The sharing economy has become an increasingly important facet of global enterprise. Once seen as unproductive, advances in technology have led to increased efficiency in shared information and collaboration. As mobile computing and cloud services become more prevalent, the scale and scope of the sharing economy will surely grow.

In 2011, Time described the sharing economy as an idea that will change the world. While some examples of pure altruism exist, the majority of the sharing economy has nothing to do with sharing – rather, it’s motivated by profit or cost cutting. The success of the sharing economy lies in its ability to reallocate under-utilized resources to more efficient use.

Sharing Economy at a Glance

Sometimes called the Peer-to-Peer (P2P) economy, the sharing economy is a decentralized economic system defined by collaboration between individuals and the sharing of resources. Monetary and barter transactions are used in the sharing economy, and both for-profit and nonprofit entities participate in the system. Although many sectors operate within the modern sharing economy, it is largely technology driven with a special emphasis on Internet-based services.

The sharing economy shouldn’t be confused with socialism because sellers of products and services may be profit driven. At the same time, buyers or users of the sharing economy want to reduce costs and may not expect to obtain goods or services for free. Another distinction is that the ownership of the means of production and of the final good may lie with the producer or be made a public good for all to utilize.

The socialist system of production relies on a well-informed and unbiased central planner that allocates resources for production, rather than employing a market mechanism to do so. The central planner not only determines what employment individuals have, but also the allocation and distribution of all products and services in the economy. There is no such thing as private ownership: the means of production instead are “owned” by the entire population. (See also: What Exactly Is a Socialist Economy?)

In contrast, capitalism is the system of economic production whereby capitalists – specifically, entrepreneurs or business owners – privately own the means of production as well as the finished product. They employ labor to work in creating the final product in return for wages or a salary; however, labor doesn’t retain any rights to that product. Capitalism is often defined by free markets that create prices that inform production and determine which market participants are rewarded. (For more, see The History of Capitalism: From Feudalism to Wall Street.)

Solution to the Tragedy of the Commons

One criticism of capitalism is the so-called “tragedy of the commons,” whereby individuals seeking to maximize their own well-being will neglect the well-being of the larger society. The classic example is a group of shepherds sharing a common piece of grazing land. In an effort to increase his own individual herd, a shepherd would seek to add another animal—a completely rational and profit-maximizing decision. But if all the shepherds act in this rational manner, adding another animal will invariably hurt the shepherds as a group by eating up more and more of the limited grass. Eventually, to everyone’s detriment, the common resource is destroyed.

The livestock example can be applied to modern times if we imagine today's limited common resources are natural resources, bandwidth, computing capacity and network storage. The sharing economy is often seen as a way to mitigate the tragedy of the commons as it applies to the finite nature of modern technology.

Sharing Economy in Action

The sharing economy is comprised of many pieces. P2P marketplaces exist to bring together individual buyers and sellers directly. This two-sided marketplace is often maintained by a third party that charges a fee for facilitating transactions between buyers and sellers and reducing transaction risk. Popular examples of such marketplaces are Airbnb and Homeaway (AWAY) which allow owners to rent out their property; ride-hailing services Uber and Lyft; and Etsy, eBay (EBAY), Craigslist, and Krrb, all which allow buyers and sellers to interact directly.  (See also: Airbnb vs The Hotel Industry, Who Will Win.)

Other sectors of the sharing economy include open-source software, where the computer code for software projects can be viewed and altered by any interested party at no cost. File sharing systems, which began with Napster, have evolved into legitimate ways to legally share content through platforms including Netflix (NFLX), Spotify, and Hulu. The sharing of content has moved beyond the digital, with technology now facilitating the efficient sharing of transportation, such as New York City's CitiBike.

Crowdfunding platforms have given entrepreneurs and inventors the ability to raise funds without the use of banks, angel investors or other traditional financing options. Wikipedia and other wikis are collaborative and fluid informational repositories that can be edited and updated in real time. Free educational resources such as massively open online courses (MOOCs) and online educators like Khan Academy or Udemy are emerging as low-cost competitors to secondary and higher education.

Lastly, Bitcoin and other decentralized digital currencies are proving to be a viable way to ensure trust in transactions without the need for traditional money or a central bank to oversee the system.

These examples are just a small piece of the current state of the sharing economy. As it grows, individuals may find it easier to personally own less and less, and the world will be forever changed. For example, if, in the near future, people can use a mobile app to summon a driverless car that will take them anywhere for little cost, car ownership will no longer be a necessity. At the same time, the number of car accidents causing property damage, injury or death will plummet—forcing insurance companies of automobiles to rethink their businesses. (For more, see: Winners and Losers of the Sharing Economy.) 

At Odds with Regulation

As promising as the sharing economy is, its inherently disruptive nature is apt to be at odds with established laws and regulations. Many of these rules have served to protect the consumer but are also viewed as outdated and inappropriate for the modern technological world. Taxi and livery companies are fighting Uber and other private ride-booking providers, and many cities worldwide are taking legal action to prevent encroachment by the services’ unlicensed drivers. Likewise, the hotel and lodging industry is opposed to Airbnb and similar services for allowing unlicensed hotel rooms to compete with their offerings. Municipalities also want to make sure they capture any potential tax revenue these sharing services may generate.

The current rationale amongst companies is to innovate first and then allow regulation to catch up with the new technology and marketplace. Entrepreneurs largely believe that although important in protecting the public from fraud and dangerous conditions, the regulatory apparatus moves far too slowly and reaches inadequate compromises. They also argue that many regulations are in place simply to maintain the status quo and to protect certain industries from new competition.

The Bottom Line

Sharing's role within the global economy has grown immensely. Collaboration and the free flow of real-time information and media content will revolutionize the way we do business and disrupt businesses that fail to adapt. The sharing economy is already branching into many different aspects of the economic system. While certain newcomers will surely butt heads with regulation, the overall feeling is that regulators will be forced to adapt to the changing environment.