In the fourth chapter of Hayek’s The Road to Serfdom, he specifically addresses the issue of monopolies. Specifically, the myth “that technological changes have made competition impossible in a constantly increasing number of fields and that the only choice left to us is between control of production by private monopolies and direction by the government.”
Hayek explains how this fear that technology necessarily leads to monopolies played out in his own day. As labor saving machines were becoming the norm when it came to mass production, many smaller companies believed that technological innovation made them economically vulnerable. Technology created economies of scale, which favored big companies over small.
This belief that big companies always have the technological upper hand is simply untrue.
However, as Hayek pointed out, these fears neglect a host of circumstances regarding the very nature of monopolies altogether.
Monopolies by Design
This belief that big companies always have the technological upper hand is simply untrue. As Hayek notes, even economies of scale reach an upper limit. To be sure, large companies outcompeting the small do not inherently create monopolies. Instead, it is the policy crafted by the state that encourages the elevation of one company over another, as Hayek points out:
The conclusions that the advantage of large-scale production must lead inevitably to the abolition of competition cannot be accepted. It should be noted, moreover, that monopoly is frequently the product of factors other than lower costs….It is attained through collusive agreement and promoted by public policy.
Luckily for Hayek, time has proven his sentiment correct, as we are currently seeing today with the ridesharing economy and traditional taxicabs.
Before the advent of the sharing economy, taxis enjoyed a near 80-year monopoly over the industry without having to deal with substantial competition. But this monopoly was not by coincidence, it was by design.
Medallion laws, as they have come to be known restrict entry into the traditional “cab” sector. Before a vehicle can be legally used as a taxicab service, it must seek the state’s permission and obtain a medallion.
In most major cities around the country these laws exist primarily to restrict the number of cabs on the road and thus, control the competition. But what is more interesting about these medallion laws is who its biggest champions have always been: cab companies themselves.
By barring entry into this field, “taxi kings” have avoided any organic incentive to innovate because the need itself has been squashed by government policy. The state, with the help of cab company lobbyists, has crafted these policies so as to avoid any unwanted competition. If someone has a newer and better way to run the industry, they will have a hard time getting these ideas off the ground without paying sometimes as much as one million dollars just for one medallion.
By barring entry into this field, “taxi kings” have avoided any organic incentive to innovate.
However, this all changed when Uber came around.
Technology Levels the Playing Field
Taxi kings were seen to have the advantage over the cab market largely because they already owned fleets of cabs. These cabs were also already issued medallions by the state. While these factors would at least seemingly deter any new competitors from attempting to join the market, because it gave one industry a financial leg up over another, no one fathomed the rise of ridesharing.
Now, instead of access to technological progress causing large companies to squash their smaller competitors as was feared in Hayek’s day, technology and economies of scale are now actually working in the favor of upstarts.
Uber and Lyft, for example, have completely abolished the need for overhead costs when it comes to maintaining fleets of taxis. This is simply because the companies themselves do not own any physical cars. And since they do not actually own the cars, they have made the argument that the medallion laws do not apply to their model.
Last year, for example, a law was passed in Massachusetts that forced a tariff on the ridesharing industry.
Since the sharing economy is based on individuals using property they already own in order to make a living, it negates any need for Uber or Lyft to make a costly investment towards owning a fleet of vehicles or permits in the form of medallions. Allowing them to compete with big cab companies who may have had the upper hand in an outdated market.
This has helped these smaller upstarts break into the market and break up the established taxi cartel. But this doesn’t mean their success has not been met with obstacles from the cab companies.
Technological advances, and especially smartphone technology, have completely restructured the way consumers even think about hailing a cab. Gone are the days when the only alternative to owning a car was standing on busy streets and hoping a cabby will notice you.
Without any real competition, there were no substantial reasons for the cab companies to alter their existing models. But once Uber, Lyft, and other ridesharing companies began rising in popularity, the cab companies got mad and demanded that the government take action. “We can’t compete with this new technology-reliant model,” some claimed, “This is unfair to our business.”
But just as in Hayek’s day, those who complained about technology putting their companies at an unfair disadvantage only offered solutions that involved government intervention.
Last year, for example, a law was passed in Massachusetts that forced a tariff on the ridesharing industry. The purpose of this tax was to hold the ridesharing industry “accountable” for the cab industry’s inability to innovate and compete with their market competitors. In this case, it was the refusal to incorporate technological advances into their service models.
So instead of competing fairly, the cab companies got away with instituting a tax on their competitors that directly went towards funding the cab company’s apathetic quest to adopt new technology.
This is the reverse from Hayek’s day in that it is now lumbering incumbents scared of the technology savvy little guy instead of the reverse. But, in both cases, the fear-mongering capitalizes on the fear of technology. Both also reiterated the belief that the state should insert itself in the market to make competition more “just.”
And as Hayek has pointed out in every chapter of his book so far, state planning, whether in the form of new taxes or regulatory medallion laws, always serves to inhibit true competition. This is as true now as it was in the mid-1940s.