California Caves, Yet Uber is Doomed?

Aaron Benanav, writing in The Guardian, opines that Uber’s business model is doomed. This seems fairly hyperbolic.

Having threatened to pull out of California completely, Uber and Lyft recently won a temporary reprieve from orders to reclassify their drivers as employees rather than independent contractors. The companies argued they could not come up with a plan for doing so overnight, even though more than two years have passed since California’s supreme court ordered them to change their ways. The Californian labour law AB5 was supposed to end their non-compliance.

It wasn’t that they couldn’t come up with a plan, it’s that they didn’t want to become cab companies. Uber and Lyft based their businesses on the premise that they connect drivers to passengers, and take a small cut to do so. The fact that California wants them to become cab companies, employing their drivers, doesn’t mean that they will. California blinked this time. Maybe next time, we’ll see if Uber and Lyft are willing to walk away from the fifth largest economy in the world, which until now has been their home base.

One might assume that misclassifying drivers as independent contractors enables rideshare companies such as Uber to make exorbitant profits. The reality is far weirder. In fact, Uber and Lyft are not making any profits at all. On the contrary, the companies have been haemorrhaging cash for years, undercharging users for rides in a bid to aggressively expand their market shares worldwide. Squeezing drivers’ salaries is not their main strategy for becoming profitable. Doing so merely slows the speed at which they burn through money.

If drivers are simply using a service–they are not even independent contractors in many jurisdictions–then its hard to see why they are “misclassified” as contractors. The fact that California wants to use the law to prevent companies from offering such a service doesn’t make it wrong to do so. To build out a world wide service costs money. The stock market recognizes this, and values the company based on future revenues, allowing these companies to borrow. With California stepping in legally, that will likely get a lot harder.

There is simply no world in which paying drivers a living wage would become part of Uber and Lyft’s business plans

This is 100% correct. They do not have a goal of paying wages. They simply want to connect drivers to passengers and take a cut. They can compete with each other on ease of use and ubiquity, but if either company gets too greedy, the other will undercut it.

The truth is that Uber and Lyft exist largely as the embodiments of Wall Street-funded bets on automation, which have failed to come to fruition. These companies are trying to survive legal challenges to their illegal hiring practices, while waiting for driverless-car technologies to improve. The advent of the autonomous car would allow Uber and Lyft to fire their drivers. Having already acquired a position of dominance with the rideshare market, these companies would then reap major monopoly profits. There is simply no world in which paying drivers a living wage would become part of Uber and Lyft’s long-term business plans.

Wall street was funding these companies before self-driving cars were even on the horizon. Automation is coming, but the money being poured into Uber and Lyft is not simply a bet on driverless cabs, but is a recognition that whoever wins the markets is likely to hold on to them. Uber has huge brand recognition. Unless they seriously stumble, that will turn into revenue when they complete their expansion, with or without automation.

Only in a world where more profitable opportunities for investment are sorely lacking can such wild bets on far-flung futuristic technologies become massive multinational companies. Corporations and wealthy individuals have accumulated huge sums of money and cannot figure out where to put it because returns on investments are extremely low. The flip side of falling rates of business investment is a slackening pace of economic growth, which economists have termed “secular stagnation.” It’s this decades-long slowdown that has generated the insecure labour force on which Uber and Lyft rely.

Driverless cars are hardly a “far-flung futuristic” technology. This is a tough problem, but huge strides have already been made. The technology will mature. It is a matter of time. Why would the stock market invest in traditional manufacturing in the west, when the globalist governments have signed trade pacts that allow such work to be done more cheaply in the third world? Technological innovations need not be earth shaking. Look at Amazon. It’s basically an automated Sears catalogue.

In slow-growing economies, labour markets are weak. Older workers who lose their jobs have trouble finding equivalent forms of employment. Meanwhile, young people just starting out in their working lives are sending out hundreds of applications only to end up in dead-end retail jobs. Rideshare companies such as Uber and Lyft feed off the insecurity that is omnipresent in the modern economy. When the alternative is working irregular shifts at coffee shops, driving for rideshare companies on one’s own schedule can seem like a dream. Management by algorithm appears similarly utopian compared with management by nasty bosses. In the early years of their operation, rideshare companies even offered rates of pay that were good relative to available alternatives.

One of the things that’s driven rates down is that there are too many people driving for Uber and Lyft, and more competition. This is hardly their fault.

Of course, Uber and Lyft were probably planning to have fired these workers by now and to have replaced them with robots. But like many promises of automation, driverless cars are still some way from becoming a reality. Uber and Lyft started squeezing these workers’ incomes to staunch their own bleeding of cash reserves. At this point, drivers started fighting back.

If they were planning a fixed time frame for driverless vehicles, they were fools. Uber and Lyft are running out of cash because places like California are making it more expensive to operate and making the markets less likely to want to buy their stock. Are they increasing their take?

This fight for workers’ rights is grounded in a growing recognition that the expansion of the digital economy does not simply reflect the triumph of an unstoppable technological change. Behind Silicon Valley rhetoric, much of what appears to be technological innovation turns out to be a means of circumventing legal regulations, including minimum wage laws. By misclassifying its workers, Uber avoided paying hundreds of millions of dollars into US state unemployment insurance schemes. Yet during the Covid-19 economic crisis, Uber lobbied the federal government to step in and pay its drivers’ unemployment benefits anyway.

Circumventing government regulation is one of the many ways the free market has of increasing productivity. Cab companies were highly regulated and spent decades lobbying for regulations that blocked competition. Uber and Lyft found a way to sidestep these regulations. Now those old entrenched interests have allied themselves with the labour movement in California. Maybe they will succeed in killing the goose that (at least initially) laid golden eggs for its drivers.

Why should Uber be entitled to have it both ways? It makes sense to demand that companies hire workers in stable jobs, or not be allowed to hire them in the first place. Yet in an environment of weak economic growth, this demand will be insufficient to win economic security for all. Capitalist economies have been able to extend security to widening circles of workers only in periods of rapid economic growth, when low rates of unemployment made it possible for more and more workers to demand better wages and working conditions. The era of high-speed economic growth ended long ago and is not coming back.

It does not make sense to insist that companies can only hire for stable jobs. The economy is not static. Almost every large company has a mixture of permanent staff and contract employees. Contractors know that they are exchanging flexibility and higher pay for security, and that if times get hard, they are the first to go. As long as the agreement between Uber and its drivers is voluntary, why should the state be allowed to demand that agreement be changed? If states like California continue to overregulate, is it any wonder if high-speed economic growth ceases there?

High rates of economic growth in the mid-20th century – the reference point for any politics that seeks to restore economic growth in the present – were premised on a historically exceptional period. The restoration of stable international trade following two world wars made possible the largest growth of economic productive capacity in human history, not just in Europe and the United States, but worldwide. By the 1970s, rapid expansion had given way to worsening global overcapacity, resulting in rising competition and falling rates of investment in internationally traded goods. People were left scrambling for work in the growing service sector, where the potential for labour productivity growth, and hence economic growth, is significantly lower.

The mid-20th century was the post war boom. Are you proposing restoring economic growth by starting another world war? By the 1970’s, disastrous trade pacts were being made by the globalists, which led to competition from the third world and falling rates of investment in local manufacturing.

Workers’ inability to find stable employment is thus not the result of recent advances in automation technologies, which, like driverless cars, have mostly failed to pan out. Their plight results from an everyday reality of low profitability in economies saturated with capital, and insufficient opportunities for its reinvestment, such that dividends and share buybacks have increasingly become the norm for surplus cash holdings. With shrinking opportunities for investment, enormous pools of capital have rushed into highly speculative ventures such as Uber and Lyft that have little capacity for demonstrated profitability.

Automation is a slow erosion. Just because you aren’t observant enough to notice it doesn’t mean that it isn’t panning out. Do you also say that electric cars haven’t panned out, and that Tesla is snake oil? If Uber and Lyft don’t “pan out”, the market will correct itself. Countless such trends have come and gone, like laserdiscs, the transputer, and rewritable optical disk drives. Countless others wait at the edge of the chasm, like quantum computing, fusion power, and general artificial intelligence, and will either cross it or fall into it. While self driving cars may yet go the way of the laserdisc, it seems unlikely. Even if they do, Uber and Lyft still have a viable disruptive business model in jurisdictions that don’t regulate them out of existence.

That governments turned a blind eye to Uber and Lyft’s misbehaviour for so long is no surprise. Governments are complicit in making workers more vulnerable. Facing persistently slow economic growth and high rates of unemployment, governments have spent decades trying to coax companies to invest by making it easier to deny workers’ benefits and to avoid paying taxes. Again, this bid to restore conditions of rapid economic growth, much like supply-side and trickle-down solutions that failed to produce generalised prosperity, was a failure. The Covid crisis has only made economic prospects less auspicious.

British Columbia’s socialist government, which had strong ties to the taxi lobby, successfully prevented ride sharing companies from entering our market for over a year, despite a promise to their allies in the Green Party to allow them. There was overwhelming public support for ride sharing. Eventually, the NDP were dragged kicking and screaming, throwing up hurdles for Uber and Lyft to jump over, into allowing ride sharing in our province. If California were to regulate ride sharing out of existence, the state would elicit an enormous backlash. This is likely why the state blinked and took its finger off the button.

People need security that is not tied to their job. The pandemic has revealed this imperative more than ever before. In a world that is as wealthy as ours, and given the technologies we have already produced – even without the realisation of the dreams of automation – everyone should have access to food, energy, housing and healthcare. If people had that security, why would they choose to work in terrible jobs where they are paid low wages? The owners of Uber and Lyft know that their business is predicated on a world in which they get to make the key decisions that shape our futures, without our input. The world of work is going to have to be democratised. They are just delaying what should be inevitable.

If you scare away companies like Uber and Tesla, along with citizens who pay your high taxes, how will you give those who remain food, energy, housing, and healthcare? Why should anyone other than the drivers, the ride sharing companies, and the passengers have any input, other than into regulations essential for public safety? The world of work will never be democratized, because companies that don’t operate on profit will always be outcompeted by those that do. As Jim Collins says, to be a great company, you need a mission that is more than profit, but without revenue, eventually your company will die.

About jimbelton

I'm a software developer, and a writer of both fiction and non-fiction, and I blog about movies, books, and philosophy. My interest in religious philosophy and the search for the truth inspires much of my writing.
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2 Responses to California Caves, Yet Uber is Doomed?

  1. Only recently did I try Uber because a client used it. I tried to use it in Houston but the taxi cartel bought up all the politicans and banned it. Soon a colleague taught me about Lyft in San Diego–with scooters even–and YES! I never made Uber work, but because I tried once in FL they now block my signing up in Brazil where Lyft is illegal. If I can ever get free I will use Uber abroad and Lyft Stateside.

    • jimbelton says:

      I’m not a huge advocate for ride sharing, but Uber was far superior to calling a cab in San Francisco, and we used it quite a bit in Toronto.

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