All Commentary
Monday, October 9, 2017

How the Sharing Economy Brings Dead Capital to Life

By enlivening previously dead capital, the sharing economy is monetizing what was previously useless.

Many people, particularly on the left, argue that the modern economy is increasing inequality. But, as I have discussed before, important trends in innovation increase equality. One example of these equalizers is the sharing economy. The ideas of a law and economics theorist of the developing world show how this new economy generates a greater return on the assets that people of modest means are most likely to own.

The Resurrection of Capital

The benefits of enlivening and monetizing the capital in the otherwise dormant capital in people’s homes redounds more to the middle class. Economist Hernando De Soto recognized that much of the capital in developing nations was locked up. For instance, squatters lacked property rights in their houses even after decades of living there and improving the land. But legal reforms providing capital can greatly enliven previously dead capital in those nations. When a squatter becomes a property owner, he can mortgage his property and use the proceeds to start a small business.

The advantages of these legal reforms go almost entirely to people of modest means. Not only did the rich generally always have formal title to their real property, even more importantly real property is a much smaller proportion of their total assets, which are mostly financial securities.

Similarly, the sharing economy enlivens important capital assets in the developed world. As Daniel Rothschild suggests, this unlocking creates prosperity. But it also boosts equality because the assets it enlivens are those which make up most of the wealth of people of modest means. While the vast majority of people in the United States enjoy formal title to their real and personal property, that property often lies fallow. When a homeowner has an extra bedroom in his house while his children are attending college or when he is going on vacation for a few weeks, that space can be legally rented, but the practical obstacles to do so for a reasonable price were often prohibitively large. Airbnb’s service makes all the difference by giving the homeowner access to a global pool of potential renters and by creating an off the shelf contract to facilitate making the rental transaction as easy as possible.

Just as in the developing world, the benefits of enlivening and monetizing the capital in the otherwise dormant capital in people’s homes redounds more to the middle class than the rich, because real property is a greater proportion of their net worth than that of the wealthy. Indeed, for most people who are not wealthy, their home is their largest asset. In contrast, for higher-income households, their homes are a much smaller proportion of their total net worth.

Ride-sharing also enlivens another important kind of capital – human capital. The sharing economy enlivens other capital as well. For example, Turo is a website that helps arrange car rentals so that car owners can rent their vehicles to individuals when those vehicles would otherwise sit idle. Sharing platforms like Spinster do the same for bikes and you can now rent a bike anywhere in the world. Even more famously, platforms like Uber and Lyft allow car owners to monetize their personal vehicles when they pick up passengers using a ride sharing app. This business model enlivens capital in automobiles – another big-ticket capital asset for most people.

And ride-sharing also enlivens another important kind of capital – human capital – because an owner’s financial returns from turning his or her vehicle into a commercial vehicle come not just from the return on the financial capital invested in their car, but also from the return on the time they drive the car. In a subsequent post, I will show how the sharing economy is transforming more and more diverse human talents into money-making assets – a trend that also helps those who are not in the one percent.

Reprinted from Library of Law & Liberty

  • John O. McGinnis is the George C. Dix Professor in Constitutional Law at Northwestern University. His book Accelerating Democracy was published by Princeton University Press in 2012. McGinnis is also the coauthor with Mike Rappaport of Originalism and the Good Constitution published by Harvard University Press in 2013 . He is a graduate of Harvard College, Balliol College, Oxford, and Harvard Law School. He has published in leading law reviews, including the Harvard, Chicago, and Stanford Law Reviews and the Yale Law Journal, and in journals of opinion, including National Affairs and National Review.