Let Airbnb Be, Mr. Schneiderman

Why is New York's Office of Economic Justice working to drive up the costs of staying in New York, and drive down the returns to small entrepreneurs?
Photographer: Andrew Harrer/Bloomberg

There's a certain irony in the fact that Airbnb Inc.'s decision to comply with a subpoena from New York Attorney General Eric Schneiderman came the same week that we learned of the death of Gabriel Kolko. Kolko, the eminent historian whose work on the early 20th century showed the role of government regulation in strangling small businesses for the benefit of big ones, would likely have seen in the struggle between the state of New York and pesky Airbnb as further vindication of his theories.

Airbnb, you'll perhaps recall, is a startup that matches travelers looking for a place to stay with apartment owners willing to part with their premises for a few days. The website boasts that users rent space "from people." Airbnb is just one in a growing number of startups that allow people to use smartphone apps to profit from excess resources. TaskRabbit, for example, lets people in my neighborhood bid to help me clean out my garage. Airbnb lets people sell off the value of unused rooms or days when they won't be home. Sounds simple.

Enter Schneiderman -- to techies, the Darth Vader of the story. He has been fighting since October to obtain lists of New Yorkers who have used Airbnb to rent out their premises. He contends that a rental for less than 29 consecutive days subjects one to the state's hotel laws, and that there may be various safety and compliance issues as well. Airbnb resisted the subpoena until this week, when it suddenly and unexpectedly gave in, subject only to the provision that the lists of users it turns over be stripped of most identifying data.

Yet some in the tech community have already pointed to loopholes that might allow regulators to identify Airbnb's actual users. The details matter, because Schneiderman's avowed intention is to pursue violators of the hotel law.

This is where Kolko comes in. Kolko, who died Monday at the age of 81, was an avowed socialist but also a severe critic of the regulatory state. In his best-known work, 1963's "The Triumph of Conservatism," Kolko contended that the Gilded Age was a period not of laissez-faire capitalism, but one of "political capitalism," in which big business cooperated with government in adopting regulations that supposedly protected the general welfare but actually served the ends of the regulated -- that is, the regulations helped big business get bigger. In his 1965 book, "Railroads and Regulation, 1877-1916," Kolko demonstrated his larger thesis through a close examination of railroad regulations -- which, he claimed, were intended not to promote the general welfare but to benefit the railroads.

And why is the Airbnb contretemps evidence for his thesis? Because the law that Schneiderman was enforcing was passed in 2010 -- that is, two years after Airbnb was founded, the very year Forbes dubbed the startup "The Ebay for the Entire House" and the company's user base exploded. Consumers love Airbnb. Who, then, was worried? That would be the hotel industry, startled by figures suggesting that by 2016, Airbnb could drive hotel revenues down by as much as 10 percent.

More evidence for Kolko's thesis is provided by the resistance to Uber Inc., the wildly popular California-based startup that allows users to flag a nearby car by using an app and pay in advance with a credit card, so no money changes hands between driver and passenger. Objections have come not from Uber's users, but from the entrenched cabbies whom taxi regulations protect. In London, for instance, drivers of the city's fabled fleet of black taxis have threatened protests to stop Uber, and they have vandalized the offices of Hailo, a competing app actually started by a trio of London cabbies.

Yet for all that traditional cabbies might complain that the Uber cars are less regulated, and that their drivers lack the requisite training and experience -- as they say in London, "the Knowledge," with a capital K -- users love the service. It meets a growing demand from people who aren't interested in standing in the street waving and hoping, and who don't want to worry about the size of the tip.

Even if one believes that Airbnb's apartments and Uber's cars are less regulated than their entrenched counterparts, users tend to be sophisticated consumers (dare we say "young and hip"?), perfectly capable of understanding the trade-offs. If I'm willing to purchase efficiency at the cost of a little less regulation, it's hard to explain why my choice shouldn't be allowed.

It's true that behavioral economics teaches us that consumers don't always know their own interests, but the regulations at issue here serve exactly the function Kolko predicts: They protect existing businesses, not the public.

Today Kolko's thesis seems somewhat old hat. A world in which politicians denounce crony capitalism and public-choice theorists warn of legislative capture might seem to be have learned his lessons. But nothing could be further from the truth. It remains the charming faith of regulators that whatever advantages big business may have had in past rounds of rule making, this time, the public interest will be served. This, even though -- to take a single example from last year -- lawyers and lobbyists representing Citigroup Inc. wrote nearly the entirety of the substantive provisions of the House-passed bill regulating the trading of derivatives.

The funniest part of the Airbnb battle in New York is that the government agency involved in the case is called the Office of Economic Justice. Cute name. In this time of supposed worry about income inequality, it's comforting to know that the Office of Economic Justice is working to drive up the cost of staying in New York and drive down the returns to small entrepreneurs.

Somewhere, Gabriel Kolko is surely smiling.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Stephen L Carter at scarter01@bloomberg.net

    To contact the editor on this story:
    Michael Newman at mnewman43@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.