The Market Fairy will not solve the problems of Uber and Lyft
Image by Admit One
Here is the thing about Uber and Lyft (and much of the “sharing economy”).
They don’t pay the cost of their capital.
The wages they pay to their drivers are less than the depreciation of the cars and the expense of keeping the driver fed, housed and healthy. They pay less than minimum wage in most markets, and in most markets that is not enough to pay the costs of a car plus a human.
These business models are ways of draining capital from the economy and putting them into the hands of a few investors and executives. They prey on desperate people who need money now, even if the money is insufficient to pay their total costs. Drivers are draining their own reserves to get cash now, but hey, they gotta eat and pay the bills.
This sharing economy shit works in a shitty economy. In a good economy, where people have what they need, it doesn’t work.
The cab company model, with medallions and so on, was exploitative. It wound up charging customers too much But it did mostly cover its own costs. Uber and Lyft charge too little and siphon too much of what they charge back to themselves.
The model which made sense was the model of car-sharing, where company owned cars could be used by those who had bought memberships in the company. This meant that the actual cost of the cars had to be covered. It was far cheaper than cabs, but not as cheap as Uber or Lyft (and you had to drive yourself). Something like that, but with drivers could have worked.
For that matter, Uber and Lyft style apps could work with regulated wages sufficient to pay costs in particular markets.
The market will not miraculously produce a capital replacing living wage. If it does so in any particular market it is happenstance; luck, not social physics.
This is a social action problem; a race to the bottom issue. It makes sense, individually, to race to the bottom. Company execs and investors get rich, consumers get cheaper rides and drivers get money they need. But this isn’t win, win, win. It is win, win, lose over the not very long run.
The cheaper wages paid to drivers, and thus the cheaper rides, also drive business with capital structures which make social sense out of business. They can’t compete with “drive your car into the ground, make less than minimum wage”.
Because it is a social action problem, where what needs to be done is to take a game which leads to some people winning while destroying capital and people and move it to a game where everyone wins and capital and people are not destroyed, it can only be dealt with socially, by government.
“Thou shall pay at least the capital replacement cost + a living wage for the market and shall take only X% on top of that for providing your app. If thou dost not we shall toss thine ass into prison.”
That is the social solution. It is not “the market fairy of supply and demand will make sure that fair sustainable solutions always occur. All praise the market fairy.”
Until we stop pretending the market fairy is going to solve social action problems, we won’t actually solve those problems.
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It’s not just capital, they’re also insurance cheats. Pushing commercial use and liability onto private policies, legally separating their business just enough that in certain cases of disaster the liability risk is held by the individual who goes bankrupt (and is basically judgment proof) or the insurance companies of the victims. Their flashy policies have holes in the that don’t really cover the true risk.
It’s definitely an extractive process– privatize the profits, leave the true costs to people out in the cold after, or to society in general (who will generally step in and feed and clothe these people as a last resort).
Good post! Agriculture and most commodities constantly run into similar problems of collective action. This is also how all the railroads when bust in the late 1800s. Insiders skim off the capital and lenders, workers, and broader society all end up covering the costs, whether they knew what they signed up for or not!
Good analysis.
At his simplest, man is an “extractor”, taking value from where he can, such as raw materials and others’ labor. Some value creation has taken place, like early agriculture or productive inventions. But the majority of wealth “creation”, as you describe, is really figuring out how to extract value, rather than create it. Most “innovations” in every field, from finance to US medicine and Healthcare and education are clever extraction processes rather than productive ones. Extraction is easier than creation. And man is essentially lazy.
Torches and pitchforks are of course the last extractive tools, for use when that Uber driven car finally breaks down, the rent is due and there is no cash to buy food.
Thanks for this. I have a hard time understanding how this isn’t obvious to everyone. But the next time I’m having the argument I will deputize much of yours.
Regarding insurance, I’m pretty sure that an adjuster worth her salt would determine the commercial use to invalidate the coverage on a private vehicle. So unless drivers are ponying up for commercial insurance—in which case, they’re probably operating at a total loss—they and their riders are completely uninsured in reality. Lawsuit futures.
Are you familiar with John Micheal Greer’s Catabolic Collapse concept? I think this fit’s the model very well. The current state of affairs lasts a bit longer by cannibalization of the capital stock.
The old liberals, in general, love it. The are Hillary supporters. The young rich love it. People who own car … Not so much.
Great post, thanks. Although it’s tricky to compare Uber to fleet-service companies (like taxi companies), since Uber and others would argue the cars are not their capital and therefore not their cost. They would (and do) say they’re a platform to connect people with capital and labor (a car and themselves) with people who require that capital and labor (riders).
Which I understand is within your post, suggesting a ‘minimum payment’ requirement that covers the driver’s cost of capital. But the car is fairly complex capital, since they also use it for other things.
On the insurance, my most recent policy update for my auto insurance specifically states that the insurance DOES NOT cover any accident or incident when the car is being used for driving services for pay. Interesting evolution.
> … the insurance DOES NOT cover any accident or incident when the car is being used for driving services for pay. …
If a driver works for Uber/Lyft 8-10AM but has an accident at 11AM, are they covered? The car is being used for Uber/Lyft, but not at the exact time of the accident. It looks like Uber and Lyft provide some kinds of insurance (e.g. Lyft has contingent liability and contingent collision/comprehensive), but it only applies while the app is active (or sometimes only while a passenger is present).
I think you are missing something important here, particularly in places where a car is considered either a necessity or so desirable that it nears necessity. Working for these services is a way for the drivers to wrest a return from a vehicle they otherwise need or want to have. In other words the drivers have already made the capital investment, this provides them with a return on that investment which they would not otherwise get. The same applies to insurance, especially to the extent that these services pick up the “at work” liability.
As a one time cab driver (I know MFI will undoubtedly accuse me of prevarication in this regard), I have a lot of problems with Uber, etc., but it is clear that these services fill enormous gaps in taxi coverage at least in NYC (serving the boroughs) and other places I have been. Although I generally use the subways there are times when they won’t get you where you want to go or won’t accommodate what you need to carry and surface transit is necessary. The imposed scarcity of the taxi model can make these situations very difficult.
The fact, also that most taxis are fleet taxis (the cost of medallion ownership tends to encourage this sort of consolidation), usually owned by folks more accustomed to limousines than taxis, leads to a situation where, in squeezing every penny out of their capital investment, the cabs on the street are frequently in dangerous, filthy and uncomfortable condition. Talk about predation.
“The old liberals, in general, love it. The are Hillary supporters” – Stirling Newberry
I have observed, the break down on who votes Hillary vs Bernie is predicated on wealth & connections, not age.
People putting their age before all other considerations when it comes to voting is a highly illogical supposition…no? Why do I read so many arguments for it using data sets that don’t control for wealth, social position and pay scale?
I make no claim that Uber and Lyft have no social utility, they do, I simply am pretty sure they aren’t covering the cost of car repairs, maintainence and replacement plus the wear and tear on the driver.
Taxi systems with medallions are shit. There was a move, in Toronto, to move to driver owned medallions, which I think was a good idea.
In Toronto, at least, I’ve had very few bad experiences with taxis, BUT they are FAR too expensive for me to use much. Get rid of the medallion extraction and it might be possible that fees would drop to something reasonable.
I do take the time to talk to cabbies, and even before Uber/Lyft I was told they were in a world of pain because the economy didn’t (again) recover after the fin crisis for them. Little stuff like that is how one tracks if the real economy has anything to do with the official stats.
I utterly hate that they’ve gotten away with calling this sort of thing the ‘sharing economy’. There’s nothing ‘sharing’ about it. It’s just another way for a small number of people to make money off of exploiting other’s labor, *and* they’re doing it in such a way to bypass most consumer and labor protections.
This is not economically literate. First: it confuses the inputs of capital and labor. More fundamentally, it confuses what Uber and Lyft offer, which is a market and service for participants to exchange individual rides in cars (albeit one that takes place under defined rules that set compensation, among other things, which doesn’t distinguish it from any other market). Someone running a market for other people to exchange things has no more capital costs than it takes to operate that market, same way your supermarket doesn’t actually have to own milk cows to stock the dairy section.
Lovely. It’s always useful to have someone like Thomas around to explain how the Valley sees things and to entirely miss the point of the article.
The market fairy approves of Thomas. He believes, and without belief, the market fairy would die.
@Thomas: How us Uber a market when they set the prices? If drivers had any control at all of what they charged then I’d be more inclined to agree with your assessment.
The market fairy has brought us an example of a cab company that can be hailed conveniently, pay with a credit card and tracks route taken to reduce fraud. If Uber goes out of business tomorrow, that contribution is still a service improvement. I don’t use Uber for low priced travel. I use it for predictable travel.
“Working for these services is a way for the drivers to wrest a return from a vehicle they otherwise need or want to have”
1. To emphasize the articles points, depreciation (of <3 y.o. cars) is expensive and is a cost that Uber/Lyft's rate structure doesn't cover for most drivers. Passenger's ride from A to B involves:
traveling from Z to A. then often dead-heading from B back to Z—one 5-mile revenue-generating trip might cost the driver 10 total miles. Try doing that consistently at Uber/Lyft rates in a 2015 car with 10,000 miles.
2. Drivers are willing to ignore #1 if they're desperate or financially illiterate. Try talking depreciation/driving costs with your next drivers—-a financially literate driver would be able to tell you his costs immediately—-MPG, repairs, depreciation, gross revenue/gross mile, etc.)
3. I'd bet a beer that annual ariver turnover is literally 100+% as Uber/Lyft keep running driver promos and adverts to replenish their driver base. Most people wash out while a small core remain. As a social experiment ask your next driver about her tenure—-keep a mental running total.
4. Uber/Lyft insurance sucks—considering the spectrum of very bad things that happen to Americans on the road every day—leaving the driver and passenger exposed. Just remember that a probablilty of random act of God during your next Uber/Lyft ride, while very small, does not equal zero.
cheers.
@ex-driver:
The “probablilty of random act of God” is, in fact, zero. The probability of human error is not.