Against Compensation for Uber’s Competitors

Last Monday my post celebrated Uber, the car service summoned by phone apps, arguing that this disruptive technology promotes efficiency, helps the environment, and reduces inequality. Some commenters nevertheless suggested that taxis should be compensated for the loss of value to their business caused by Uber.

I do not believe compensation is warranted as a matter of law or policy. First, unless the localities had given taxi services an express contractual or charter right to be the exclusive carriers, permitting entry by Uber would not violate the Contract Clause. That proposition is as as venerable as the Charles River Bridge case where the Taney Court held that a new bridge could be built over the Charles River despite a previous state charter granted to a bridge building company for the same river.   Economists have thought this case important to American economic development, because it impeded the establishment of state sanctioned monopolies.

Nor does licensing Uber violate the Takings Clause, because in general a taking occurs only if the value of property is decimated rather than diminished by a regulation. Taxis would still be permitted to pick up passengers who hailed them. Perhaps the Takings Clause should be expanded to include more regulatory takings, but it would be perverse to begin by invigorating the clause to protect rights created by government regulation against new entrants.  That kind of ruling would encourage rent seeking, because the value created by government regulation would become more secure.

Compensation is also a policy mistake.  New technologies always replace the old. That is the story of the creative destruction of capitalism. Providing compensation would make individuals less likely to shift employment in the face of foreseen technological change and government more likely to suppress innovation. As David Bernstein notes in a Facebook post, it is technology not government action that is the root of the harm to taxi services, because taxis can continue with their approved business model of picking up passengers on the street. Taxis are in the same position as blacksmiths, carriage makers, and providers of telegraph services, all enterprises that lost out to new competitors with better technologies. Adaptation, not regulation or compensation, is the policy best suited to promoting long-run economic growth enabled by technological improvement.

John O. McGinnis is the George C. Dix Professor in Constitutional Law at Northwestern University. His recent book, Accelerating Democracy was published by Princeton University Press in 2012. McGinnis is also the co-author with Mike Rappaport of Originalism and the Good Constitution published by Harvard University Press in 2013 . He is a graduate of Harvard College, Balliol College, Oxford, and Harvard Law School. He has published in leading law reviews, including the Harvard, Chicago, and Stanford Law Reviews and the Yale Law Journal, and in journals of opinion, including National Affairs and National Review.

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Comments

  1. gabe says

    John:

    Your argument appears to be based upon some erroneous understandings of the specific limits placed upon taxis in certain municipalities and also upon the licensing of such conveyances.
    As an example, in the seattle area, per code, only licensed medallion (somewhat different than NYC medallions, to be sure) are permitted to convey passengers. I use convey rather than pick up because they are expressly forbidden from picking up passengers who hail them. Now comes the city and decides that Uber may in fact do what the taxis may not. Moreover, this is counter to the established rule that only certain taxis may operate as indicated by code (and at a rate set by the municipality). Thus, one can argue that it IS government action that is the root of the harm experienced by this industry.
    Can the taxis adapt? Yes – and they should; however, when a substantial fee has been paid in order to operate under certain governmentally defined conditions with the expectation that all will play be these rules AND the government then changes those conditions to the detriment of the taxi industry, it is not unreasonable to expect that the government should be held accountable for the damage it has inflicted.
    It does not need to be money – perhaps, the taxis should be free to operate as they do in NYC, etc and pick up hailing passengers or be permitted to pick up passengers at the airport instead of limiting that to only certain taxis. Just think of the regulations we could rescind. Oh Happy Day, Oh Happy Day!!!!!!(insert your own musical notes).

    • R Richard Schweitzer says

      “Now comes the city and decides that Uber may in fact do what the taxis may not. ”

      Not pretending to knowledge or expertise, but overall that does NOT seem to be a correct statement of the conditions, at least generally (which is what leads Uber and Lyft to simply start services without making “application”).

      It is simply that the “Rules” as written do apply to, and do not fit the activities of Uber and Lyft.

      If the rules don’t fit, it’s not a question of allowing anything. The Law (real Law) is whatever is not prohibited (by Common Law or Statute) is permitted.

  2. nobody.really says

    New technologies always replace the old. That is the story of the creative destruction of capitalism.

    It is — and that’s a controversial story. There is no theoretical basis to conclude that the benefits society accrues from innovation will outweigh the cost.

    But it’s also more than the story of creative destruction; it’s the story of inducing private parties to make investments based on the state of the law, and then changing the law. (Arguably the current case is even worse than that; the current case involves selective imposition of a regulatory regime on some drivers but not on similarly-situated rival drivers. I suspect even McGinnis is not defending this practice.)

    Ultimately I suspect McGuinnis is right both as to the law and the economics. As a matter of law, I’d guess that a court would uphold the right of a municipality to terminate its policy of requiring taxies to obtain medallions, or to reduce the requirements for obtaining a medallion and to issue more of them. (Selective enforcement might still pose a legal challenge.) And as a matter of economics, I suspect society will derive more benefit from Uber than it will destroy by permitting Uber to operate.

    Mostly I wanted to point out that part of the social benefit I derive from innovation is, in practice, the reallocation of wealth from others.

    And I wanted to raise the meta-question of law and economic policy: Does society derive optimal benefit from retaining the flexibility to change its policies as new circumstances warrant, unencumbered by the harm these changes impose on private parties? Or does society derive greater benefit by protecting the incumbent interests of private parties when they act in reliance on government policies, thereby inducing them to make long-term investments in reliance on regulatory stability? Arguably, the former policy is more “democratic.” That is, it grants the current government a freer hand to respond to its current constituents; the later policy would give a past government a stronger hand in responding to its constituents, arguably at the expense of future governments and future constituents.

    In some respects, this boils down to defining the boundaries of private property. How explicit must “express contractual or charter rights” be before people accrue a compensable property interest in them? I think the US had no obligation to compensate the shareholders of Fannie Mae and Freddie Mac, for example, but others seem to feel that the implied obligation was sufficiently strong.

  3. gabe says

    Nobody:

    good post. I also am conflicted about this situation. As a general principle I do not wish to see the government providing a compensatory benefit to those affected by change (destructive or not). Yet, on the other hand when an individual (or an industry) has been forced into a government mandated scheme with an expectation (wrong, perhaps) that such a scheme will continue, and consequent to that, invests rather large sums of capital to engage in the state mandated scheme, then there is a question as to what is proper and as you point out – Is there a property right in same?
    I also agree with the Fannie / Freddie comment. One can not argue that there was any government compulsion involved there; that, however, is not the case with the taxi industry.
    IMO, I would simply drop most of the restrictions on taxi service and have Uber operate under the same. If there was a valid state interest in requiring medallions in the first place, then perhaps it still exists and Uber ought to play by the same rules. By virtue of using a smart phone app, are we to dispense with the supposed “safeguards” that the state imposed in the first place. I think not!
    You want to compete – do it on the same terms.
    Alternatively, if the state wishes to allow Uber to operate on less restrictive terms, then maybe the state should compensate those whose investments are diminished by the lessening of those same government licensing requirements applied unequally as they are.

    seeya
    gabe

    • R Richard Schweitzer says

      Gabe,

      “States,” despite judicial efforts at artificial insemination, have no “interests.” Only people, individuals, have interests, which they may hold in common with others.

      That concept is one of the great malignancies of our time; and it has metastasized.

      • gabe says

        Correct – unfortunately the typefaces available on my computer do not have an option for “sarcastic” when typing the word “interests” – would have been better if I added “purported.”
        And I do like the ” judicial efforts at artificial insemination” – although this version of the process is apparently different in that it actually hurts!!!!

  4. R Richard Schweitzer says

    Here follows my last post (now archived) on the previous go at this issue about Uber:

    “If **changing** the **law** to accommodate Uber (and others) has the effect of . . . ”

    As noted in other contexts, we are dealing with regulations, ordinances and legislation which are Rules of Policy; which are given the “force of Law” but are not LAW.

    In most of the issues confronted so far (in this transition) the Rules of Policy are not “changing.” In most cases, those Rules do not cover the manner of establishment of relationships and conduct of activities which are affecting the complainants. In some cases, authorities are attempting to “stretch” the Rules now in place, but their motivations are probably mixed, rather than rights or economics driven.

    “What may seem like a big social benefit may principally be the re-distribution of **some else’s private property.**”

    The monopolies involved are those of privilege to **establish and conduct a relationship** with others (provide transport). those others are customers, and the relationship is as much their right as it is that of the monopolists. That relationship is not being “re-distributed.” One party (the customer) is making a determination (of convenience and necessity).

    If that customer power of determination *requires (or public passive acceptance allows)* the exercise of police powers for public safety, that requirement may be subject to test. But, it has naught to do with property, it is a matter of relationships.

    Most of the evidence so far does not indicate that the new format of service is less expensive to the customers. It seems to be a matter of service, time and response to need.

    Now, let us address the effects of regulations that destroy the use and value of coal fired electricity generators – which are property – shall we?

    To add to that: “Open Access” requires freedom in determination of association and relationships. We have, for almost 70 years been on a path of reducing Open Access. This will return a Republic to an Oligarchy (the current general arrangement of transport or “conveyance” services).

    • nobody.really says

      Now, let us address the effects of regulations that destroy the use and value of coal fired electricity generators – which are property – shall we?

      That’s a fun example. I’ll be interested to see what happens to the value of stranded investment. I would not be at all surprised to see that utility ratepayers end up compensating regulated utilities for these costs. Time will tell.

      • R Richard Schweitzer says

        N.R.,

        Well, yes, that effect to as to replacement facilities or methods.

        But the destruction of “existing values” should be part of a “taking.” That destruction cost or loss would not generally be in the rate-making process – at least by my experience. Now, the costs of maintaining insurance against the risks of “shut-downs” (nuclear and other) are in the base.

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