The real losers are not just the next generation of innovators but also customers who lose out on more ways of getting what they need or want.
What the invisible hand of free-market innovation giveth, the dead hand of politically motivated regulation tryeth desperately to take away.
That’s the only way to describe what’s happening to three wildly innovative and popular products: the award-winning electric car Tesla, taxi-replacement service Uber and hotel alternative Airbnb. These companies are not only revolutionizing their industries via cutting-edge technology and customer-empowering distribution, they’re also running afoul of interest groups that are quick to use political muscle to maintain market share and the status quo.
The battle between what historian Burton W. Folsom calls “market entrepreneurs” and “political entrepreneurs” is an old and ugly one, dating back to the earliest days of the American experiment. Market entrepreneurs make their money by offering customers a good or new service at a good or new price. Political entrepreneurs make their money the old-fashioned way: they use the government to rig markets and kneecap real and potential competitors. In his great 1987 book The Myth of the Robber Barons, Folsom discusses how the 19th century steamboat pioneer Robert Fulton quickly went from a market entrepreneur to a political one by securing a 30-year monopoly from the New York legislature for all steamboat traffic in the Empire State.
Especially in today’s sluggish economy, it’s more important than ever that market innovators win out over crony capitalists. Letting markets work to find new ways of delivering goods and services isn’t just better for customers in the short term, it’s the only way to unleash the innovation that ultimately propels long-term economic growth. After all, no country has ever regulated its way out of a recession.
Tesla has done the unthinkable not once but twice: First, it built an electric car that people actually want to buy despite a price tag north of $70,000 for its cheapest models. Second, it has the temerity to sell directly to its wealthy customers rather than subjecting them to the ritualized hell known as auto dealerships. But because auto dealers account for as much as 20% of state sales taxes, their wishes often become legislators’ commands. At the top of their wish list? Don’t let carmakers sell directly to customers. The most glaring example of protectionism just took place in New Jersey, whose legislature added even more burdens to rules that already banned the direct sales of cars to customers. Now Teslas effectively can’t be sold in New Jersey, reports the New York Times, all in the name of ensuring consumer safety and protecting competition. News flash: Anyone who can afford a $70,000 car doesn’t need much protecting. And if you’re ready to believe car dealers when they argue that incredibly complicated rules making it impossible for new companies to enter their market are about protecting competition, I’ve got an expensive undercoating package I want to sell you.
The app-driven car service Uber, which bills itself as “everyone’s car service” and connects drivers and riders in minutes, presents a similar threat to traditional taxi and ride services in the 30-plus U.S. cities in which it operates. Rather than fight for customers by cutting fares, increasing the number of cabs or improving services, taxi commissioners and city councils from San Francisco to New York are instead trying to regulate Uber out of business on the grounds that it provides unfair and unsafe competition.
Never mind that Uber riders get to instantly rate their experience in a way no cab passenger ever does (just as amazingly, drivers get to rate passengers!). At the state level, California has already instituted a bevy of regulations on Uber, Lyft and other new ride-sharing services. These include mandatory criminal-background checks for drivers, licensing via public-utilities commissions, and driver-training programs. Last year, Washington, D.C., officials unsuccessfully tried to squeeze out Uber with regulations on the types of cars that could carry passengers, what sorts of credit-card processing machines could be used and how the company’s app operates.
Airbnb, a website that allows people to rent everything from vacation homes to spare couches for short-term stays, works great for everyone but conventional hoteliers and cities trying to bilk travelers for tourist taxes. Operating in 192 countries and typically showing hundreds of thousands of offerings, Airbnb has faced stiff regulation in towns supposedly famous for their weirdness and openness to lifestyle experimentation, such as Austin, which charges hosts an annual licensing fee and limits the number of participants, and Portland, Ore., which has banned the service in residential neighborhoods. In New York City, rent-control advocates are teaming up with hospitality-industry heavyweights to try and shut down Airbnb and similar services.
If mobsters were pulling these sorts of stunts, we’d recognize the attacks on new ways of doing business for what they are: protection rackets, with state regulators rather than professional hit men creating and enforcing rules to benefit well-connected businessmen. The real losers are not just the next generation of innovators but also customers who lose out on more ways of getting what they need or want.
Folsom’s study of political and market entrepreneurs also suggests that political entrepreneurs are ultimately unsuccessful. Indeed, Fulton claimed in 1817 that his monopoly meant no one could ferry passengers to New York City from neighboring states. A young Cornelius Vanderbilt was hired by a New Jersey businessman to challenge Fulton not in a court of law but on the Hudson River, ferrying passengers from Elizabeth, N.J., and Gotham. Vanderbilt cheekily flew a flag from his ship that read, “New Jersey must be free.” While evading capture, Vanderbilt lowered prices and changed the business climate.
It turns out that New Jersey must be free again — to sell Teslas. And New Yorkers should be free to rent out their rooms if they want to. And Uber to drive you where you want to go. The invisible hand of free markets shouldn’t have to spend so much of its time slapping away the dead hand of political entrepreneurship.