Uber forms of governance
A few weeks ago Samuel Hammond posted some interesting thoughts on multi-sided platform (MSP) technologies like Uber and PayPal, and the role they play in providing forms of governance. You can read the whole thing here, but the outline is as follows: Governance—that is, things like rational planning to solve co-ordination problems, the setting of rules and assigning of rights, etc—is done not just by states but by private companies, too. Platform technologies (essentially those which enable interaction between different groups of people) are a good example of this. Amazon and Ebay, for example, are virtual marketplaces which connect disparate buyers and vendors from across the world, whilst PayPal is not only a payments processor but an arbiter of commercial disputes, with procedures to file a complaint and rules on when compensation is entitled.
'Good' governance occurs when the rules set and rights assigned are reasonable to both sides of a transaction, and when the total societal cost of any regulation is kept to a minimum.
State governance schemes are well-intentioned, but can be rather crude and inefficient in their execution. Take taxi-regulation for example: licenses guarantee a certain level of quality and safety for consumers, whilst regulated fares remove the cost and risk of having to haggle for every journey. At the same time, though, these regulations result in high prices, inflated barriers to entry, a lack of competition and little reason for incumbents to innovate or improve their service. Whilst the state tries to efficiently balance the costs regulation imposes on each party it often falls short, both because of the grand Economic Calculation Problem, and things like capture of the regulatory process by special interest groups.
In contrast, Hammond argues, MSP technologies are very good at being governance institutions. For example, Uber has ruffled so many feathers because its popular service is arguably a superior system of taxi regulation, thanks to its use of participant rating systems, safety features, an algorithmic pricing structure and so on. And, by controlling a bottleneck to market access, Uber to some extent acts as a de facto private licensing authority.
These 'market regulators' tend to be good at governance for a couple of reasons. One is that they're free to harness new technology and experiment with different setups, driving down transaction costs. Another is the fact that a rival platform may always come along an offer an alternative service— and, as Hammond notes, "the only way to supplant an incumbent platform is to adjust the governance structure in a way that social costs are better compensated by maximising the bargaining surplus". This ensures that even when a market regulator looks like a natural monopoly, so long as there is the possibility of exit, the cost of regulation will tend towards the social minimum.
Hammond argues that this means that MSP technologies are not just a bit better at governance than state institutions, but that "they potentially meet the economic definition of an ideal 'public interest' regulator". And, just as Uber challenges traditional taxi governance models, we can imagine a future where all property rentals are listed on something like Air BnB, with tenancy acts and local regulation displaced by market-set rules and regulations which efficiently balance the interests of renter and landlord.
Such a situation should perhaps not be understood as 'deregulation', but a shift in the act of governance from the state to the firm, resulting, we assume, in reduced costs to society as a whole.
I particularly liked this post because it complemented some thoughts (and assuaged some fears) I'd had about the state harnessing new technology and commercial consumer insights to better perform its functions. In November I wrote a rather gloomy piece on 'algorithmic regulation' and the government's use of things like 'big data' and behaviour prediction to create more efficient, streamlined, and reflexive regulation, which, like the google search algorithm, would be constantly reviewed and updated according to insights generated into 'what works'.
Such algorithmic regulation, I thought, could make government regulation more efficient, less irrational and less intrusive—but it could also open the doors to forms of dystopic technocracy. Once governments have the ability to create, access, and utilise vast swathes of information on their citizens, they're likely to want to expand their scope of operations. Perhaps they'll be tempted to 'connect the dots' between different types of lifestyles and tax income, health outcomes and the like. The opportunities for Nudge-on-crack policies could be everywhere. In addition, behind the seemingly apolitical goal of 'rule by algorithm' it's easy to smuggle in hidden political assumptions, and use questionable or untrue assumptions to dictate what our government supercomputers do. Nonetheless I felt I was being an unwarranted techno-pessimist, so I filed it away my wonderings before resurrecting them recently on my tumblr.
However, Hammond's post sketches out an alternative governance system I'm much more of a fan of. Instead of harnessing private sector insights and using them to aid an intrusive and bloated state, he imagines a situation where government effectively outsources certain functions to private bodies (Uber as a private licensing authority, etc). And, because these bodies have to respond to market pressures, if they do a bad job or overstep the mark parties can vote with their feet. These alternative governance systems are less likely to cater to special interests, and don't require the state to handle so many terabytes of personal data. We still have algorithmic regulation, but done more on the terms of the parties affected instead of the state.
To me, neither of these two futures of regulation seem implausible. But I certainly know which one I'd prefer.
Economic Nonsense: 39. Only strong government regulation can hold big business in check
It isn't strong government that causes concern for big business. They are more worried about the smaller, newer businesses that might take away their trade. It is competition, not government that they worry about. Big business often cozies up to big government. It employs lobbyists to negotiate with civil servants and ministers, and hammers out agreements on what types of regulations should be introduced, and how they should be implemented.
Big business can cope with regulation. It can afford the staff to deal with compliance. Small businesses, especially start-ups, find it more difficult to afford the money or the staff time that regulatory compliance takes up. Big business knows this, and often strikes deals with lawmakers to impose regulation that will deter newcomers from entering the market. Far from it being used to control big business, regulation often helps big business by imposing unacceptable costs on its real or would-be competitors. People speak of "regulatory capture" when the industry works with government to secure helpful regulation.
Some regulation is needed to reassure the public that it will not fall victim to sharp practice or shady dealing, but five words should be engraved above the door of every legislator: "Competition is the best regulator." It is competition that keeps firms striving to deliver high quality and keen prices. The fear of losing trade is more powerful than the fear of incurring the displeasure of government.
Regulation is commonly used to protect those in the market from competition by those who might enter it. If no-one can trim hair without training and a certificate, the prices charged by existing hairdressers will not be undercut. If no one can enter the taxi trade without a medallion or a two-year training course, the fares charged by existing cabbies will be protected. All rules like these are done in the name of protecting the public, but in reality it is the established operators that they most commonly protect.
To control big business government should pursue a policy of promoting competition. It should make it easier, not harder, to enter established markets. This, more than regulation, will keep firms attentive to their customers.
Economic Nonsense: 24. Strong laws are needed to curb the activity of speculators
The villains of the piece change as the economy changes. At one time it was money-lenders, then corn merchants. In modern times speculators are up there with bankers in popular dislike. Speculators are commonly perceived as people who add nothing to a product, and often as people who profit from the hardships endured by others. They are seen to buy cheap in the hope that the price will rise, then sell at a profit without having added to or improved whatever it was they speculated on. In fact speculators often provide a useful service. They can take the burden of risk that others might find difficult to deal with. The speculator who buys a farmer's crop in advance gives the farmer the certainty of a price. Farming is an unpredictable activity, and the market price when the crop I harvested might be higher or lower than that agreed price. The speculator hopes it will be higher and takes the chance, but the farmer prefers the certainty of a known price that enables him to plan his affairs.
When speculators buy or sell commodities hoping to profit from price changes, they dampen some of the fluctuations. If they bet on a future shortage, they will buy now in the hope of selling for a higher price. If enough of them do it, the effect of buying now is to raise the price now, signalling to users to curtail their use, and to producers to bring out more supply. The same happens in reverse if they bet on a future glut by selling.
Businesses that sell to other countries face the uncertainty of not knowing what their goods might fetch in foreign currencies at the time of their delivery. They can smooth this by buying or selling currencies in advance from speculators prepared to take a punt on future changes in exchange rates.
The invisible service that speculation adds to goods is risk management. It is a valuable service, but because people cannot see it, they see it as money for nothing. Always there will be populist politicians prepared to trade on their resentment and propose tough laws to curb an essential service that helps markets to work more efficiently.
Who rules Britain: how much of our law comes from Brussels?
Business for Britain was right, on 2nd March, to question the proportion of our laws that comes from Brussels. Nigel Farage says it is 78%, Nick Clegg 7% and the House of Commons Library 13.2% but that is also an understatement due to the Library’s omission of no less than 49,699 EU Regulations, during the same 21 years to 2014. EU Regulations are not approved by Parliament and thereby escape the Library’s attention. From that, Business for Britain concluded that 65.7% of our legislation comes from Brussels. The figures, in fact, get murkier because the Library also seems to have omitted up to 2,000 statutory instruments a year, which would offset most of the swing. SIs are the UK equivalents of EU regulations: both are secondary or “delegated” legislation and cover a broad range of rules from laws in the full sense to temporary road closures. SIs can even be used to repeal primary legislation.
The proportion from Brussels is really beside the point, namely the total number of rules both from Brussels and Whitehall. Governments claim they will staunch the flow but little is done. Surely by now we must have enough laws?
Curiously, so far as business regulation is concerned, Whitehall is the bigger offender. In 1972 we signed up to a Common Market. That is the one bit of the EU we all like and let us hope that, and not much else, survives the EU renegotiation. A single market must have a single set of rules governing that market. You cannot have a single market if everyone makes their own. The market-maker is the EU and it is no more a loss of sovereignty to conform to their rules than, say, playing by the club’s rules when one joins a poker club. Sovereignty is being able to opt out.
Business, like poker, is competitive so it is crazy to add ones own rules, hobbling one’s own business, to those required by the club. Telling the others at the table that you will never raise on, say, two pairs, stacks the odds against you. For this reason, counter-intuitively, it would be best if 100% of business regulation came from Brussels.
If a regulation is needed in the UK then we should ensure Brussels adopts it for the rest of the single market. If the others think it is unnecessary, we should think again. Rather than dreaming up its own business regulations, Whitehall should be staunching the 4,000 a year flow from Brussels and ensure that what does get through will deliver the open, fair and competitive single market we need.
Not only can we ditch all UK business regulations not required by the EU, but, with all that new free time at their disposal, our civil servants can be out and about in the capitals of Europe developing best practice, closer working relationships and, in consequence the simplest and best set of rules. In this game, fewer is better as anyone who witnessed the FSA contribution to the banking crisis can testify. Indeed, they will not need desk space in Whitehall, probably the most expensive in Europe, any longer.
There is little truth in widespread view that we must accept EU legislation without demur, beyond fine tuning directive-based legislation a bit. The European Scrutiny Committee of MPs “assesses the legal/political importance of EU documents, deciding which are debated, monitoring the activities of UK Ministers in the Council and keeping developments in the EU under review.” In other words, it is supposed to be briefed with EU Regulations in draft and seek to amend those not in the UK interest. How often does it do that? Hardly ever is probably a generous estimate. When that doughty EU fighter, Sir William Cash, became chairman, some of us hoped for action, but no, he was overcome by the same torpor as overwhelmed his predecessors.
In short, Business for Britain are right to complaint about the excess of regulation from Brussels but we should complain even louder about the excess from Whitehall and Parliament’s spineless defence of British business.
Enemy of the steak: what's wrong with government diet guidelines
As an amateur chef I have become increasingly interested in the government’s guidelines and regulations around food. For something so central to our lives, the advice and rules the government makes to do with what we eat are usually overlooked. Two developments this week suggest that this is a mistake. I have previously argued that government regulation is often bad because, if it turns out to be bad regulation, it imposes a single error across an entire group of people or firms. That view may explain the financial crisis, where banks were required to hold lots of mortgage debt by regulators who thought they were forcing banks to be sensible.
Now, it looks as if it might also apply to diet guidelines. This week a new paper has been published that argues quite convincingly that, not only does modern evidence show that government guidelines to reduce dietary fat intake were a bad idea, they were even against the bulk of the evidence available at the time.
Today, it’s being reported that the US will stop advising people to avoid dietary cholesterol, because of a change in nutritionists’ view of how our diet affects our bodily cholesterol levels.
The Verge says that ‘The DGAC is more concerned about the chronic under-consumption of good nutrients, noting that Vitamin D, Vitamin E, potassium, calcium, and fiber are under-consumed across the entire US population.’ Interestingly, high-cholesterol foods like eggs, offal and seafood are very high in some of those vitamins.
It’s tempting to suggest a connection there – that vitamin deficiencies may be a direct cause of misguided government diet advice. And this may be the case. But, having looked around and spoken to the British Nutrition Foundation, I can’t find any work by either the government or independent academics on how much impact these guidelines have on what we eat, let alone on our health. (The exception is the five-a-day campaign, which has been fairly successful.)
If it turns out that diet guidelines have been wrong on things like fat and cholesterol, and maybe things like salt as well, what are the costs? I see there being two potential downsides to bad advice. The first is that the advice is actually dead wrong and drives people to eat in ways that ends up being worse for their health. Perhaps this is true of the cholesterol advice.
The second, which is more ambiguous, is the welfare cost. We eat not just for sustenance but because it gives us pleasure – a steak done well is much better for me than a well-done steak, because, even though the nutritional content is basically the same, it makes me happier. If government guidelines have been mistakenly putting people off eating foods they enjoy then they have been costly in welfare terms even if the health impact is not significant.
Of course people may need to get advice from somewhere, and I don’t see any reason to believe that government advice is worse than, say, the stuff you get in the Femail section of the Mail Online website. But if government diet regulations are still likely to be mistaken, and they influence people much more than any single bit of diet advice from an independent source, then they may end up holding back a process of private trial and error that would give us better information about what’s good to eat over time.
This picture is illegal in California
Or rather, the action being performed in that picture is illegal in California. It's not that the lettuce is not organic or anything. It's that it is evidence of someone working during their lunch break:
I mentioned earlier that we had struggled to comply with California meal break law. The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day. They said they would sign a paper saying they had agreed to this. Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I. What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties. The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of). Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills. This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.
Eventually a system becomes so encrusted by such nonsense that nothing useful can ever be done and all that can be is to chase the paper around in ever decreasing circles. That is arguably what happened to the Ottoman Empire, various incarnations of the various Indian and Chinese empires and so on and on. It's one of the reasons that we here shout so loudly about regulation and the necessity of a bonfire of much of it.
We do not say that there should not be regulation, not at all. But we do say that we need to carefully consider who is doing the regulating. There are times and circumstances when it does need to be the bureaucrat or the politician. But far more often tasks that they take upon themselves will be better regulated through what we might call simple market processes. Markets are, after all, just the interaction of voluntary behaviour and surely we can trust two adults to agree between themselves about whether someone might usefully check a spreadsheet, or not, while munching on a salad?
With property rights, there are plenty more fish in the sea
We at the Adam Smith Institute need little further evidence that property rights are the best way to an efficient allocation of resources. Even so, more literature on how property rights can work in different industries and regulatory environments is always welcome. A new National Bureau of Economic Research paper looks at how the strength of property rights can affect regulators' willingness to allow the exploitation of natural resources. They focus on the most common system of regulation, which sees a limited number of firms given the right to extract to the level of a cap set by a regulator. They attribute this, at least partly, to a benign form of regulatory capture.
Commonly, it is seen as an unwelcome anticompetitive force, leading to the overexploitation of resources by monopolistic producers in industries with clearly defined property rights. However, because of the temporary, weak, and ill-defined nature of rights in the natural resources sector, the authors suggest that this analysis is not applicable. Instead, they find that
when property rights to the resource are strong, the regulator’s choice (which is the product of resource harvesters’ influence) coincides with the public interest. However, when property rights to the resource are weak, the regulator’s choice leads to overexploitation. This suggests that the resulting extraction level is closer to the socially-optimal extraction level when rights to the resource are strong.
The authors distinguish between 'weak' and 'strong' property rights using the probability that such rights will be revoked – the more likely, the weaker the rights. They propose that, when rights are strong, firms influence regulators (either formally by voting in regulatory councils, or by informal means) to choose a lower extraction rate than they would in a situation with less secure property rights, because they are less concerned about those rights being revoked in the future. In addition, regulators discount utility from future harvests less when there is less risk of rights being revoked, causing them to favour less current extraction.
The paper tests this thesis empirically against novel panel data from 178 of the largest commercial fisheries, and finds that regulators are "significantly more conservative" in their management of resources when property rights are most secure. In those cases where poorly managed fisheries switch to a 'Catch Share' system, with more secure property rights, there is a significant fall in exploitation, supporting their thesis (the fall prior to the switch is attributed to a gradual policy change in the face of overexploitation):
If in practice the Coasean idea that the assignation and enforcement of property rights – through their effects on the decisions of regulators – lead to more efficient outcomes, this has important implications for policy. It gives us an even greater incentive (as if we need it) to promote the institution of secure property rights, especially in those resource-rich low-income countries which could be subject to a swift depletion of natural resources due not only to tragedies of the commons, but also to the insecurity of extractive firms property rights.
Uber: helping drivers, helping customers
The first comprehensive analysis of Uber 'partners' (i.e. drivers) has come out, written by Dr. Jonathan Hall, head of policy research at Uber, and Prof. Alan Krueger, of Princeton, and formerly Barack Obama's top economist. The results in short: Uber provides flexible employment at higher per-hour wages than traditional taxi driving, while building up reputational capital that traditional taxi systems cannot offer. It does not undermine traditional employment more general, or enhance inequality, but we all know how cheap the fares can be, and how useful the service is (this previously led me to believe that its stratospheric valuation might be justified).
This paper provides the first comprehensive analysis of Uber’s driver-partners, based on both survey data and anonymized, aggregated administrative data. Uber has grown at an exponential rate over the last few years, and drivers who partner with Uber appear to be attracted to the platform in large part because of the flexibility it offers, the level of compensation, and the fact that earnings per hour do not vary much with hours worked, which facilitates part-time and variable hours. Uber’s driver-partners are more similar in terms of their age and education to the general workforce than to taxi drivers and chauffeurs.
Uber may serve as a bridge for many seeking other employment opportunities, and it may attract well-qualified individuals because, with Uber’s star rating system, driver-partners’ reputations are explicitly shared with potential customers. Most of Uber’s driver-partners had full- or part-time employment prior to joining Uber, and many continued in those positions after starting to drive with the Uber platform, which makes the flexibility to set their own hours all the more valuable. Uber’s driver-partners also often cited the desire to smooth fluctuations in their income as a reason for partnering with Uber.
As we see above, Uber drivers really like their jobs, and that's probably why so many of them are still there a year later. I actually feel quite sympathetic towards existing taxi drivers both in the UK and US. They were forced by existing rules to invest heavily in getting their privileged spot in the market place, and Uber is effectively circumventing this process altogether.
This suggests we should compensate taxi drivers so that in the future people are not so worried that tech changes will force transformational rule changes that will ruin them. But this progress promises improvements on practically every margin of taxi driving; I can imagine a future where no traditional taxi driving exists—indeed with self-driving cars I can imagine a future where only an Uber-style rental-taxi system exists. So, compensation aside, it must go on.
A plain pack of lies
BBC News tells us that: “A law introducing plain cigarette packaging in England and Wales could come into force in 2016 after ministers said MPs would be asked to vote on the plan before May's general election.” We really are seeing the thin end of the wedge here as yet another misjudged interference in the free market looks set to take place. The confusion that people like Public Health Minister Jane Ellison harbour is that they only seem to think of smoking in terms of bodily damage. Yes, if you only want to think about smoking in terms of the effects of physical degeneration on body parts, then cigarettes are a terrible thing, and plain packaging can be argued for on those (albeit flimsy) grounds. But only a fool would do that. Jane Ellison is presumably aware that many people still smoke even though they have full knowledge of how bad cigarettes are for them. With this knowledge she ought to have a clue that there is a reason people smoke in spite of knowledge of its degenerative effects – they enjoy doing it. Clearly people who voluntarily hand over money to buy and smoke cigarettes have accounted for cigarettes being bad for your health, but have still concluded that the positive effects of smoking outweigh those negatives. Ben Southwood's blog on smoking is particularly appropriate here.
Contrary to the 'plain packaging' lobby's misapprehension, it is trivially obvious, that smoking is only entirely bad for you if you forget all the reasons that it is good for you. The trouble with going down this road is that if you consider only the costs, then just about everything is bad for you. Take drinking water. By only counting the costs you'd find drinking water is a pretty disagreeable action - it brings about increased urination, it causes time lost in the toilet, it engenders increased chlorine levels in your stomach, and it causes gradual damage to your detrusor muscle in the bladder. Drinking water - one of the most innocuous activities we can undertake - has risks and it has costs, but no one thinks it's bad for you in net terms. Quite the contrary, in places where water is scarce we do all we can to make it plentiful.
Governments interfere too much by focusing only on costs and ignoring benefits. It’s unsurprising that people like Jane Ellison want to trespass into other people’s free choices so much – she’s only aspiring to do what the state does on a frequent basis. This is the simple and straightforward reason why I'm a libertarian, and why I hold the view that a small government is best. People know how to run their lives better than any government. That's not a blanket truism, but it's true for the vast majority of people, and it's true in the majority of ways that relate to how we live our lives by making cost-benefit analyses and exercise our freedom of choice. Politicians are quick to interfere or ban things that have costs, which often involves failing to appreciate that humans can decide for themselves whether those costs are worth paying.
Because it is impossible for the state to know how much every individual values health, exercise, weight training, smoking, alcohol, and so forth, it is impossible for the government to know better than its citizens what is good for them. A good government would understand this, and seek to minimise its involvement in our lives to enhance our welfare and liberty, as the quality of welfare and the benefits of liberty are synchronised to enable people to voluntarily undertake the activities they prefer.
Another strange idea to reform the housing market
It does continue to amuse us, watching the contortions that people twist themselves into in their attempts to reform the housing market. As opposed to, you know, just getting on with issuing more planning permissions so as to bring down the price of housing. The latest one is that self-builders should be treated as special little snowflakes with their own, special snowflake, planning permissions system:
But we also need to reform the land market, to make it dramatically easier for those without much capital to buy a plot of land and commission their own homes – either individually or as a group. All political parties pledge theoretical support for custom and self-build, and the government’s “Right to Build”, which allows people to buy council land on which to build their own houses, is a first step. But systemic change is needed to create a market providing land specifically for custom and self-build housing.Let’s create a new land use class in the planning system “C5 Custom build”. In effect, that would create a parallel land market that differentiates between a house built as a speculative asset, and a house built as a place to live. Let’s create space for both, and see which works.
There's only one problem with this suggestion. Which is that we don't in fact want a special class of planning permission for self builders. What we actually want is simply the issuance of more planning permits. For as is entirely obvious to everyone the price of housing in the UK is determined by a shortage of said planning permissions. So, therefore, we don't want the creation of a special system for special snowflakes, we simply want the loosening of the planning permission system as a whole. And then indeed self builders can run alongside more commercially minded organisations and may the best man win.