At The Long + Short's Christmas gathering on Wednesday 9 December, we hosted a debate with the motion: "This house proposes that we nationalise Uber". Arguing for: Izabella Kaminska of the Financial Times. Arguing against: Rachel Cunliffe of CapX. What follows is a transcript of the debate, lightly edited for clarity.
Izabella Kaminska (opening statement): We hear all the time about how Uber is making our lives better and how it's disrupting these terrible cartels, taxi black cab drivers. But I argue that this is not the case. That the temporary benefits we're accumulating as consumers are coming at a cost, which is the transfer of power to an autocratic body, which has no public supervision despite its public role.
I argue that this is essentially a political governance story at its very heart. The second issue is the cost of falling barriers to entry and why this is fundamental. And the third is about the role of standards generally.
Let's start with monopolies. There are three types of corporation: there is the SME; there's the sort of blue-chip, FTSE-listed big corporate; then there's the monopoly. All aspiring entrepreneurs know – because they've all read Peter Thiel's book – that everyone should aspire to be a monopoly. His book, Zero to One, says it is so. The reason being that if you achieve monopoly status, as per Schumpeter, the economist, you then get to be rewarded by something very magical – and that magical thing is…
…the right to extended rent extraction (returns over and above your cost of doing business), which – if you don't use that power responsibly – over time provides the incentive to competitors to come and disrupt you. This echoes the three core forms of political structure and their cycles: autocracy, oligarchy and demogarchy, which can manifest both in good forms (the wise philosopher king) or in bad forms (the oppressive tyrant); and also their ability to extract taxes (or tribute) from the economy and to spend it wisely or to misspend it. In the worst case scenario you end up with a Game of Thrones scenario where you can charge excessive rents and gain taxes until the system is squeezed to its very core. So, Uber is by definition a platform that depends on network effects. Network effects are another term for populism. They are another term for basically getting the loyalty of as many people on your app as possible. This is a very political situation.
And there are two types of monopolies generally. There are strategic monopolies and there are natural monopolies. Strategic monopolies we know about, from the likes of Ida Tarbell, who busted the Rockefeller monopoly. They’re things like Microsoft, like De Beers. Strategic. We hate them. We have antitrust systems for them. And there are natural monopolies, like utilities, telecoms. And we do regulate these because whilst we appreciate there is a certain factor of network effects that can only be achieved in a monopoly structure, we also know that you have to rotate the power: every now and then you have to give someone else a chance so they don't abuse their position.
The British Empire was effectively a unicorn. It outsourced risk to a network of independent mercenaries who went off to find fantastic treasures, and if they were successful the Empire would take a cut
Then there's a third type of monopoly, which connects to my point about falling barriers to entry: it's the monopoly that is achieved through pure populism. It's the one where you are entrusted to help everyone else organise together for the benefits of scale. We have done this in terms of language, in terms of standards: if we all agree to drive on the left, that's going to be much more useful; but do we reward the man who decided that we should all drive on the left with rents for evermore? We don't, for a reason. And we also don't like to reward the most famous low barrier to entry monopoly of all: which is money. Because money is the original platform monopoly. It's essentially what Uber, Airbnb, all the Silicon Valley platforms aspire to be, which is a low barrier to entry power monopoly, which doesn't have to work very hard at all to establish that platform but must actually work very hard to maintain it. Money is that structure.
My last point is about standards. What is the cost here? What we're talking about is a political situation. The network effect in Silicon Valley is equivalent to marketing spend: you don't have to spend that much money on R&D to get a platform out there – it's very low cost. What really costs money is marketing and advertising. You raise your capital, and then you spend it on getting as many people as possible to be loyal to your platform. That sounds very similar to political campaigning to me. The only difference is that in the Uber economies, you're being rewarded not with the promise of a better life, but with low-cost services for x, y and z. But was is the cost? The cost to you as a beneficiary, well, there isn't one. The cost is to the drivers, to the other side of the equation, the people who are providing those services. This is deeply political because those Uber drivers, to be so competitive, are having to compromise their standards of life.
I should close on the point that we have seen network monopolies of this power before. My best analogy is the British Empire. The British Empire was effectively a unicorn. It outsourced risk to what I would call a network of independent mercenaries who went off to go and find fantastic treasures, and if they were successful the British Empire would take a cut – and if they weren't, that was no problem for the British Empire. And we know what happened: that monopoly didn't last long, for a reason. We needed to have fragmentation to allow a fairer and more equal distribution of power in that system.
Rachel Cunliffe (opening statement): In 1948, the British government nationalised 55 hotels and a golf course.
This was a consequence of nationalising the rail companies which owned the old railway hotels. Some of these came with luxury tennis courts, wine cellars, and even a golf course, all of which quickly become the property of His Majesty's Government.
If that seems bizarre, remember that the government also used to operate utilities, telecoms, shipbuilding, aerospace, and car manufacturing.
Today, the idea of the government deciding what phone you could install or how much it costs to fly to Canada seems ludicrous. But now we are debating giving the government control over something even more mundane: when and how you are permitted to hail a taxi.
In the past, we've nationalised industries that affect national security, or which risk bringing down the British economy if they fail. But Uber is a raging success. Over 1 million drivers in 300 cities have jobs that didn't exist five years ago. Those are people who might otherwise be unemployed, who now have the option of flexible work that fits around childcare, studying, or other part-time jobs.
Meanwhile, 8 million users now have access to cheaper and more accountable taxi travel. If you don't want to wait 40 minutes for your minicab to get lost on its way to you at 2am, you don't have to. If a black cab refuses to take you home because you live too far away, you have an alternative. And if your driver is rude, dangerous or unpleasant, you have a direct way to hold them accountable. All from your phone.
Let's take a minute to just imagine what an Uber run by the state would look like. You can forget about clean cars maintained to the highest level. The software would never be upgraded in time to keep up with new phones, and would be as glitchy and hard to use as HMRC's tax filing site. As for direct accountability via Twitter and email, try a 14-working-day waiting period before any hope of a response.
The government isn't deliberately inefficient. It's just hard to move quickly when you're employing 5 million people and taking a top-down approach. Sharing economy ventures like Uber have been so successful because they're customer driven, starting with people on the ground. It's no surprise that, by the time the Liverpool local authority got round to approving Uber, 25,000 people in the city had already downloaded it.
You can forget about clean cars. The software would never be upgraded in time to keep up with new phones, and would be as glitchy and hard to use as HMRC’s tax filing site. As for direct accountability via Twitter and email, try a 14-working-day waiting period before any hope of a response
For anyone who thinks that the 'sharing economy' phenomenon that everyone is so excited about is actually not that new an idea, think about it this way. It's true that industries built on the ideas of sharing risk or capital have been around for years. It has also always been possible to get from Manchester to Mumbai, but that doesn't mean it was easy. Aerospace technology shortened a journey that used to take months to a few hours, and in the same way, the internet has radically altered the ways in which information and resources can be shared.
We're not just sharing things. We're finding ways to make use of resources we didn't know we had. Spare rooms, for example. Power tools you only use a few times a year. Money you'd be prepared to invest in a quirky new project that no bank would touch.
This a radical disruption of how we thought the economy worked. The industrial revolution taught us that economies of scale yielded huge productivity gains, that centralised locations with hundreds of people could be more profitable than individuals. Now that's being reversed. Overheads and startup costs in many industries have fallen so far that individuals can run successful businesses from their bedrooms.
This is, understandably, terrifying, especially if your job or business is at risk. Even if it isn't, the sheer pace of change is daunting. And with fear comes the desire to have the government step in and fix everything.
Over the last year, we've seen different approaches to this, exemplified by how societies have responded to Uber. In France, for example, taxi drivers decided that setting fire to cars and blockading the city was a good tactic.
New York, meanwhile, is being sued, by the owners of taxi medallions. These were selling for over $1m a few years ago, but since Uber came on the scene the price has plummeted. Medallion owners are suing the city for allowing competition, and demanding a taxpayer bailout now that their cartels are no longer profitable.
In London, we haven't faced riots or lawsuits over Uber… yet. But in September we saw ridiculous and impractical 'safety' regulations proposed by TFL – a pointless waiting period, restrictions on flexible working, and a ban on showing available cars via an app. What does this have to do with passenger safety? Absolutely nothing. TFL never cared about my safety when I had abusive minicab drivers or the company cancelled my cab and left me stranded. Now that Uber has presented solutions to those problems, they're rushing in to meddle.
What, if anything, do we have to fear from the rise of Uber?
There have been some concerns over the monopoly Uber will have on the taxi market. But this is the opposite of monopoly. This is a service that has liberated a tightly restricted market. The reason black cabs and minicab firms are so angry is that Uber has injected an unwanted dose of competition. If every cab company other than Uber goes out of business, the market has an answer for that: it’s called Lyft. Or Blablacar. Or Liftshare. This isn't like the railway tracks or telecom lines which required such high upfront costs no competitor could ever get close. The genius of the Uber model is that anyone can set up something similar, so if Uber starts to abuse its power, consumers and drivers will just switch to an operator that offers better. That's how the market works.
And it isn't just about Uber. It's an unfortunate accident that Uber has become the poster child for the sharing economy. There are much more exciting and groundbreaking ventures out there, like M-Pesa, the mobile payments platform in Kenya which is bringing banking services to millions of unbanked across Africa. Or crowdfunding platforms like Kickstarter which have funded everything from luxury watches to full-length feature films.
What these initiatives prove is that it's possible to turn an industry on its head, connect consumers to providers directly, make use of spare capacity, all using just a computer.
There are some legitimate concerns, especially about how to retrain people who lose their jobs. And I do have sympathy for taxi drivers who invested in a qualification which is becoming redundant, hotels under threat from Airbnb, people whose salaried jobs are at risk as freelancing becomes the norm. But all industries must adapt – when was the last time you dictated letters to a typist, or booked a holiday using a travel agent? For that matter, what happened to the men who used to deliver telegrams, or the women who operated telephone switchboards?
We don't need the state to bring those jobs back, just like we don't need them to run Britain's hotels or airlines or telecoms. Nationalising Uber now is as ridiculous as nationalising Gleneagles golf course was in 1948. It's a panicked, gut reaction to uncertainty, and it would mean crushing a flourishing new industry that will offer us opportunities we never saw coming.
IK: I think when we talk about 'nationalising Uber', what we really mean is supervising it in a regulated manner, to the point where one particular private entity is not the beneficiary of all the rents: so it's about rent control.
The other core point here is that there isn’t really an alternative, because it's a network-effect situation. So this idea that low barriers to entry will give you endless amounts of competition – well, that's just false. When you look at BlaBlaCar, Lyft and all these others, actually they're having to form cartels, they're having to cooperate on an alliance basis to have a crack at Uber at all. And that's all because the costs of doing business are just too high: you can't compete by lowering the costs of doing business, you cannot compete by allowing slave labour, and this is where we're going with Uber, because there is a presumption here that there is no base capital cost with a service provider. But there is: the taxi drivers are taking on responsibilities and liabilities that they themselves don't really understand in terms of cost. Whether that's the loans to borrow their cars, the depreciation rate of their car, the insurance liability – they don't really price all these different factors in. If they did, they wouldn't be in business.
I just wanted to reply to the point about the medallions. Yes, they are a cartel, but you have to have a restricted supply because if you had open-ended supply then all you get is a race to the bottom that continuously compromises the quality [of life] of the people who are providing those jobs. They're having to work on debts that they can never pay back, and on a lifestyle compromise that essentially debases all of our lives as workers – unless we have a compromising mechanism like basic income but I'm presuming that we don’t…
RC: Regulation does different things. Regulation can be used as a tool to protect customers and workers in a positive way, such as with safety regulation, such as finding some mechanism to with negative externalities or regulations can be used to protect the incumbent. What we're seeing with Uber, and why I think Uber has become the poster child for the sharing economy, even though it shouldn't be, is because in all cities, really, the taxi market has been very restricted and very protected. You should see how much the black cabs fought against registered minicabs. I even heard black cab drivers giving interviews about how the Heathrow Express was terrible because they used to get three airport runs a day and now they only get one a week. This is a market where competition and protection has always been an issue. And I think the regulations, it's becoming clear, were there not for the consumer, but to protect the incumbents. I think that some level of regulation is necessary: I would like anyone participating in the sharing economy to have the right insurance, I would really like cars to be wheelchair-accessible if possible, and there are environmental concerns that you can address in a variety of ways, but the pendulum is swinging back now. And the reason it's the taxi industry is because that is where this battle has been raging for so long.
IK: What I'd personally rather see is government moving in and ensuring good standards. And standards cost money. Because while what we hear from the pro-Uber side of the equation is that we can have disabled access in the long run and we can ensure these things will be done, the truth is those things do cost money and really while most of us have really good experiences with Uber, the costs in the system are based on the outlier events. The times when things go wrong. For every 90 per cent of things going right there will be a fringe element of stuff going wrong. It's like car rental: the market is so competitive now that they don't make money from the rental costs, they make it only from the insurance. Because it's when things go wrong that we pay for it. And in a nationalised model you'd be able to distribute those risks a little bit more fairly. And at the moment the risks are being distributed unfairly to people who don't understand the risk management involved – the drivers, you the users – because there isn't a third party doing quality control that a properly regulated network would be doing.
And at the moment the risks are being distributed unfairly to people who don’t understand the risk management involved, because there isn’t a third party doing quality control that a properly regulated network would be doing
RC: I just think it's a little bit patronising to say that the millions of Uber drivers out there don't know what they're getting themselves into. Some of them probably don't, and all of us make poor decisions, and it's up to Uber to inform them, but I also think this model fits in with their lifestyle. There was a survey that came out this week that said that 81 per cent of Uber drivers in the US are satisfied and want to ride Uber, and 88 per cent quoted flexibility as a Number One reason. This is something that is generally overwhelmingly positive.
This week Uber Pool came to London. There's also Uber Hop in Seattle, a kind of bus service which is not going to replace public transit but could offer a more flexible alternative for some people. So there definitely are cost-saving initiatives and ways for government to work with the sharing economy to save money and to become more flexible. You don't need to nationalise it to get those benefits.
IK: With respect to the risk-sharing and patronising comment, it's not a question of patronising Uber drivers, because quite frankly many industries underestimate the risks in their business models. Look at airlines, shale producers – this is an issue of market supply and demand. And markets tend to overshoot, because when there's a good thing going everybody starts to want to come in and when there are no protecting measures then there tends to be an overshoot. Like in oil or shale, when all want to mine, suddenly there's an oversupply and once there's an oversupply you have to get very ruthless with your competition to really compete. Once you've invested in something you have to drop your standards. And that's where the risk comes in. EasyJet, all these guys, the only reason they're not dropping their standards is because we have a really strict regulatory regime that says you can't compromise on safety. We don't have that with Uber and that's a problem. When you have too much competition, you get to the point where, literally, capitalism doesn't have any moral values. If you can get an advantage over your competitor by not taking this particular insurance, whatever, you will. And that's the risk to the system.