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Join Uber in a tale of rent seeking and employment law

This sharing economy sure is gonna be fun

Worstall on Wednesday Dabbsy was chuntering on about Uber and TfL finally deigning to take note of the regulations under which they should offer services, and it reminded me that we've got three lovely pieces of economics wrapped up in this whole sharing economy story.

The first is one well known to youse guys in the tech industry: network effects. The first fax machine isn't all that much use and every other one added to the network adds to the usefulness of every other one.

This is obviously true of Facebitch, of the internet in general and so on: and it's also true, to some extent at least, of the gig and sharing economy behemoths like Airbnb and Uber.

The more people that use them the more supply there will be for people to use, attracting more people and so on. So, the game that, as organisations, all of these people are engaging in is the attempt to be the network for whatever it is; eBay for tchotchke, Uber for transportation, Google for ad slinging and Amazon for, erm, tchotchke.

So far we all know. And we all also know that the vast valuations of these businesses are being supported by the hope that they will indeed become the network in their field.

Which brings us to rent seeking and the TfL response that Dabbs was talking about. Quite the most eye-popping of the proposed new rules to me was that drivers should only be able to drive for one specific network. This struck me as a very clever indeed move on the part of the rent seekers. And yes, this is rent seeking: so is the whole structure of The Knowledge and so on for black cab drivers.

Sure, it started out as a form of quality control: only those who know that Fleet Street is in the vicinity of Ludgate Hill get to ferry people around town, those who think that one or the other is in Wimbledon don't. But we do have these phones now, $50 Android and mapping services. It just isn't necessary for people to spend two years learning the roads before we want to let them take peoples' money.

Sure, it's a different form of rent seeking than the NYC taxi medallions we discussed here but it is still a form of rent seeking: attempting to restrict the competition so as to increase incomes.

And the point about rent seeking is that it is maintaining or increasing the incomes of the incumbents which is the point, nowt else. So, whatever you can plausibly shout about that achieves that goal is just fine and dandy.

Which brings us to that only-work-for-one-network thing. For we've seen what's happening in the US with Uber, California deciding that at least some of its people are in fact employees, not contractors. And thus blowing great gaping holes in the economic structure of the company.

And, incidentally, if it sticks, making an Uber ride more expensive relative to a taxi ride than it currently is. Which is why this work only for one network rule in London would be so great at rent seeking. Because the UK test for whether you're a contractor is ... how many different people do you work for?

And if you're restricted to only one then you'll not be going to be a contractor very long. With all the implications for sick and holiday pay, national insurance and so on that has. And prices of course, don't forget prices.

It really is a great move: can't incorporate because you'll run straight into IR 35. Can't be a contractor, have to be an employee and yet all the black cab drivers will be just what they always have been: self-employed contractors. Great way to engineer a cost difference, no?

Steve Randy Waldman has actually suggested that it might be of benefit to Uber and the rest to make sure that they don't become the only network in their field. That is, you can only drive for Uber if you also drive for Lyft, so that you can plausibly claim to actually be a contractor.

And Uber and Lyft et al should be the ones insisting upon this. Which is why that TfL proposed restriction is what caught my eye. There's absolutely no reason whatsoever why drivers should be restricted just to the one network.

Well, on rational grounds that is, consumer welfare and all that. But it makes very great sense if we regard that regulation as what it actually is, namely rent seeking. Because the insistence upon that solo employer clause makes everyone run smack into employment and taxation law.

It's actually rather clever and I'd love to know who actually drafted that. Along the lines of all your rents are belong to us.

What we don't know at this stage is how this is all going to pay out in the end. Tyler Cowen has used this as an example of why it's sometimes easier (for which read 'better') to simply ignore the law and regulation. Because the rent seekers will attempt to defend their corner and so asking permission will get bogged down in such attempts to defend them.

It's only by launching, gaining the consumer backing for what they now know they enjoy, that it might even be possible to win.

All of which leaves me wondering one final thing. Assume that Uber etc do run into that employee/contractor problem in a major way, and Waldman is right about the only way they'll be able to solve it. That means that they cannot be monopolists, cannot be the network in their area or field. And how much less are they going to be worth when people figure this out?

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