Every day, modern liberal economies create wealth. That wealth translates into better health, better education, art, literature, and the finer things of life. We only need to look at Zimbabwe and Venezuela to see how wealth can easily be destroyed—and how health, education, and the rest go with it.
So how is wealth created? To understand the mystery of wealth creation, we have a great example in Airbnb.
Economics professor David R. Henderson often talks about what he calls The Ten Pillars of Economic Wisdom. One of these is: “The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange.”
If you have a resource you don’t need, and someone offers something you value in exchange for it, the exchange creates wealth. You get something more valuable than what you had before, and the other party does as well. That’s wealth creation. And it’s exactly what Airbnb is empowering millions of people around the world to do.
Airbnb lets people with spare rooms they aren’t using get something of value in return for letting people who need lodging use that room. A free and peaceful transaction creates wealth for both parties.
Make a Buck
For decades, many Americans have been at the beck and call of their employers with no hope that their next month’s pay could be any bigger than their last. Innovations like Airbnb and Uber have opened doors of opportunity for thousands of workers to make money outside their day jobs. These platforms offer people with limited financial resources a way to tap into a new cash flow using the resources and skills they already have.
Even people who do not currently own property are finding ways to make money through these platforms. Long-term apartment renters in cities are letting out their extra rooms. And carless college students are borrowing parents’ vehicles to make some extra money picking up passengers using a ride-sharing app.
There is nothing magical at work here, just everyday people jumping on opportunities to exercise their entrepreneurial spirit while enabling others to travel without breaking the bank. People who weren’t born with money or property are suddenly able to have a reliable, uncapped source of additional income without having to hurdle the usual barriers of advertising, special taxation, business licensing, permitting, and generating a client base—what economists call transaction costs.
These new tech platforms have achieved massive success by enabling people with underused assets—things as common as a driver’s license or a spare room—connect with people who want affordable transport and lodging. But these platforms do more than connect people; they provide an efficient medium for discovering how much the service is worth to the traveler and what the supplier considers an adequate reward for their effort. In other words, the platforms help establish a price.
If you want to rent a room in your home out to guests, one of your first considerations will be what price to charge. That can be a difficult and time consuming question to answer. You could start by researching hotel prices. But simply matching hotel prices wouldn’t work, because most travelers would rather stay in a hotel than a stranger’s home if cost were not a factor. And demand for lodging fluctuates as seasons change and big events come and go.
Home sharing platforms like Airbnb offer an easy way to find these answers. In 30 seconds a person can discover the average room price in her area on any given day. This allows hosts to quickly choose a reasonable and competitive price—another reduction in transaction costs.
With a price established, all sorts of people are able to vacation affordably, thanks to being connected with others who are willing to offer them a place to stay, at the right price. Budget-conscious college students can experience new places they never would have visited before—and make human connections too.
Wealth is created for everyone partaking in the market—a form of mass capitalism based on previously dormant capital.
Don’t Punish Wealth Creation
Unfortunately, this new more decentralized capitalism is under threat. A storm of regulations is gathering over the short-term rental landscape as politicians from New York to New Orleans seek to pass bills meant to address this “unregulated” industry.
While proponents of new regulations claim they would protect consumers, in practice they impose additional taxes on low-budget travelers, place needless restrictions on hosts, punish entrepreneurs who try to make a business out of hosting, and impede wealth creation.
And many of these regulations would benefit existing special interests that have something to fear from this new “little guy” competition. Policymakers should resist the urge to regulate on their behalf, and allow these new platforms to continue to create wealth.
Originally posted to the Foundation for Economic Education.