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Tuesday, June 23, 2015

Sabotaging Uber: The Umpire Strikes Back

The Labor Commission takes a side in the Uber vs. taxi competition

Evolution works by killing. Sometimes the death is slow — starvation or exclusion. Sometimes it’s outright murder, bloody and face-to-face. But make no mistake: natural selection means that some things survive, and others die. The things that survive may not be “better” than the ones that die, but they are better suited to their environment.

And so it is in a market system. Joseph Schumpeter called it “creative destruction,” but we tend to understate the “destruction” part. Economic competition implies the replacement of inferior systems of production and distribution by more efficient mechanisms; new and better ideas work through killing off the old ways, the old firms, and the old jobs.

It’s brutal. Instead of “survival” in a biological sense, the competition is over providing goods and services at higher quality and lower cost. Consumers win in this system, but it is tough on employees and employers.

Of course, the old ways don’t go down without a fight, as we saw last week.

We tend to think of the government as a judge, a kind of umpire. But sometimes the umpire plays favorites. The California Labor Commission, an administrative law body, issued a ruling on June 16 that reclassified Uber drivers from contractors to employees.

This will have several effects, which were spelled out here (with a little help from me, though Ms. Brown did almost all of the work). The short version is that the costs to Uber of having employees rather than acting as a seller of information will effectively prevent Uber from expanding, and may even cause it to pull out of California altogether.

In August of 2011, my Twitter pal @pmarca (Marc Andreessen) wrote an article that will still be discussed 10 years from now, maybe longer. The title was “Why Software is Eating the World.”

What was important about that article is that it recognized, and spelled out pretty clearly, the destructive power of smart phones with software apps that provide services. Not employees, mind you. Software. “Eats the world” was Andreessen’s way of describing the death of traditional ways of doing business.

Of course, one of the key examples of software eating the world is Uber. The company claims that it is not a provider of taxi services, but rather a software platform that helps a willing buyer and a qualified, nearby seller to find each other.

And Uber is exactly right about that: Uber is not an employer of drivers, and it is not a seller of transport services. Uber is selling reductions in transactions costs: I want a ride, and you have a car and a few minutes. We could never find each other on our own, but with Uber we can make a convenient, mutually beneficial exchange in safety and with minimal fuss on clearing the payment.

In any kind of fair contest between Uber and traditional taxi companies, software eats the old way of doing things. It is perfectly true that some of Uber’s advantage lies in avoiding taxes on services, and in fact Uber has been moving in the direction of solving that problem.

But much of the advantage for Uber is the fact that drivers only have to cover the marginal cost of providing ride services, while traditional taxi and limousine companies have to cover their average costs. It is true that this is a real advantage, but that advantage benefits consumers, so the umpire-state should stand back and let it all be.

But in California, the umpire struck back. The “workers” who drive with Uber often do it precisely because they can set their own hours and they have freedom to decide whether to offer rides on any particular day or route. They can say “no,” and all Uber does is offer information about ride opportunities.

The “court” (which, as I noted above, is not a court at all but the Labor Commission) said this, in response to the suit by disgruntled driver Barbara Berwick:

Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation. The reality, however, is that Defendants are involved in every aspect of the operation.

Eek. That’s like saying that Rotten Tomatoes makes movies. What Rotten Tomatoes does is provide information about a transaction (reviews, film ratings, nearby theaters, showtimes, and options to buy a ticket) that will take place only if the consumer decides she wants to see that movie, or not.

Yes, Rotten Tomatoes is “involved” in the movie watching business, pretty deeply. But what they are selling is information.

Of course, it really is true that with Uber (unlike with Rotten Tomatoes) you pay the company, and they pay the driver. But the rates are fixed and known in advance (yes, even during a “surge,” you know in advance).

Uber just acts to clear the transaction conveniently and quickly, so you don’t have to carry cash and neither does the driver. It is just not true that Uber is paying the driver. The passenger is paying the driver, in a way that is more convenient for everyone. Uber just handles the transaction.

Why did the umpire strike back? The California Labor Commission is actually an advocacy group, for labor. Not for Uber drivers, though that is the way that this decision is justified on paper. The CLC is advocating for taxi drivers, and other employees of companies that need to die.

They don’t need to die because they are evil; in fact, the folks who work in traditional transport services are decent, hard-working, salt-of-the-earth people who are just trying to make a living and, in many cases, support their families.

No, the reason that traditional employee-driven (pardon the pun) transport services need to die is that software is cheaper, faster, and better than “employees.” The costs to consumers of paying the extra amount, which takes the form of higher prices as well as reduced convenience and more difficult payment, is far higher than the benefit to employees of keeping their jobs.

The solution is for the umpire to quit playing the game and go back to a neutral role. Sure, it’s tough to see one side get crushed, especially when you consider that the “employee” team is far more likely to be Democrat, and the transportation contractors are more likely to be Republican or independent. In California, that’s a real consideration, because policy is more about politics than about taxpayers or the law.

Remember how at the end of The Empire Strikes Back Han Solo was frozen in carbonite (right after he responded, “I know” when Leia expressed her love for him)? That’s pretty much the situation for Uber right now. We all love Uber. Uber knows it. But California is on the verge of freezing out one of the most useful and innovative software platforms of the last decade.

  • Michael Munger is the director of the philosophy, politics, and economics program at Duke University. He is a past president of the Public Choice Society.