Friday, October 09, 2015

The "Uber Economy" is Devolution

by Michael Dorf

Because I live in a small town where I either walk, bicycle, or drive my own car wherever I go, I don't have occasion to use Uber (or one of the similar services, like Lyft) when home. A couple of years ago I downloaded the Uber app, thinking I would use the service when traveling but on each of my trips to major cities in the last couple of years I've ended up using mass transit or conventional taxis. Accordingly, I haven't felt a need to look deeply into the question whether the supposed advantages of such services over conventional taxi services are built entirely on their evasion of conventional regulations or whether they provide a genuinely different service. My friends who use Uber regularly--including some who consider themselves progressive on regulation and labor matters--claim that Uber is actually better for drivers without undermining useful regulation, but that could just be motivated reasoning.

In a post back in April, Prof. Buchanan laid out the case for thinking that Uber really is just a means of dodging regs and taxes that apply to taxis. As I noted in a comment then, some of the Uber advantage in places like NYC, which artificially restricts the number of taxis with a requirement of purchasing a medallion, is that Uber drivers--as livery services rather than taxis--don't need a medallion. That's an advantage over what is probably a foolish monopoly. We don't require one of a limited number of medallions to operate a bodega, a sporting goods store, or most other businesses; we allow any individual or firm that complies with the applicable regulations to operate such a business, with the number of such businesses operating being determined by the intersection of the supply and demand curves. But if Uber's great value is that its drivers don't need medallions, this advantage will either be eliminated by the market--as the price of a medallion gets driven down by competition from Uber drivers--or get eliminated (or perhaps phased out) for everyone.

Put differently, there is simply no good economic reason why people selling rides in their own cars are at a competitive advantage over people selling rides using dedicated equipment. In Prof. Buchanan's April post he noted but disagreed with the ostensible theory behind the Uber advantage: that it utilizes the excess capacity of private cars when they're not being used by the owner for getting herself from point A to point B. But this isn't really excess capacity. Cars are not like empty buildings. If you use a car when you otherwise were not going to, you have added marginal cost that is roughly comparable to the marginal cost of using a dedicated taxi: gasoline, maintenance, wear and tear, and of course the labor input.

A recent segment on The Daily Show that was highly critical of Uber made the point that some of the expansion of Uber-style services seem downright dangerous--like Uber pilots. But the flaw in the Uber Economy is even easier to see with relatively simple goods and services. Simple modern goods--like toasters and hammers--are much more inexpensively provided by specialists than by spare-time tinkerers and miners of the various metals that go into making the component parts. Likewise with many services. You could develop an app for finding people to teach your children what you want them to learn. Various instructors in math, science, reading, etc., would then show up at your house or some central meeting place that you and some others have chosen, and they could teach your kids. But in so decentralizing and "democratizing" primary education or toaster production or hammer production or whatever, you would be running away from the bedrock of a modern economy: comparative advantage.

I can't deny, of course, that Uber, Airbnb, and like services have enjoyed some success to this point. Perhaps there is even evidence that they would be profitable and popular even without the unfair advantage over more conventional businesses that comes from their falling within regulatory gaps. And I certainly wouldn't claim that conventional taxi businesses--which charge drivers high fees for the use of their vehicles and, where applicable, medallions--do well by their drivers.

Rather, my point is simply that the Uber or "sharing" economy that has been heralded as a new stage in capitalism made possible by advanced technology is in fact devolution to a form of economic organiztion that pre-dates the craft economy, which at least took advantage of specialization. The "new" Uber economy is barely more advanced than barter. Perhaps such devolution is what people want. But the fact that it utilizes a smartphone app does not make it revolutionary.


Paul Scott said...

I am a regular user of Lyft. It was an experiment and one that has worked. Last December I gave away my car (I am in Los Angeles, btw) to KPCC and decided if I needed a car when my wife had ours, I would use Lyft (or Uber if Lyft failed to have a driver in 5 mins - more on that below). So what I can tell you is that it has worked and resulted in a car not being in my driveway at least, if not on the road. In fact, though, it has prevented an extra car on the road as well, because I must now actually think about the options when I drive. Before December, if I wanted to go to the grocer's store for something one backpack or less, I would drive. Now I take my bike. I have found uses for LA's limited public transportation and also just bike for commuting more than I did before. I am an anecdote. I have no idea how many of me there are, but to answer Neil's original suggestion that Uber/Lyft are car neutral will take studies, not guessing. But I hold myself out as one example of the possibility that Lyft is good for the environment.

Then there is the service difference. Any formerly frequent user of taxi/limo services (limo's btw already avoid some of those regulatory gaps as compared to taxies) knows that cost is not the benefit driving our use. Lyft could be much more expensive than it is (and in the case of Uber, you can choose it to be) and I would still use it. The driver comes when I want them, pretty much always within 5 minutes, the cars are clean and the drivers have been universally pleasant. Again, I am an anecdote. Unlike the prior paragraph, though, I feel confident about my guess in the event of a study, but one would still be needed.

Now the drivers. I am always asking my drivers about their experience, even though at this point I know most of the answers. With four data points (not quite a study, but at least not a single anecdote) from former cab drivers that now do Lyft/Uber I can tell you that the universal response so far has been that it is more pleasant for the drivers to do Lyft than it is to drive a cab. I can also say that when discussing this more broadly it is more pleasant for the drivers to drive Lyft than it is to drive Uber, mostly due to compensation. Uber apparently charges its drivers a flat fee per route to cover the insurance they provide. Also, most oddly to me, but apparently true of both Uber and cabs (at least in LA), is that tips are just part of the fee, so Uber (and LA cabs) take a cut of those just as they do with the fare. These two things combine to explain why Uber is less expensive than Lyft - more of the lower fee for the ride is going to the company. Again, want to know about driver satisfaction, then we'll need a study.

Unknown said...

I agree with Mike’s final sentiment – the fact that a particular transaction is facilitated by an app doesn’t make it a revolution in commerce. However, I’m not sure that I’d analogize the “sharing” economy to barter. If you listen it proponents in industry (Uber, AirBnB, Task Rabbit) or in academia (for the most extreme version of this check out Arun Sundararajan, an economics professor at NYU), it sounds like a different blast from the past: unreconstructed Lochnerism, albeit with a digital utopian twist. The advantage of participation in the sharing economy, its advocates say, is that it promotes individual freedom to contract for your own time and services without the limits imposed by oppressive bureaucratic institutions, be they governmental or private. Of course, like its ideological ancestor, this modern spin on freedom of contract ignores the coercive aspect of many contractual relationships. For example, AirBnB breathlessly enthuses about how its service allows middle class people to stay in vibrant urban areas by supplementing their incomes – rent out that futon stuck in the walk-in closet, or that sofa bed in your living room/dining room/kitchen alcove. While this is some sort of solution to the problem of promoting economically diverse cities, telling people that they have the “freedom” to give up their privacy in order to avoid uprooting themselves and their family, hardly seems like either an unmitigated public good or an exercise in what most people would consider an uncoerced choice.

Shag from Brookline said...

I took torts in the Fall of 1951 and learned of the greater liability standards of common carriers. In the early years of my practice that began in 1954, I handled tort cases, a fair number of which involved taxis, including representing taxi owners/operators. I don't know what the status of common carrier liability standards are at the state level at the present time. But is Uber for practical purposes holding itself out as a common carrier similar to taxis? And there must be some serious insurance issues, including worker's compensation. I am aware of Uber's position that owners of vehicles in its business model are considered to be independent contractors, which would significantly reduce Uber's liability.

Regarding "bed and breakfast" operations, are they treated as innkeepers for purposes of liability standards similar to the Uber situation?

Should the consumer assume the risks involved? I assume Uber is the deep pocket in its business model. Back here in the Boston area years ago there were issues involving what were referred to as "Gypsy Taxis."

It seems that consumer protections are in order.