AUSTRIAN ECONOMICS ADDICT

UBER vs. THE TAXI CARTEL

The battle between upstart competitor Uber and the monopoly held by the taxi cartel isn’t anything new. Around 1915, owner operated taxi services called ‘jitneys’, fought this battle against the government created rail transportation monopoly. The rise of Uber and their battle with the taxi cartel reminded me of something I read in Thomas Sowell’s book Knowledge and Decisions, published in 1980. (Everyone should read this book.) In the chapter, Trends in Economics, Dr. Sowell talks about “forcibly changing costs” through government regulation. Here are his words. Does this sounds eerily similar to what Uber is doing?

“The history of American transportation, from municipal bus and street lines to railroads and airlines is a history of government – imposed cross-subsidies. Initially, municipal transit was privately owned by a number of firms operating streetcars along various routes. The creation of city-wide franchises – monopolies – was usually accompanied by fixed fares, regardless of distance traveled or transfers required. “

“When a price is simply made higher by government fiat…it conveys a false picture of the “society”, thereby causing potential consumers to forego the product even though others are perfectly willing to supply it for a price that they are willing to pay.”

“Like most price discriminators, municipal transit was vulnerable to competitors who chose to serve the overcharged segment of their customers. Around 1914-1915, the mass production of the automobile led to the rise of owner-operated bus and taxi services costing five cents and therefore called “jitneys” the current slang for nickles:”

“The jitneys were owner-operated vehicles which essentially provided a competitive market in urban transportation with the usual characteristics of rapid entry and exit, quick adaptation to changes in demand, and, in particular, excellent adaptation to peak load demands. Some 60 percent of the jitneymen were part-time operators, many of whom simply carried passengers for nickel on trips between home and work. Consequently, cities were crisscrossed with an infinity of home-to-work routes every rush hour.

The jitneys were put down in every American city to protect the street railways and, in particular, to perpetuate the cross-subsidization of the street railways city-wide fare structures. As a result, the public moved to automobiles as private rather than common carriers…”

“The rush-hour traffic congestion caused by thousands of people going to work separately in individual automobiles has been denounced by social critics as “irrational” and explained by some mysterious psychological attraction of Americans to automobiles. It is, however, a perfectly rational response to the incentives and constraints conveyed. The actual costs and benefits of automobile-sharing are forcibly prevented from being conveyed by prices. As in other areas, claims of public irrationality are a prelude to arguments for a government-imposed “solution” to the “problem”. As in other areas, it is precisely the government’s use of force to prevent the accurate transmission of knowledge through prices that leads to the suboptimal systemic results which are articulated as irrational intentional results of a personified “society”.”

“…maintenance of incumbent transportation entities, often implies the maintenance of incumbent technologies ie., subsidized obsolescence, resisting the phasing out of existing modes of operation, as competing modes arise…..competing modes with technological or organizational advantages are either penalized or prohibited (as in the case of the jitneys), to preserve incumbent organizations and technology.”

MONOPOLIES CAN’T EXIST WITHOUT GOVERNMENT SANCTION

Uber is the modern-day version of the jitneys from 100 years ago. The taxi cartel is the protected “incumbent transportation entity”. The street rail system couldn’t foresee a competitor until a new technology, the automobile, came into existence, just as the taxi cartel couldn’t foresee a competitor until a ride sharing app came into existence. Government created monopolies look to government for help in stifling competition. When a business begins to expand because they win a larger share of the market, its efforts turn away from serving customers and toward protecting their market position. They lobby government to pass regulations making it more difficult, if not illegal, for competitors to enter the market. The combination of big business and big government is toxic to the economy and consumers.

FREE MARKETS OR CENTRAL PLANNING

In this article, Once A Sure Bet, Taxi Medallions Becoming Unsellable, there is a video of a Chicago taxi driver complaining about Uber drivers not having to jump through all the government hoops that taxi drivers have to jump through to be licensed to drive people around. He doesn’t realize that he is actually making the case against government intervention into the taxi industry. Starting with the price of the taxi medallion and going through all the other costly regulations is an indictment of government, not Uber.

This article, Major Trouble For Uber In California, is an example of governments trying to regulate Uber, at the cost of the consumer. Politicians and bureaucrats don’t understand that a free market creates the incentive for businesses to provide great service, or the consumer has an option of going to a competitor. Under a government created monopoly system the business has no incentive to provide great service for the consumer, because there are no competitors, (Think DMV) read this article, Uber vs Big Taxi: Time To Resolve Driver Complaints – Seconds/Days vs. Years.

The consumer pays a higher price because the supply of cabs is limited to the amount of medallions issued by the government. In a free market supply and demand coordinates the number of cab  drivers and passengers at a particular price. Allowing the price to change, allows supply and demand to be continually coordinated according to the changing values of demanders and suppliers.

HOW UBER WORKS

The ride sharing Genie is out of the proverbial bottle. Governments can’t stop it. With how quickly technology changes, don’t be surprised if something different comes along that will challenge Uber as the most cost effective way of transporting people from one place to another. Can you say, “Beam me up Scottie”?

Related Article – Are People Smarter Today Compared To People 100 Years Ago?, at austrianaddict.com.