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Kevin Grier, the sufferable half of Kids Prefer Cheese, writes this about AirBNB:

I used to think AirBNB was cool, but now that Thomas Friedman has slurped it in the Times, I’m not so sure. One interesting thing in the piece was how the AirBNB founder confuses his company’s revenue with new economic activity.

Surely most of AIRBNB’s revenues are actually just diversion, no? I’d guess that at least 75% of their revenue is just diverted from hotel/motel revenue.

This is a common mistake. “look how much NAFTA increased trade”, “Look how much the new stadium will boost the local economy” are examples of this kind of erroneous thinking.

Creation vs. diversion is an important and often overlooked distinction.

I just had a great stay in an AirBNB property in Brooklyn, but the Staten Island Hilton Garden Inn lost the revenue that AirBNB generated.

He’s right about Tom Friedman, of course, but wrong about everything else. But wrong for interesting reasons!

The first, and simple reason, is that on the margins AirBNB, by creating cheaper, unique, higher-quality, or differently-located lodging options, may result in more overall travel. I may choose to take that why-the-heck-not weekend trip to FunTown if I know I can book a super-cheap night in someone’s apartment, or stay in the cool gentrifying neighborhood that doesn’t have any formal hotels.

Secondly, and more importantly, it is certainly the case that AirBNB is more often than not “diverting” trips that would have otherwise occurred in hotels. But that doesn’t mean it’s not creating new economic activity!

A house or apartment is capital, a machine that provides a flow of services, primarily “comfortable shelter.” When you own a house, you can choose to consume those services however you want – entirely for yourself, rent them out to others, occasionally donate a share of those services to friends or relatives (for example, my in-laws just stayed with us the past week, and next week a friend is staying with us). However, until recently, was difficult and uneconomical to rent out one’s residence for simply a day or weekend or week because of issues relating to information, trust, payment mechanisms, and insurance.

But these are all problems that AirBNB, a new technology, has effectively and efficiently solved, making renting out a portion or the whole of one’s home like a hotel or B&B go from “extremely challenging” to “extremely easy.” This makes houses more valuable. To quote the master, Paul Romer:

Economic growth occurs whenever people take resources and rearrange them in ways that make them more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Basically, the combination of AirBNB + house = hotel is a new recipe that makes existing resources more valuable than they once were. If AirBNB really takes off, what we’ll see is that, as more people elect to take trips and stay in people’s homes (as my wife and I have done before and will do again, thanks to AirBNB) the existing stock of homes become more valuable, there will be substantially increased efficiency in the hospitality industry and there will be more efficiency in urban land use since the hotel-to-overnight-stay ratio will decline and thus valuable land downtown can be used for other purposes, like offices, residences, entertainment or commerce.

I’m not a shill for AirBNB, but it’s a great example of how the combination of information exponentiation and aggregation economies of scale that the internet enables can substantially increase economic growth and human welfare by making all the stuff we already had more valuable. My wife and I got an espresso maker on Freecycle, so we didn’t buy one. We bought something else instead (probably a couple of board games). So in one sense that was just consumption diverted from one thing to another, but comparing the equilibria that’s clearly a net increase for human welfare. In the pre-internet days, that espresso maker goes to a landfill. Instead, it goes to us. So the original owners are unaffected, the public waste burden is reduced, and we get the espresso maker we wanted and other stuff. Someone else went on Craigslist and bought a board game for $5 that cost $60 new, and used the savings to help buy a new espresso maker. It’s all about increasing efficiency, and just because it doesn’t always increase GDP doesn’t mean it doesn’t increase welfare and, eventually, growth.

Yesterday a friend of mine tweeted an invitation via a new service called Feastly. The invitation was to come to her home and eat a delicious, home-cooked gourmet meal in exchange for money. The service, Feastly, is set up to do exactly that – while it is still in private beta (and therefore cannot be fully-explored until one is invited in) it clearly aggregates offerings of that sort, sortable by dietary restrictions, price, attire, pet-friendliness, and other criteria. It’s a great idea, and one I wish I thought of.

On a social scale, I think as we see more services like this that directly connect buyers and sellers – think eBay, Etsy, ebook self-publishing – it will throw further into question whether statistics like GDP/GNI are useful metrics, not just of broader concepts like "standard of living," but of what they purport to measure. Every meal eaten on Feastly and not at a formal restaurant is one that involves an exchange of goods and services for money, and most of them will likely not be counted by current methods of measuring GDP. This issue predates the internet, of course, but the internet’s amazing power to match small-scale producers to buyers will accelerate this trend, as will the advent of 3-D printing.

In response to an email from my father-in-law re: the "six strikes and you’re still in but slightly less in" system of attacking the Dread Pirate Bay, I wrote this:

I think there are some major weaknesses in this approach:

Firstly, small business will be in a bad position:

https://www.eff.org/deeplinks/2011/07/content-industry-and-isps-announce-common

Secondly, file-sharing follows a power-law distribution – roughly 20% of file-sharers are reponsible for roughly 80% of file-sharing, and they know how to beat the system.

Thirdly, this is still a mostly-bogus problem:

http://business.time.com/2012/01/06/digital-music-sales-finally-surpassed-physical-sales-in-2011/

Digital music sales are up and growing, and for the most part if there was no file-sharing almost none of those downloads would be replaced by sales. In fact, artists themselves benefit from file-sharing, especially those outside the top tier, since it gives them broader exposure (and leaves more money in the pockets of their fan for concert tickets and merchandise, of which a larger share of proceeds end up in the artists pockets compared to record sales, from which many artists never see a penny).

And lastly, ISPs really don’t care at all about this and consider the RIAA, MPAA, etc, to be giant nuisances. So to the extent this ever becomes truly annoying to internet customers ISPs will quit this completely voluntary program because the content providers aren’t their customers.

So I expect this new enforcement mechanism to quietly fizzle out within the year.

I should have also said:

Now, this is how you kill a pirate:

http://www.nytimes.com/2012/01/26/world/africa/us-raid-frees-2-hostages-from-somali-pirates.html?pagewanted=all

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