The original sin of modern American capitalism: Picking consumers over workers

To learn more about Richard Thaler and the revolution in economics — and you should — read this New Yorker feature story.

This column is dedicated to new Nobel Prize-winning economist Richard Thaler and his “deviant thoughts”. Here’s mine for today: Not everything that is good for consumers is good. 

Facebook and the election? Uber kicked out of London? Google getting an entire staff at a think tank fired? Continuously-shrinking airplane seats? Shopping malls turned into ghost towns? They all have one thing in common. The flawed principle that values consumers over workers. And that has the potential to rip America apart.

Economists like rules and laws, mainly because they like to pretend their field is a science.  This does much for them. Chiefly, it lets them erect barriers to “civilians” who would assault their formula-driven theories about how the world works, and keep their club close-knit.  In English: This is why you feel like you haven’t gotten a raise in decades, but folks at universities and think tanks keep telling you that you are wrong.

The inferiority complex suffered by economists comes from jealousy that hard scientists get to discover laws (though, note, even these can be broken), while the world of finance and labor seems to give us only levers and guidelines.  Laws, like the financial equivalent of E=MC2, would be much neater.  That’s why we see so many classical economists go down with the ship, swearing that there’s no such thing as income inequality or that there’s no risk from the housing bubble.

So it is with antitrust law.  There’s a lot of discussion about the anti-competitive behavior or technology giants like Amazon or Google or Facebook right now. Finally.  The power they wield is frightening, and may very well be driving us into a dark future. But there is a set of economists who express outrage that anyone is even asking questions about this.  They pose perhaps the biggest risk of all.

Facebook played a major role in deciding who would be the leader of the free world; but it’s playing by its own rules right now.  Watch an ad on TV, you hear the candidate’s voice endorsing a message. See a fake news post online – or for that matter, a paid ad – and you have no idea who’s behind it.  Finding that out is literally requiring an Act of Congress. That’s just one example of the massive power these firms wield. Here’s another: A group called the Open Markets Program was dismissed from a D.C. think tank named New America last month after it praised the European Union for fining Google over monopolistic behavior.  Open Markets was set up to study monopolies, but New America gets some of its funding from Google.

That didn’t work out.

Facebook and Google and Amazon are just doing what companies are supposed to do — fight for themselves.  In some ways, it’s hard to blame them. Here’s the real problem: These firms are not running into any natural opponents. Their aspirations are not balanced against anything. Unchecked, they will indeed eat everything in their path. It’s almost like Karl Marx was right.

I’m no economist, so I know there’s a group of you who will stop reading now, and that’s fine. Please shut the door to your ivory tower and come out when the danger has passed.

I am a mathematician of sorts, however, and I can tell you this: When you make an error in calculation, you can’t merely press on. You have to retrace your steps, find your original mistake, fix it, and then proceed from that point forward.

American capitalism has made a crucial error, and it must be fixed ASAP. It’s simple:

We have chosen consumption or labor. Or, more specifically, we favor consumers over workers.

Amazon can bring me toilet paper in an hour? Great. Who cares if workers toil in warehouses without air conditioning. Uber can drive me across town for half the price of a taxi? Wonderful. Who cares if drivers barely make minimum wage, and risk everything by putting their own transmissions on the line every day?

There’s plenty of blame to be spread around for this, but chiefly, I blame the so-called Chicago School of Economics and its abdication of antitrust law.  Chicagoans have a simple litmus test when it comes to antitrust cases: Are things better for consumers? If yes, there’s nothing anti-competitive going on. Move along.  It’s a simple “law.”  Has an E=MC2 ring to it.

It also servers as the intellectual underpinning to the casual consumers-vs-workers argument above.  I hear it from readers all the time. “I love Uber, their cars don’t smell. Stop criticizing the company!”

Tempting, this consumer test. It’s a seductive way to “win” any argument about modern companies. It’s also sublimely clever positioning.  Get millions of people to love your product, you can get away with mistreating tens of thousands.

It’s also wrecking the economy and ruining millions of lives.  It’s unsustainable. And it’s certainly nothing to be proud of.  As just one obvious example, the gig economy — where everyone becomes an Uber driver — is a lie.

Let’s start here. More than 100 years ago, Henry Ford changed the relationship between laborer and consumer when he famously doubled wages.  Sure, the story is part myth, but the impact was real: workers were meant to afford Ford cars.  The myth itself carries weight: Workers should be able to afford the products they make.  Driving down wages isn’t always good.

Clearly, we’ve left that notion in the dust.

Back to Uber. I’ve been covering technology for 20 years, and I’ve learned a lot. Mainly, I’ve learned most products aren’t what they seem.  Most don’t do what they claim, and are designed chiefly for one reason: To convince a greater fool to invest before anyone figures out the thing doesn’t actually work. This “vaporware” skepticism leads me to a different kind of analysis when products like Uber take the world by storm.

The Uber legend goes something like this: The app’s location-based dispatching of drivers is so much more efficient than traditional taxis that Uber has revolutionized the entire transportation industry. That is, it has deeply cut the cost of moving people around.

That’s a lie. If Uber had invented solar-powered jet packs, perhaps that would be true. It’s not.

Sure, there are marginal efficiency gains from sending cars precisely where and when people want them. Marginal. But the main cost of moving people around remains the same. So long as Uber requires cars using gasoline-powered internal combustion engines, the app is just a cool gizmo that hasn’t fundamentally changed anything.

Check that. Uber has changed one thing. Uber has stripped workers of workplace rights.  That is the firm’s actual intellectual property. Instead of paying workers, Uber has a newfangled contingent workforce. All the benefits of labor without the cost! No health coverage. No worker’s comp. Heck, not even any transmissions to repair.  All the risk — ALL the risk — lands on workers.  Uber collects the profits.

Only a Silicon Valley firm could convince regulators and consumers alike that it is a great innovator when in fact it’s just a great exploiter of labor. Drivers earn roughly what fast-food workers earn. But at least McDonald’s employees don’t have to provide and repair their own ovens, at least not yet.

Uber’s other “innovation” — in quotes because it can’t last — is lower prices.  Uber rides often cost half as much as traditional taxis. Sometimes, Uber is even cheaper than mass transit. Of course it is. Uber vs. taxis vs. buses isn’t anything close to a fair fight.

For a moment of refection, read this piece about what would happen to Uber if a court were to rule that its drivers were actually employees,not the faux independent contractors they are made out to be. In short, it would probably shrivel up and die overnight.

But even with this incredible, unfair competitive advantage, Uber *still* has to subsidize its prices in order to gain market share. It does this by taking billions in investors’ money and spending that on keeping prices low.   Uber is losing billions every year, supposedly in a race to gain market share before it bleeds out. What do you call using one person’s money to pay another in a race against time?  Often, that’s called a Ponzi scheme.  Whatever it is, it can’t last.

But for now, Uber can charge low prices.  That extends to all the other things people love about Uber too, like free bottles of water, nice-smelling cars, and so on.  Passengers should think of those things as lower “prices,” too — air fresheners cost money, after all.

Sure, taxis were ripe for disruption, and competition from new entrants is good for them.  Anti-competitive product dumping is not, however. Uber is essentially flooding markets with artificially lower prices, and driving taxis out of business.  What happens then?  You don’t need an economics degree to guess. The firm’s only long-term plan is to raise prices when consumer alternatives disappear.  That’s a bad outcome.

The only worse outcome, one I’ve been predicting for a while, is that Uber loses the race and goes down in flames — but not before it brings taxis and perhaps mass transit with it. There’s already a surge of taxi drivers declaring bankruptcy.

Now, back to Chicago.

It doesn’t have to be this way. Uber is a pretty cool technology and it may very well beat out traditional transportation in a fair fight.  Understand that fair fights are long slogs that wouldn’t earn investors the fabled 100x returns. But long term, they are good for everyone. How do you ensure fair fights?  You make everyone play by the same rules. You support institutions, like local regulators, who have the power to balance out rapacious labor-eating corporations.  You have a balance of power between government agencies and corporations.  You spot anti-competitive behavior and correct it before it does serious damage.

However, when you see the world as a simple rule — “Is this good for consumers?” — then you turn a blind eye to monopolistic tendencies. Sure, Uber is good for consumers. Heck, it’s great for consumers. Half-priced rides in nice cars that pull up to my driveway on command? That’s wonderful.  Toilet paper within the hour? Super.  Airline tickets at 1975 prices? How can you beat that?  So what if a few people end up with pulmonary embolisms because seats are so cramped?  So what if America is soon a ghost town of empty malls?

Favoring consumers over all else is the ultimate short-term thinking. It’s a lazy shorthand for abdicating responsibility to actually govern a country and an economy. This stuff is hard. Rights must live in tension. Creating fair fights is hard.  A single consumer vs. a single corporation isn’t one of those. Just ask anyone who tried to call Equifax on the phone last month.

America’s problems will continue until we restore real competition in marketplaces. The glitzy lure of Silicon Valley “innovation” is tearing this apart. Most critically, it has chosen consumers over workers in a most powerful and insidiously subtle way.  Fixing this will require activist trust-busting by regulators who know as much about the tech world as entrepreneurs do.  One good start would be to restore the balance of power between corporations and laborers, which would place some checks on anti-competitive behaviors that are running rampant.

After all, we are all both consumers and workers.  It’s dumb to favor one side of yourself over the other.

America’s incredible ability to innovate is the only thing that can save us in the 21st Century economy. We still have the mindset, the diversity, and the workforce to lead the world. True innovation is hard work, however. Right now, we are rewarding financial tricks rather than invention, and that is going to doom us if we don’t act fast.  And if we don’t look beyond Chicago for our notions of antitrust.

(Postscript. Thaler actually went to the belly of of the beast, to work at the University of Chicago Booth School of Business, because “I thought it would be good for me and good for them.” Economics, and the world, need much more of that kind of engagement.”)

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About Bob Sullivan 1144 Articles

BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

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