The Promise and Perils of Upstarts Like Lyft, Uber, and Airnb
October 23, 2014
It turns out not everyone is using the Internet to look at cute pictures of cats.
A wave of startup companies is creating Internet marketplaces that make new kinds of transactions possible and turn ordinary people into entrepreneurs. These new services let people rent spare rooms, cars, and bicycles; buy and sell labor and expertise; and lend Wi-Fi access and even money. One way to measure the potential of these innovations is in decibels, that is, in how loud is the outcry from the status quo.
New York hotels, unions, and politicians just launched a multi-million dollar campaign against Airbnb, a service that allows people to rent a guest room or even just a couch. Taxi companies and their unions have staged massive protests in London and Paris against Lyft, Uber, and other ride-sharing services. A German court ruling, recently overturned, banned Uber from operating in that country. Lyft and Uber both recently launched in Oklahoma City and Tulsa; officials in both cities are weighing demands from taxi and limo companies to regulate the upstarts.
The innovators are a challenge, and potentially an embarrassment, to the regulators. After all, regulations are supposed to serve the interests of consumers. When unregulated Lyft and Uber provide better service than highly regulated taxis and limos, the public is left to wonder who really is being protected.
In fact, what is unique about all these new services is the way they make information available to all parties in a transaction. Companies like Lyft and Uber make consumers smarter, empowering them to make their own choices and eroding the rationale for government intervention.
Economist Joseph Schumpeter advocated free markets and predicted their downfall. The trouble, he said, is that the constant pressure to create new and better goods and services—the best feature of the competitive system—is also a constant threat to the status quo. Schumpeter described the process as “the perennial gale of creative destruction.”
The rise of the Internet in the first decade of the 21st century was disruptive, but not particularly destructive. Print media suffered, some bookstores failed, and other publishers and retailers felt an uncomfortable pressure to their bottom lines. The current decade is shaping up to be different, with far greater innovations made possible by the proliferation of high-speed Internet connections and high-powered smartphones.
Airbnb, founded in 2008, has connected more than 17 million people with places to stay around the world. Some of these travelers probably left their dogs in private homes found using another new service, DogVacay. At their destination, they can arrange for rides on Lyft, Uber, or Sidecar. If they want a car to themselves, Getaround and RelayRides will connect them with people willing to rent out their cars. In fact, instead of paying for airport parking, travelers can now make money using these services to rent out their cars while out of town.
All these new services are tiny compared to their established competition, whether hotels or rental car companies or taxis. Yet the status quo is right to see a threat. Smartphone prices are dropping even as the phones and networks get faster. Consumers are transacting more and more business online. While some people will never join the so-called “sharing economy,” the lure of cleaner cars, friendlier drivers, and a cheaper place to stay is hard to resist.
A typical taxi transaction has significant risks. The driver and passenger know nothing about each other until they are both in the car together. Even if a driver is routinely rude or keeps a dirty cab, there is little incentive for passengers to complain or for companies to take corrective action. Drivers have no recourse against obnoxious passengers. In the absence of information, government steps in with regulations that try to provide basic assurances to both parties. The goal is to make the transactions possible by making them more reliable and safer.
The downside of regulation is the burden placed on small and startup businesses, which reduces competition and creates cartels. Taxi companies must have a certain number of cars, all painted a certain way, and drivers with special licenses. Many cities impose pages of additional regulations. Big businesses easily comply, smaller businesses are disproportionately burdened, and starting a new business can become impossible. Regulations often bring big businesses and government together in a kind of partnership. Businesses encourage government to assert more power in the name of “public safety.” Government imposes regulations that happen to stifle competition. Eventually, however, businesses that forget their customers put themselves at risk. The bad reputation of many taxi services is, at least in part, a result of government protecting taxis from competition.
Companies like Lyft and Uber offer consumers more than just a ride from one place to another. They collect and share information. Passengers provide feedback about drivers. Drivers provide feedback about passengers. This information is provided to people before they decide to get in a car together. And anyone who consistently fails to uphold the community’s standards gets excluded. The point, of course, is not to kick people out, but to create incentives for good behavior.
Regulation is about creating a floor, but the side effect of regulation is a low ceiling. Competition, where people have good information to make their own choices, produces excellence.
In addition to providing information, the new services share something else in common. They let people take advantage of resources that would otherwise go to waste. People with time on their hands, cars sitting in garages or parking lots, an empty guest room—economists call these idle resources “slack.” The new sharing services allow people to transform slack into useful, profitable work. This is one of the easiest ways to make a society richer, since it simply puts existing resources to use.
As the American economy continues its slow recovery, the new sharing services are putting money in people’s pockets and cheaper services at their fingertips.
OCPA recently offered testimony before the Oklahoma City Council to point out that accomplishing this in the absence of government intervention is not a crisis, but a triumph. New entrepreneurs and happy customers is not a crisis, not even if it threatens to upset the status quo.
Trent England (J.D., George Mason University) is vice president for strategic initiatives at OCPA, where he also serves as the David and Ann Brown Distinguished Fellow for the Advancement of Liberty. A former legal policy analyst at The Heritage Foundation, England has contributed to two books, The Heritage Guide to the Constitution and One Nation under Arrest: How Crazy Laws, Rogue Prosecutors, and Activist Judges Threaten Your Liberty. His writings have appeared in The Wall Street Journal, the Christian Science Monitor, and numerous other publications.