Potential Smartism #4: Uber vs. City Governments Is a Stylized Free Market vs. Regulated Market Argument

There’s a great story recently of a market regulating itself without influence from a big central regulator. For the most part they’re doing it with happy participants, a much lower cost, and, for the meantime, no explosion of risk and abuse. No I’m not living in a Libertarian fantasy land, I’m talking about Uber. As a frequent enjoyer of Uber I’ve been following the debates / riots (really France?) a lot recently. Fundamentally, I totally understand the objections to Uber:

City governments make a lot of money from cab companies who pay them for the right to effectively have a monopoly on providing services. It makes sense that cabs would lobby to protect this monopoly. It also makes sense that cities would react favourably to this lobbying to protect that revenue stream.

In response to this, Uber (particularly the Uber X service) has essentially come in and said to the cities “hey, we can do this better, cheaper, and get your citizens around more efficiently than the current system. Isn’t that what you want?” In order to avoid outright saying that protecting a revenue stream is a large consideration, governments have been forced into PR contortions to justify continuing Uber resistance. These range from totally legit (Uber doesn’t operate rurally) to pretty silly (Ubers don’t get inspected bi-weekly like city cabs).

This is where this story gets interesting for me: Uber essentially crowdsources regulation and lets the market participants regulate themselves. If an Uber driver is creepy or drives like they’re in Grand Theft Auto, they get down rated (rating is mandatory) and either given less work, or removed from the rotation entirely. If their car squeaks and is poorly maintained, same thing. Passengers are rated as well to protect drivers. So while there isn’t as much up front checking, though they do background checks, there is a consistent, frequent, and motivated “regulating body” of riders and drivers afterwards. Most importantly this regulating body is free (!) and the savings are passed along to consumers and drivers.

I completely understand that giving an Uber driver a 0 star rating isn’t going to be much comfort in the worst case scenario, but incidents with licensed cab drivers / cabs aren’t exactly unheard of either. Uber also provides the advantage of having all your interactions tracked and logged via the app, vs. cabs, where you are effectively anonymous other than your pickup location. I would say that at worst, Uber is as safe as cabs.

Anyways, this isn’t a treatise on why Uber is better, but on why it has the ability to be cheaper than traditional cabs. This cost advantage subsequently gives them the ability to bludgeon cities with rhetoric that by banning Uber they are increasing costs for their citizens. Uber’s financials aren’t public, nor are most cab companies, but here would be my guess on why the cost differential arises (from largest to smallest):

  1. Regulatory outsourcing (no mandatory maintenance checks, no drug and alcohol testing / programs, no partitions, no cameras, no training programs, no fuel efficiency requirements, no mandatory downtime for cars or drivers etc etc)
  1. Technical improvements (no human dispatch, more flexible pricing, more efficient use of cabs)
  1. Legit gripes (drivers use personal insurance vs. commercial insurance, don’t have to pick up disabled passengers, aren’t required to subsidize mandatory rural service with downtown fares)

With regards to Uber, the people have spoken. Price and convenience is king and they are willing to either a) trust that the “crowdsourced” regulation is sufficient or at least that b) any additional risk is offset by lower prices. However, Uber is a simple “free market” example that is easy to get your head around. Any potential additional risks are easy to understand, and the benefits from accepting those risks are readily apparent.

It is much more complicated when scaled up to an entire financial system. There are a number of regulatory bodies that need to agree, a ton of regulations that often conflict (see Potential Smartism #2 for a discussion of the difficulty of de-regulating conflicting policies), and the benefits are more challenging to observe, but the concept is the same. Rather than one governing body making the “risk decisions” for all participants at a high cost, participants make the risk decisions on one another at a lower cost. These participant risk decisions are made on a regular and constantly updated basis. They are also made by players who are more directly incentivized and potentially more capable. When it is framed in an additional risk vs. reduced cost manner, the free market decision can become much easier to analyze.