Cronyism Uber alles

The great economist Joseph Schumpeter called called capitalism “creative destruction.” The invisible hand of the marketplace is constantly at work, using the basic laws of supply and demand and the self-interested actions of individuals, to tear down outdated business models and create innovative new ways of satisfying human needs.

Unfortunately, there is an opposite force at work that resists these forces for change. As Adam Smith pointed out, whenever businessmen meet over dinner, someone invariably brings up a new scheme for how they can use government to lock in profits and prevent new competitors from entering the market. The way it is most often done today is through government regulations operating under the guise of “public safety.”

Uber is a San Francisco-based company which has exploded on the scene as one of the new “peer to peer” businesses that use smart phone technologies to allow ordinary people to offer private services like ride sharing and bed and board sharing outside of the normal regulated taxi and hotel industries. Uber has cleverly avoided these regulations by claiming it is a technology company, not a transportation company. On Oct. 24, new Uber driver Anthony Morris picked up Rachel Martinez, an undercover Nevada Transportation Authority operative, who used the Uber app to summon him for a ride in Las Vegas. Halfway through the ride he was pulled over and ticketed for not having a “certificate of convenience and public necessity.” Nevada Attorney General Catherine Cortez Masto then took Uber to court, and on Nov. 25, a Washoe County Court issued a preliminary injunction against Uber, which made Nevada the first state in the nation to forbid Uber from operating.

The Nevada taxi industry, especially in Las Vegas, is protected from competition by the Nevada Transportation Authority. In 2001, the libertarian law firm Institute for Justice prevailed in court against regulations that allowed existing limousine companies to intervene against granting competitors a license. A license, of course, gives a new company the right to compete against the boardmembers who issue the license. This onerous requirement that places the burden of proof on a new company to show why it should be allowed to compete against existing companies was struck down by then-Clark County Judge Ron Parraguirre as a violation of the constitutional right to earn a living.

The new peer-to-peer internet technology is a threat to the regulatory state. The old model of a bureaucratic parceling-out of market shares is becoming outmoded. Consumers rate the quality of the experience and so the market is allowed to self-regulate. Bad Uber drivers receive a bad rating, and therefore fewer rides. The consumer feedback is much faster and more effective than under the old progressive licensing model. Instead of a board hearing complaints and possibly issuing a fine a couple of years later, if a driver has complaints in his profile, riders will simply not call for him.

Uber is not a model company in some ways. An executive has threatened to investigate journalists who criticized Uber. Many people hate its peak pricing feature, which allows drivers to charge higher rates in bad conditions. Libertarians don’t, because we understand incentives matter, and drivers will respond faster when paid more. What we don’t care for is Uber’s practice of working with regulators to lift the velvet ropes so it can join the party, but then using those same regulations to close the ropes against its competitors, like Lyft.

So long as voters believe that regulations are better done by the state than by consumers in free markets, we will have companies who capture those regulations and use them against consumers.