In defense of Uber?

Must Uber be stopped? What’s wrong with Andrew Leonard’s August 31st article in Salon, Why Uber must be Stopped.

Leonard’s article is a call for the government to directly address Uber, and the ‘issue’ it has become. Leonard believes that Uber has shown itself to be intrinsically dangerous and dirty. He alleges that devious tactics are second nature to the company. He fears that Uber will use underhanded tactics to assume monopoly status in the livery business, and then violently take over other logistics markets. He then falls just short of calling for the end of Uber by government fiat, without advocating any other solution to the problem he has imagined.

In my opinion Leonard ends up looking like a caricature of a ‘big government liberal.’ Where a moral majority conservative says, “won’t somebody please think of the children!” to prevent adults from having fun, the big government liberal declares, ‘there should be a law!” before they even know what kind of problem is at hand.

The article is doomed by the first paragraph where Leonard sets up a false dichotomy. By asking if Uber is an example of efficient markets working, or, if it demonstrates what happens when no regulations exist to make companies play nice, the piece cannot help but miss the point. The reality is that Uber is taking advantage of a market inefficiency to provide convenience at the same time as it demonstrates how regulations can improve markets.

Leonard argues that Uber’s behavior has been unsavory, most emblematically through its “Operation SLOG.” Here Uber agents hire Lyft operators to recruit them and/or use them for low-profit to no-profit rides. Competitors allege that sometimes agents simply place fake orders. Leonard compares this ‘street fighter ethos’ to practices of robber barons.

Thankfully Uber has nothing on the robber barons. Leland Stanford was a governor of California who legislated away competition*. 19th and early 20th century industrialists would pay goons to kill unionizers**. Heck, Uber’s non-violent chicanery isn’t even on par with Henry Ford’s stealing (credit for the light bulb) or doing crazy things (shocking dead animals) to discredit Nikola Tesla. Do we even need to get into banks right now?

Leonard takes for granted that these tactics will allow Uber to take over the entire taxi-limo market.

Then he freaks out, asking scary questions:

“What happens when Uber’s priorities turn to generating cash rather than spending it? What happens to labor — the Uber drivers — when they have no alternative but Uber? What happens when it rains and the surge-pricing spikes and there’s nowhere else to go?”

Let’s face it, Uber is no shoe-in for monopoly. Lyft still exists, along with SideCar, Haxi and other startups. Local taxi and limo companies aren’t going away without a fight either. Leonard hasn’t shown that an evil Uber monopoly outcome is preordained. Nothing about the livery market suggests that a single firm should naturally take over. The whole reason companies like Uber succeed is because this market has low barriers to entry. Combined with a happy-to-revolt consumer base that shows no love for monopolistic systems, such as the racist old taxi system, nothing short of the government could establish a monopoly.

However, Leonard isn’t quite charging windmills when he frets over an Uber monopoly. Any problems with Uber are certain to get worse if the company could somehow manage to obtain a monopoly. Any company, not just Uber, that becomes a monopoly holds all the leverage with their suppliers, laborers and customers. Monopolies even have the luxury of passing on any increase in regulation related costs to the consumer in full. Thankfully, laws already exist to prevent Uber from becoming the only firm in the livery business.

Then Leonard goes beyond scary questions to provide scary answers:

“A company with the street-fighting ethos of Uber isn’t going to let drivers unionize, and it certainly isn’t going to pay them more than it is required to by the harsh laws of competition. It will also dump them entirely in a nanosecond when self-driving cars prove that they are cheaper and safer.”

Because monopolies are illegal, Uber will always have competition, driving ride prices down and labor prices up. This takes care of any worries that Uber will make massive wages cuts. There has only been one effort to unionize Uber drivers. So far it seems that the labor market has not required them. Many Uber drivers enjoy being able to manage their own schedules. That luxury is not usually found in more structured unionized work places, and is actually a selling point of Uber’s.

Uber will very likely adopt self-driving cars when they become economical. This isn’t a bad thing, and preventing Uber from growing won’t save cabbies from technology anyway. Self-driving cars are already safer and more efficient than human driven cars. People who realize this warm up to the idea of a driverless car, and any car company seeking to survive into the future will adapt to that reality.

We finally get to the prescriptive part of “Why Uber must be Stopped.”

“Society is going to realize that power as great as Uber’s needs to be checked. Uber, by virtue of its own success, will demonstrate where the lines need to be drawn for the general good. When Uber is the only game in town, the necessity for comprehensive requirements for commercial insurance and background checks will be obvious. When Uber starts using its logistics clout and unlimited investment capital to go after UPS and Hertz and FedEx, regulators will start wondering about antitrust issues.

It’s probably too soon to cry out “Break up Uber.” The company hasn’t won yet.”

Once again we are told that Uber’s rise is a fait accompli.

Oddly enough it is only when this monopoly has been established that Leonard becomes interested in regulating the taxi industry. Whether you think those policies should be requirements or not, it is oddly inconsistent to only support them when there is a monopoly.

And his last sentence in that quote is the most telling. He is not calling for the end of Uber, yet. But if Uber’s rise is inevitable, the implication is that its fall at regulator’s hands must be too. The author cannot even help but realize that his idea is “probably” a bad one. Asking the government to deus ex machina–away a company is not only a foolish idea, it is also very uncreative.

Customers of rideshare companies and anyone interested in making money by starting a business deserve better.


Of course, there are legitimate concerns with the way Uber conducts itself.

As Leonard writes:

“Collateral damage to Lyft has extended beyond the siphoning away of drivers. When a Uber recruiter ordered a ride and discovered that the driver was someone who had been previously recruited, he or she immediately cancelled the ride. According to Lyft, Uber has been responsible for more than 5,000 cancelled rides in recent months.”

Capitalism can be a dirty game, but hyper-competition should only be encouraged when the struggle benefits the consumer. Uber fails us when it takes its focus off of improving its own product, and invests in degrading Lyft’s.

For a step by step explanation, go here****

This is obviously not good for consumers in the present. It also has negative implications for the future because Uber will have less incentive to improve its own services in the face of weaker competition. So it is a clear opportunity for regulators to use the law to channel competition away from sabotage, towards service.

Right here we have the meat for a good article. Leonard had the real issue and solutions in sight, but didn’t do anything with them. Instead, he stoked irrational fears and did away with nuance.


If Lyft’s worst accusations against Uber are true, then it is clear that we need updated fraud legislation. This will make sure that the profit motive keeps companies working for the consumer. I don’t have the legalese to tell you what the exact regulation should say. I do know that companies in an efficient economy should not be competing against one another with fraudulent calls.

Uber is making customers happy, and this is a good thing. If Uber and its competitors did not meet a market demand, then we wouldn’t be talking about them. But like all markets, the taxi/limo/livery one needs good regulation. Regulation for regulation’s sake is a terrible idea, but good regulation is awesome (See Canadian banks).

I argue that regulation is best treated like taxation – some call taxation a form of regulation. Economists calculate the effectiveness of taxation with the Laffer Curve. The Laffer Curve* demonstrates that taxation rates should neither be too high nor too low to achieve greatest efficiency. In real life it has been used to show that lowering tax rates can increase tax revenues when rates are too high.

I believe that regulation acts in quite the same manner. Too much stifles business, no one argues for extra red tape after all, but no regulation is akin to anarchy. Thus the key to good policy, just as with taxes and bear porridge, is finding something in the middle that is juuuuuust right. I agree with the EU Technocrats and Supply Siders who have already proposed this concept.

The ability of the state to regulate, or tax, using the laws on the books effectively is critical. Unenforced and over enforced regulations are bad, as are tax regimes that are easily flaunted. In Russia Putin became a hero for bringing about a flat tax. Flat taxes are not necessarily efficient along the Laffer Curve, and they proportionally favor higher earners. But Russians loved the flat tax scheme. Because it is so simple, it has been the only system Russian government can enforce (first half of the article). Likewise, the best designed regulations are easy to follow and easy to enforce.

So what we want for Uber are regulations that are simple and enable companies to harness their abilities for the greater good. Focusing competitive energies on service improvements, such as criminalizing fraudulent activities, is one way. Keeping the markets easy to enter and innovate in is another. If someone can find a way to reach consumers at cheap prices during times when Uber ‘price gouges’ then the market will have more efficiently addressed the issue of high price than the government could. So rather than block or hinder these companies, we should encourage new ones.

Leonard’s article burned me up because Uber is demonstrating the need for regulation. But his writing was full of hysterics, fear mongering, and he failed to put forward a credible solution. Breaking up a fast growing and popular company should pretty much never be your solution. People have to be able to do better than that. Expanding working fraud legislation to cover new markets, now that’s smart and sensible. After all, Uber, and its competitors, provide desired services at high quality, and have other positive social benefits.


 

*Burton W. Folsom Jr. (1987). Entrepreneurs vs. the State: A New Look at the Rise of Big Business in America, 1840 — 1920. Young America’s Foundation. ISBN-13: 9780895265739  p.22

**Krause, Paul (1992). The Battle for Homestead, 1890-1892: Politics, Culture, and Steel. University of Pittsburgh Press. ISBN 0-8229-5466-4. p.20-21

***The Laffer Curve exists on an x-y axis, Y corresponds to money raised through taxes, the higher Y is, the more money raised. The X corresponds to the taxation rate. On the left hand side of the x-axis there is zero taxation, which by definition raises zero dollars. On the right side of the x-axis you have 100% taxation – the most stifling environment for enterprise possible. The values for Y (taxation income) are assumed to be lowest at these two points, and that Y approaches the global maximum, its highest over all point, somewhere in the middle. Thus the plotting of the Y axis looks like a curved bow, moving up from one end, reaching a high point about the middle, and then arching back down as it approaches the other end. The implication here is that taxation rates should neither be too high or low to achieve greatest efficiency.

****We want to foster competition where companies become successful by delivering better service. Lets imagine that Uber and Lyft are charging at the same rate. If Lyft can provide you with a driver in 7 minutes, and Uber can only do so in 10, this market provides customers with rides in 7 minutes, and Lyft profits. Under the current system Uber agents sabotage competitors, so Lyft can only supply a driver in 11 minutes. Now the consumer must wait three more minutes, yet Uber is still rewarded though it made the market worse.

 

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