Policy Studies Regulatory Reform

Five principles for regulating the peer production economy

The attached paper was co-authored by R Street Executive Director Andrew Moylan.

Economic history over the last 200 years is largely the story of the industrial move from small-scale domestic production and piece work to systems dominated by economies of scale: factories, big businesses and multi-national corporations. But over just the past two decades, new technologies have radically altered this trend,disaggregating physical assets in space and time and employing digital platforms that allow for more individually tailored pricing, matching and exchange. Changes in the way we communicate and transact business have reduced economies of scale in some industries, shifting value to producers who have access to distributed capital.

In some cases, this shift has allowed small startups to threaten dominant market incumbents, as long-standing asset-intensive firms like car rental giants Avis and Hertz now must compete with new firms like RelayRides and Getaround that can tap the tens of millions of privately owned cars that currently sit idle in American driveways. Overall, the effect has been to eliminate many of the benefits of being big.

These changes have led not only to a greater diversity of products to meet niche demands, but to a panoply of divergent business models in sectors previously dominated by a just a handful of options, whether the consumer need is to find lodging or to get across town, to take just two notable examples.

As a result, there are more opportunities for individuals and small groups either to develop and build upon innovative ideas or to bring their marginal capital and/or labor into productive use. This phenomenon goes by a number of names, including the “sharing economy” and the “mesh economy.” We will use the phrase “peer production” as the hallmark of this emerging economic phenomenon. To be sure, the participants in this market aren’t necessarily peers, but we feel this label better describes the underlying dynamics. Peer production is not sharing, per se, nor is it a seamless mesh of production. Rather, it is about harnessing technological platforms to connect buyers and sellers who otherwise would not have connected, either because of supply- or demand-driven constraints.

Alas, the development of these new modes of doing business has been threatened by legislators and regulators — particularly on the state and local level — who in too many cases attempt to apply regulatory models developed in an earlier era to the individuals and small firms that are innovating through peer production. These actions do little to protect consumers, but rather they prevent innovative ideas from coming to market and keep potential service providers sidelined. Too often, the presumption is to “ban first; ask questions later.”

In exploring how to regulate new firms that shake up existing markets — especially those who develop entirely new business models — or what rules should apply to individuals who develop smartphone apps or rent out their power tools over the Web, legislators and regulators should step back and reexamine the first principles of consumer protection. Consumer-oriented regulation should be about providing basic standards to market players and should not serve as a barrier to entry, either for those who seek to compete with incumbent producers or for those with innovative ideas that redefine markets.

As the markets for peer production services evolve, it is the welfare of consumers that most concerns us and that should most concern policymakers. Innovation and “creative destruction,” as the economist Joseph Schumpeter termed it, are not prized because of their effects on incumbent producers, which are in many cases negative. Nor are they prized because of their “jobs created” or similar workforce metrics frequently espoused by politicians. Rather, they are valued because, from the perspective of the consumer, they improve on existing goods and services, reduce costs for households and create a host of new options to increase consumer utility.

In many cases, regulators charged with defending consumers’ interests instead work to protect incumbent producers from innovative market forces. This phenomenon, known as “regulatory capture” in public choice literature, not only impedes innovation and economic growth, but is profoundly unfair to consumers.

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