Startups versus the State

The free market tends to destroy opportunities for unusually high rates of profit as entrepreneurs reallocate resources from areas of normal profit rates to areas with higher rates of profit. In the short run, there is money to be made in satisfying neglected consumer demand, but in the long run competition makes it so that each opportunity eventually becomes less and less lucrative.

This process is great for both consumers and entrepreneurs. Consumers either get an inexpensive solution to an old problem, or they get an expensive solution to a problem that previously had no solution (and even this product will fall in price over time). Entrepreneurs get rewarded with unusually high profit rates for creating new and better products.

Unfortunately, this process gets interrupted when the state hampers the market with regulations, monopolies and other arbitrary laws. The taxi medallion monopolies are one well known system that causes economic havoc. These laws artificially reduce the supply of taxis in major cities which means some people have to stand around in the rain. Mass transit monopolies are not any better, resisting any and all demands for better roads, brides, tunnels and railways.

Enter Uber, a service that allows people to request private transportation from their mobile phone. For those who have ever wondered in frustration about how the government can fail at something as simple as running the same buses at the same time everyday, it is  really empowering to have a free market alternative.

Not to mention the lengths to which a private company like Uber goes to make the experience pleasant. After you request a car, you can track it on a map. After your ride, Uber takes care of all of the billing, so you just get out and go about your business. Plus the driver rating system means that drivers have an incentive to be very polite and friendly. Contrast that with the self important government bureaucrats who could not care less about how their actions impact the lives of others.

How long will it be before governments try to outlaw technology like this because it is competing too effectively against government cronies? As Jacob Heubert explains, not long at all. For another great startup, Airbnb, that time has also come. What did Airbnb do to earn the state’s ire? The same thing Lysander Spooner did with his American Letter Mail Company in the 19th century.

Airbnb gets around government granted privilege by enabling ordinary people to rent out their homes. This is in direct competition with officially licensed hotels which have historically reaped unusually large profits due to artificial shortages. With Airbnb, the temporary housing market has been flooded with new supply, driving the cost to the consumer down immensely. Not only that, but Airbnb has made it possible to find housing in areas like New York City, where before it was impossible to find a hotel room at certain times of the year.

There are other benefits as well. The rental services provided by Airbnb are depriving the local governments of tax dollars.

A huge amount of money hangs in the balance of this dispute, including revenue for Airbnb, as well as untold millions in hotel tax dollars that the attorney general says Airbnb has been costing the state every year. Also at stake is a discrete little economy, populated by New Yorkers who make a substantial portion of their income by renting out apartments on a short-term basis through the website, sometimes legally and sometimes not.

And that’s the rub. There is a great deal of money at stake, so corporatists and bureaucrats are happy to use aggression to make sure it comes their way. Yet, this also creates a great incentive for businesses and entrepreneurs to fight back. Henry Hazlitt lamented long ago that too many businessmen were willing to give up against every increasing government control of industry. It is also unfortunate that the larger companies that are more able to fight back against the state are the ones most likely to be corrupted, and use it to gain an advantage over their competitors. So, while some hope that one day the mega corporations will begin a tax strike that ends government as we know it, it may be that small, hungry startups will be the first to rekindle the fires of liberty.