The “Gig” Economy?

This article talks about the rise of people working part-time, doing various ‘gigs’:

http://www.thedailybeast.com/blogs-and-stories/2009-01-12/the-gig-economy/full/

Perhaps her intended audience is not interested in “dull” things like economics, but even someone like me with just a smattering of reading in economics can’t help but think of Coase and his Theory of the Firm when reading it.

The question is: why do firms exist? Why isn’t the economy composed of a huge network of independent contractors? If markets and prices and such work so well, why do these big, monolithic companies, which internally, are not ‘free markets’ exist?

His answer is, greatly simplified, “transaction costs”. From the article:

Every time the boss turns around asking for a key member of staff to join today’s frantically convened cost-cutting strategy meeting the reply comes back, “It’s not Sam’s day to come in and he’s the one working on it. Julia can come, though.” “Julia? What she got to do with it?” “Yeah, well, we’ll have to bring her up to speed.”

In other words, while there is a savings from not having Sam present every day, there is also a cost associated with it, which includes having had to look for and interview Sam to do some work, and bargaining over a price for Sam’s services, and then “bring him up to speed”. You have to do those things with regular employees too, but you have to do them less often with people who stick around for years.

So if one wanted to look, in a less anecdotal way and slightly more scientific way, about whether the US, or other countries, are turning into “gig economies”, one could do worse than look at the transaction costs associated with utilizing contractors as opposed to permanent employees. If those costs have fallen (it may be easier to find people, thanks to the internet, for example), perhaps it is more efficient to have more contractors and fewer full time employees and so the equilibrium will tilt in that direction. Of course, another explanation might simply be that the economy is bad, and companies don’t have the budget to take on more people, so they get by with what they can in the short term.

In terms of the social costs and benefits to a “gig economy”… well, that discussion is best left for other sites, as it’s a big, long, complex one with lots of politics and economics and eventually boils down to everyone’s own view of how the society they live in ought to look, which is very much outside the scope of this journal.

Hosting, Commodities, and “The Cloud”

Anyone connected to the world of IT has been bludgeoned over the head with “cloud” news lately, to the point where the term has become vague and mostly a buzzword. There is, however, something behind the phenomenon, described in Nick Carr’s book The Big Switch, with more computing power being centralized at large data centers where economies of scale come into play.

I had an interesting chat with Marco D’Itri a while back, about hosting and commodities. It’s clear that there is some commoditization going on, but he maintains that hosting is not a commodity. I’ve been thinking about it and the conclusion I’ve come to is that some parts of the business are certainly commodities: disk space, memory, bandwidth, and processor cycles. Those things, are, ultimately, what we want to buy when we buy ‘hosting’. However, the bits and pieces between that, and people who build on top of those services (i.e. someone who runs a web site) are not really a commodity, yet. Customer service, for instance, might vary a great deal between providers. What will happen in that space, will we see a baseline price for the commodities, and hosting resellers built on top of that that offer different levels of service? I do think that the “mom and pop” hosting type of situations will gradually disappear in favor of larger data centers that can take advantage of economics of scale, though.

Also, as I’ve written about in the past, in Web Hosting – A Market for Lemons, there are some serious information asymmetry issues – how do you know the people providing your service are serious? How do you know they’re using good components that wont’ break often, rather than cheap junk that will lead to frequent outages? If you have the resources, you can build a system like Google’s, where it doesn’t matter what fails, it just works around it, but the basic tools that most of us are working with right now aren’t that high level.

I was reminded of the information asymmetry issue by this article, written by the Dreamhost folks, Web Hosting’s Dirty Laundry, which describes how they caught a ‘review’ site trying to get money from Dreamhost for positive reviews, which is interesting in light of the lemon problem. Wikipedia has some criteria for a lemon market here: http://en.wikipedia.org/wiki/The_Market_for_Lemons#Criteria, which include the following:

Deficiency of effective public quality assurances (by reputation or regulation and/or of effective guarantees / warranties

If it’s difficult to get real, honest, impartial reviews of hosting services, that is a push in the direction of ‘lemons’. Of course, it’s not impossible to get this information, but it seems that a lot of us still go by “hearsay” – what others we know use and report to be ok. To compare it with another product, I’d probably ask around to friends prior to purchasing a new car, but whatever I get is likely to work ok, even if it’s not the absolute best. On the other hand, the wrong hosting provider might be very much a “fly by night” operation that leads to a lot of downtime, so I’m far more likely to listen to what other people have to say, and be far more cautious about buying “any old thing”.

Opinions? Comments? Thoughts? Where do you see this industry going?