Many people, particularly on the left, argue that the modern economy is increasing inequality. But, as I have discussed before, important trends in innovation increase equality. One example of these equalizers is the sharing economy. The ideas of a law and economics theorist of the developing world show how this new economy generates a greater return on the assets that people of modest means are most likely to own.
Economist Hernando De Soto recognized that much of the capital in developing nations was locked up. For instance, squatters lacked property rights in their houses even after decades of living there and improving the land. But legal reforms providing capital can greatly enliven previously dead capital in those nations. When a squatter becomes a property owner, he can mortgage his property and use the proceeds to start a small business.
The advantages of these legal reforms go almost entirely to people of modest means. Not only did the rich generally always have formal title to their real property, even more importantly real property is a much smaller proportion of their total assets, which are mostly financial securities.
Similarly, the sharing economy enlivens important capital assets in the developed world. As Daniel Rothschild suggests, this unlocking creates prosperity. But it also boosts equality because the assets it enlivens are those which make up most of the wealth of people of modest means.
It is rare that an election in San Francisco brings good news to the nation, but last Tuesday voters there defeated a referendum that would have interfered with Airbnb by limiting the number of nights people could rent out rooms in their homes. While this victory is good on policy grounds, it is even better for what it tells us about the capacity of the sharing economy to mobilize small businesses and consumers against onerous regulations.
Small businesses and consumers tend to lose out in politics, because they are diffuse groups where the gain for each individual from engaging in politics to shape regulations is small and the cost of organizing is high. In contrast, large businesses and labor unions are more concentrated interests and as a result have more leverage. In politics concentrated interests tend to win out over diffuse groups.
Such concentrated interests stood to gain substantially from restrictions on Airbnb. Hotels are competitors of Airbnb and so are the labor unions of hotel workers. Generally owners who want to rent out apartments for short stays and their customers would be no match for these interests. But Airbnb lowers the cost of organizing, because it is internet based. This organizational ability levels the playing field. The sharing economy is the porcupine of politics with ample quills in the form of participating consumers and small businesses for defense against government regulation.
Taxi drivers in France rioted yesterday to prevent Uber from competing with them. They attacked vehicles on the mere suspicion that they were working for that company. They broke windows on cars carrying tourists. It was a kind of economic terrorism. Even a left-liberal rock star was upset!
France is one of the most heavily regulated and centralized states in the Western world. But Uber represents the new forces of decentralizing competition that it may ultimately be powerless to block. While the French government appeared to take the side of the violent strikers today, it will have difficulty in stopping this kind of competition without deploying coercion unacceptable in a democratic society.
Uber is essentially an app that connects people who want to make a mutually beneficial transaction. Other apps will connect those who want to make other transactions—for plumbing, gardening or housework. These services will be less expensive than current services, whose cost is inflated by regulations, not least of which are those designed to protect incumbents.
In the sharing economy, companies like Uber, Lyft, and Airbnb, add value by using resources that would otherwise be idle. The Internet connects people who need transportation or accommodations with people who are willing to provide them. Another substantial advantage is that these same connections permit social norms rather than government regulation to enforce standards of good conduct.
Government has a model for regulating taxis. It generally requires substantial licensing and enforces rules by tracking complaints and disciplining drivers found in violation. But a company like Uber makes much of this regulation unnecessary. First, given its substantial capital investment, it has every interest in checking out drivers itself before it permits them to represent its good name.
But Uber also makes use of social media to assure continuing good behavior of its drivers.
The so-called sharing economy has arrived. In this economy, the services sector has grown as information technology connects individuals who wish to provide services, such as transportation or gardening, with those who wish to buy them. Companies in this economy, like Uber and Airbnb, help match buyers and sellers but do not tend to employ the latter. Rather, people who provide services deal directly with their clients. By giving people more opportunities, the sharing economy also expands liberty.
Regulators and incumbents have already tried to prevent the disruptive entry of these new providers. A prime example is the battle against Uber. But a recent article highlights a set of social critics who dislike the sharing economy as a whole, and not just particular industries within it. Opponents of the sharing economy – and everyone quoted in the article who does not participate in this industry is a critic – presage attempts to regulate it by imposing burdensome work rules.
The article sketches the lives of a few people who make their living in this world. Although their stories are vivid, the article does not capture analytically the three great advantages of the sharing economy.