The Industrial Revolution led to the creation of many large and mid-size companies in which people worked together to produce goods and/or deliver services. Having a good job meant working for one such company. These workers, many of them unionized, enjoyed relatively secure, stable jobs and a number of company benefits, including health care insurance, vacations and retirement pensions.
This corporate capitalism era, - characterized by hierarchically organized institutions, - reached its height in the US in the period following World War 2, when the country craved a sense of stability following the pain and chaos of the Great Depression and the war years. But those days are long gone. In the more recent past, these relatively slow moving organizations were not able to keep up with fast changing technologies and markets, nor could individuals assume that being loyal to a company would translate into a secure job with good benefits.
In its stead, we are seeing the rise of what The Economist called the On-Demand Economy in a recent article. “Ever since the 1970s,… Manufacturing jobs have been automated out of existence or outsourced abroad, while big companies have abandoned lifetime employment. Some 53m American workers already work as freelances.”
Two powerful forces have been speeding this trend toward on-demand workers and pushing it into more parts of the economy. First is the availability of ubiquitous and inexpensive computing power, sophisticated applications, and cloud-based services of all kinds. “Complex tasks, such as programming a computer or writing a legal brief, can now be divided into their component parts - and subcontracted to specialists around the world.”
“The other great force is changing social habits. Karl Marx said that the world would be divided into people who owned the means of production - the idle rich - and people who worked for them. In fact it is increasingly being divided between people who have money but no time and people who have time but no money. The on-demand economy provides a way for these two groups to trade with each other.”
To better understand this emerging on-demand economy, - an evolution of what’s been called the sharing economy, - let’s take a look at the changing nature of the firm over time. The intrinsic structure of companies has long been a subject of study, most famously by Ronald Coase, the eminent British economist and recipient of the 1991 Nobel Prize in economics. In 1937, professor Coase published a seminal paper, The Nature of the Firm, in which he explained that, in principle, a firm should be able to find the cheapest, most productive goods and services by contracting them out in an efficient, open marketplace. However, markets are not perfectly fluid. Transaction costs are incurred in obtaining goods and services outside the firm, such as searching for the right people, negotiating a contract, coordinating the work, managing intellectual property and so on. Thus, firms came into being to make it easier and less costly to get work done.
A firm will keep expanding and adding people as long as doing so is less expensive than securing the additional services in the marketplace. But, there are limits to what can be produced efficiently within the firm, as well as to how big a firm can get and still remain competitive against faster moving companies. All that growth generally leads to ever larger, multi-layered hierarchical organizations. The additional layers of management and staff can cause the organization to become bureaucratic, significantly impacting its ability to quickly embrace new ideas and technologies when market conditions change. A well managed company strives to achieve an optimal balance between what work gets done within and outside its boundaries.
Advances in information and communication technologies are having a huge impact on the structure of companies. Fundamental changes have been taking place in the organization of firms and in the overall flow of goods and services in the economy. Significantly lower transaction and coordination costs are leading to organizational decomposition, with companies fragmenting to smaller and smaller entities, even down to individual providers. At the same time, economies of scale and network effects are leading to organizational consolidation and a winner-take-all world where only the largest survive. Fragmentation and consolidation will co-exist with each other to a greater or lesser extent across different companies and ecosystems.
Where is the future of work heading in such an economy? “Freelance workers available at a moment’s notice will reshape the nature of companies and the structure of careers,” says The Economist. “Now that most people carry computers in their pockets which can keep them connected with each other, know where they are, understand their social network and so on, the transaction costs involved in finding people to do things can be pushed a long way down.”
Ubiquitous communications and very low transaction costs are giving rise to a new class of firm, the on demand company. These firms aim to efficiently bring together consumers and suppliers of goods and services with their highly scalable platforms and innovative applications. A variety of such companies have emerged in the last few years, aspiring to achieve the scale and success of Uber and Airbnb. They’re hoping to become the Uber- or Airbnb-of-X, where X is only limited by their founders’ imagination. Not unlike their industrial economy counterparts, these new on-demand firms are tying to become trusted brands in their chosen market segment, but relying on a large freelance workforce instead of on the classic company workforce.
The Economist is rather skeptical about the chances for most such companies, citing three main potential obstacles in their way. First, because on-demand companies generally try to keep their costs as low as possible, they will face difficulties training, managing and motivating their freelance workforce. Moreover, as the economy recovers, it may be harder for these companies to attract casual, low cost, high quality labor.
Another potential obstacle are the regulatory and political problems these on-demand companies are likely to face as they get large. In recent months, Uber has been plagued by a number of such problems around the world.
Scalability is the third potential issue. As we see with Uber, Airbnb and similar companies, there are clear network effects in the on-demand model. “Yet scaling up may be difficult when barriers to entry are low and bonds of loyalty are non-existent. It will be hard to get workers to be loyal to just one middleman. A number of Uber drivers also work for Lyft. In many service industries it is hard to see obvious economies of scale on a national or global level.”
“What sort of world will this on-demand model create?,” asks The Economist. “Pessimists worry that everyone will be reduced to the status of 19th-century dockers crowded on the quayside at dawn waiting to be hired by a contractor. Boosters maintain that it will usher in a world where everybody can control their own lives, doing the work they want when they want it. Both camps need to remember that the on-demand economy is not introducing the serpent of casual labour into the garden of full employment: it is exploiting an already casualised workforce in ways that will ameliorate some problems even as they aggravate others.”
“The on-demand economy is unlikely to be a happy experience for people who value stability more than flexibility: middle-aged professionals with children to educate and mortgages to pay. On the other hand it is likely to benefit people who value flexibility more than security: students who want to supplement their incomes; bohemians who can afford to dip in and out of the labour market; young mothers who want to combine bringing up children with part-time jobs; the semi-retired, whether voluntarily so or not.”