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Commentary By Jared Meyer

The Sharing Economy for Dummies (or Politicians)

Economics, Economics Employment, Regulatory Policy

It took a while, but the sharing economy has finally arrived in Washington, D.C. For years it has been possible to book a stay in the nation’s capital through Airbnb or get around the town by taking Uber, but federal policymakers are now taking note of this growing sector of the economy.

Before Washington policymakers start tinkering with the sharing economy (have bureaucrats ever found a business model that they did not want to regulate?), it is important for them to understand what drives the sharing economy.

In what follows, three experts explain what policymakers need to know about the sharing economy. I also argue that what powers the sharing economy goes far beyond the smartphone apps that policymakers focus on.

Christopher Koopman, Mercatus Center:

“What differentiates the sharing economy is the creation of opportunity for those in most need. A cash-strapped homeowner may not have seen her spare bedroom as capital until the Airbnb platform provided a way for her to rent it out to vacationers. A college student with an extra hour between classes may not have viewed his time as a profit opportunity until Instacart and TaskRabbit allowed him to put that time to use for others. A young couple may not have been able to use their couch to connect with other travelers from around the world, but can now do so through Couchsurfing. A retiree with a workbench full of power equipment may not have viewed his tools as a way to supplement his income until 1000 Tools connected him with people in his area wanting to borrow tools.  This is the sharing economy.”

Iain Murray, Competitive Enterprise Institute:

“The world is on the verge of a consumer-driven entrepreneurial revolution that could provide as many relative benefits as the industrial revolution did in the 19th century. I call it a consumer-driven entrepreneurial revolution because the central features of this new economy are meeting unserved consumer demand with underused capital, and providing consumer protection in forms of feedback mechanisms and secure payment mechanisms.

These start-ups are able to meet this consumer demand because there has been an across-the-board lowering of market transaction costs. As Nobel laureate economist Ronald Coase noted in the 1930s, corporations arose because market transaction costs are high. Now that these costs are lower, new markets are made available to put consumers and suppliers in touch with one another.”

Will Rinehart, American Action Forum:

“People are increasingly choosing alternative work arrangements to the normal “9 to 5” schedule. A segment of this alternative work is done via peer-to-peer technologies, often described as the sharing economy. These new technologies are united by four broad features:

1. They are enabled by advanced communication networks, and this reduces transaction costs, which allows new trades to occur.

2. These trades often occur with assets that otherwise would be underutilized, thus bringing “dead capital” back to work for consumers.

3. The new organizational forms push services from isolated, one-off exchanges to large-scale, market exchanges.

4. Review systems and other dynamic policing mechanisms instill trust into both sides of the bargain.”

This Goes Far Beyond the Sharing Economy

These three statements show how sharing-economy companies use technological advances to create new work opportunities and give consumers greater power. While these observations are certainly true, the benefits of increasingly affordable connectivity extend well beyond the companies typically associated with the sharing economy.

Sharing-economy companies are clearly innovative, but the needs they address are nothing new. As I explain in my forthcoming monograph, Uber-Positive: Why Americans Love the Sharing Economy, people have always wanted to buy a hard-to-find product (eBay), find a place to stay (Airbnb), eat a home-cooked meal (EatWith), get assistance on a task (TaskRabbit), or find a way to get around (Uber). The problem, before the sharing economy’s rise, was finding someone who was trustworthy and willing to offer the desired goods or services at a reasonable price.

Across all sectors of the economy, technology that makes exchanges easier and cheaper creates entrepreneurial opportunities for anyone with productive resources. These resources can be anything from physical or mental ability (such as handyman services, academic tutoring, and legal advice) to use of property (be it a drill, car, or office space). In other words,  the real driving force behind the sharing economy is not smartphone apps, but lower transaction costs. And lower transaction costs affect every aspect of the economy.

There is a real risk that federal policymakers who do not fully understand how the economy is changing will end up dampening the growth of individualized, consumer-centered business models through misguided regulation. The technological advances that made the sharing economy possible continue to open up opportunities for workers and consumers alike. As long as Washington does not stand in the way, these benefits will only continue to expand throughout the economy.

This piece originally appeared at Forbes

This piece originally appeared in Forbes