Where is the sharing economy taking us?

Privacy and its exchange transactions represent a daunting set of problems for economic theory.

If nanny cams had been available in Austria in the 1930s, we never would have heard about raindrops on roses or “The Sound of Music.” Maria would have been cashiered and sent back to the convent long before she had an opportunity to sing about her favorite things.

In a recent essay, author Laurence Scott describes how in our economy we are substituting surveillance for trust. He cites the nanny cam as an example, along with similar devices that monitor dog walkers to ensure that they really take the dog for a walk.

Scott also points out that Airbnb requires its customers to provide self-descriptive financial and other data. And he describes this as “a model of consumerism that makes our traditional idea of trust irrelevant.” As he notes, “In an open-plan world, trustworthiness isn’t so much a moral quality as a condition of not having to be trusted at all.”

Where is the sharing economy taking us? His is a pessimistic view, certainly, but it is a reasonable extrapolation from what we are doing in our economy now. Since it was economics that started the problem, though, we should examine what economics has to say on the subject before drawing conclusions about the future.

It is an interesting subject for economics because it involves resources, products and assets whose value is not generally established in the marketplace, at least not in the traditional way. And, even more interestingly, when an exchange takes place, the payment is often made in the opposite direction from what takes place in a goods transaction.

Privacy, for example, is normally thought of as a valuable personal asset. Its monetary value, if any, is assigned by the individual owner. As a result of devaluation, though, we have transactions where we give up private, personal information in exchange for a commercial firm’s discounted price on a good or service. Where it gets even more puzzling is when economics is spun around backwards. This occurs when the consumer pays a fee to have his or her privacy invaded, and personal data collected – as in purchases of some “smart” homes, communications devices, and appliances. What does that say about how and how much we value our personal privacy?

Taken together, the characteristics of privacy and its exchange transactions represent a daunting set of problems for traditional economic theory.

Traditional economic theory will probably play an important, and easier to understand, role, though, on the buyer side of privacy – the business firms that pay for personal information.

One economic element may eventually dawn on businesses when they notice that those who profit most from massive amounts of consumer personal information seem to be the firms who sell the data, not the businesses that buy it or the individuals who were the original owners.

It may also occur to businesses that “big data” and complex statistical models do not often provide useful insights that cannot be obtained by information sampling and human judgment at considerably lower cost. Dynamite products and innovative services that deliver bigtime profits are not often the outcome of “big data” analytics. Innovative thinking in product development and thoughtful, effective marketing are still the dominant, necessary ingredients in business success stories.

There is nothing inherently wrong with big data, but it can, and often is, acquired at the expense of privacy, which is difficult to recover once lost. A retail store’s security breach, for example, often yields information that allows hackers to estimate your annual income, which will tee you up for focused and generally unwanted, telephone and mail advertisements and other marketing materials. In worst cases it can result in identity theft.

The quirky economics of trust, privacy, and morality doesn’t end with big data or the hackers thereof. Now government is stepping in and attempting to protect privacy and restore trust – in the face of opinion polls which indicate a declining public trust in government and other institutions.

California has a new law, the California Consumer Privacy Act, (CPPA), which, since it covers over 40 million people, might be a model for other states or future federal legislation.

The law allows consumers to review the information a company has collected on them via the internet and, if they wish, to instruct the company to delete it or not sell it to a third party.

It is too early to determine the impact of this law, but it could mean the end of the romance between businesses and big data. Its effect on trust in our society, though, may not be as direct.

The U.S. one-cent coin, the humble penny, still carries the words, “In God we trust” but, of course, the familiar commercial cynicism adds the advisory, “All others pay cash.”

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