The Sharing Economy

by Don Boudreaux on July 24, 2013

in Beautiful, Complexity & Emergence, Inequality, Prices, Seen and Unseen

One of the political left’s most popular (the most popular?) trope is to complain that free markets promote and exacerbate economic “inequality” (where “inequality” is used as a synonym for “observed differences across people – or statistical categories of people – in some variable, usually pecuniary income or wealth, that we presume to be especially important”).

But what are too often overlooked are the many ways that markets spread economic benefits and costs and, in the process, promote greater economic equality than would otherwise exist.  The ways that markets promote this sharing of benefits or costs are numerous.  Here’s just one example: the real-world consequences of what economists identify as the “law of one price.”  This sharing works across geographic space and across time.

Space

Suppose you’re strolling down 5th Avenue in Manhattan on a beautiful Autumn day.  You notice as you cross 14th Street that Golden Delicious apples are selling for $3.00 a piece.  A few minutes later, when you reach Washington Square park, at the foot of 5th Avenue, you notice that Golden Delicious apples are selling there for $1.00 a piece.  Having nothing urgent to do that day, you buy several boxes of Golden Delicious apples in Washington Square park and then haul them up to 14th St. to sell them.  You buy low ($1.00) and sell high ($3.00).  Your buying low in Washington Square park will, of course, cause the price of Golden Delicious apples sold in Washington Square park to rise, and your selling those apples up at 14th St. will cause the price of Golden Delicious apples sold at 14th St. to fall.  You – and other apple arbitrageurs – will continue to haul apples from Washington Square park up to 14th St. until the price of apples in both places is pretty much the same (say, $2.00 per apple).  One price will reign in both places for Golden Delicious apples.

Your profit-seeking actions here enable people up at 14th St. to share in the relative good fortune of people down at Washington Square park – that relative good fortune being an initially higher supply of Golden Delicious apples at Washington Square (or, more generally, a lower marginal value of those apples at Washington Square than at 14th St.).  Or, looked at differently, your profit-seeking actions oblige people down at Washington Square park to shoulder some of the relative misfortune of people up at 14th St. – that relative misfortune being an initially lower supply of Golden Delicious apples at 14th St. (or, more generally, a higher marginal value of those apples at 14th St. than at Washington Square).

Your profit-seeking actions moved a valuable good from where it was relatively more abundant to where it was relatively less abundant, causing the relative abundance of Golden Delicious apples at both sites to be pretty much equal to each other.

(If you doubt the veracity of my hypothetical, imagine how surprised you would be if, in fact, you saw interchangeable apples selling for one price at some location and, at pretty much the same time, selling for a very different price at a nearby location.  The very fact that such price differences aren’t common attests to the validity of the law of one price.)

Now suppose that before any of this arbitrage takes place, a neighborhood association up at 14th St., upon hearing rumors that Golden Delicious apples sell at Washington Square park for a mere $1.00 a piece, enacts and enforces legislation to force the price of those apples at 14th St. down to $1.00 each.  What’s the consequence?  Answer: no one down at Washington Square bothers to haul apples from Washington Square up to 14th St.  The (presumably well-intentioned) legislation prevents the market from performing its sharing function.  People down at Washington Square continue to enjoy apples at a price so low that it doesn’t reflect – as it otherwise would – the demands for apples of the folks up at 14th St.  The legislation meant to help the folks at 14th St. ends up benefitting the folks down at Washington Square by eliminating the incentives of arbitrageurs to haul apples from Washington Square up to 14th St.  And this legislation harms the people at 14th St. by artificially eliminating the incentives that would otherwise have driven arbitrageurs to haul apples from where they are relatively more abundant (Washington Square park) to where they are relatively less abundant (14th St.).

Time

The very same analysis holds over time.  When speculators buy today in the hopes of selling tomorrow at higher prices, these speculators move goods across time; goods are moved from a time when they are relatively more abundant to a time when they are relatively less abundant.  Successful speculation obliges people in times of relative abundance to share their good fortune with people existing in times of relatively less abundance.  Or, alternatively stated, successful speculation enables people in times of relatively less abundance to share in some of the good fortune of people existing in times of relatively great abundance.

And, of course, what’s true for ‘long’ speculation (buying today in hopes of selling at higher prices tomorrow) is true for ‘short’ speculation (selling today in hopes of buying tomorrow at lower prices).  ’Short’ speculators, if they are successful, move goods from tomorrow (when these goods are relatively more abundant) to today (when these goods are relatively less abundant).

Beautiful, isn’t’ it?!  (And no, I do not ask this rhetorical question facetiously.)

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