There’s a good reason why half the startups in the world call themselves “Uber for _______”. However, something about the phrase has been bothering me a lot, and I’ve realized it is about the different dynamics of capital and labor. Uber is about more than just car service; it is a testbed for the idea of a better capital marketplace. Instead of purchasing capital (e.g., buying a car), users rent it with their phone. Social welfare can be increased because the cost of capital is amortized across near-continual usage instead of twice a day when the car is used for commuting. The surplus is large enough that both Uber and the driver can take a cut while the user still saves money. It’s a great idea! It also works even better in many other sectors because Uber is so heavily labor-dependent and so introduces a high variable cost that induces a lower limit on available cost savings. In other applications where the user is purely renting capital (e.g., Airbnb), the clearing price might be very, very low. The user gets a benefit, the capital owner gets rents, and the platform gets a cut: social welfare is massively increased.
It works conceptually less well when the user is hiring labor – e.g., delivery, cleaning, grocery-shopping. The laborer requires pay, which means that there are variable costs. You must pay the laborer enough to make the task worth her while, because she has the opportunity cost of doing your task instead of something else. This cost structure is a huge difference from renting unused capital (e.g. a car or house), where the opportunity cost is zero or negative. There’s no reason to believe that platforms can actually provide labor-intensive services more cheaply than traditional methods. They might increase social welfare by improving matching and making the market more liquid, but that’s a marginal improvement compared to utilizing capital much more efficiently. This liquidity advantage might allow some of these startups to gain market share, but it won’t throw off huge profits because it has to be cost-competitive with existing incumbents. While some of them might be able to offer lower costs than incumbents now, that’s due to both the slack labor market and subsidies from VCs.
In short: we should expect general success of “Uber for capital”, and much slower adoption of “Uber for labor”. If you want personal service delivered to your door, you should expect to pay the same premium whether or not you book it via an app.
Like Yglesias, I noticed that Republicans have been trying to politicize Uber. I thought it was pretty neat, in large part because this is one of the cases where political science gives us pretty clear predictions. This effort won’t work, but even if it did it would likely be bad for both the Republican Party and Uber. First, let me explain why this is unlikely to go anywhere:
In order for an issue to become a partisan issue, it must be both salient and divisive. Salience just means whether an issue is important enough to be near the top-of-mind for many Americans. The economy, welfare, crime, (maybe) foreign policy; all of these are persistent salient issues for Americans. Others become more salient at specific times – the environment, civil rights, gay rights, etc. The mechanisms of how issues become salient is complicated, but let’s ignore that for the moment. Uber just isn’t important enough to ever become a salient issue for most Americans – especially since it only operates in large urban areas where most Americans don’t live. Ah, you might retort – but that’s where young voters the GOP is trying to win live!
Sure, but it fails the test of divisiveness. Most Americans don’t see any reason why Uber should be illegal*. In fact, outside of taxi lobbyists and trade associations, I suspect you will have trouble finding any meaningful number of Americans opposed to allowing Uber. If the Republicans succeed in raising the salience of Uber to any degree, the Democrats will side with Uber as well. The current state of Democrats passing anti-Uber laws is an oddity simply because legislators protect incumbents when allowed to operate without public scrutiny (i.e., low salience) and because legislators in large cities are virtually all Democrats. If the issue became widely salient, the Democrats would not obligingly line up behind a massively unpopular policy stance.
The implicit theory here, by the way, is that Uber could drive a realignment wherein the GOP captures younger voters. The idea here is that the public has a wide range of opinions along multiple dimensions, and there are multiple stable equilibria for dividing them. By exploiting a highly salient cross-cutting issue where each party is internally divided, political entrepreneurs can tip the parties into new configurations. This is what happened with slavery in the 1850s and civil rights in the 1960s. This is basically Rand Paul’s gambit for 2016, about which I will write more soon. A few practical problems with applying this theory to Uber – it’s not salient enough, it’s not cross-cutting, and even if it worked current party leadership would lose their jobs as the party base completely changed. So a pretty half-assed effort here all around.
Finally, I just want to touch on the consequences for Uber if the GOP’s plan worked, because they are terrible. If an issue successfully becomes a partisan issue, the natural implication is that the other party lines up against it. If the GOP succeeded, then Uber would find themselves in the crosshairs of the Democratic Party after the GOP had made the issue highly salient. Democrats happen to run the cities where Uber operates. The consequences for their business would be highly negative.
More generally – is it a good idea for minority parties to attempt to activate new partisan issues? If you believe elections are mostly decided by fundamentals, it is a terrible idea. By raising the salience of these issues, minority parties make majority party action more likely and in a direction that is likely to differ from the minority party’s preference.
*: Poll was commissioned by Uber. Most polls on the issue are commissioned either by Uber or the taxi lobby. This one had the fairest wording – asked whether existing regulations are sufficient or whether it should be regulated more heavily.
With the summer here and the pace of academia slowing down a bit, I have had time to do some pleasure reading. One book I have just launched into is American Colossus, a history of the American Gilded Age. It’s excellent so far, quite engaging if a little light on the linear explanatory broad-strokes history. One aspect of it I was struck by was, however, the description of the railroads. Brand mentions, as have other histories I’ve read, the way that the complexity of modern railroads drove the emergence of the modern enterprise structure. Joint-stock companies are much older, but they reached their modern structure only with the railroads – and many other innovations such as long-term capital management, regular schedules, and use of statistical management were only developed because the sheer complexity and size of the railroads mandated with them.
It matches up quite interestingly to this story about the use of Silicon Valley methods in revamping Healthcare.gov. Small teams, rapid testing, and outsourcing much of the technical backend to the cloud. Yes, Silicon Valley can be much too self-congratulatory and yes, most of their methods are quite inappropriate in a governmental context where the needs are high and the costs of even a single slip-up are devastating. A fatal error in your laundry-delivery app inconveniences some rich professionals for a day, while a fatal error in public-sector software can mean that people die. That being said, there are still some parallels between the two – the railroads transformed American business by developing the techniques necessary to deal with large amounts of capital, whereas Silicon Valley is transforming American business by developing techniques necessary to do more with less capital.
If I were to bet on what the economy looks like in 2050, it would be an economy doing more with less stuff. It’s about more than just replacing server clusters with AWS – it’s about applying the same model to physical stuff. Airbnb and Uber are demonstrating this quite well – taking advantage of capital that ten years ago simply sat idly. Rooftop solar panels promise the same – generating enough electricity on site to power a home without the massive infrastructure of coal plants and substations underlying the 20th-century energy grid. You sometimes hear the complaint, in the financial media, that there is too much capital chasing too little returns – that this is the reason that institutional money is flooding into VC funds that in turns floods into silly social apps with no business plans. If software truly is eating the world, this is what we would expect – that the material abundance of society increases while the need for capital declines, and the standard of living increases more rapidly than its material abundance.
In a world doing more with less, we would expect this complaint to become a universal feature – a paucity of ways to productively deploy capital, and declining returns to it. Maybe it’s finally time to read this Piketty book…
I was glad today to see that the California Public Utilities Commission lifted its fines against Lyft, of which I am an avid fan. Lyft, for those of you who don’t know it, is an incredibly awesome app that lets you call a car with your phone for below-taxi rates. Disclosure – a friend of mine works there. It’s very interesting, in that it moves in an industry that seems at first competitive but actually turns out to be a highly regulated industry. Which is weird – given the vast number of cars and people capable of driving them in a large city, it seems supply shouldn’t be a constraint. But the taxi lobby is a powerful one in San Francisco, Lyft’s home, and in most cities.
Serious question – how do the taxi operators and car companies survive the introduction of driverless cars combined with the Lyft business model? Right now the supply of cars is huge, but at any given time they’re mostly unused. The business model of Lyft alongside driverless cars seems pretty obvious – use spare driverless cars to deliver people where they want, when they want. Given the vast supply of currently-spare-capacity, it seems that the need for raw numbers of cars should plummet. The taxi industry can be killed without the need for driverless cars, but they will make it quicker. However, it’s harder to see how the car companies can continue to sell current volumes as the demand for cars collapses.
Of more immediate interest, to what degree should this future scenario disincentivize urbanists from pursuing mass-transit expansion today? TaaS (transport-as-a-service) should render obsolete most transit options other than extremely-high-capacity subway service and intercity rail – it’s easy to see it killing off a lot of bus service, especially once the cost-per-vehicle-mile-traveled starts to drop dramatically as the technology gets cheaper and older cars are retrofitted.
It makes me think that if you’re in favor of an urbanist agenda, the number-one priority should be zoning reform. Maybe that seems roundabout, but here’s my thinking – if the driverless car revolution happens sooner than we think, a lot of the investments in transit will turn out to be white elephants. Who needs an expensive light-rail line when grabbing a robotic Lyft-type ride is easier? On the other hand, if we can succeed in getting greater density than the economics of developing the robot-Lyft-company gets easier and easier sooner and sooner. In the meantime, things like buses can serve as a gap solution.
So basically, driverless cars => abandon the cause of transit investment in favor of greater density. The non-car-oriented city will follow in time.