My colleagues who get out a bit and would never ever drive and drink are wild about Uber, their preferred taxi service. The Uber taxi service is made possible by ever advancing information technology. The service could not be offered without the GPS enabled smart phone with its extraordinary advances in computing capabilities that Uber relies upon.
The service offers a number of advantages over its competition, however well connected or instructed by a call centre. The most decisive advantage is the flexibility and certainty of the service provided – you can call an Uber car and driver up precisely when you need it (something you may not wish to decide in advance) and know with a high degree of certainty that the call will be answered and punctually: a clear advantage that the alternative services, including those provided by a taxi allowed to roam, cannot offer with anything like the same predictability. Finding a cab on a busy street corner to take you quickly out of the rain cannot be predicted with any confidence.
There are other conveniences on offer to both the passenger and, as important, the driver who supplies the Uber service. No cash or credit card swipe is required. The reputation, not only of Uber but of the driver and passenger, is always on the line. It is in Uber’s interest to vet not only the competence of its drivers and the soundness of their vehicles but also the behaviour of their passengers. It is also in the interest of Uber to ensure that its drivers are not only competent but fully insured against accidents that may damage its passengers and therefore its reputation. Cars for hire understandably command higher insurance premiums than vehicles used only privately – they are more on than off the road and therefore are likely to suffer more accidents.
This care for its customers will be taken because the value of Uber as a business, as is the value of almost every business enterprise, is completely dependent on attracting repeat business. Its reputation is its most valuable business asset of which its owners and managers will be fully aware because of their own economic dependence on its reputation and value.
Perhaps the most valuable innovation of the Uber system that could be scaled up very easily is its treatment of the peak pricing and loading problem. When demand peaks, fares rise to restrain demand. But the same higher level of demand instantaneously revealed by the system, with or without the inducements of higher Uber charges, encourages additional supply. Capacity responds immediately to revealed demands because it is in the interest of drivers and owners of vehicles to do so. The costs to their owners of cars standing idle becomes patently obvious when the state of demand and the income earning opportunity becomes so conspicuous.
Most cars however stand idle most of the day and are employed almost entirely at peak hours in the working week. Uber offers a very effective way to bring enough of them out of idle storage to meet peak demands. What if the Uber service offered for income and profit could be extended to car sharing to and from work from homes that is currently only encouraged as acts of charity by the car owners and users? Uber might well be able to get you to economically share a ride to or from work at a time to suit perfectly.
But while Uber is a potential boon to consumers of taxi like services it is a clear and obvious danger to the established taxi services and the economic interests associated with them. The right to run a taxi service in many cities is a valuable one because supplies of the service are artificially restricted by regulation of entry into the business. It can also become a tradable right as the valuable trade in New York City taxi medallions demonstrates. The licensing system is also valuable to the officials with licensing power who have their own jobs and benefits to thank the regulations for.
Competition through innovation from Uber is as much a threat to the jobs and benefits of the regulator as it could be to established suppliers. It will not be a threat to the drivers for whom remuneration will be determined by the supply and demand for drivers. The supply of drivers and the employment benefits they command will be influenced by the difficulty to qualify as a licensed driver. Drivers will surely be a lot keener on the opportunities presented by Uber than licensed taxi owners. Uber should be seen as high tech system helping job creation.
The revealed demand for the Uber service at the prices being charged for them is proof of its welfare adding capability for the society at large. The patterns of demand for and the supply of the Uber service is an outcome of competition at work. Competition of the most important kind- that is not merely price competition for an established good or service – but the transforming competition that comes with invention, innovation and capital put at risk as well as capital used more intensively and productively than it was before. It is this ‘creative destruction’ that has made the economic world the much more powerful productive system it has become over the past 300 years or so. Had the Luddites had their way this economic progress would not have been allowed to happen1.
The reaction to Uber illustrates the destructive power of established interests and especially those of regulators to limit competition. Growth happens when individuals are left largely free to pursue their own interests by competing with the established suppliers working hard, taking risks and constantly innovating to improve their own rewards. The hidden hand that converts private benefits into public gains is a work in constant progress.
Growth is frustrated when established interests are protected against competition, be they those of the King and his court or by formal religions to protect their own interest in the established order. Or when competition is frustrated and growth potential denied in order to protect the interests of regulators and politicians in the established ways of doing things.
The different reactions to the entry of Uber into the market place, relatively encouraging or discouraging and highly suspicious reveal that the forces of competition may be treated by the broad society as instinctively helpful or otherwise. That is as innocent and welcome until proven otherwise. Or, alternatively they may be presumed guilty of unwelcome interference, until the entrant can prove themselves (with great difficulty) innocent of the charge of not causing economic damage. It is those economies that welcome competition, that believe market forces in principle should be allowed their freedom, that will pass the Uber test to the great benefit of society, not only in the convenience of its taxi service, but in every sphere of economic activity, the future shape of which is unimaginable, given the power of innovation.
1The Luddites were 19th-century English textile artisans who protested against newly developed labour-replacing machinery from 1811 to 1817. The stocking frames, spinning frames and power looms introduced during the Industrial Revolution threatened to replace the artisans with less-skilled, low-wage labourers, leaving them without work. I would suggest labour saving- productivity enhancing inventions rather than labour replacing. The supply and demand for labour and real wages have risen consistently since then even as the machinery has become ever more labour saving and micro-processor assisted. (Source: Wikipedia)