Cato’s Matthew Feeney Explains the Importance of Middlemen in the Sharing Economy

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Posted by Dennis Cakert on Monday, February 1st, 2016, 1:05 PM PERMALINK


In his most recent Forbes column, Matthew Feeney, policy analyst at the Cato Institute, explains how the sharing economy contributes value by lowering transaction costs, not by transporting or lodging people.

Feeney begins with an anecdote about trade between prisoners in a POW camp. Each prisoner values the goods in a Red Cross care package differently. When care packages arrive, the prisoners who know the likes and dislikes of their fellow inmates help to facilitate trade, earning the name “middlemen.” The value the middlemen contribute is the knowledge they possess, for which they charge a fee.

The sharing economy contributes value in a similar way:

Uber and Airbnb do not own cars and hotels. Rather, they are profiting from what they know about consumers and dead capital. Before the rise of Uber there were many people who needed rides but were unable to efficiently contact nearby strangers who would be willing to give them a ride in exchange for a fee. In a similar fashion, Airbnb connects travelers in strange cities to the hundreds of nearby homeowners who have spare bedrooms.”

To regulate the sharing economy as a transportation or lodging business is a mistake. They are not in the business of transporting or lodging people, they are in the business of connecting people who wish to transport or lodge others. Hence the name “Peer to Peer” service.

It might strike many readers as bemusing that companies that merely trade in information can be valued at billions of dollars. Like some POWs critics of middlemen regard Uber’s and Airbnb’s profits not as “reward for labour, but as a result of sharp practices.” Not too long ago a friend of my family remarked that he didn’t understand why Uber was worth so much money when it doesn’t “make anything.” Unfortunately, many people remain skeptical or ignorant of the fact that the total welfare within a group can dramatically increase without an increase in available goods. All that is needed is voluntary exchange.

Using another example, Feeney cites how the sharing economy service “Klink” delivers alcohol for residents in Washington, D.C. Unfortunately, because of strict alcohol regulations, the service is currently barred from competition in Virginia.

Clearly, people are willing to pay for lowered transaction costs, and we should expect that trend to continue and for more companies to seize the kind of opportunities the founders of Uber and Airbnb saw years ago. But it shouldn’t be a surprise if suspicion of middlemen as well as anti-competitive market incumbents hamper the spread of this revolution, if only temporarily.”

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