From a certain perspective, Uber’s surge-pricing, which was again in the headlines this past New Year’s Eve, is easy to defend: the only way to balance supply and demand is to adjust the price. In fact, there is a lot of fundamental economic theory behind this simple explanation, specifically the idea of a “price mechanism.” A price mechanism (i.e. the surge pricing) has three functions:
- Signaling: A higher price tells suppliers to increase production, while a lower price tells suppliers to do the opposite; in the case of Uber surge prices signal drivers who might prefer to not work to that it is worth the inconvenience to get on the road
- Rationing: If supply is insufficient, a higher price reduces demand and ensures those who most want the good in question can obtain it; in the case of Uber surge pricing ought to compel many riders to take alternative modes of transportation or to wait until there is more supply and/or less demand, while those who need a ride right now can be sure they get one
- Transmission of preference: Signaling and rationing are all well and good, but what makes the price mechanism so amazing is that it ties the two together: disparate consumers inform disparate suppliers about how much supply is needed without the need for any coordination
Key to the price mechanism is money; while barter works, it carries a huge information burden: who can quickly and easily compare the value of a cow to the value of a bushel of grain to the value of a piece of pottery to the value of an Uber ride? It is much easier to have an intermediary that easily transmits relative value, which is why Uber rides are priced in dollars and cents and not in ounces of meat.
The end result is a system that ensures that those who need a ride are guaranteed to get one; those who really could do without self-select out of the system, at least until more drivers are compelled to increase the supply. It is much better than the alternative, where someone who could just as easily walk a couple of blocks might by pure chance grab the taxi needed by, say, a woman in labor. That’s an extreme example, but I use it to make the point: pricing ensures those who truly need a good can get it, and, on a holiday defined by champagne, we should all be grateful.
The Problem with Money
In the context of the price mechanism, money serves the role of a medium of exchange. The problem, though, is that money serves other functions as well: specifically, money is a unit of account and a store of value. It is the latter that is the rub when it comes to Uber and the idea of allocating rides based on price. To return to the extreme example above, what if the woman in labor is poor, and the person who only needs to travel a few blocks is rich? It very well may be that the latter’s ability-to-pay will trump the former’s willingness-to-pay; this is, to my mind anyways, the most valid reason to oppose surge pricing.
What, though, are the alternatives? As I noted, the current taxi system basically reduces rides to a lottery: you either get an empty taxi or you don’t.1 That in itself is frustrating enough, but the bigger cost is the uncertainty of it all: if you are not sure whether or not you will be able to get a ride, you are less likely to depend on the ride service in question at all. This is especially problematic on occasions like New Year’s Eve: when those needing a ride are drunk, the last thing we as a society should hope for is that folks default to a ride that is guaranteed, i.e. their own car. And, frankly, those needing a ride should, in the grand scheme of things, be similarly grateful that surge pricing guarantees that rides are available: sure, an unexpected $200 fare is annoying, but a DUI with all its attendant cost is far worse (and that’s not even close to the worst-case scenario when it comes to driving drunk).
It is also not realistic to expect traditional taxi companies to have sufficient supply for high demand times like New Year’s Eve: the problem is that all of the supply necessary to fulfill peak demand would sit idle the vast majority of the time. That idleness has a very real cost — specifically, opportunity cost. Any resource, whether it be vehicular or human, that is devoted to one activity is by definition not devoted to another. That may not seem like much when it comes to a few taxis, but in aggregate this makes the “pie”, which is the total pool of economic resources available, smaller for everyone.
This gets at why Uber is a much bigger deal than any one New Year’s Eve: the way in which the service much more efficiently utilizes resources, both vehicular and human, actually grows the pie: indeed, the only possible way to grow gross domestic product is through increased efficiency, which frees up resources for new value-generating activities.
Still, what of the poor woman in labor?
In fact, the relative wealth of the woman in labor and the lazy rich person ought to have nothing to do with ride allocation at all: however, due to the fact that money works as both a medium of exchange and a store of value they are easily intermingled. The answer is to disentangle them; instead of ruining the brilliant mechanism by which rides are both distributed to those who signal the greatest need and through which resources are most efficiently allocated, It would be far better to focus on ensuring that everyone has the same opportunity to signal their preference. To contort Uber into a welfare provider is to ruin both.
A New Politics For a New World
At the heart of the Uber conundrum and its potential solution is a new political philosophy for technology. Mobile and ubiquitous connectivity have the potential to unlock efficiencies that were never before possible. Take taxis, to stick with the Uber theme: the justification for most taxi regulations were important ones like safety, dependability, and consumer protection. Given the fact that taxis would be out on the street unsupervised it made sense to tightly control entrance to the market. However, were it possible to address all those same concerns far more effectively, through, say, precise tracking and full histories of both drivers and passengers, as well as knowledge about pick-up and intended drop-off points, would not the regulations look significantly different?
Similarly, in a world where the key to building a sustainable business was controlling distribution, the greatest gains naturally accrued to the biggest companies. And, by extension, it was reasonable to ask those companies to not only pay their workers well, but to also provide for needs beyond salary, like health insurance and disability insurance. But do those same assumptions hold in a world where distribution is free, and where preferences and needs can be distilled to an individual or gig basis?
The money problem — the fact it is both a means of exchange and a store of value — is an allegory for the dysfunctional nature of what passes for a social safety net, particularly in the United States: things like health insurance and disability are intermingled with a salary or fee. This is problematic on both sides: new efficiencies that are unlocked through mobile and ubiquitous connectivity are not fully realized thanks to regulations from an era that operated on fundamentally different assumptions. This, ultimately, hurts everyone because it limits the growth of the economic pie,
On the other side are the people actually doing these new jobs, or those who would like to. Given the fact many social safety nets are built by traditional companies, those not in those companies are left completely exposed. This is unacceptable both morally and economically: morally because to deny healthcare or basic insurance is to deny the humanity of those in need; economically both because of higher costs incurred because of treatments not received, but especially because of the cost of opportunities not pursued for fear of having no net.
It would be far better — and a far better match for the reality of today’s labor market — to disentangle once-and-for-all employment from the social safety net. This should be the central political focus of technologists in particular. Outdated regulations forged under fundamentally different assumptions are one of the chief obstacles to the opportunities afforded by mobile and the Internet, particularly when it comes to the aggregation of consumers in markets that weren’t even imaginable 10 years ago.
What Technology Owes
Of course, to argue for less regulation is hardly controversial in Silicon Valley: what is missing is the necessary trade-off. Specifically, as the opportunities for technologists and their investors continue to grow, so should the willingness to pay: that pregnant woman still needs a ride.
This is where articles like Paul Graham’s weekend piece Economic Inequality ring hollow. Graham’s defense of the broad-based gains that accrue from new technology is absolutely correct: increased efficiency, which technology is uniquely suited to deliver, is the only way to grow the pie for everyone’s benefit. But given that much of those efficiency gains also contribute to winner-take-all dynamics, it is reasonable to expect that those winners — and their investors — pay commensurately more. Imagine if Graham had written his article accompanied with a call to close the carried interest tax loophole, which allows venture capitalists to be taxed at the (significantly lower) capital gains rate on money they themselves did not invest: his defense of getting rich — which wasn’t necessarily wrong! — would have had much more gravitas.2
Still, I’m glad Graham opened the debate. Technology is changing the world, and it is naive to not expect the world to begin to push back. Rather than always be reactionary, it is past time for the technology industry broadly and Silicon Valley in particular to get serious about what that world will look like in the future, especially given the fact there is actually a way forward that is a win for not just technology companies and their investors, but for those who are impacted — i.e. everyone. Just as we should separate the means by which Uber allocates drivers from the ability to pay for a ride, it makes sense to separate work from the provision of a social safety net, and those most able to capitalize on this new world order should be the most willing to pay.