As with the first industrial revolution, the merger of "bricks" and "clicks" forces us to ask: Which laws need to be updated, which are just irrelevant, and which are barriers to entry created by special interests? In the best position to help our internet billionaires contribute to this important project are... politicians, civil servants, lobbyists and other political hangers-on, looking for lucrative work.
America’s statutes, policies and regulations (laws) are designed for a non-digital world -- a world where a taxi was something you hailed on the street, not by clicking a smartphone app. The world of bricks (i.e., the older traditional economy) and clicks (i.e, the newer tech-fueled economy) are merging. With this merger, we are forced to examine our existing laws (a point also made by Fareed Zakaria). As companies scramble to lobby the government for the most favorable results, political types and high-powered lobbyists will be in great demand (e.g., David Plouffe , a key strategist behind President Barack Obama’s two presidential wins, recently joined Uber).
Originally, computers (e.g., the IBM 700/7000 series, circa 1952) had little direct interaction with the world of bricks. They were used for artillery trajectory tables, payroll and accounting, and similar behind-the-scenes work. The machines took up entire rooms, were programmed using punch cards and operated in batch mode.
Moore’s law (computer-processing power doubles every 18–36 months) has proved unrelenting. As processing costs decline exponentially and other technologies advance, the worlds of bricks and clicks are merging.
Cabs have existed for centuries -- London has had taxi service since 1654. And renting out a spare room has been happening for centuries. What has changed -- and the impact is dramatic -- is the decline in transaction costs and the resulting increase in market efficiency brought about by adding the world of bricks to the world of clicks. This has triggered the rise of the sharing economy, among many other manifestations.
Innovations such as, Uber’s uniting dynamic pricing, smartphones, GPS, stored billing information, a two-way rating system (you rate the driver and the driver rates you) and more , make the new economy a very efficient system for transacting business, thereby resulting in more business activity.
But merging bricks with clicks creates friction with old laws from the pre-click world, which can be categorized as:
- Laws that remain necessary, in some form, in our digital era: For example, most cities have auto inspection and safety rules for vehicles, particularly for vehicles that carry paying passengers. The safety concerns are the same, whether the passenger is picked up by Lyft, Uber or a traditional car/taxi service. These laws served a legitimate purpose prior to the merging of bricks and clicks, and that purpose remains applicable, even in the digital age.
- Laws that are obsolete in the digital era: As an example, in a different time, when horses were the major mode of urban transportation all sorts of laws were created specifically for an era of horse traffic. Most of these are now irrelevant or have been repealed. But those remaining from that era must be re-examined (and eliminated or revised) if unnecessary or detrimental to new needs and goals.
- Laws that never had any good reason to exist, but were the result of special interests creating barriers to entry, as discussed in more detail below.
As Adam Smith said:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
One way for businesses to conspire against the public is to have government create artificial barriers to entry and thereby generate unearned profits for politically connected businesses.
For example, the number of yellow taxis allowed on the streets of New York City at any one time is restricted to 13,437. No matter how great the demand, the capacity of the streets, the time of year, or the strength or weakness of the city's economy -- only 13,437 yellow cabs are allowed. The number 13,437 doesn’t reflect a perfect balance of the laws of supply and demand -- demand for the privilege of driving a yellow cab far outstrips the supply. The current price for a medallion (i.e., the right to have a yellow taxi on the streets of New York) -- about $1 million -- reflects this high demand.
New York City medallion owners are a concentrated special interest group, with a financial interest in limiting the issuance of new medallions. The general public also has an interest in the taxi industry (more and better service ), but for most people this isn’t their highest priority. For medallion owners, however, the taxi medallion is of utmost importance since it represents their very livelihood. Medallion owners, therefore, can have an outsized influence on this one narrow issue. But the rise of Uber and similar services means we suddenly have new and powerful interests at the table, challenging old rules.
This isn’t just about the taxi industry. This challenge will occur across the entire economy. One benefit of this merging of bricks and clicks is a “housecleaning” of our laws. As significant new participants emerge, they’ll seek to remove government barriers that hinder their business models. However, these new competitors will behave as Adam Smith predicted and attempt to create new barriers to trade benefitting their own interests. Arguably this process has already begun : Newcomer Uber was recently accused of encouraging taxi regulations that would favor its business model and make it more difficult for new entrants. Capitalism is innovative and efficient, but not always admirable.
My one prediction: For both well-funded new competitors (trying to revise or create laws that benefit their interests), and old-form competitors (with tremendous incentives to protect their turf), civil servants, politicians, lobbyists and others of their ilk will be in high demand!
[An earlier version of this blog appeared as: Strauss, Steven. “Regulation for Bricks, Clicks, and the Sharing Economy.” Aspen Journal of Ideas. Aspen Institute, Nov. 2014. Web.]
Steven Strauss is the John L. Weinberg/Goldman Sachs & Co. Visiting Professor at Princeton University’s Woodrow Wilson School and an Adjunct Lecturer in Public Policy at the Harvard Kennedy School.
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