How iPhones and Uber Cut the Red Tape and Expanded the Economy

How iPhones and Uber Cut the Red Tape and Expanded the Economy

Last week, America heard the sad news that the VCR has finally been retired. That surprised some of us who assumed that DVD and Blu-Ray technology had already killed any interest in manufacturing new VCRs. After nearly 60 years – and 40-plus years as a mass-produced consumer product – the last manufacturer could not ignore its obsolescence any longer, created by innovation and open-market principles.

It’s worth remembering, though, the attempts to push government into protectionist positions in the development of the VCR’s successors, as well as the VCR itself. The emergence of an affordable recording technology generated a near-panic in the entertainment business at the time. Horror stories about the potential for piracy abounded, and not without good reason, but also of the social damage caused by allowing people to watch television and movies on their own schedules rather than that of producers. At times, they succeeded in restricting recording devices, but inevitably the next generation of innovation made those restrictions obsolete once more.

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In the end, though, the technology created new markets rather than robbing providers of the existing consumer framework. Studios discovered direct-to-video markets for lower-profile fare. They also grew much fatter on sales of theatrical releases on home-video platforms than they ever did through re-releases. One would be hard-pressed to think of a television series that couldn’t be acquired for cash on DVD or Blu-Ray, a market that became much more practical for consumers with those technologies than with tape.

Nor is this the only recent success story regarding free markets. When the government sued AT&T to break up the phone monopoly, many Americans wondered why we should dismantle the best telecommunications system in the world. Thirty-five years later, the answers are myriad. An entire generation only understands “long distance charges” as an ancient relic. Telephone companies have to compete for service at the local level. The smartphone most of us carry wasn’t even a dream at the time of the divestment in 1984. But even before all that took place, AT&T itself notes that consumers woke up the next day in a free market “to discover that its telephones worked just as they had the day before.”

The smartphone itself figures into a new technological challenge to an existing, protectionist market – taxis. Thanks to the proliferation of both smartphones and GPS services, new services like Uber and Lyft have emerged, blending social-media technology and the demand for hired transportation into brand-new choices for consumers.

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Until now, however, the hired-transportation industry has been tightly controlled by local governments that hand out an artificially low number of taxi medallions. Limousine services run a similar gauntlet of regulation. Both government and providers routinely warn of the dire consequences of deregulation and democratization of the market through the Uber/Lyft challenge, including market collapse, consumer exploitation, and other ills.

Oddly enough, I can actually sympathize with that argument – to an extent. Almost thirty years ago, I spent a couple of months driving a cab in southern California, and it’s a tough business. Drivers spend long hours attempting to earn a decent living by either rushing around a territory or by standing still long enough to get a fare at an airport or bus station. The customers on night shifts come from all walks of life; had I been a more disciplined writer at the time, I could easily have filled a book.

However, much of the tough aspects of the job came from the regulations and available technology at the time. The costs of licensing – imposed by governments and supported by the major players – and the artificial shortage of medallions made it nearly impossible for drivers to act as free agents. Taxi companies controlled the dispatching, thanks to their economies of scale. Drivers couldn’t access information about consumers and consumers had to trust the license of the driver. For consumers, access to services outside of high-density urban areas is limited and usually costly. Almost all of these shortcomings are resolved through the new technology used by Uber.

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But what about the market collapse for traditional transportation services? Yahoo’s Rick Newman took a look at the biggest market of all, New York City, to see how Uber and Lyft has impacted the taxi market. Not surprisingly, the newer services have bit into the taxi market, comparing April 2015 and 2016 numbers, but total trips dispatched per day by taxis only declined 9 percent. Uber traffic increased 121 percent, while Lyft rose 871 percent, albeit on a much smaller share of the market.

The important point to note, though, is that the market itself grew over the last five years since Uber and Lyft entered the Big Apple. “In April, taxis and ride-sharing services together provided nearly 614,000 trips per day to people in New York City,” Newman reports from the Morgan Stanley study. “That’s 25 percent more than five years ago.” Furthermore, most Uber and Lyft drivers work part-time to supplement their income. “So thousands of people still driving a cab feel the job is lucrative enough to do it full-time.”

In other words, breaking down artificial barriers to markets does not create chaos – it creates opportunities. Would the transportation business in New York City have grown 25 percent in five years if still restricted to the medallion operations? Would we even have known of that pent-up demand without new-technology entrants Uber and Lyft?

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Time and time again, we have discovered that reducing regulation and intervention in markets and allowing providers to innovate increases consumer choice, lowers cost, and expands markets. Local governments may belatedly learn this when it comes to taxis – and we can only hope that the federal government will figure it out soon when it comes to health insurance, energy, and any number of other over-regulated markets.