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The Market Fairy Will Not Solve the Problems of Uber and Lyft

2016 April 14
by Ian Welsh
Image by Admit One

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 drivers 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 cover its own costs–mostly. 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 should do so in any particular market, that 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’s a long con. And not a very long one, either.

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, 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. This can only be dealt with socially, by government.

“Thou shalt pay at least the capital replacement cost + a living wage for the market and shall take only an additional X percent 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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27 Responses
  1. jemand permalink
    April 14, 2016

    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).

  2. JohnnyGL permalink
    April 14, 2016

    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!

  3. Chris permalink
    April 14, 2016

    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.

  4. John permalink
    April 15, 2016

    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.

  5. GlobalMisanthrope permalink
    April 15, 2016

    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.

  6. tony permalink
    April 15, 2016

    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.

  7. Stirling Newberry permalink
    April 15, 2016

    The old liberals, in general, love it. The are Hillary supporters. The young rich love it. People who own car … Not so much.

  8. April 15, 2016

    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.

  9. Ryan permalink
    April 15, 2016

    > … 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).

  10. hvd permalink
    April 15, 2016

    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.

  11. S Brennan permalink
    April 15, 2016

    “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?

  12. Ian Welsh permalink
    April 15, 2016

    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.

  13. Eleri Hamilton permalink
    April 15, 2016

    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.

  14. Thomas permalink
    April 15, 2016

    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.

  15. Ian Welsh permalink
    April 15, 2016

    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.

  16. Other Thomas permalink
    April 15, 2016

    @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.

  17. John permalink
    April 16, 2016

    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.

  18. ex-driver permalink
    April 16, 2016

    “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.

  19. anonone permalink
    April 16, 2016

    @ex-driver:

    The “probablilty of random act of God” is, in fact, zero. The probability of human error is not.

  20. LyftUberExploited permalink
    April 17, 2016

    hvd said ” Working for these services is a way for the drivers to wrest a return from a vehicle they otherwise need or want to have.”

    even if an Uber/Lyft driver buys a car as a necessity, their cost per ride needs to cover:
    1) The added cost of “sharing” miles on the car through depreciation, wear and tear, and increased frequency of routine maintenance
    2) Additional liability of for-hire work since regular auto policies do not cover “sharing” gigs and ‘hybrid policies that cover such gigs are expensive. Many posters have mentioned the loopholes in Ubers’ insurace.
    3) Pay for time spent driving people around which the driver could have spent flipping burgers, for example.

    In most major cities, drivers earn less than 40-80 cents per mile driven. You can get a rough estimate for your city by splitting the $/mile rate on the app by two since the driver is only paid for miles with customer in the car and not for the miles they drive to pickup and after dropping off a customer. According to the IRS it costs .57 cents per mile to operate a vehicle so Uber/Lyft at best cover #1 leaving the driver to pick up #2 and #3.

  21. hvd permalink
    April 17, 2016

    Thoughtful responses. Thanks. Obviously the problem with this otherwise reasonable model is the fact that there are absolutely no controls on the owners. This could work out wonderfully for everyone if only we could arrive at a reasonable return on investment, either capital or sweat with a larger return always on the latter. With respect to capital I am hard pressed to understand how anything more than 5% is reasonable.

  22. hvd permalink
    April 17, 2016

    I need to add that the lack of controls both come from the state and from our equally corrupt sense of our place in society. A profound lack of humility.

  23. markfromireland permalink
    April 18, 2016

    @ Eleri Hamilton April 15, 2016

    Hear, hear.

    The real “problem” is that a working class group managed to carve out a reasonably decent economic niche – can’t have that.

    Go back through the archives here – the venom with which the nice middle class (American white) commentariat expressed themselves when the Parisian authorities acted to protect their licensed taxi drivers is very revealing.

    mfi

  24. B Rich permalink
    April 18, 2016

    For me, Uber driving is profitable. However I have a full time job, own my car, and only drive to make extra money. The added commercial insurance makes it a lot harder, but I reported a profit last year. I also live in the suburbs and most of my rides are long distance. For anyone trying to make a living via Uber/Lyft, you have to really study the peak times and work hard to find long distance trips like to and from the airport. It is impossible to make a profit working the rides needed the most – short trips in the heavy entertainment areas of town. This is why it is difficult to do it long term-the majority of trips aren’t profitable because they are minimum fare trips. While Uber recently raised the minimum fare amount, it needs to go a lot higher for drivers to buy into full time driving for the long term.

  25. Norm Buttsburger permalink
    April 19, 2016

    Hi Ian,

    Neat analysis, but I think you’re delving into a field that you might want to do a bit more research in. In finance and economics, cost of capital has a pretty specific meaning, ie the expected rate of return that an investor/creditor could expect on a similarly risky venture. When someone says that Uber doesn’t “cover it’s cost of capital” what they’re saying is that Uber isn’t generating enough income on its projects to pay back creditors and equity holders what they are expeciting (which it might not be? I dunno I’m not on the Uber finance team)

    Wikipedia will be your friend on this one

    -Norm

  26. Ian Welsh permalink
    April 19, 2016

    Thanks Norm.

    I’m familiar with that definition of Capital.

    I was using a different definition of Capital, meaning the means of production.

    I can see how using “cost of capital” could cause confusion, and in the future will use a different phrase.

    Nonetheless, most readers did understand the thrust of the article.

    For a more complete explanation please see: http://www.ianwelsh.net/what-should-wages-prices-and-taxes-be/

  27. markfromireland permalink
    April 23, 2016

    @ hvd April 15, 2016

    As a one time cab driver (I know MFI will undoubtedly accuse me of prevarication in this regard)

    On the contrary if you have relevant experience as a taxi driver relevant to the topic at hand please share it. Nor am I going to accuse you of telling lies. You’ve just ADMITTED to having been a driver so unless Ian extracted your CONFESSION from you by force along with your toenails I have no reason to doubt you.

    Awwwwwwwww bless!. It warms the cockles of my aging heart to know that several years after the event you’re still apparently traumatised by the take down I did of your completely contemptible attempt to justify removing one of the very few remaining legal safeguards ensuring that defendants are to be tried and convicted on the basis of the facts entered in evidence and only on the facts entered in evidence.

    Do please let me assure you that I’m not the forgive and forget type and accordingly I have neither forgotten nor forgiven the fact that using talking points supplied by the Federalist Society you mounted a sustained assault on the fundamental right of defendants to a fair trial on the basis of the facts entered in evidence and upon those facts alone.

    It’s very simple. All you have to do refrain from acting as a shill for Federalist Society talking points and I’ll refrain from delivering another take-down.

Comments are closed.