The Sharing Economy Will Thrive Only If Government Doesn't Strangle It

We're unlocking unthinkable amounts of capital and lawmakers stand in the way.

The so-called sharing economy is many things to many people. To Wall Street and Silicon Valley, firms like Uber and Airbnb offer tantalizing market capitalizations, the likes of which have not been seen since the go-go '90s. At the same time, political operatives see the emerging debates over regulation of ride-sharing and space-sharing as a potential opening for the libertarian right to assert their world view in urban politics for the first time in a long time.

At the other end of the political spectrum, some on the left see the rise of these services as yet another brick in the wall of income inequality, putting downward pressure on service workers' already paltry incomes while simultaneously expanding the myriad opportunities the wealthy already have to pay to jump to the front of most any line. Others on the far left disagree, going so far as to hold up "peer to peer" transactions as the model for a new, post-capitalist economic regime.

If ye gaze into the sharing economy, the sharing economy gazes also into ye. It contains multitudes.

It's easy to dismiss these various takes as just more grist for the hype mill, as pointless navel-gazing over fads that most Americans have never used and for which they might never have need. But there is reason to suspect the sharing economy might, in fact, be more than that. Indeed, the potential economic benefits of putting our vast stores of trapped and dormant capital into the stream of commerce and reducing the costs of productive work on the margin really are quite enormous.

A national survey in the United Kingdom showed that, in 2008, more than one in every three households was "under-occupied," with more bedrooms than people to sleep in them. Meanwhile, of the world's roughly 1 billion cars, about 740 million are mostly used only by a single rider. These sorts of statistics help demonstrate the scope of currently fallow resources that new technological platforms are beginning to put to productive use. The McKinsey Global Institute estimates that social technologies could unlock $900 billion to $1.3 trillion of annual consumer surplus in just four key sectors of the economy: consumer packaged goods, consumer financial services, professional services and advanced manufacturing.

In this way, it's possible that Lyft and Flightcar, SnapGoods and ShareDesk, TaskRabbit and Etsy and DogVacay – rather than merely being the new digital toys of over-entitled millennial hipsters – are following in the footsteps of other grand innovations and social movements throughout history that have unlocked trapped capital and powered economic growth. These include the public offerings of non-railroad companies in the 1920s and the development of high-yield bonds in the 1980s. But they also include the even larger unlocking of human capital that came in the form of the mass movement of women into the U.S. workforce and the opening of skilled jobs to African-Americans in the second half of the 20th century.

But in order to achieve these benefits, regulators must not strangle the emerging peer production economy in the cradle. In too many cases, when confronted with disruptive business methods, the tendency of public officials is to apply regulatory models developed in an earlier era. This obviously provides clear benefits to incumbent firms, but the benefits for consumers, who lose access to expanded choices and cheaper prices, is not so obvious.

In a new paper, my colleague Andrew Moylan and I suggest regulators tread extremely lightly in this emerging sector, allowing firms and industries to self-regulate to the extent practical. For instance, reputation has shown itself a powerful force in these markets, where most firms offer a system for participants to rate each transaction. Those who receive consistently poor ratings are edged out and sometimes barred from operating, while those who receive good ratings see that translated into better sales.

Which is not to say that there is no room for regulation of any kind. For providers of services such as transportation and lodging, it may be appropriate to require they maintain liability insurance to cover the costs of injuries sustained by consumers. Where this is the case, insurance can also serve something of a self-regulatory function, as insurers tend to make coverage available at attractive rates to those who demonstrate good market conduct, while limiting coverage or raising rates on those who demonstrate a pattern of recklessness. (We also would urge peer production services, the insurance industry and insurance regulators to work together to develop and approve new products in areas where existing offerings are not good fits for the nature of these emerging risks.)

Finally, where lawmakers do find the need to pass new legislation to deal with sharing economy services, they should take this opportunity to significantly scale back, rather than increase, reliance on occupational licensure. Occupational licensing laws, which impact as much as one-third of the U.S. workforce, cost roughly $100 billion annually in lost economic output, despite no evidence that licensing improves the quality of services provided to consumers.

The sharing economy has not, for the most part, birthed many truly novel services. Instead, what it does is harness technology to connect buyers and sellers who otherwise would not have connected. A regulatory approach that is modest and even-handed, and that does not discriminate between new and old providers or new and old business models, is the best way to ensure those connections are not cut prematurely.