Regulation for Bricks, Clicks, and the Sharing Economy

Our regulatory structures 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 (shorthand for the older traditional economy) and Clicks (shorthand for the newer tech-addicted economy in all its manifestations) are increasingly colliding and merging — forcing society to revisit our regulatory structures[1]. Nearly all our current laws and regulations were crafted for a world where the Internet, high speed digital computing, and the modern sharing economy didn’t exist.

Any start date for the digital era is arbitrary, but let’s date its beginning, for the sake of discussion, from the availability of the IBM 700/7000 series (circa 1952[2]). At first, the digital age had little direct interaction with the world of Bricks. Computers were first used for large scale computational work (e.g., artillery trajectory tables) and payroll and accounting work. The digital world operated in batch mode (programs were typed on punch cards and left to run overnight at a data center, and realize that punch cards were still in use as late as the mid-1980s). Amazon was 50ish years in the future, and people shopped in stores made of bricks and mortar, or ordered from catalog retailers (who often maintained physical showrooms).

However, Moore’s law (processing power doubles every 18-36 months) has proved unrelenting. The speed and memory capacity of your smartphone dwarf the power of that 1952 IBM 700. As processing costs have declined exponentially and other technologies have advanced, the world of Bricks and Clicks are increasingly merging.

In one sense, nothing is really new about Uber or Airbnb. London has had taxi service since 1654[3] (the first taxis were horse-drawn carriages), and car services were available as early as the 1930s. And renting out a spare room has been happening for centuries. What has changed — and that change is dramatic — is the decline in transaction costs and increase in market efficiency brought about by adding the world of Clicks to the world of Bricks.

Yes, I remember calling an old style car service in the 1980s: being put on hold, trying to communicate my exact location (somehow this was never easy), having a car and driver pull up about whom I knew nothing, and so on. Leaving aside the cost of the ride, the transaction costs of this experience (time on hold, time waiting, hassle trying to find the driver) were all very high. Bringing together dynamic pricing, smartphones, GPS, stored billing information, a two way rating system (you rate the driver and the driver rates you) and much else – make the new shared economy a very efficient system for transacting business, and not surprisingly, more business is happening.

This merging of the worlds of Clicks and Bricks necessitates re-examination of existing regulatory policies, guided by the three categories below:

  1. Regulations that remain necessary in some form in our digital era: For example, most cities have auto inspection and safety rules for cars, particularly for cars used to carry paying passengers. The safety concerns are the same, whether the passenger is picked up by Lyft, Uber or a traditional car service. These laws served a legitimate purpose prior to the merging of Clicks and Bricks, and that purpose remains applicable, even in the digital age.
  2. Regulations that are obsolete for the digital era: As an example, in a different time, when horses were the major mode of urban transportation, all sorts of regulations 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 had to be re-examined (and eliminated or revised) if unnecessary or detrimental to new transport needs and goals.
  3. Regulations 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.

Many regulations serve important public purposes. Government is far from useless — it creates a lot of value. (Hint: you can drink water from your faucet because of government requirements and regulations; imagine a major city without a municipal sewage system and sanitation regulations.) However, governments (and their policies) are subject to capture by special interest groups. As Adam Smith[4] 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.”

The easiest way for companies and businesses to conspire against the public is to have government create artificial barriers to entry (through laws and regulations), and thereby create rentier profits for certain fortunate businesses. As with any tectonic shift in market structures, the sharing economy forces us to ask: Which regulations need to be updated, which are just irrelevant, and which ones are barriers to entry created by special interests?

This discussion of special interests has been a little abstract, so let’s be more specific. The number of yellow taxis allowed on the streets of NYC at any one time is restricted to 13,437[5]. No matter how great the demand, the capacity of the streets, the time of year, or the strength or weakness of the NYC economy – only 13,437 yellow cabs are allowed on the streets of NYC. This magic 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 NYC) – about $1 million[6] – reflects this high demand.

You might wonder why the number of taxis on NYC’s streets is limited. One legitimate policy reason might be to control traffic congestion. That would imply a flexible system, shifting with the city’s needs and capacity (increasing or decreasing the medallion supply, as needed). But as it happens, the number of medallions doesn’t fluctuate in response to demand, capacity, or any market factors. Another hypothesis is that the limited, magic number of taxi medallions is closely connected to the power of the medallion owners (who are major donors to NY politicians and hire vocal lobbyists). NYC medallion owners are a concentrated special interest group, with a particular overriding focus on limiting the issuance of new medallions. The general public that rides taxis also has an interest in taxi service – more and better service – but for most people outside the taxi industry, this isn’t their highest priority. For medallion owners, the taxi medallion represents their livelihood. The special interest group consisting of medallion owners, therefore, can have an outsized influence on one narrow issue. But the rise of Uber, Lyft and similar services means we suddenly have new and powerful interests at the table, challenging the old rules.

My example is specific to the taxi/car service industry, but my point is a more general one. One side benefit/effect of this collision of Brick and Click worlds is a forced “housecleaning” of our laws, policies and regulations. As significant new participants emerge, they’ll seek to remove existing trade and investment barriers that hinder their business models – and (no doubt) try to create new barriers and regulations benefitting their own interests.

Welcome to a brave new future; my one and only prediction: it will be a great time for lobbyists!

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Filed Under: The Economy, economy