Year: 2013

Some Obvious Things About Internet Reputation Systems

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Update 2: This essay is the starting point for Chapter 7: “Strangers Trusting Strangers”, in my book “What’s Yours is Mine” (2015 in the US and the UK; 2016 in Canada and elsewhere).

Update: now with added footnotes.

Debates around the “sharing economy” have been driven by personal stories and broad claims. In contrast, this is a dense and not-easy-to-read step-by-step look at the internet reputation systems on which the sharing economy claims are based, with some predictions about the neoliberal future of the sharing economy. References, statistics, and, yes, some personal stories are relegated to footnotes. If you’re really interested you can download a PDF.

Introduction

Internet reputation systems let individuals rate other individuals over the internet and provide recommendations based on those ratings. A new class of enterprise claims to use internet reputation systems to enable sharing of personal goods and services at unprecedented scale. Its rise has been announced by both Forbes, and by The Economist, according to which accommodation rental service Airbnb…

…is the most prominent example of a huge new “sharing economy”, in which people rent beds, cars, boats and other assets directly from each other, co-ordinated via the internet. …[T]echnology has reduced transaction costs, making sharing assets cheaper and easier than ever—and therefore possible on a much larger scale… social networks provide a way to check up on people and build trust; and online payment systems handle the billing.

The claim is that internet reputation systems solve two problems. One is coordination (can I find someone who has what I want, or wants what I have?) and the other is trust (can you trust the person on the other side of the exchange to keep their end of the bargain?).1 Sharing economy advocates claim, and I will return to this at the end of the essay, that it is both necessary and sufficient to solve these problems to unlock a large new economy of resource sharing.

Trust and Coordination

To understand the sharing economy it is necessary to understand trust.2

A truster must decide whether or not to make a loan to a potential trustee; if the truster does make the loan, then the trustee must decide whether or not to repay it. We say the truster trusts the trustee if she expects him to repay, and the trustee is trustworthy if he would repay a loan, should the truster make it.

Trust is a problem of asymmetric information: a truster cannot divine the trustee’s trustworthiness directly but must look instead for signs of trustworthiness.

An opportunist is someone who is not trustworthy but who seeks to mimic signs of trustworthiness in order to deceive potential trusters. Opportunists create what Bacharach and Gambetta call a “problem of secondary trust” which, they argue, “almost always accompanies, and is often the key to solving, problems of primary trust” (p158). Instead of just looking for signs of trustworthiness, the truster must decide whether she can trust those signs; instead of just displaying signs of trustworthiness, the trustee must convince the truster that he is not mimicking them.

Secondary trust is a signalling problem in the sense first spelled out by economist Michael Spence. An effective signal is an action or sign that is easy for a trustworthy person to display but costly for an untrustworthy person to display. If it’s not worth the effort for an opportunist to mimic the signal, we say that the signal separates trustworthy people from untrustworthy people or discriminates between them. If no discriminating signal is available, then there is no way to distinguish trustworthy people from opportunists—an outcome that is called pooling—and trust cannot be established between truster and trustee. In real life, of course, we deal with probabilities rather than certainties, but there is a spectrum from separating to pooling outcomes in problems of trust.

The Economist observed, above, that the internet has reduced the transaction costs of collaboration, enabling what Yochai Benkler calls a “new modality of organizing production: radically decentralized, collaborative, and non-proprietary… ‘commons-based peer production’” (The Wealth of Networks, p60). But the problem of secondary trust emphasizes that low transaction costs do not necessarily improve collaboration.

Other things being equal, and in the absence of opportunists, lower transaction costs (discovery and communication) should increase the amount of collaboration, but in the presence of opportunists—in what Bacharach and Gambetta call “mimic-beset trust games”—collaboration is possible only in the presence of an effective signalling mechanism, and lowering transaction costs can destroy trust-dependent collaboration by making it easier for opportunists to mimic trustworthiness.3

Reputation

In the sense used here, reputation is a sign of trustworthiness manifested as testimony by other people. When my neighbour says “Don’t hire John the Plumber: he came to fix my sink but it’s still blocked”, she is providing information that lets me decide whether to trust John to fix my drains.

When it works well, reputation is an effective discriminating signal that promotes trust and collaboration based on trust. In a community with strong word of mouth, it is easy for a good plumber to establish a reputation as reliable, punctual, and skilled simply by being reliable, punctual, and skilled; it is difficult for an incompetent or lazy plumber to do the same.

Reputation is not a perfect discriminating signal. Much of what is communicated in testimonies may be private and informal (“he fixed my sink and came on time, but there was something about him… I just didn’t like having him in my house”) and this privacy and informality can have both good and bad effects. It can transmit justified but nebulous suspicions, but it makes it difficult for John to gain a good reputation—no matter how trustworthy he is—if he is a black man trying to find work in a white community with a history of racism, or difficult for Jane the Plumber’s skills to be taken seriously if the community has traditional norms about women’s roles. “Old boys’ clubs” and other insider groups provide members with an inbuilt advantage when it comes to establishing a reputation.

Reputation is only one mechanism for solving the problem of trust. Others include reciprocity in long-term relationships, regulations (you can trust this restaurant because it has passed a food safety inspection), professional qualifications (you can trust this person to fix your leg because she is a doctor), voluntary industry certifications (you can trust this coffee to be fair trade because there is a fair trade label on the package), independent rating agencies, individual firm commitments (you can trust this retailer because they have invested heavily in their brand, and so must act accordingly), the common property regimes explored by Elinor Ostrom, and many others.

Reputation, in the sense used here, is peer-to-peer, informal, decentralized, community-driven, and non-commercial, and it is those alternative qualities that sharing economy advocates claim can be scaled up by using internet reputation systems. Airbnb and BlaBlaCar both describe themselves as “a trusted community marketplace”; Lyft’s one-million rides show “the power of community”.

The effectiveness of reputation depends on the motivations of those giving testimonies as well as on the actions of the trustee: the problem of secondary trust described above. Reputation is effective only if the testimonies are independent and free from the taint of collusion or retaliation. Testimony from John’s brother does not carry the same weight as that of someone who has no stake in John’s success or failure, and while John may not want my neighbour to tell me about his failure to fix their sink, there’s not a lot he can do about private conversations over a garden fence.

Market-based incentives erode the effectiveness of reputation, and in this respect reputation is a cultural commons (see here, and see also me here). In her TED talk, influential author Rachel Botsman says that in the new economy “reputation will be your most valuable asset”, but as reputation becomes an important asset, markets will grow around it and intermediaries will claim to help you boost your reputation, but these market-based incentives destroy the value of reputation as a mechanism for establishing trust. Mechanisms for buying and selling testimonies, for example, cause testimonies to lose their ability to discriminate between trustworthiness and opportunism because an opportunist with money could buy themselves a good reputation.

Internet Reputation Systems

Internet reputation systems promise to create a global village by scaling up informal word-of-mouth reputation mechanisms for sharing and for creating trust, and so solve both the coordination and the trust problem for a variety of services which could not previously be exchanged. For sharing economy advocates, reputation is an alternative to regulation: in the recent book The Reputation Economy, law professor Lior Strahilevitz asks us to “imagine if every plumber, manufactured product, cell phone provider, home builder, professor, hair stylist, accountant, attorney, golf pro, and taxi driver were rated… In such a world, there would be diminished need for regulatory oversight and legal remedies because consumers would police misconduct themselves.”

Do internet reputation systems act as an effective signal of trustworthiness?

Figure 1 is the distribution of ratings for the Netflix Prize data set. Netflix ratings are not a reputation system in the sense used here, in that they are not testimonials about people: the data set consists of ratings of movies and TV shows by Netflix customers. There is every reason to believe that the ratings are independent and honest: the rater can offer an opinion freely, having no reason to expect expect reward or punishment for any particular rating. The rater also has an incentive to give a rating that matches their actual opinion, as it enables Netflix to recommend movies that better match their tastes. So Figure 1 can take this as a reasonable distribution of independent ratings.

Figure 1.
Figure 1.

BlaBlaCar, a French sharing economy company that connects “drivers with people travelling the same way” throughout Europe, has over a million registered drivers, transports over half a million passengers every month, and is expanding rapidly. Also, it makes testimonial-based ratings available on its web site. Figure 2 is the distribution of a set of 190,000 ratings from the blablacar.com site.4

Figure 2.
Figure 2.

Of 190129 distinct ratings, 2152 were one-star, there was not a single two-star rating, there was one three-star rating, five four-star ratings, and 187971 five-star ratings. A BlaBlaCar rating means something different from a Netflix movie rating.

With over 98% of ratings being five stars, the reputation system does not meaningfully discriminate among drivers or riders. A reputation system that does not discriminate fails as a reputation system: it fails to solve the problem of trust.5

Collusion and fear of retaliation are the reasons why there are essentially no reviews less than five stars for rides that take place. If you give a less-than-five star review then, unlike in the case of offline community-based testimonials, it is visible to the reviewee, who can give you a harsh review in return and so affect your chance of getting future rides. Do you want to defend your opinion that the driver was a bit close to the car in front, or that the car was a bit dirty, or do you just want to give a five-star review and make a note to yourself not to ride with them again? Collusion is the other side of the retaliation coin: I know I turned up late and was eating smelly food in your car and you didn’t like it, but so long as you give me five stars I’ll give you a good positive rating and we’re both better off. Neither of these factors need to be explicit or even to be very important to produce large effects, because it makes no difference to me how I rate you. One seemingly tiny difference between word-of-mouth and the internet rating system makes all the difference, that testimonials are visible to everyone including the reviewee instead of everyone except the reviewee.

The problem is not unique to BlaBlaCar. Reciprocity and collusion in the eBay reputation system has been studied here and the authors also provide an estimate of how many dissatisfied people are not rating their trustee:

The fact that from 742,829 eBay users… who received at least one feedback, 67% have a percentage positive of 100%, and 80.5% have a percentage positive of greater than 99%, provides suggestive support for the bias. The observation is in line with Dellarocas and Wood (2008) who examine the information hidden in the cases where feedback is not given. They estimate, under some auxiliary assumptions, that buyers are at least mildly dissatisfied in about 21% of all eBay transactions, far higher than the levels suggested by the reported feedback. They argue that many buyers do not submit feedback at all because of the potential risk of retaliation.

Finally, on Airbnb, reviewing of hosts by guests and guests by hosts also happens in public and is reciprocal. The Airbnb web site does not display individual numerical reviews, although it does display individual text reviews; instead it displays the average rating that a room has received in each of several categories (cleanliness, location, communication,…) together with an overall average, rounded off to the nearest 0.5 out of five. The web site is less easy to traverse programmatically, but out of well over a hundred offerings in New York, Sydney, Berlin and Paris I have yet to see a single one that is not rated 4.5 or 5.6

So even in the absence of explicit gaming, peer-to-peer internet reputation systems do not solve the problem of trust. The BlaBlaCar site fails the basic test of discriminating among almost any of the 190,000 drives that took place—it fails to deliver any useful information beyond giving the occasional sign that a driver or rider may not turn up.

The “Growth” of the “Sharing Economy”

Rachel Botsman claims that “Even four years ago, letting strangers stay in your home seemed like a crazy idea”, and she describes the meteoric growth of the sharing economy. The picture she paints would seem to be incompatible with the idea that internet reputation systems fail to solve the problem of trust. What’s going on?

Some perspective is in order. The rapid growth of individual sharing economy companies does not represent the appearance of new social practices of sharing. The growth of sharing economy companies is, at least in part, a movement of already-existing social practices to online forums.

“Letting strangers stay in your home” has long been a common practice. Millions of people let strangers stay in their homes without the benefit of internet reputation systems: the overall vacation rental market, which includes cottages, apartments, second homes and other personal rentals, is much larger than Airbnb.7 , 8

Similarly, BlaBlaCar is a small fraction of the overall carpooling practice, which precedes internet reputation systems. Carpooling has been a widespread practice in many urban centres for decades, encouraged by local governments and transit authorities with “Park-and-Ride” facilities, especially in Europe where fuel costs are higher than North America. Student union noticeboards have long been a way to coordinate rides home for the weekend.9 , 10

The dispersed nature of tourism boards, local travel authorities, booking agencies, university notice boards, and so on make counting trips and visits difficult, while the centralized nature of sharing economy sites makes data collection trivial for those with the infrastructure, so it is easy to underestimate—or entirely neglect—the pre-existing economy.

Also, not all the activity on sharing economy websites is of the personal, informal kind that the site owners portray, so the growth of these companies overstates the growth of sharing. Multiple rentals are common, suggesting rentals of properties other than the host’s primary residence, such as investment properties.11 , 12

The Problem of Trust in the Sharing Economy

Still, sharing economy web sites are growing fast. How are they succeeding if the peer-to-peer reputation systems fail to solve the problem of trust?

One reason is that coordination is useful in itself. Classified ads, whether local newspapers or sites like Craigslist and Kijiji, solve coordination problems but do not even try to solve problems of trust beyond the most basic verification. It’s left to individuals to contact each other, make arrangements, decide on the terms of a sale, and complete the deal. In trading second-hand lawnmowers for cheap prices, the worst that can happen to a purchaser is that they overpay by a few dollars, and that’s a risk that many are prepared to take. One option for sharing economy companies would be to accept that they are solving only the simpler coordination problem, and adopt a business model that has no involvement in the transaction itself and which charges small listing fees.13 But such a business model will not provide the returns that venture capital is expecting from this industry. Sharing economy companies funded by venture capital have no option but to solve the problem of trust.

In some cases, community membership itself has provided an adequate signal of trustworthiness, particularly in communities that are prepared to accept some level of risk. Opportunists are screened out, to the extent that they need to be, by an implicit community selection process, so that matching within the community is reduced to a coordination problem. For example, travel site Couchsurfing built itself largely by word-of-mouth among young travellers. Couchsurfing members pre-selected themselves to be adventurous (so not looking for a high degree of assurance from the organization) and community-minded individuals with a common interest in travel. Simply being part of the Couchsurfing community was a sign that correlated with trustworthiness, and community members voluntarily undertook the additional risk that came with the program.

Unfortunately, community membership as a sign of trustworthiness does not survive large scale growth, for two reasons.

As a community grows, it attracts opportunists. In a small community, the benefit to an opportunist of mimicking a sign of trustworthiness is small, but as the community scales, the potential benefits for opportunists are larger, and the incentive to mimic trustworthiness is greater. In evolutionary terms, Bacharach and Gambetta describe the phenomenon as “model precedes mimic”. Sharing economy sites have benefited from community membership as a screening process, but as they become larger they will need new solutions.

Second, people who have a commitment to a community may be prepared to take on additional personal risk, either because of the nature of the community itself (a community of adventurers is not looking for a high level of security) or because they are prepared to overlook lapses to support the community. There is a reciprocity, not just between individuals, but between the members and the community-as-a-whole. However, the revenue and growth models of venture-capital funded companies are based on providing a service that can scale to people with no particular commitment to the community itself. As AllThingsD reporter Liz Gannes writes: “maintaining customer trust is paramount because, at any given moment, they are all one bad incident away from users turning back to more traditional arrangements”

The Future of the Sharing Economy

Venture capital demands for scale will produce changes in the nature of the sharing economy sites, changes that erode any community focus they have, and which turn them into far more traditional models. Such changes are already underway at the largest, most heavily funded sites.

As Gannes reports, a single bad incident has forced Airbnb to hire a 50-person “trust and safety team” headed by a former US Army intelligence office and a former government investigator. The use of a human team clearly doesn’t scale, so Airbnb is now turning to centralized analysis to solve its problems, saying “We want to apply data to every decision. We want to be a very data-driven company.” On April 30 2013, asserting that “Trust is the key to our community”, Airbnb introduced a “Verified ID program” which demands that you provide government-verified identification and permit the company to analyze your social networking presence or provide it with a video profile.

There is also a drive for more professionalism among hosts. Airbnb now lets hosts sell tours and activities, and here is Chip Conley, the new “Head of Global Hospitality” for Airbnb, hired from the hotel industry, in a September 2013 interview:

We’ll be introducing nine minimum standards around what we expect an Airbnb experience to be, whether it’s related to cleanliness or the basic amenities you expect, which is not currently the case. The idea that we create some amenities that you should expect—clean towels, clean sheets—that’s important.

In short, Airbnb is abandoning the idea that peer-to-peer reputation systems can solve the problem of trust, is moving away from the casual “air bed” mentality that gave it its name, and is resorting to traditional centralized systems of enforced minimum standards, documentary verification, and so on.

There is, however, one remaining difference between Airbnb and a traditional hospitality business. To go back to the beginning of this essay, sharing economy companies claim that it is both necessary and sufficient to solve problems of trust and coordination to unlock a large new economy of resource sharing. The “sufficient” part of this is valid only if there are no spill-over effects from the operations of the sharing economy, so sharing economies will campaign for freedom from those constraints that prevent them maximizing their returns: health and safety standards, employment standards, licensing laws, and so on.14

To be successful, the venture-capital-funded “sharing economy” will be forced to lose all those aspects of informal sharing that makes “sharing” attractive, and to keep those aspects that erode neighbourhoods, erode employment rights, and remove basic standards. And if they succeed, they will have used the language of sharing to bring about an unregulated, free-market, neoliberal economy.

Footnotes

1 For example, economist Arun Sundararajan says that in peer-to-peer marketplaces “Reputation systems and active supplier screening maintain quality” and that “These reputation systems take community enforcement up a few notches from the time of the Maghribis, combining numerical scores and textual feedback with reviews, pictures, and peer references that are instantly visible to any potential market participant. By making both product and trader quality instantly transparent, this approach reduces the risks that often lead to market failure”; PBS Newshour says that “Users trust each other according to a person’s accumulated social credit; user ratings thus form a currency to increase the odds of finding a willing driver”; and in a January 2013 interview Airbnb CEO Brian Chesky said “Well it turns out that cities can’t screen as well as technologies can screen. Companies have these magical things called reputation systems”; Forbes writes that “Ebay’s much-duplicated rating system bestows commercial credibility on individuals”.
2 The description draws from the work of sociologist Diego Gambetta, who has spent years writing about trust, and in particular from a 2001 article written with Michael Bacharach.
3 The need for trust in collaboration is essential to opposition movements in authoritarian states, which is one reason I don’t believe that the “low transaction costs” of social media were key to the Arab Spring uprisings of 2011. I have made trust-based arguments here and more formally in this working paper.
4 Methodology: In a BlaBlaCar rating, a reviewer gives a rating to a reviewee. The first step of the algorithm is to record all the ratings of an individual user. Each subsequent step chose a new reviewee by selecting at random from the lists of reviewers, and then records all the ratings for that user. There are cases where a single reviewer has reviewed a single reviewee multiple times; these were discarded. Only the numerical rating was recorded, and if a reviewer has not been reviewed by anyone a single “null” rating was recorded. The procedure is far from scientific, but at 190,000 ratings is way better than a few anecdotes, which is the point.
5 Almost all the one-star ratings are given when the rider and driver failed to meet without cancelling ahead of time. Perhaps the rider didn’t turn up, or perhaps the driver didn’t, but one way or another the ride didn’t happen. If a ride takes place, it is almost universal that each of the pair will give the other a five-star rating.
6 See also this question on Quora for impressionistic responses.
7 In 2013, Airbnb claims over 300,000 listings, but a 2010 study showed that “more than 6 million vacation properties in the U.S. and Europe were being rented out to travelers for a fee at least two weeks of every year”. Ad Age reports that Airbnb’s 2012 revenue was $150 million, which a little arithmetic based on 3 percent host fees and at least 6 percent guest fees suggests it is part of $1.5B in transactions. The same survey estimated the global vacation rental market at $85 billion in 2010, at an average of $14,000 per property. Supporting these estimates, a report by market research firm PhocusWright estimates the size of the overall vacation-rentals market in the US alone to be $23 billion, and vacation rentals in Europe are much more popular.
8 Personal story: During my childhood my mother booked almost all our family holidays from the Farm Holiday Guide, which listed farmhouses that provided either bed-and-breakfast or self-contained accommodations throughout the UK.This practice was not unusual. For four years, we stayed with Miss Whittaker in the Duddon Valley in the Lake District. She was a dinner lady at the local school, and rented out accommodations to supplement her income. She had a sheepdog called Jan, which we played with in her back garden. When it rained, which was often, we would read books from her bookshelves: I first encountered Miss Marple and Hercule Poirot at Miss Whittaker’s house when I was about ten. My younger brother would sometimes get up early in the morning and sit in the kitchen with her, colouring in a colouring book while Miss Whittaker started her day. Families I know in Ontario have rented out cottages for decades, through personal contacts and scattered local tourism organizations like this one.
9 BlaBlaCar hosts half a million passengers a month, which sounds like a huge number, but in the year 2000 12% of the 128.3 million workers in the US carpooled to work (US Census) which, assuming two people per car, is around 7 million passengers a day, excluding non-work trips.

10 Personal story: My own pre-digital ridesharing experiences include a year of commuting between Hamilton and Waterloo, driven by four different—and all wonderful—people, as well as several years of intermittent and luckily incident-free hitch-hiking in the UK, mainly between Leeds and London.Quiz for the reader: how would you rate the following drivers?

  • The German ex-prisoner of war who stayed in the UK and who gave me a ride in a small lorry, spending much of the ride explaining in a friendly manner how Hitler had been misunderstood.
  • The driver who spent 30 minutes complaining about how dark-skinned immigrants were wrecking the country.
  • The driver of the empty lorry who explained that he was picking up my friend Lawrence and myself on a windy day just to provide some extra ballast.
  • The driver who had cerebral palsy and whose hand shook increasingly as he reached for the gear lever, explaining that he drove better when he’d had a couple of drinks because he didn’t tremble as much.
  • Women may experience many kinds of problem that I have never faced. What is the acceptable level of flirtatiousness and/or overt propositioning from a driver? And would you report over-the-line behaviour if the driver had your phone number?
11 Personal story: Rachel Botsman also makes a point that the sharing economy now means you can stay in unusual places, not just regular hotels. When I was three years old my parents rented a converted railway carriage near Aberdovey in Wales. The jellyfish on the beach were disgusting, but otherwise it was fun.
12 Personal story: my sister and I tried to book an apartment in Rome in spring of 2013 through http://www.homeaway.co.uk/. The owner said that apartment wasn’t available, but another one listed on http://www.homelidays.co.uk/ was free. We never met the owner, but we did meet a cleaner who had a key. The rental was clearly a business transaction, and the apartment was one of six owned by the same person. The experience was very similar to booking a traditional bed and breakfast or holiday apartment through emails, websites, or even older mechanisms.
13 Thanks to Eric Farrar for insights into the differences between sites like Kijiji and sites like eBay.
14 One of the legal challenges faced by Airbnb is that local governments demand licensing of rental accommodation for reasons that go beyond the interests of the landlord/host and tenant/guest to include the interests of neighbours and wider community. Airbnb must campaign against such rules if it is to maintain its growth. It is no surprise that the first two actions of the new sharing economy advocacy group Peers are in support of two of the best funded companies: Airbnb and Lyft. The very first action was to campaign in the Silver Lake neighbourhood of Los Angeles against restrictions on short-term rentals. San Francisco is the home base for the venture-capital wing of the sharing economy, and claims of unnecessary bureaucracy are now running into the claims of neighbours. In the Mission district, local newspaper El Tecolote reports on how people are making large amount of money by “using a unit that’s rent controlled and they’re taking the space away from people who really need a place to stay in San Francisco” and gentrifying the Mission neighbourhood, pushing native residents out.

Trying a Dark Theme

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I’m a chronic theme-fiddler, and I thought I’d try to use a version of the zenburn colour theme that I use in emacs and vim. It’s designed to be low-contrast, and easy on the eyes for extended use. Zenburn works well for me in Org mode (see here), so I thought I’d give it a go. If light-on-dark bothers you, or anything else come to that, let me know in the comments.

The WordPress theme is Parabola from cryout, which is fantastically customizable. The colour choices from the zenburn palette are my own.

Six Degrees of Omidyar

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Venture capital damages commons-based sharing, and one name appears time and time again…

[Update: a version of this post, re-edited in the light of the Omidyar/Greenwald news venture, is now at The New Inquiry: Charity Assets.]

Start with an old story. Back in 2006 the world of microfinance split between “pure do-gooders and profit-minded do-gooders”, between Nobel Peace Prize winner Mohammed Yunus and eBay billionaire Pierre Omidyar. Yunus’s Grameen Bank had pioneered group-based credit for the impoverished, but had stayed away from making the Bank into a public company; Omidyar wanted to turn microfinance into a fully commercial, profit-making sector.

A few years later Hugh Sinclair, who spent several years working for microfinance institutions, compellingly described his disillusionment and anger at the way the industry was going in Confessions of a Microfinance Heretic: as money flooded into the microfinance institutions, they became like the loan sharks they replaced. At the centre of the book is the Lift Above Poverty Organization (LAPO), a Nigerian microfinance institution (MFI). It charged deceptive and high interest rates, it was audited by the brother of the CEO, and it siphoned money into many already-wealthy pockets. As microfinance grew in scale it spawned a web of interacting operations: microfinance funds invest in microfinance institutions which are rated by microfinance rating agencies, and which make loans through other partners. Principal-agent problems become pervasive and, without a regulatory framework, there were incentives everywhere that not only enabled corruption but, Sinclair argues, pushed participants to keep a lid on stories of corruption—to try to fix them quietly rather than to risk the reputation of the broader industry. Taking a charity and turning it into a bank is, Sinclair says, a great way to build assets and then capitalize on them.

Beyond generally promoting the market-driven approach to microfinance, Omidyar Network was a big donor to Unitus, a microfinance fund embroiled in a 2010 scandal involving Indian MFI SKS. When SKS went public, raising $350m in its IPO, Unitus backed out of microfinance: “In charity circles, people wondered about the motives of the Unitus board members, at least four of whom had invested in SKS Microfinance themselves and thus would reap profits from the I.P.O.” More controversy followed in 2012 when it was revealed that over 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010. The state blamed microfinance companies for fueling a frenzy of “overindebtedness and then pressuring borrowers so relentlessly that some took their own lives”.

Sinclair concludes that “Frankly, I think the only means to rein in these groups is to formally regulate them.” (p227) He also notes that “Impact Investing”, which is the Omidyar Network’s current emphasis, has similar problems: “I do not believe there are panaceas for poverty reduction – it is hard work and requires a number of tools used wisely and collaboratively” (p236).

A lesson of the story is that, as capital and social action have conflicting goals, using markets to scale up social action can destroy the very thing that made it special in the first place.

Microfinance operates at the border between charity and business. LAPO was for several years a major partner of Omidyar-funded “peer-to-peer” lender Kiva, until Kiva cut ties in 2010. The episode highlighted a fact that was worrying some observers, including David Roodman: “peer-to-peer” lending is not actually peer-to-peer, instead Kiva works with intermediary partners which in turn make loans which were not, as many thought, interest-free.

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Anyway, new topic. Last year I was reviewing a book on the reputation economy which included a chapter by the founders of GlobalGiving, an Omidyar-funded “Internet-based service focused on making international philanthropy more efficient and high impact”. GlobalGiving set out to use technology and capital to scale up charitable giving, just as Omidyar had set out to use capital and commerce to scale up microfinance. Believing in Omidyar’s vision of “market-based efforts that catalyze economic and social change”, GlobalGiving adopted a “hybrid model” involving a parallel company (ManyFutures) that provided a technology platform to support its charitable work. But ManyFutures never made money, so the funding transfer ended up going from GlobalGiving to ManyFutures rather than the other way round, and controversy ensued. As with microfinance, the idea that capital and sharing are natural complements went wrong.

The idea that bringing commerce to play can scale up nonprofit efforts has become commonplace in the technology world, and the Omidyar Network is the poster child for mixing profit and sharing. It’s a “philanthropic investment firm” that supports “market-based approaches with the potential for large-scale, catalytic impact”; it’s taken a lead in “impact investing”, and in “social enterprise”. The ideas of social entrepreneurship, Benefit Corporations or the closely-related B Corporation sound sunny—who doesn’t want to Do Well by Doing Good?—but capital has a way of eroding sharing-based initiatives. The hybrid charity and microfinance examples are two that I had come across, but it doesn’t stop there…

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So a little while ago, I wrote about the tensions between capital and commons in an essay called Open Wide, at The New Inquiry. As part of the research for that essay I looked at what had happened to travel community Couchsurfing, and wrote this:

In his book Cognitive Surplus, Clay Shirky highlighted Couchsurfing, a site where young global travelers can arrange to visit and host each other, as a healthy digital commons. Couchsurfing started life as couchsurfing.org, not couchsurfing.com; even the code that ran the site was provided by the Couchsurfers themselves. But the site did have owners, and in August 2011, they incorporated and accepted $7.6 million in venture funding. As the company’s market value has grown, the Couchsurfing community has deteriorated. A long-time Couchsurfer laments the days of “art gatherings, bonfires, a weekly meet up at a bar, café gatherings, potlucks,” now lost.

The community’s former strength turned out to have little to do with technology. As a commenter at Quora writes:

“The old Couchsurfing thrived with a very haphazard and underfunded management structure precisely because local volunteers around the world believed they were part of a cause bigger than profit. Local collectives were highly tied to their local communities… The technical architecture of the new systems is much better, but paradoxically the ‘professional’ product development process fixes things that were broken on purpose. In other words, Couchsurfing evolved around certain quirks and inefficient processes that actually became critical to the health of the social trust platform.”

Over 5000 Couchsurfing members have joined the forum We are Against CS becoming a for-profit corporation.

Contrast Couchsurfing with Hostelling International, a venerable network of national youth hostelling organizations that has remained resolutely nonprofit. Over 100 years old, it is still going strong and “currently provides 35 million overnight stays a year through more than 4,000 hostels in over 80 countries.” Some people do support themselves through the commons of hostels — some work in the hosteling organizations, others are paid to run hostels themselves — but it’s orders of magnitude away from the sudden injection of millions of venture-capital dollars.

What I didn’t do was name the organization that funded Couchsurfing’s transition from nonprofit to profit-driven company. But you know what it is: it’s the Omidyar Network. Again, it saw markets and profit as a way to scale up a non-market operation, and again the profit motive is driving out the non-commercial effort that is needed to sustain a trusting community. Couchsurfing will not have the longevity of Hostelling International, just as GlobalGiving will not have the longevity of Oxfam.

Update (October 15 2013): Couchsurfing’s CEO just resigned and 40% of the staff was layed off. See here and the announcement here.

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Before writing Open Wide, I wrote some things about Open Government, including Seeing Like a Geek at the Crooked Timber group blog. Open Government Data is yet another area where commerce and sharing sound like they mix nicely, but where there are real problems. In short, one of the things that making data open does is to make it free. If action around open data is kept non-commercial, then it may form an alternative to profit-driven action, but if commercial use of open data becomes the predominant form then all that has happened is that one form of industry has been replaced by another, and as the new industry is technology-driven it is more likely to be an oligopoly than the industry it replaces.

No surprise, then, that as I was doing the research for that piece it turns out that the Omidyar Network is deeply involved in both the Open Government Partnership at the international level, in Code for America in the USA, and is the first major investor in the UK Open Data Institute. At Code for America, which describes itself as a new kind of public service, Omidyar has funded an Accelerator arm which invests in startups, conveniently augmenting the idea of “service” with the contradictory idea of “entrepreneurship” and blurring the boundaries between those who want to make money from government contracts and those who want to contribute to a stronger civic space. Unsurprisingly, the Open Data initiative has been colonized by major companies.

*                       *

And still we are not done. Here is one final case where the Omidyar Network’s vision of social enterprise leads to more enterprise, but less social. In 2012 Change.org joined Couchsurfing as a “.org” site with a for-profit motive–a misleading presentation of the organization’s mandate. Change.org changed its mandate from being a broadly progressive non-profit to a for-profit company, allowing “corporate advertising, Republican Party solicitations, astroturf campaigns, anti-abortion or anti-union ads and other controversial sponsorships”. In May 2013 it took venture capital from the Omidyar Network and others in order to scale up, and the nature of the organization changed. The change in mission was described by Lindsay Beyerstein in In These Times and Ryan Grim of The Huffington Post.

The Omidyar/Change.org press release uses the standard language of social entrepreneurs: blandly inspirational and content-free.

“Social enterprises can play an instrumental role in solving some of the world’s biggest problems,” Rattray said. “This funding will help us continue to expand our empowerment tools internationally while innovating on new products with the potential for disruptive social impact.”

Every challenge is a problem, rather than a conflict. Who can disagree with phrases like this?

Omidyar Network was founded on the fundamental belief that every person has the power to make a difference. We create opportunity for people to realize that power and improve the quality of their lives. When people take the initiative to make life better for themselves, they can share the benefits with their families, become more active in their communities, and be a more positive force in society.

These failures demonstrate concretely what I have been arguing more generally: that the idea of a natural synergy between business and sharing, between capital and commons—encoded in the ideas of social enterprise, in the Apache flavours of open source license, and in the variant of open content licensing favoured by Omidyar-funded organizations—is fraught with tensions and contradictions. Also, I may be wrong, but from what I can see these repeated failures have not been addressed by Omidyar Network in a public way.

Impostor Syndrome

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This is a vivid and completely unsubtle dream I had in late July, or maybe early August. Offered for anyone who has similar ones: feel free to add your own.

I’m about to give a talk in Manchester, in a large crowded room that looks like a courtroom. I’ve given the talk the day before, in Liverpool, and it went well, but now I’m feeling nervous because I can’t find my notes anywhere. I’m sure they’re in a pocket, or a bag, but I just can’t find them and now the crowd is coming in.

The room is full and there are two young white men with dark hair who are my hosts. One stands up to introduce me. He starts with “Tom Slee spent …” and then looks for the background information, and then at the other young white man with dark hair. He thinks I come from somewhere impressive; that I have qualifications for the talk I am about to give; that I have credentials that will roll off the tongue and give the evening a stamp of prestige.

I don’t. It’s not like I’ve deceived anyone – the other host knows my background, it just doesn’t include anything impressive. The introducer looks to the other host and asks “where is he from?” and the other host says “Nowhere. He doesn’t have an affiliation.”

There is great embarrassment all around as everyone realizes that I am not the kind of speaker they were expecting, and this is not the kind of event they thought they were in for. Swiftly and quietly, everyone starts to leave.

My humiliation at this misunderstanding is matched only by my relief. I still haven’t found my notes. I have no idea what I could have spoken about.

“Hacking Society”: me at the Literary Review of Canada

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I am thrilled to have a long review of three “internet and society” books in the always-excellent Literary Review of Canada. It’s online at http://reviewcanada.ca/magazine/2013/09/hacking-society/.

Books covered are: Networked: The New Social Operating System by Lee Rainie and Barry Wellman; Black Code: Inside the Battle for Cyberspace by Ronald J. Deibert, and Coding Freedom: The Ethics and Aesthetics of Hacking by E. Gabriella Coleman.

Why The Sharing Economy Isn’t

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So a couple of months ago Douglas Atkin, head of Community and E-staff Member at AirBnB, took to the stage of the Le Web conference in London (video) to announce the formation of Peers: “a grassroots organization that supports the sharing economy movement.” I like grassroots organizations and I like the co-operative impulse, but this… Well here is his speech in its entirety (in italics) with comments from yours truly.

I joined AirBnB about four months ago, but I’m going to talk about a different organization.

He means Peers.

In fact I’d like to talk about a movement for the sharing economy. By “a movement” I mean exactly that. I mean huge numbers of people, with a shared identity, mobilized to take action to do two things: to grow the peer sharing economy, and to fight for their collective interests against unfair and unreasonable obstacles.

A grassroots organization with 40 corporate “partners”, with unspecified but significant funding, formed with guidance from a set of high-profile “thought leaders”, without local chapters, and with nothing much for the grassroots to do, but with an Executive Director on day one.

Andrew Leonard from Salon has been following the story, and tells us that funding comes from “mission-aligned independent donors”. So that’s wealthy backers with a financial interest in the sharing economy. This is not grassroots, it’s astroturf.

If there is one thing that makes me angry, it is people appropriating the language of collective and progressive politics for financial gain. And that’s one thread of what’s going on here. As we shall see. It does seem that Executive Director Natalie Foster’s heart is in the right place, but that’s one of the tragedies of the sharing economy: well-intentioned people end up contributing to immiseration and injustice when they think they are doing the opposite.

So what we’re talking about here is not just people sharing their skills, or their apartment, or their car, but also their collective power to expand the sharing economy together, and to stand up against entrenched interests who stand unfairly in their way. So “people power” if you like, or more accurately “peer power”.

And what we’re not talking about here is venture capital. Going through Crunchbase tells me that the total funding for the 40 partners is over $600M. AirBnB has received $120M, including funding from Andreessen Horowitz, Jeff Bezos, Ashton Kucher. You know, people standing up against entrenched interests.

At the end of this post I’ve added a table of what I could find. It tells us that almost all the funding is going to the Bay Area or New York. The non-profits in this organization are being taken for a ride by the appealing anti-establishment language of Silicon Valley . They need to take a look at who their bedfellows are and what the real agenda is.

Venture Capital funds are not interested in people power, they are interested in an investment with a good return. The fact that Douglas Atkin doesn’t once mention the financial motivations of the forces behind the sharing economy is either dishonest or unbelievably self-deceiving.

Now why would there be a need for such a thing? The sharing economy seems to be barrelling along pretty happily. Why do we need another organization? Well, firstly the opportunity. This was brought home to me a week ago in San Francisco where I attended a meeting of sharing economy participants. So there were drivers, passengers, hosts, guests, and tour guides from RelayRides, Lyft, AirBnB, Vayable and Sidecar, and they were literally bouncing up and down with enthusiasm about the opportunity to collaborate together — with each other.

So they were developing ideas — brilliant ideas actually — to share customers with each other, across verticals. One person even suggested that there could be a peer economy currency — maybe Bitcoin. Or even points to encourage people to cross verticals and recruit new people into this new economy.

The language changes, the mask slips. Participants become customers, sharing becomes buying. The phrase “across verticals” reminds us that Douglas Atkin is an advertising executive. Now the sharing economy is about loyalty programs and cross marketing? Not the kind of sharing I want to be part of. I don’t have a problem with commerce, but what I do object to is commerce wrapped up in, and appropriating, the language of solidarity.

These people were incredibly impressive, with their passion and their eagerness and creativity to work together locally to expand the sharing economy. So that was the opportunity. It was incredibly exciting to see that. And I did a couple more of these types of meetings, with people from different verticals in the sharing economy in New York, where the same thing happened. So there’s the opportunity.

The Peers organization came together, then, in San Francisco and New York – the well-heeled, well-funded districts of the sharing economy movement.

Secondly, though, there’s the challenges. It’s unlikely, I believe — and I believe this because I used to work for them — that the entrenched interests of the old economy are going to stand idly by as their business model of the past seventy years is challenged by the new economy.

Billion-dollar venture capital funds are out to undercut people who run licensed bed and breakfasts, and he’d have me believe that it’s the B&B owners who are the “entrenched interests”. If this is your idea of a revolution (and it is, unbelievably enough: that comes later) then brother don’t you know, you can count me out.

What’s more, outdated laws and new laws which have been badly conceived, with unintended consequences, really threaten the growth of this nascent new world economy.

The laws that he is talking about are licensing laws and other laws put in place to protect employees, customers, and neighbourhoods. These laws are not all perfect. But the sharing economy has nothing to replace them beyond magical thinking about “trust” (with little accountability).

How much better would it be if citizens banded together to grow and protect their interests in the sharing economy rather than companies wielding their power?

How about banding together to protest when a TaskRabbit customer posts a job to do four loads of laundry and it’s actually 10 or 15 loads covered in cat diarrhea? No: if you do that, you’re fired. The company (a partner of Peers.org, natch) also takes steps to prevent its TaskRabbits from meeting because “They don’t want us unionizing”. I’m sorry, what was that about citizens banding together against companies?

So I’m here to tell you about some plans which will enable people to create a member-driven movement for the sharing economy. If you like, a new kind of union for a new kind of economy. And I’m also here to ask for your support. So if you’re a platform: help your users create this organization and join it. If you’re a thought-leader, blogger, or conference speaker: champion it. And if you’ve got some ready cash, please help fund it.

A new kind of union? What, me and Peter Thiel, billionaire investor in TaskRabbit? Sorry, I won’t be handing over my cash any time soon.

Now why should you do this? Well it’s the right thing to do. We literally stand on the brink of a new, better kind of economic system, that delivers social as well as economic benefits. In fact, social and economic benefits that the old economy promised but failed to deliver. As Julia, an AirBnB host, told me just last night, “the sharing economy saved my arse”.

The sharing economy is not an alternative to capitalism, it’s the ultimate end point of capitalism in which we are all reduced to temporary labourers and expected to smile about it because we are interested in the experience not the money. Jobs become “extra money” just like women’s jobs used to be “extra money”, and like those jobs they don’t come with things like insurance protection, job security, benefits – none of that old economy stuff. But hey, you’re not an employee, you’re a micro-entrepreneur. And you’re not doing it for the money, you’re doing it for the experience. We just assume you’re making a living some other way.

The old economy has largely failed us. Most people are not experiencing the economic independence and the happiness that mass production and consumerism promised. Partly, in a way, because the old system centralizes production, wealth and control. That’s just the way it works. And in a sense, that’s largely to blame. The peer sharing economy is a new model, which distributes power, wealth, and control to everyone else. Best of all, the very things that have become the casualties of the old economy — things like economic independence, entrepreneurialism, community, individuality, happiness — are actually built in to the very structure of this new economy. You can’t do sharing without building community, without creating individualized experiences.

The sharing economy is the centralization of global casual labour. Investors invest because individual sharing economy companies have the potential for global reach, collecting a little from each of millions of transactions around the world, and funnelling it to California.

We’ve had this ridiculous debate for the past thirty years ago in this old economy about a work/life balance, because the honest truth is life gets squeezed out because of work. As Rachel says: doing jobs we hate to buy shit we don’t need. But in this sharing economy, life is built in. So Etsy producers get to know their consumers and sell individualized goods. Whenever I take a Lyft or a Sidecar — which are ride-sharing organizations in San Francisco — I always ask them “So why are you doing this?” And their first response is “To interact and meet with new and interesting people”. And then secondly, the flexible hours and a bit of extra cash. It’s the community they are most interested in experiencing.

Trashing consumerism appeals to many environmentally-minded, social-justice oriented people. But if you displace taxi drivers and replace them with casual labour, you’re not improving the work/life balance of drivers, you’re making them poorer.

Fred Mazella was a genius when he named blablacar blablacar, because he’s actually naming what happens in the car. He named his organization not after the transaction, which is ridesharing, but because people communicate and go “bla bla bla” to each other in the car. He correctly identified what the real benefit of the sharing economy is, which is these other social and economic rewards.

You know, I talk to taxi drivers too. Some of them are interesting people. You should try it sometime.

So there’s a nascent organization which is about to bloom. It’s independent, it’s member-driven, it’s global, it’s not a trade association, it’s not a lobbying group. It will use peer power and collective action to grow the sharing economy and overcome unfair obstacles.

I don’t know if he’s lying or if he believes this stuff, but take a look at the website of Peers.org and tell me you believe it.

I personally want to see the sharing economy grow to become the dominant global economic model in the world, because of the social and economic benefits which are built-in, because of the distributed wealth, control, and power which it represents. It has the possibility of transforming the world for the better. So if you want that too, especially if you’d like to see members champion it for themselves, rather than the usual suspects, come and see me afterwards and I can tell you how you can help. Or talk to Leah, who is the founder of TaskRabbit and Fred from blablacar or Lisa Gansky. We can all tell you a little more about it.

So Vive La Revolution, and thank you very much.

When all jobs are Taskrabbit jobs, how does anyone earn a living?

Appendix

Here’s that table of Peers.org partners.

Company Funding ($US) Location Investors include…
AirBnB 120M San Francisco Andreessen Horowitz, a $2.5B fund
Airtasker — Sydney, AUS
Bay Share — —
Blablacar 10M Paris
Car Next Door — —
Carpooling.com 10M Munich Daimler
City Car Share non-profit San Francisco
Chegg 195M San Francisco (many)
Collaborative Fund (VC) New York
Collaborative Lab — — —
co:NYC — New York Members include AirBnB etc
Cookening — Paris
Divvy — Australia —
Farmigo 10M Palo Alto Sherbrooke Capital
General Assembly 14.3M New York Maveron, a $780M fund
Getaround 19M San Francisco Marissa Mayer
Green Spaces New York
The Hub — Vienna
ioby — New York
LiquidSpace 12.2M Palo Alto Greylock Partners, a $1.73B fund
Lyft 82.5M San Francisco Andreessen Horowitz, a $2.5B fund
Maker Media — San Francisco
Meetup 18.3M New York Omidyar Network
Mesh (book)
Mosaic 22M Oakland Spring Ventures
Open Shed — Australia
OuiShare non-profit France?
ParkAtMyHouse — UK BMW
RelayRides 13M San Francisco General Motors, Google Ventures
Scoot Networks 1.65M San Francisco Lisa Gansky
Shareable (magazine) San Francisco
Side.Cr (Sidecar) 10M San Francisco Lisa Gansky, Google Ventures
Skillshare 4.65M New York Union Square Ventures, a $200M fund
TaskRabbit 37.7M San Francisco Lightspeed Ventures, a $2B fund
TimeRepublik — South Africa?
Vayable — San Francisco SV Angel, an $89M fund
Yerdle — San Francisco
WeWork 6.85M New York
Zaarly 15.2M San Francisco Kleiner Perkins Caufield & Byers
Zookal 1.46M Sydney Filtro Private Equity