Negative Implications of Centralization

Preface:
It is always easy to induce a vivid discussion, or find cheep and cheerful yay-sayers, when binary thinking comes into action. Binary thinking is unfortunately rooted in everyone’s psychological mode of operation. If there is only black or white, it will be hard to agree on a colour as a solution to your problem. Only self-reflection and profound knowledge about your own and any of the opposing point of views will enable a debate, from which any involved party can actually benefit. Accordingly this article does neither intend to generally condemn anything centralized nor naively propagate decentralization as the panacea for any problem we are facing in this world. Instead it should give you as a reader examples, that suggest the existence of systematic inefficiencies . Not for all of them, decentralization is the most adequate solution. But in the first place there should be awareness about errors, then we can contemplate about the best approaches for making our world a better one.

Asymmetric Information:
Every other day new revelations dominate the headlines, that corporations don’t always follow the rules that corporate social responsibility guidelines and governance policies would require them to do. The public has to rely on the existing mechanisms that seldomly can be fully enforced and thus fail to apply their precautionary functions. The customers, even though they are the most dependant and in many cases the most harmed party, are forced to rely on these 3rd parties to detect fraudulent practices. If this happens too late, their only way of claiming justice or compensation for any fraud they have fallen prey to is to take legal action against the wrongdoers with limited chances of success. This issue stems from the fact that usually all information a consumer receives is exclusively emitted from the product or service provider himself. This leads to a lack of transparency, as no customer can validly determine the authenticity of the information and the quality of the internal practices. This is called information asymmetry. From the corporate perspective the concentration of power to just a handful of people potentially enables erroneous decisions, mostly caused by laziness, greed, sloppiness, vanity or hubris . This can be seen as the behavioral precondition which in combination with information- and power asymmetry can lead to detrimental consequences both for the company and the consumers. It is often referred to as moral hazard.

Examples:

• Misuse of personal data from Facebook accounts of over 87 mn users by Camebridge Analytica to influence the 2016 political promotion, e.g. 2016 presidential elections.
• Dieselgate / Volkswagen emissions scandal: Illegally and intentionally falsifying emmission measurements by programming the emission control unit to emit less NOx in testing cycle.

Illegitimate Rent-Seeking:
Consumer electronics nowadays enable us to interact with each other and other connected devices at almost any time in any place. The convenience and endless possibilities emerging from this technological infrastructure doesn’t want to be missed by almost anyone. But there are certain drawbacks to the way this technology has been brought to such an immense amount of people. The fuel that keeps this system running is not only the revenues of the hardware manufacturers or the network operators. It is rather the endless amount of data, that is being captured by a handful of companies without the consumer actually knowing about that in detail. Search engines, social platforms, marketplaces are the beneficiaries, that earn money with a commodity that no one else than their users created and are the originators of. Interestingly it’s not really questioned that many of those businesses don’t actually earn money with the product they are offering to their customers in the first place. But in any way you are forced to choose — either you use the service and bite the bullet or you can refrain from giving away your data and thus being excluded from the services and networks.
Benefiting from the profits as a customer of these services or monetizing your own data, is not possible at all. Regarding the platform economy it feels likewise paradoxical to see how companies that neither own nor actively rent assets can achieve billions in valuation. The “Sharing Economy” or “On-Demand”-Services have already been the topic in our first article. These services are important for the economic evolution so they should not be missed, but they are still profiting from the monopolistic market situation they were able to create in these times of venture capital imperialism.

Examples:

• Any service that requires you to agree to it’s data policy terms. Predominantly all services, where a user account is required.
• Sharing Platforms functioning as intermediaries and claiming up to 35% mark-up for actual P2P-Interactions.
• Also look at this great article about the mechanism of “free platforms” from Eddie George.

Well then?
Looking at the two consequences centraliztion in economies can have, the following insights are observable:

• Centralization only becomes a problem when decisions are made that exploit the existing power asymmetry.
• When relevant information becomes undisclosed to another involved party, this automatically leads to a negative situation for the party in ignorance (Customer < Company).
• People make decisions, that can be wrong. Even if it is a group of people, it won’t reliably avoid mismanagement or prevent egoistic actions. This shouldn’t be too surprising, looking at social psychology.
  Everyone should make up his mind about which solutions, he thinks are the best for overcoming the described problems.
  As long as human decision making is involved, there will always be unexpected outcomes, that eventually can be bad for others. In my opinion excluding the human variable from the equation shouldn’t be an option for us in this context. And it wouldn’t actually be feasible at this stage right now.
  Instead we should reshape the organizational space where interaction takes place and make it more suitable for the better connected, more informed and more dynamic economic and social environment we are living in since the advent of the information technologies.
  Information must be evenly accessible and stakeholders should interact as peers. This eliminates power asymmetry and would lead to an economy where everyone can benefit from the generated value to a fair share based on the contributions made. Transparency in general leads to self-regulation, which is the most desirable form of governance for an interactional system.
  DriveDeal is taking the findings of this article into account and applies it to all use cases, that can be found in the mobility and transportation sector. Sharing services, rentals and car ownership are far away from efficient or they fundamentally lack transparency. A dictate by the biggest corporations is leading the development of innovations and hindering promising and disrupting approaches at the same time. By decentralizing the ecosystem and internalizing every stakeholders’ interests the structural predispositions for a more transparent and sustainable economy are set. By bringing together thought leaders, solution architects and most importantly the whole community a holistic concept is built.
  Get involved and dare to leave the status quo!

Alexander Frank
Co-Founder & COO
DriveDeal