people refer to uber and airbnb as being examples of the “sharing economy”, which has drawn complaints from people that they aren’t really sharing. i agree that the terminology is wrong . these companies are doing something called ‘market making’ – which is way better than sharing. in a ‘sharing’ economy, whoever is best at arguing, persuading, and making other people feel guilty gets all the resources. in a market economy, whoever produces the most is rewarded with more resources. of course, producing something for someone with a ton of resources is a lot easier if you are their child and you give them love and happiness – or if you steal it or take it through legal subterfuge – but those are not problems with markets, they are problems with reality that markets try to alleviate.
what uber and airbnb are doing is connecting sellers of services – transportation and lodging – with buyers of those services. connecting buyers and sellers allows you to create a market where one didn’t exist. when there is no market, powerful connected players dominate. taxi unions prevent new drivers from getting on the road, which means they have little incentive to give you good service; they are the only game in town. when there are strict regulations on what kind of hotels can exist and how they have to operate, it means bigger hotels dominate, and people only provide housing if they have a ton of extra resources.
in other words, without markets, a few powerful players dominate. when markets are made, lots of tiny players can enter, moving faster and reacting better than big, lumbering, powerful players. it’s no wonder these powerful players tend to use the government to restrict their competition – under the old ‘we are protecting you’ racket. don’t you hate apps that you can’t uninstall from your phone? ATT, verizon and other companies say they you have to leave those apps there “so your experience is better.” this is the same bullshit argument made by car dealers trying to prevent tesla from selling to you, or taxi unions trying to limit your options and claim that their credit card reader is broken.
in the 90’s and 00’s, people were already using new computing technology to make markets – in finance. market makers look at the conditions of the market to determine what they believe the correct price for certain financial instruments is. if the market price is below their ‘correct’ price, they buy; if the market price exceeds their ‘correct’ price, they sell. market makers provide value in the same way that retailers provide value. if you have a specific model of television in mind, you can walk into target, best buy, or any of a number of retailers and walk out with that television right away. you are paying a premium for the lack of wait; your ability to buy the object right away is worth something. without these retailers you’d have to talk directly to a manufacturer of televisions, which would take a lot longer to ship you the tv and it would cost both of you a lot more. the ability to provide you with any tv you’d like on the day you want it means these companies have to have huge inventories of televisions sitting around. that’s risky – they could be stolen or break if there were a fire – and it’s expensive. they take up space.
market makers of options face the same risk – they have to hold large amounts of securities that can change in value. without market makers, someone holding one of these options might want to sell it immediately, and without anyone who needs it right away, they’d sell it at a huge loss. someone wanting to get rid of something right away could either think the thing sucks, or just really want something else much much more. without market makers who are always willing to buy at a price they list, it’s much harder to determine whether a seller is motivated by positive emotions – the hope of getting value elsewhere – or negative emotion – the fear of losing value immediately.
someone can question the value of options – do they really need to exist? can’t we regulate them away? the answer is that options have been around for hundreds of years and people would find ways of making them exist even if they were illegal. in that case, they’d be much _more_ volatile, much less understood, and therefore much more dangerous.
someone could argue that market markers are really just making rich people less afraid. what’s the value in that, they might ask? money is power. do you really want a bunch of powerful people being unnecessarily afraid? a trader holding a bunch of options to buy google might be trying to sell those options because she wants the to buy options in a smaller company that she thinks is suddenly looking really great. she’s motivated by positive emotions; she’s exited. without market makers, she needs to find someone to buy these options by selling them for less than they are seen as being worth by the market – which other investors could easily interpret as ‘oh crap these things are worthless’ – leading to an unnecessary and dangerous panic.
airbnb doesn’t have to hold a position on housing – they connect buyers and sellers without taking any risk. uber does, though. when i was there, they were paying some drivers an hourly rate, to make sure there was always someone on the road even if there weren’t many fares. paying drivers who may not get rides is like holding on to hundreds of tv’s you may not sell – or holding a bunch of stock options that may expire worthless – it’s risky. you are taking that risk, and being rewarded for the availability you provide to others. things which are always available are things which we find comforting. although you may scoff at the idea that incredible wealthy people need to be comforted, try making real friends when you’re worth a couple hundred million bucks.
if you think i’m defending something just because i did it myself – you’re right. but if you think i didn’t share your concerns, you couldn’t be more wrong. if i hadn’t worked for two market makers, i’d have been arguing that they were great things without really seeing the problems. working in finance and benefitting handsomely from something i thought was good – yet still feeling bad about – it made me think a lot about what was happening. working at uber and seeing the similarities – in what we were doing and in how people saw us – helped me see a bigger picture.
the first full time job i had was working for a company that was market making stock options using a network of computers connected to multiple stock exchanges. i started working at this company in fall 2008 – a week before the market tanked. i didn’t really understand exactly what we were doing, but it seemed wrong to me. even though i had been a hard-core republican and supporter of free markets since i was old enough to stumble, i felt like we had to be doing something bad. i heard my parents and grandparents telling me they were losing half of their life savings, and here i am making more money than i’ve ever seen in my life. it was easy for me to argue about markets making the world better in the abstract, but once i started benefitting from that – while everyone else seemed to be losing their money with great efficiency – i felt like i had to be making the world a crappier place to live.
the complaints people have about uber and airbnb are based upon that same emotional reaction i had to what i was observing. and they are just as flawed.
years later i came to understand better what we were doing; it’s not that we were profiting by knocking the system over. we profited because all of the other market makers pulled out when the market started swinging wildly, which meant there were more opportunities for us to profit by remaining calm and consistent. in other words, there was a fire in a crowded theater, and instead of panicking and running out of the theatre with all of the other investors, we stood in the corner and kept watching the movie. the movie wasn’t for our entertainment, though – it was a movie about the economic state of the world. by staying calm and watching the movie, we gave some of our calmness (based upon amazing technology, by the way) to people who can mess the world up in a big way when they panic.
if a hurricane destroys a bunch of housing and leaves people stranded, the existence of airbnb incentivizes people to open their living rooms to strangers, alleviating a shortage of housing caused by a natural disaster. nobody would think airbnb was responsible for the hurricane – but people might be pissed at them if they felt prices were too high. they’d be ignoring the fact that airbnb made rooms – which formerly would have gone empty – open to people who needed them. they might say ‘people should just share out of the goodness of their hearts’ – and i agree – but doing so requires trust, and it’s easier to trust someone who can keep her calm, when everyone else is losing theirs and blaming it on her.
a car sitting idly serves no one, but it still takes up space. a room sitting empty shelters no one, but it still takes up space. connecting empty cars and idle drivers with passengers helps the world; it provides real value and moves things forward – literally.
it sucks that some people have so little money that they can’t afford transportation or housing – but that isn’t the fault of markets. it’s problem with the reality we live in – one with limited resources, which we must consume or die. markets alleviate the problem of limited resources; they increases the resources available to us by giving us more incentive to produce resources than to try and take them from others.
because markets work to reduce the difficulties of limited resources, they often suck up the blame for those resources being limited. if markets didn’t exist, instead of blaming the wealthy, we’d trust our kings and priests – who had much more power before markets – and blame those nasty foreigners with their weird language and funny beliefs. blaming airbnb for increased housing prices, or blaming uber for reducing taxi jobs is like blaming the guy moving calmly and directly in a burning theater for not panicking. shut up and sit down – you’re ruining the show. and besides, oxidation of iron is a long process, and our calculations show that this theatre will last far longer than the movie.