The rise of the fru­gal econ­omy

Financial Mirror (Cyprus) - - FRONT PAGE -

In a fa­mous 1937 es­say, the econ­o­mist Ron­ald Coase ar­gued that the rea­son West­ern economies are or­gan­ised like a pyra­mid, with a few large pro­duc­ers at the top and mil­lions of pas­sive con­sumers be­low, is the ex­is­tence of trans­ac­tion costs – the in­tan­gi­ble costs as­so­ci­ated with search, bar­gain­ing, de­ci­sion-mak­ing, and en­force­ment. But with the In­ter­net, mo­bile tech­nolo­gies, and so­cial me­dia all but elim­i­nat­ing such costs in many sec­tors, this eco­nomic struc­ture is bound to change.

In­deed, in the United States and across Europe, ver­ti­cally in­te­grated value chains con­trolled by large com­pa­nies are al­ready be­ing chal­lenged by new con­sumerorches­trated value ecosys­tems, which al­low con­sumers to de­sign, build, mar­ket, dis­trib­ute, and trade goods and ser­vices among them­selves, elim­i­nat­ing the need for in­ter­me­di­aries. This bot­tom-up ap­proach to value cre­ation is en­abled by the hor­i­zon­tal (or peer-to-peer) net­works and do-it-your­self (DIY) plat­forms that form the foun­da­tion of the “fru­gal” econ­omy.

Two key fac­tors are fu­el­ing the fru­gal econ­omy’s growth: a pro­tracted fi­nan­cial cri­sis, which has weak­ened the pur­chas­ing power of mid­dle-class con­sumers in the West, and th­ese con­sumers’ in­creas­ing sense of en­vi­ron­men­tal re­spon­si­bil­ity. Ea­ger to save money and min­imise their eco­log­i­cal im­pact, West­ern con­sumers are in­creas­ingly es­chew­ing in­di­vid­ual own­er­ship in favour of shared ac­cess to prod­ucts and ser­vices.

As it stands, nearly 50% of Euro­peans be­lieve that, within a decade, cars will be con­sumed as a “shared” good, in­stead of pri­vately owned, and 73% pre­dict the rapid growth of car­shar­ing ser­vices. BlaBlaCar, Europe’s lead­ing car-shar­ing ser­vice, now trans­ports more pas­sen­gers monthly than Eurostar, the high-speed rail ser­vice con­nect­ing Lon­don with Paris and Brussels. And the bet­ter-known ser­vice Uber is caus­ing panic among taxi com­pa­nies world­wide. De­spite re­cent con­tro­versy, the com­pany, founded in 2009, is val­ued at more than $40 bln.

This shift in con­sumer

at­ti­tudes

extends

far

be­yond trans­port. The peer-to-peer home-shar­ing ser­vice Airbnb now rents more room-nights an­nu­ally than the en­tire Hil­ton ho­tel chain. And the peer-to-peer lend­ing mar­ket, which by­passes banks and their hefty hid­den fees, sur­passed the $1 bln mark in early 2012.

The global mar­ket for shared prod­ucts and ser­vices is ex­pected to grow dramatically, from $15 bln to­day to $335 bln by 2025, with­out re­quir­ing any ma­jor in­vest­ment. The Euro­pean Com­mis­sion pre­dicts that peer-to-peer shar­ing, now an in­come booster in a stag­nant labour mar­ket, will evolve into a dis­rup­tive eco­nomic force.

The na­ture of hor­i­zon­tal net­works sup­ports this pre­dic­tion. Such net­works begin work­ing long be­fore they re­duce trans­ac­tion costs. By en­abling or­di­nary peo­ple to do at home what, a decade ago, only sci­en­tists in large labs could do, the In­ter­net econ­omy is low­er­ing the costs of re­search and devel­op­ment, de­sign, and pro­duc­tion of new goods and ser­vices in many sec­tors.

Thanks to low-cost DIY hard­ware kits like the $25 Ar­duino or the $35 Rasp­berry Pi, peo­ple are in­creas­ingly build­ing their own con­sumer de­vices.

More­over, cus­tomers can now de­sign and man­u­fac­ture industrial-cal­iber prod­ucts by us­ing shared high-tech work­shops – so-called “fab labs” – equipped with CNC routers, laser cut­ters, and 3D prin­ters.

Such changes are pro­pel­ling the so-called “maker move­ment”: a le­gion of tin­ker­ers who col­lec­tively can cre­ate prod­ucts faster, bet­ter, and more cheaply than big com­pa­nies can. To­gether, the maker move­ment and peer-to-peer shar­ing plat­forms are em­pow­er­ing once-pas­sive cus­tomers to be­come ac­tive “pro­sumers,” thereby spawn­ing a fru­gal econ­omy that can cre­ate value in a more ef­fi­cient, cost-ef­fec­tive, so­cially in­clu­sive, and en­vi­ron­men­tally sus­tain­able way.

Recog­nis­ing th­ese benefits, some com­mu­ni­ties are ac­tively sup­port­ing the maker move­ment and ac­cel­er­at­ing the devel­op­ment of fru­gal economies. For ex­am­ple, may­ors of ma­jor cities – in­clud­ing New York, Tokyo, Rome, San­ti­ago, and Oslo – are seek­ing to host Maker Faires, where or­di­nary cit­i­zens show­case their in­ge­nu­ity and en­gage with other mak­ers.

Last June, US Pres­i­dent Barack Obama hosted the first White House Maker Faire – declar­ing that “To­day’s DIY is to­mor­row’s ‘Made in Amer­ica’ ” – and ap­pointed a se­nior ad­viser to de­ter­mine how to turn the maker move­ment into an en­gine of US eco­nomic growth. And New York City Mayor Bill de Bla­sio, who pro­claimed Septem­ber 15-21, 2014, “Maker Week,” and Barcelona Mayor Xavier Trias, who wants to build a “Fab City,” are try­ing to put their cities at the fore­front of the global maker move­ment.

Mean­while, in Vauban – a neigh­bour­hood in the Ger­man city of Freiburg – 65% of elec­tric­ity is pro­duced by so­lar pan­els and a co-gen­er­a­tion plant es­tab­lished and op­er­ated by lo­cal cit­i­zens. And Helsinki is build­ing a “mo­bil­ity on de­mand” sys­tem that seam­lessly com­bines mul­ti­ple shared- and pub­lic­trans­port ser­vices in a sin­gle pay­ment net­work, with the goal of elim­i­nat­ing pri­vate car own­er­ship by 2025.

A self-or­gan­is­ing fru­gal econ­omy could gen­er­ate bil­lions of dol­lars in value and cre­ate mil­lions of jobs in the medium term. But, of course, there will be losers: the large West­ern com­pa­nies whose “more for more” busi­ness mod­els, backed by huge R&D bud­gets and closed or­gan­i­sa­tional struc­tures, are not de­signed to serve the needs of cost-con­scious and ecoaware con­sumers seek­ing more – and bet­ter – for less. In or­der to sur­vive, th­ese es­tab­lished com­pa­nies will need to rein­vent them­selves as fru­gal en­ter­prises that in­te­grate dig­i­tally em­pow­ered “pro­sumers” into their value chains and strive to ad­dress mar­ket needs in a more eco-ef­fi­cient and cost-ef­fec­tive way.

The tran­si­tion to a fru­gal econ­omy is hap­pen­ing. Tra­di­tional com­pa­nies must get on board – or risk be­com­ing ob­so­lete.

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