Creative Destruction and the Sharing Economy

Henrique Schneider explores the implications of creative destruction, competition regulation and the role that businesses play, using Uber as an example.

What is ‘the sharing economy’? Is there anything common to all business models belonging to ‘the sharing economy’? Is Uber part of ‘the sharing economy’? What is creative destruction? Is it a force for good or bad? If Uber is an agent of creative destruction, how is it being impacted by regulation? How does ‘the sharing economy’ and Uber impact regulation? What is the relationship of innovation and regulation? So many questions – what are the answers? The new book Creative destruction and the Sharing Economy gives some of these answers.

Creative destruction is a force in economic development first described by the Austrian-American economist Joseph Schumpeter (1883–1940) and developed more in detail by the American economist and business-scholar Clayton M. Christensen (born 1952). Since the emergence of the digital economy, creative destruction is a widely-used term. However, creative destruction and regulation more often than not are at odds with each other. Some economists would push this claim even further. They would say that creative destruction and regulation are by necessity and natural opposites. The reason is: While creative destruction is about innovation, or the advancement of new ideas turning them into new products, or business models, thus challenging the status quo of the markets; regulation is about perpetuating this status quo. See Uber: The creative destruction it is supposed to unleash is being stopped by regulation that prefers traditional taxicab-providers.

Granted, regulation often envisages maintaining or enhancing the wellbeing or at least the welfare of a society. However, it is very often that regulation fails to achieve this aim and even more often that it falls prey to special interests. And these, again, are mostly about preserving the status quo. Also here, some economists would push the claim further than this. They would say that even if regulation maintains the wellbeing of a society by continuing the present state of affairs, this continuation is detrimental to possible future gains in welfare and wellbeing. When regulation in the short-sighted interest of the present prevents creative destruction from happening, it does so at the expense of future developments. In short, by privileging the present over the future, regulation opposes innovation.

Most of those protesting Uber worldwide do not demand any new regulation

Uber illustrates this intuition very well. Most of those protesting Uber worldwide do not demand any new regulation. They just call for the existing to be applied to Uber. And as local regulators decide about that, they either make Uber comply with existing regulation or they outlaw Uber simply because it is not a taxicab company as regulators know them. No regulator explicitly sets out to curb innovation in the taxi-business, but because of the static and backward-looking character of regulation, regulators tend to block the innovator.

Disruption, more often than not, imposes problems on those businesses that are regulated and accept regulation as part of their trade. Very often, these businesses succumbed to inertia and stopped innovating altogether. The more regulated a sector is, the less novelties it tends to produce. This creates an innovation-gap-and-lag. The first outside-competitor that figures out how to fill the gap and update the lag will be immensely attractive. The more attractive this outside-competitor is, the stronger will be the disruption of a sector. This is what is happening through Uber and many of the business models in ‘the sharing economy’.

Economists and other social scientists are generally interested in abstract lessons to learn. They want to know if there is any general pattern in the answers given to the questions above. Then they want to know if this pattern can be generally applied to other and similar cases. Economists and social scientists usually look for what they refer to as ‘generalizable knowledge’.

This book combines both: the interest for Uber as a unique business model and the more general preoccupation for abstract patterns. This approach has two main advantages. On the one hand, it makes it easier to think about the economic relation between creative destruction and regulation by reviewing a well-known and timely case. On the other hand, this approach helps to understand Uber as such. Many things that Uber is claimed to be – for example an innovator, a disruptive agent or a game-changer – become clearer once they have been explained within their economic rationale. Besides, there are a lot of economic expressions used around Uber that sound straightforward…but are not. Examples are creative destruction, sharing economy or competition regulation. This book make them clearer – or debunks them.

What can economics learn from Uber? And how does economics help to understand the Uber-effect on other businesses? These two questions are important. They warrant answers. And that is what this book sets out to do.

Henrique Schneider is Chief Economist at the Swiss Federation of SME, Switzerland

Creative Destruction and the Sharing Economy: Uber as Disruptive Innovation by Henrique Schneider is available now.

Read Chapter 1 What is the Economics of Uber (and of this Book)? free on Elgaronline.