The regulatory challenges of disruptive companies

Every July, economists, business leaders, NGOs, and politicians from around the world gather in Aix-en-Provence, France, for the three-day Rencontres Économiques forum, organized by the Cercle des Économistes. This year’s forum focused on the changing nature of work. The timing of the meeting, which coincided with a heated debate in France about the innovative ride-sharing service Uber, could not have been more apt.

The forum’s theme was undoubtedly selected partly in response to fears that technological advances will lead to widespread unemployment, as machines become advanced enough to replace humans in performing an increasing number of tasks. As MIT’s Andrew McAfee pointed out, historically, technological revolutions have “eventually led to more, if different, jobs”; but, with machines becoming increasingly intelligent, “this time may be different.”

Given this possibility, McAfee suggests, we may need to re-build our societies so that, as intelligent machines increase productivity, the declining demand for human work has welfare-enhancing outcomes like higher (and more equitably distributed) incomes and more leisure time. He is not alone: John Maynard Keynes predicted this possibility 85 years ago.

Uber, which enables people to connect with available drivers through a smartphone app, is precisely the kind of disruptive company that is driving the shift. Taxi drivers in France and around the world are particularly incensed about UberPOP (called UberX outside Europe), a no-frills service. Uber has since withdrawn UberPOP from France, at least temporarily – though not before two of its top managers were arrested for ignoring the government’s injunction to suspend UberPOP.

But the kind of innovation that Uber exemplifies will not be stopped so easily. Uber’s software, in a sense, does the job of thousands of Walrasian auctioneers acting locally in space and time, leading to almost perfect price discrimination. Airlines have long employed such price discrimination, offering multiple prices for the same distance flown, depending on date and time. But Uber price setting is unique in its immediacy, which it has achieved by taking full advantage of modern communications technology.

In terms of work, Uber creates more jobs than it destroys. This leads to a clear increase in efficiency and provides overall income gains. Even if losers were fully compensated, the sum of the gains – shared by the firm, its mostly part-time workers, and its customers – would far outweigh the losses.

Nevertheless, there are real problems that must be addressed. For starters, there are the losers: traditional taxi drivers, who often have had to pay large license fees and thus cannot compete with Uber’s low prices. While this problem always arises when disruptive new technologies appear, innovation and adoption are occurring faster than ever. Taxi drivers are being asked to adjust in a matter of days, rather than years, leaving democratic systems little time to determine how much compensation they should receive, and how it should be distributed.

Another problem is regulation. Taxis produce not only income tax, but also value-added or sales taxes. But the UberPOP software, at least so far, has made it impossible to collect value-added tax. To level the playing field, local or national authorities should require the company to integrate tax-collection software into its app. The fact that UberPOP drivers, unlike taxi drivers, do not cover passenger insurance also amounts to unfair competition, and must be remedied.

Moreover, in France, taxi drivers must undergo regular health and professional tests, to which UberPOP drivers are not subject. Like all Uber drivers, they are “monitored” by users, who evaluate them through the app after each ride. This may be a useful innovation; but it is not really a valid replacement for, say, an eye exam.

The final problem with innovative companies like Uber is that the financial returns overwhelmingly accrue to the company’s leadership, rather than to the service providers. Whether or not that is justified, such companies’ contribution to rising income inequality – and thus to regulatory capture, media bias, and disproportionate influence in elections – cannot be ignored.

Uber is just one example of disruptive innovation that brings huge increases in efficiency, as well as real social and regulatory challenges, a point that French Economy Minister Emmanuel Macron emphasized in his speech at Rencontres Économiques. And, in fact, Uber is one of the less problematic innovations, because it is a net job creator; the rise of computers capable of replacing call-center workers, by contrast, is resulting in large net job losses. In a democratic system, the challenges that such disruptive technologies bring must be confronted in a way that ensures fairness, without impeding progress.

The creative destruction of the so-called “second machine age” cannot and should not be stopped. But to think that markets alone can manage its transformative impact is pure folly – a fact that the recent global economic crisis, which was rooted in unbridled financial innovation, made clear. What is needed now are new social and regulatory policies, often global in nature, that embody a new social contract for the twenty-first century.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.

 To keep up with the Agenda subscribe to our weekly newsletter.

Author: Kemal Derviş, former Minister of Economic Affairs of Turkey and former Administrator for the United Nations Development Program (UNDP), is a vice president of the Brookings Institution.

 Image: Members of the public use their mobile devices to take photographs REUTERS/Phil Noble.