On its face, Airbnb would seem to violate Nashville laws against short-term rentals of any sort, other than licensed hotels and historic bed-and-breakfast inns. And so, lawmakers are planning to regulate the young start-up’s activity in their city.

The incident is a striking example of the tension between the categorical method of organization, which regulators must rely on exclusively, and incremental responses to particulars. It is also at least as interesting what regulators are not seeking to do as much as the specific course they’re pursuing.

In Knowledge and Decisions, Thomas Sowell distinguishes between decisions that are categorical and those that are incremental. Categorical decisions are necessary for regulators and, to an extent, for any large bureaucracy, as they economize the knowledge required for decision-makers at the top of a large hierarchy. Thus, a corporation can have policies that apply across the board without needing an endless list of qualifiers because of the particular circumstances of particular employees. Legislators similarly deal with high-level categories, which judges must often radically recast in order to make them fit particular contingent circumstances.

Incremental decisions, on the other hand, are extremely responsive to particulars. Sowell’s example is Gerber’s decision to pursue offering insurance. From a categorical point of view, it makes no sense—Gerber is a baby food company, what does that have to do with insurance? But in a free market with basic property rights, businesses don’t have to fit into neat categories. If the people running the business see an unrelated area where there’s money on the table, or an area that relates to their business in ways that might not be intuitive from a categorical point of view, they can go for it. This is the great strength of the Knightian entrepreneur, navigating a sea of irreducible uncertainty to create value.

Whatever you may think of the merits of licensing or taxing short-term rentals, fitting them into the straightjacket of categories kills off potential innovation by entrepreneurial tinkering. What’s interesting, though, is that they could have done just that. Given the outright ban on unlicensed short-term rentals, Nashville could simply have opted to shut Airbnb down in their city. That they didn’t is evidence that Robin Hanson’s theory of the struggle between regulators and “sharing economy” services is correct—such startups currently enjoy a high status among voters, and so are harder to regulate. If that’s so, then perhaps the straightjacket of categorical regulation can be overcome, if we can continue to advocate for and dignify the virtues of the tinkerers.

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