the interest of business to say, well, society’s interests are aligned with mine, and so just leave me alone to do whatever I want to do. And we don’t want to go to that extreme either, but when you think about what’s unique about the sharing economy platforms, they are not providing a lot of the goods and services themselves. They are fundamentally intermediates. Which means that they gain visibility into the transactions at an unprecedented level. First of all, they have an interest in preventing market failure. They have an interest in making sure that things are safe. They have interest in the participants on the platform and the people around them having a good societal experience and so they’re natural allies to the government for a lot of regulation.

We just have to reframe the thinking from what it is today, which is that the platform needs to be regulated, to a framing where you say the platform and the government are natural partners for the regulating of certain things. They aren’t natural partners for the regulating of other things. So we need to bring in other entities—either the government or third parties, maybe homeowner associations have to play a role to some extent in deciding certain things about Airbnb hosting. Maybe there are driver cooperatives. Maybe there are driver organizations that are going to play a role in setting standards for safety. Maybe there are peer networks that will play a role in facilitating food safety in the future. Because when you look at any industry under any form of regulation and examine it closely, you realize that there’s an idealized goal of what society wants and then there’s the reality of where we’ve reached.

So any form of regulation is inherently going to be inefficient. I mean restaurant safety is good but it’s not perfect. It would be perfect if we stationed an inspector in every restaurant and have them inspect every piece of food.

People laugh at me when I say this. They’re like, come on. This is impractical. I say, yeah but it means that we do make tradeoffs already and so as the supply model changes, where we draw the line may change and what we do to ensure the safety may also change. And so I guess the summary of this is that self-regulation doesn’t mean no regulation. It means regulation by someone other than the government. There’s a long history of self-regulation in successful societies. Platforms and governments, rather than being at odds, are in fact very well-aligned and very well suited to be partners in regulating a lot of the commercial activity that takes place on the platforms.

Awesome. Yeah. And I guess in a practical manner that would mean some amount of transparency between what the company’s doing and what governments could monitor and some kind of data sharing or access to data that governments could at least be confident these companies are in line. So there is some kind of implications of what you said there.

On the transparency front, my opinion I think at this point in time is in the minority, but there’s a lot of excitement about the potential of open data policies where there’s transparency to a city or state or federal government into the workings of any business or any platform. This kind of openness of data is often fraught with privacy challenges but more importantly it also takes the data from its natural home and puts it in the hands of someone who may not be best equipped to do good things with it. Not because they don’t have good intentions but maybe they don’t have the talent or they don’t have machine learning resources or it’s not feasible to provide second-by-second data feeds from a platform to the government.

So I’m in favor of as far as possible delegating regulatory responsibility to the party who is the natural holder of the data. If you take an example of platforms and taxation of the activity that takes place over the platform. One model would be to tell every provider to register with the government. Tell the platform to hand over the information about the extent to which these providers are making money, then have the government collect tax from them. An alternative is to say well, for the government to tell the platform, you already have the data. You know exactly what’s going on. It would be extremely easy for you to simply deduct the taxes or collect them as the transaction is taking place. Aggregate it for us and hand it over to us. Perhaps with an audited statement that ensures that you’re complying with the guidelines, all the rules that were in place.

Any publicly traded company in the United States does some version of this. We don’t ask these companies to hand over every iota of operational data to make sure that they’re reporting honestly. We say, here are a set of things you have to provide. Get them audited and bring them forward. There are challenges associated with this but what I think will end up happening if we go towards the sort of data-driven delegation is that we’ll start to discover new and better solutions to familiar problems that have thus far evaded good implementation even though the rules exist in theory.

In theory, a lot of laws exist but they’re not enforced because they’re unenforceable and so now if you put some responsibility in the hands of the platform and say, use your micro data to identify patterns that seem to be bad behavior and correct them, rather than saying, give me the data and I’ll identify the patterns, because the platforms can actually identify the patterns so much better than a city government agency can because they know their data, they’ve got the talent, they’ve got the resources and so delegate to the person who has the data rather than taking the data and giving it to a government is one of my sort of heuristics for forward-looking regulation.

I love that idea. Now, how about this comment again in terms of redesigning the boundaries of regulation. One of the game-changers that applies to every sharing economy company or environment is that the people who use it rate everybody back and forth. Now this is something that we didn’t see in the kind of 20th century model. To what extent is that really a game-changing kind of feature that essentially calls for a very different way of thinking of regulation? 

Maybe you could explain it. I mean people have used it. In a weird way, having an inspector in every restaurant 24/7 is not practical, but on the other hand with Yelp, basically every restaurant is getting an inspector or somebody kind of keeping an eye on it. But could you explain your own views on how big a shift that is and how important that aspect of the sharing economy is?

So I think that back in the mid-1990’s, peer rating systems were in fact revolutionary and a game-changer, and the company that introduced them at scale was eBay and this was fundamentally the institution on which the marketplace was built. It meant that you didn’t know what the person’s name. You didn’t know where they were. You had no information about the individual themselves but it generated enough trust in the system so that you were willing to send them money to receive a package, or send them a package and then receive money.

Today, if you look at the kind of activity that is taking place on platforms, the stakes are a lot higher than sending and receiving a package. What’s the worst that can happen if something goes wrong on eBay? The product is damaged. You don’t get what you were promised. You don’t get paid. That’s a very different level of risk from turning over your apartment to a stranger or letting a stranger sleep in your spare bedroom or getting into a stranger’s car and saying, drive me to another city.

As the stakes have gone up, the breadth of the trust infrastructure, the digital trust infrastructure that is necessary has also grown. So every single platforms has these kinds of peer review systems. They’re sort of a crowd-based form of regulation and they’re central to providing trust, but by themselves, they aren’t sufficient to facilitate the exchange. They often come accompanied by more traditional forms of authentication, like verifying a government ID. Indicating that you belong to a certain auto-club. They come with the new forms of identity, like I have a Facebook account, I have a LinkedIn account.

And what Facebook and LinkedIn and other social networking platforms do is that they digitize real world social capital. They bring online all of the relationships that exist in the real world. Social capital has always historically been a provider of trust. I think all of these things put together, forms of identity, forms of social capital and the peer review systems together…we had to get them at scale and the technology had to be ready for all three to co-exist before we could see high stakes peer-to-peer interaction at the mid-scale.

And so now that we’re here, any recommendations going forward of how much to trust that or how to evolve that in any way, or do you see it as really kind of done its work and you need to build off that in other ways in terms of regulation?

Well, I think that one of the things that people are starting to realize, users themselves start to realize, is that peer rating systems don’t provide a representative view of customers’ experience. People tend to write reviews when things were really good or things were really bad, a lot more than they write them when things were as expected.

And so I think we’re beginning to adjust our view of them naturally to realize that good and bad extremes may be overrepresented, but it’s helpful for a platform designer to sort of try and bake that into their design to inform customers and to account for the fact that this isn’t going to be a normal distribution but it’s going to be emphasizing the tails, in statistics peak.

But I think the basic building blocks for a trust grid, so to speak, the digital trust grid are in place. It’s exciting because if you look back at history, every time there was a big expansion in the world’s economic activity, it was generally induced by the creation of a new form of trust. And so when governments started stepping in and setting food standards, I think this started in Roman times, although a lot later at scale, that was an injection of trust that allowed you to buy milk from someone you didn’t know rather than from a farmer who lived in the same village.

Once we created courts of law and the ability to write contracts, that created another significant expansion in possibilities for trade. Once we got familiar with the idea of brand-based trust, again, that dramatically expanded the extent to which you can engage in everyday commercial interactions with people who you didn’t know and didn’t have the bandwidth to write a contract with.

So now that we’re creating this digital trust grid, I think that the possibilities for exchange between individuals are going to grow dramatically again and I think that’s one of most exciting contributions of platform-based sharing economy to the modern society. We’re going to have a whole host of people who didn’t have the ability to run a business or didn’t have the ability to choose because they were constrained in some way. It’s almost like the drivers of trust are very local. They’re the people you interact with, the friends that you have, the evidence of your identity. But we’re taking all this information and making it available to a global audience and so over time, this definitely expands the commercial possibilities or the possibilities for exchange.

So yes. Reputation systems are central but they’re more than just peer-to-peer feedback systems and any smart platform recognizes that.

Without going into too much of a can of worms here, you make reference in your book to blockchain which for a lot of people trying to wrap their head around the sharing economy, that’s a whole nother concept to wrap their head around but I think it is worth … I’d like to ask you, to what extent again, building on the sense of trust, how important is the evolution of blockchain to the success of the sharing economy? Do you see that as pretty central, or how intertwined are those two developments that are going?

I think it’s going to expand the scope of crowd-based capitalism significantly. If you think about it, today’s crowd-based capitalism is the crowd being the source of resources, of labor, of capital and tapping into a centralized platform. The vision of the blockchain is where the crowd collectively is not just a source but is also the market maker. And so the crowd somehow collectively also mediates the transactions without the need for a third party and that’s what the revolution that bitcoin has introduced us to, where there’s no central bank but it’s purely peer-to-peer. It’s sort of like what happened fifteen years ago with file sharing where when Napster was shut down, a generation of pure peer-to-peer file sharing networks with no centralized…

So in some sense, the blockchain is the natural successor to that kind of peer-to-peer, where instead of it just being the ability to find a file somewhere else, putting in payment capabilities, the ability to clear transaction. And so there’s a lot of promise here. Will it be a revolutionary new way of providing transportation, accommodation, healthcare, energy? Probably not in the near term, because while the philosophy of saying, well, we’re going to have a purely decentralized world is sort of an appealing one, there are still certain frictions in the market in the provision of trust, in the facilitating of logistics, in the ability to find things that you’re looking for, that centralized intermediaries are just simply better at doing today.

An example that I often use is the World Wide Web. Back in the mid-1990s when the web emerged, it was the ultimate decentralized content creation platform, right? You could create content. You could put it out there and anybody could find that. The revolution was supposed to be in completely disintermediating publishing. What happened was that while anybody could create content, there was no quality control and it was really hard to find what you were looking for.

So along came the early search engines and then Google who put themselves in the middle of the system and said, well, here’s a missing piece and I’m going to provide this for you in this decentralized world and the value creation continues but a centralized intermediary starts to re-aggregate some of that distributed value creation, in the same way that Google now runs a business based on the fact that content on the web is decentralized and inherently not quality controlled.

And so I see a lot of promise for the blockchain and digital assets, financial services, where the idea of trust—making sure that the product is as promised—doesn’t have those physical world aspects to it, where the logistics are not like, once you buy something digital, it’s there. It’s delivered to you immediately. You don’t have to worry about it actually being transported to you.

So there’s a lot of promise there. I think that there’s a lot of promise in some industries where the creators of stuff are capturing only a very small fraction of the value that they create, like in music and in publishing, where the artist or the writer typically only gets a very small fraction of the revenue of the value that the content generates. What it means is that there’s a really huge margin that the intermediary is capturing and so there’s more room to maneuver in creating an alternative and getting people to buy in. But in a business where the platform is taking 10% of revenue and the provider anyway gets 90%, it’s going to be hard for a blockchain based system to move the needle enough that people are going to say, I’m willing to give up all of this centralized advantage in exchange for an additional dollar for every $10 I make.

So there’s an important role for these companies that given the scale of a platform, you can actually get maybe not monopolistic but certainly get huge scale very quickly and that is causing a backlash. So as we’re kind of winding down the interview here, we’ve talked about kind of what government could do to ameliorate and do some of these things. What would you say to tech companies themselves or these platform companies? What could they be doing that would essentially lower the kind of backlash. You mentioned, in your book for example, maybe you could elaborate on a little bit, is giving the peers themselves some kind of piece of it because otherwise we’re getting these huge conglomerates that are causing in some quarters a backlash just because of their scale. Could you talk a little bit about that?

Absolutely. I think that there are a number of things that platforms can do to shepherd a more broad-based, crowd-based capitalism and give society a better feeling about the sharing economy more broadly. One is certainly to build the right platform culture in a way that makes the providers feel like partners. There may be backlash that some platforms are facing from their providers. The correction to that is to create a culture where providers feel a sense of ownership in the success of the broader platform.

This can be done by creating the right culture and the feeling of belonging. This could done by providing them with a financial return from the platform’s success that goes beyond the money that they make. A number of different companies are thinking about ways in which they can provide sort of the equivalent of employee stock options to their providers.

It’s not a new innovation. Traditional companies have realized a long time ago that it makes a lot of sense to align the interest of employees to the interest of the company. And the vehicle for doing that is equity or options. It’s pretty natural to say, well, that’s even more necessary with providers because the relationship is more tenuous and the provider’s the face of the brand and so we really want their interest to be aligned with the brand’s interest.

So that’s one way in which platforms need to think carefully about when thinking about the image of the sharing economy. That providers should be seen as partners rather than simply sort of a source of resources.

Another thing that platforms need to think carefully about is how to position themselves well as the natural regulators of some of the economic activity that takes place on them. Sometimes the engagement between a city and platform is adversarial. Sometimes there’s no way of avoiding it because when a platform facilitates certain kinds of sharing economy activity, it challenges vested interest, it challenges the status quo, it may challenge other stakeholders, other industries that a city government is beholden to.

There’s no way of eliminating that completely. But sometimes it has to do with the platform taking an adversarial stance. I think what have seen happen over the last four or five years is platforms getting a lot more sophisticated about positioning themselves as partners rather than, we’re going to come in and change the rules and there’s nothing you can do about it. That’s not the right approach.

The right approach is, hey this is different. Let me explain why it’s different. Let me explain why we can actually help you do some of the work that you needed to do in the past and here’s how the rules need to change.

And so there’s going to be more of a, “we’re on your side and we can grow your economy, and here’s a roadmap for how to change regulation,” a more pragmatic approach, rather than a, “we are disrupting your world” kind of approach. Certainly when a platform is two founders and a vision of changing the world, there’s going to be much more of the disruption talk but I’ve seen over the last few years a lot more nuance, a lot more sophistication, a much better understanding of how government works and the realization that you can’t just sort of take something out and replace it with something new. There’s going to be a transition part.

So positioning themselves as worthy successors of certain things that regulatory agencies had to do is another thing that I think platforms can do to improve the image of the sharing economy.

I think that’s a nice place as we’re kind of winding down to tie it back to one thing we weren’t able to really go into, thinking about this new social contract. We’ve talked to others in this series, Andy Stern among others, who’ve gone really deep into some of the possibilities of that and we just don’t have the time here to do that. But one of the things that ties into this theme of what could technology companies do, do you think of being proactively generous in that space, trying to take care of workers more, maybe voluntarily setting aside money for different aspects that were previously covered in more employment context? Are there any suggestions along that line in terms of helping make this what is clearly going to be a long transition into a new kind of social contract?

I can certainly see value in platforms being proactive about replicating the safety net or facilitating the emergence of the new social contract and there’s a lot of value in them being as generous as possible in doing that. I think the big stumbling block there is one that only government can solve, which is that every time a platform thinks about taking a step towards providing benefits or providing something that is traditionally associated with full-time employment, they bump up against the risk that if they do that, then their providers potentially have the case for a class action lawsuit that says, hey, we’re employees because you’re doing this for us.

And time and again, across industries, across labor markets, there’s a wide range of platforms for which I’ve seen them bump up against this for things as simple as contributions towards someone’s health insurance, or the desire to provide training so that the providers can do their job better.

All of these efforts are sort of held back by this looming threat of a potential classification suit. The reason why I say that the burden is on the government is that that structure of labor law where we say, here’s the category and here’s how we decide the category, has to change or a safe harbor has to be created so that the platforms can actually step up and say, well, we’re smart and we realize that happier providers are more likely to stay with us.

There’s good historical precedent for this over the last 50 years. If you actually look at what a typical full-time employee gets from a company, only a small fraction of that is actually mandated by law. I meant the United States has no paid vacation law but 75% of full-time employees get paid vacation. The minimum health insurance requirements are vastly exceeded by a lot of companies and the logic of the companies isn’t hey, we’re doing that out of the goodness of our heart. But it’s a talent retention and talent attraction strategy.

And so platforms actually will naturally go in that direction of saying, we’re going to provide a broader safety net as a way of attracting and retaining talent. You’ve seen in the ridesharing space, the platforms spend millions of dollars competing for drivers. None of them offered benefits as a carrot and the fact that they didn’t do that, is sort of illustrative of the kind of barrier I’m talking about.

So we need that to be removed and then we’ll see the evolution where there’ll be some of it that’ll be government-mandated but a lot of it will come from the platforms just the way that it comes from the corporations today.

So it sounds like to end here—and again, it’s been an awesome conversation—but it looks like the ball is now in the government’s court in many respects. I understand that there’s responsibilities all around. But if you had to give advice to people in government, city government, state, federal for that matter, any advice or last words to say, are we talking here like a one or two-year window? A five-year window? Or how critical is it to their role at this stage? Is there any advice you want to just kind of give? Because that is a lot of the audience that we’re talking to here.

Well, I think at this stage what’s critical in the short-term is to lay the groundwork. In the United States, it’s unlikely that a government funded safety net structure is going emerge. This may be more aligned with the philosophy of other countries, but it seems if at all we do see basic income or something like that, that’s probably in the distant future. In the interim, what we need are structures that align incentives.

Fifty years ago, if you worked for a company fulltime, chances are that you would get a pension when you retired. Now, that’s a very rare occurrence today but meanwhile the government has put in place some structures for individuals to contribute, companies to match, and they say when you get a tax break you plan for your retirement.

So systems like that, legislation that creates partnership models where individuals have incentives to be more responsible, platforms have an incentive to support this. That’s the kind of groundwork that we need in the near term and we also need to take a really close look at the state of labor law and the categories of work that exist and think about ways in which we can loosen both the categories and the way in which these categories are determined so that the market can start to provide some of the social contract like it always has done in the past.

And that looks a little bit more federal and state. Any last words to a mayor or someone running a city, city council people, city managers on the ground in localities? Any advice to them?

Well, I guess the thing that’s overlooked most about the sharing economy is that it is good for a city’s local economy. Policy that is supportive of sharing economy activity is analogous to policy that created jobs in the 20th century because you’re creating economic activity. You’re creating income sources for your residents.

And so if you would reframe and start to think of some of the sharing economy activity as creating work, and realizing that if you’re a city that has policies that are proactively supporting this kind of activity, you’re going to attract more of this work and more of this economic activity. If you’re a city that is trying to resist it, then that activity and the people who live there are going to go elsewhere.

So in a world of the future, a lot of work is not going to take the form of full-time jobs. It’s going to take the form of work flowing through platforms. So it’s important to lay the foundations in your city to make sure that you’re well-positioned to be a magnet for this kind of work rather than a deterrent.

And that seems like a perfect time to end what has been an awesome interview. And actually to say thank you to Arun and to highly recommend anyone who wants to pick up on this conversation, The Sharing Economy, a new book by him out this year. Highly recommended and this has been a fantastic conversation. One I thought really did kind of move the ball. Thank you so much.

This was really enjoyable. Glad we had a chance to do this.