FreedomWorks Foundation Content

Uber Creates Abundant Supply, Price Controls Create Shortages

As seen in Forbes

Do you ever wonder why there’s generally always an “Uber” when you need one? Don’t worry, the post-lockdown exception to this rule will be discussed at conclusion. For now, think about why Uber is always there when you need it. What’s the secret?

The answer is kind of obvious, or should be. And it’s a happy one. Uber treats its drivers as customers. For one, drivers are encouraged to rate their passengers. A rude passenger, or one who is late for the driver, or one who makes a mess of the car transported in will be given a low rating. Unknown is if a stingy approach to tipping factors into passenger ratings. If not, it should. Uber empowers its drivers to essentially “fire” problem passengers.

Of course, the most important way that Uber treats its drivers as customers is in terms of pricing. The latter rises to reflect high demand, bad weather, standstill traffic, and anything else that might act as a deterrent to drivers getting out on the road. This is crucial. By allowing prices to reflect reality, Uber creates an incentive for drivers to be out in large numbers when they’re most needed.

Put another way, Uber allows prices to rise in order to avoid driver shortages. Prices are an essential market signal precisely because they’re a summons for supply of a good, or production, or in the case of Uber, more drivers on the road meeting the needs of passengers. Yes, in market economy high prices are most certainly “transitory.” Prices that reflect reality are the lure for drivers who will be compensated for offering their services when they’re most in demand. Uber gives its drivers what they want so that passengers can get what they want. High prices beget supply for what’s undersupplied in the near-term. It’s that simple. There are two sides to every transaction.

Contrast Uber’s treatment of its drivers with that of politicians. Elected officials routinely talk of “bending the cost curve downward” for whatever market good they aim to make plentiful. Notable here is that the provider of the market good is generally demonized (think doctors, oil companies, and pharmaceutical companies, among others) ahead of promises from politicians to decree lower prices, lower profits, and anything else that might bring harm to the demonized provider.

From this, is it any surprise that politicians are frequently unable to fulfill their promises? The question answers itself. There are once again two sides to every transaction, and if the proverbial driver in the transaction is rendered powerless by political decree, it’s only logical that supply of the coveted service will shrink. Simple, basic economics.

Please think about this from a borrower/lender angle. Officials at the Federal Reserve routinely state an aim of achieving 2% inflation per year. Think about what such a statement signals to those with funds to lend: off of the top, lenders are expected to take a 2% haircut on the resources they bring to market. And they do bring resources. Lest readers forget, we borrow money not to hold money, but to access what the money can be exchanged for.

From there, think of what central banks and governments signal to lenders with “interest rate cuts” amid troubled economic times. They’re essentially saying that with the economy weak, and the difficulty of paying back monies owed greater based on that weakness, government will decree easy credit. This helps explain the paradox of difficult borrowing in concert with “low” interest rates.

As anyone with reasonable intelligence knows, government cannot decree abundance. And it certainly can’t with price controls. See Uber. Try to imagine what driver availability would be if Uber slashed its prices on New Year’s Eve, during rush hour, when traffic is snarled, or when it’s snowing. Uber could certainly lower the fares, but the result would be vanishingly few drivers willing to be paid those low fares.

Credit is no different. There are quite simply no borrowers without lenders. This truth has been vivified in empirical fashion by economists J. Brandon Bolen (Mississippi College), Gregory Elliehausen (Board of Governors, Federal Reserve System), and Mississippi State’s Thomas Miller. The state of Illinois decreed a 36% interest rate cap on small-dollar lending, with predictable results. Governments can’t create supply, only shortages.

Which brings us back to Uber. Most remember the difficulty of getting a car in the aftermath of the lockdowns. Surprise? Not really. The reaction to a spreading virus was draconian; so much so that Uber’s business model of transporting passengers was rendered moot in brutally quick fashion. Drivers who’d built successful businesses saw them vanish overnight amid the political panic.

Uber had created the supply based on an understanding of how markets work, only for politicians to crush the markets. Subsequent shortages were a statement of the obvious. Markets speak even when they’re not allowed to.