by Misha Lepetic

“People say New Yorkers can't get along. Not true.

I saw two New Yorkers, complete strangers, sharing a cab.

One guy took the tires and the radio; the other guy took the engine.”

~ David Letterman

A few months ago, friends of mine moved to the Bedford-Stuyvesant neighborhood of Brooklyn. The three of them signed a lease on a five-bedroom duplex, with the express purpose of leasing out the remaining two rooms on Airbnb, the service that allows people to rent out extra rooms or apartments on a short-term, informal basis. Since then, they have had a colorful assortment of travelers, tourists, students and businessmen tramp through their place. In return, the additional income has allowed them to live in a much larger and better appointed place than would have been otherwise possible.

The expense of renting an apartment in New York has been the stuff of legend for a long time now, but as this expense continues its inexorable climb, brokering sites such as Airbnb have inspired people, perhaps for the first time, to intentionally re-conceptualize their living space as a business model. In other words, what is generously known as the “sharing economy” is really the monetization of all those bits and pieces – your apartment, your car, your power tools – that used to sit around and just, well, be yours.

And then last week, New York Administrative Law Judge Clive Morrick ruled Airbnb illegal. Is this really a setback to all the annoying shouting about the “sharing economy”? Or is it more of a setback to Silicon Valley’s dogma that there is always another patch of contemporary life that, whether it knows it or not, is in need of disruption?

Actually, let’s first be clear about the ruling, since there has been much breathlessness in the media around this. The so-called “hotel law” violated by the respondent had been passed in 2010. Specifically, the law prohibits the right to charge for a stay of less than 29 days if the person renting out the space is not present. So the law still has plenty of loopholes; Airbnb is by no means “illegal.” But it is also worth mentioning that most leases explicitly prohibit any rentals – most New Yorkers don’t need such a “hotel law” to find themselves in violation of their lease (or even condo or coop rules). This of course has not stopped Airbnb from encouraging people to sign up; after all, the company gets roughly 10% per transaction and is currently estimated to be worth around $2.5bn.

However, the ruling does raise an important point about the informality. When one talks of the informal economy, one imagines vast and chaotic open-air markets in Argentina, or hardworking street vendors in Bangkok. The informal also takes the form of vast trading networks, such as the flow of computer equipment into and out of Paraguay, as richly described by Robert Neuwirth in The Stealth of Nations. But informality has always been here in the United States, too, and it is getting bigger and more important.

As James Surowiecki noted in a recent New Yorker piece, approximately $2 trillion dollars of income went unreported to the IRS last year. But what is really impressive is the rate at which off-the-books income is increasing: “in 1992, the I.R.S. estimated that the government was losing $80 billion a year in income-tax revenue. Its estimate for 2006 was $385 billion, almost five times as much” – and that is still probably an underestimate. It is also worth considering that, as the job market has stagnated since the 2008 crash, these numbers can only have continued to increase.

Hence the great attraction in monetizing assets such as the extra room in your apartment. As an exceptionally carefully executed brokering service, Airbnb found its sweet spot by taking the classifieds from Craigslist and bolting on a rating and feedback system pioneered by eBay, the grand-daddy of retail-based brokering sites. Trust and transparency are literally what make this market function. Airbnb will even send over a photographer to make your place’s listing look great – after all, unlike Craigslist, they have real skin in the game. (Of course, this same transparency makes easy pickings for anyone wanting to enforce laws like New York’s). More subtly, it’s worth examining the ideological role the individual is expected to play, as shown in the way Airbnb organizes consumption.

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Airbnb breezily promulgates the dogma celebrating the economic empowerment of the individual. In Silicon Valley, this rhetorical stance possesses a distinctly moral force. Has corporate America reneged on your social contract? Let startups like Airbnb allow you to reclaim financial independence by enabling you to leverage what is already yours. Airbnb's CEO, Brian Chesky, cheers: “People providing these services in many ways are entrepreneurs or micro-entrepreneurs. They're more independent, more liberated, a little more economically empowered.” It is easy to nod (off) at this, since the default individual is always blameless and normal. Interestingly, this is where New York’s hotel law deserves revisiting.

A friend who is an urban historian noted that the law was originally passed to prevent landlords from doing short-term rentals of their places – Airbnb, having been founded in August 2008, was still in its infancy and was not the object of the hotel law. In other words, the city sought to prevent the use of apartments – or even entire buildings – as wholly unregulated hotels. Landlords were doing an end run around the regulations (and taxation) that comes with signing long-term leases with pain-in-the-ass tenants who are always demanding things like plumbers and exterminators. So it is ironic that landlords have increasingly been the ones who have been taking advantage of Airbnb – for exactly this purpose. Even if it was interested in drawing such a distinction, how could Airbnb differentiate between landlords and “individuals”?

This isn’t to say that the hotel lobby won’t eventually seek to stifle young Turks like Airbnb. Should the hotel industry determine that it is losing significant amounts of revenue to Airbnb and its ilk, it will be sure to strike back. How far off is that day? A 2012 Airbnb study on its economic effect on San Francisco found that travelers spent $12.7m on rent over the course of a single year. While the ostensible reason was to show off to city politicians that $43m was spent by those same travelers on San Francisco businesses, that was $12.7m of foregone revenue to the city’s hotels. The faster this number increases, the more eyebrows it will raise, for both the industries being affected, not to mention the IRS. It would be unsurprising to see the hotel lobby muster the political muscle to truly shut down Airbnb, as the RIAA did with Napster, or it could neutralize the threat the old-fashioned way, like Avis did with ZipCar, and simply buy them outright.

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The importance of regulation (or its unintended consequences) as both a decisive factor in the successful incubation of disruptive technologies, and the use of regulation as competitive ammunition, is one that seems curiously unappreciated by connoisseurs of said disruptive technologies. This is again tied to a reliance on the myth of the empowered individual. It seems that the free market – which by their accounting seems to be little more than a very large aggregate of empowered individuals – is the ultimate arbiter of success. That is a simply naïve stance.

As an example, consider one of the most celebrated examples of the informal economy – Kenya’s M-Pesa service, which allows people to send money to one another using SMS technology. Founded in 2007, by 2011 15 million Kenyans (out of 40 million total) had M-Pesa accounts. But the platform had several distinct advantages from the start. M-Pesa may have begun from a student software project, but it was never the kind of start-up that Silicon Valley likes to think is the only thing capable of “disrupting” anything. In fact, M-Pesa was rolled out in Kenya by Safaricom, already the dominant telecom provider in the country (Vodacom played much the same role in M-Pesa’s rollout in neighboring Tanzania). That is, it’s much easier to get 15 million people to participate in your new product when you can choose from a pool of 19 million subscribers. The other, perhaps even more important factor, is the clever approach that Safaricom took – they were able to persuade Kenya’s regulators that M-Pesa shouldn’t be considered a financial organization. This allowed M-Pesa to proceed building its market share within the context of an environment nearly unfettered by regulation.

The difference that this makes becomes evident when one considers M-Pesa’s expansion beyond Kenya. In South Africa, which has a more developed regulatory environment, uptake has been roughly an order of magnitude less than projected. However, now that the paperwork imposed on small businesses using mobile money has been conveniently repealed, M-Pesa is getting ready to make a second go of it. Here it certainly helps that M-Pesa is not a scrappy startup, but rather has access to the deep pockets of Safaricom and Vodacom to keep it in the game for the long haul.

Regulation is also regularly used by entrenched interests to protect their market share. Even in its Kenyan stronghold, competitors have used regulation as a means of stifling the competition. In December of 2007, a group of banks compelled the government to audit M-Pesa. The hope was to identify, exploit – or probably just fabricate – any structural weaknesses that might provide the banks with an opportunity to muscle in on M-Pesa’s decisive market share. It didn’t work, but it should still be a salutary lesson for those startups, like Airbnb, who seem to think that the sheer weight of commercial success will somehow magically rearrange the regulatory landscape to accommodate their “disruption”.

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One would think that a developing world startup would have far fewer scruples than a US-based company that has attracted millions of dollars of venture funding and a highly visible public profile. But last week’s decision highlighted Airbnb’s equally breezy disregard of regulation, or, even worse, the manner with which it places the onus of understanding and managing risk on the average host. In an email to New York City hosts, the company writes:

As always, we encourage all of our hosts to understand and obey their local laws. But this judge’s decision demonstrates how difficult is [sic] for hosts and even companies like ours to adequately understand laws that were not meant to apply to regular people hosting to make ends meet.

This is tantamount to saying “we don’t understand the laws, and what we do understand we think is wrong or confusing. So just keep on doing what you’re doing.” Serving up another heaping of ideological comfort food, Airbnb conjures the injustices wreaked on the blameless individual: “These are not illegal hotels. These are amazing stories within a core community of hosts and travelers adding to the diverse fabric of New York.”

Nor is New York the only place where Airbnb has encountered regulatory friction. In its hometown of San Francisco, Airbnb has been taken to task by its consistent avoidance of the Transient Occupancy Tax. Steven Jones, writing for the San Francisco Bay Guardian, recently asked for clarification on this point:

The answer that David Hantman, Airbnb’s global head of public policy, gave this morning was pretty astounding in its hypocritical arrogance. He acknowledged the tax ruling by San Francisco and the company’s lack of compliance, and said the company was waiting for clarification on the various issues related to the questions of the legality of some of the short-term rentals it facilitates before paying its taxes. In other words, this company is making tens of millions of dollars annually in San Francisco alone on a business model that it developed – one that often runs afoul of local land use and tenant laws, and in violation of people’s leases – and it’s up to city officials to find a solution to this company’s problems before it will pay taxes?!?

Here and in other articles Jones nails the issue. Disruption may be happening here, but at whose expense? Is the sharing economy about hauling its participants in front of a judge while the instigating corporation shirks its taxes? To put it somewhat extremely, in an era where municipalities are declaring bankruptcy left and right, the room you are renting won’t be quite so attractive if the street it's on busts a water main and there’s no one around to fix it.

The truth is that there is a limit to what the informal economy can accomplish. That limit is not found in adaptability or profitability, but rather in whatever always exists beyond the boundaries of any economic entity. Writing in the concluding chapter of The Stealth of Nations, Robert Neuwirth recounts the story of an auto parts market in Lagos that self-organized to the point that they had secured a space and established regular hours, with the market even being closed on Sundays. However:

To get to the market, you have to exit the Badagry Express Road and enter the trade fair compound. And that short trip has become an opportunity for perpetual corruption. Someone has taken over the entry to the compound and turned the access point into a privately controlled tollbooth…It’s a huge frustration and a huge cost, and market leaders say they have no ability to get rid of the fellow who has taken over the bridge (pp217-8).

This is a portrait of the informal economy as surrounded by a lawless vacuum. Similarly, the shareable economy functions the way it does because there are so many other aspects of society and economy that it can rely on. City governments may be annoying when they demand their taxes, but it is these same city governments that keep the trolls off the bridges.

In this sense, the deepest flaw of Airbnb’s approach is not just its poor corporate citizenship, but also its refusal to ask anything more of its individual users than their own, atomistic empowerment (along with a small cut for the company). This is – emphatically – not the job of the site’s users. It is the job of the company, which has invested millions to optimize the behavior of its marketplace participants – that is to say, its website. Without this recognition, the shareable economy is little more than a new way to say “I’m all right, Jack/Keep your hands off of my stack.” Give enough socioeconomic clout to this kind of model, and soon enough you’ll move from a sharing economy to a locust economy.

Why would I think this? Earlier today, I spoke with one of my friends who run l’Auberge Bed-Stuy. I wanted to know whether the ruling had given her pause, and was surprised at her sanguinity: “We’re not worried at all, since there will be an appeal, which will take at least six to eight months. But the best thing that can happen is that other apartments in the neighborhood get spooked and delete their listings – that will mean less competition for us.”