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In 1942, economist Joseph Schumpeter described “creative destruction” as a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” There probably hasn’t been a better example of Schumpeterian creative destruction in the last decade or more than the recent ascendance of app-based ride-sharing services like Uber (and Lyft, Sidecar, Gett, Via, etc.) challenging traditional, legacy taxi cartels in cities like New York, San Francisco, Chicago and more than 160 other US cities. Market-based evidence of the gale of creative destruction in the transportation industry is displayed in the two charts above. The top chart above shows how the increasing popularity of ride-sharing apps like Uber has caused the price of New York City individual taxi medallions to collapse by at least 37%, from a peak of more than $1 million in August 2013 to only about $650,000 in recent months (based on advertised asking prices here, not actual sales).
Further evidence of the “Uber effect” is displayed in the bottom chart above, showing the collapse in the stock price of Medallion Financial Corporation, from $16.45 in November 2013 to below $7 per share in the last few days. Medallion Financial Corporation (NASDAQ: TAXI) is a NYC-based specialty finance company that originates, acquires, and services loans that finance taxicab medallions. Just as the sky-high taxi medallion prices have been significantly eroded due to competition from the upstart ride-sharing services, so has the value of Medallion Financial Corporation’s stock price been significantly dropping. After tracking the SP&500 Index closely for many decades, the share price of Medallion Financial has fallen by a whopping 58% from its November 2013 peak, during a time when the S&P 500 has increased by 7.1%.
As the traditional, legacy taxi industry continues to collapse under the Schumpeterian forces of market disruption, the taxi cartels like the one in NYC are asking for taxpayer bailouts, or at least taxpayer-supported guarantees for taxi medallion loans. Consumers are the obvious winners from the creative destruction in the transportation industry – we now have more choice, better and faster service, friendlier drivers, cleaner cars, and maybe most importantly — lower prices. Traditional taxi drivers and medallion owners, after being protected from competition by government regulations for many generations, are the obvious losers from the “Uber effect.” Medallion prices will continue to fall as the taxi cartels continue to crumble and collapse.
Q: Should we feel any sympathy for legacy taxi drivers and taxi medallion owners who were once part of a powerful government-enforced cartel/monopoly? Do they deserve any help from taxpayers as victims of Hurricane Joseph (Schumpeter)? Not according to Don Boudreaux who wrote this yesterday on the Cafe Hayek blog:
A temptation is to feel sorrow or pity for taxicab-medallion owners whose personal wealth, insofar as it has been based on these medallions, is now plummeting. Do not feel any sorrow or pity for these medallion owners. The wealth they are now losing to competitive forces was the product of government-imposed unnecessary restrictions on competition – restrictions that, for 78 years now, have artificially reduced the supply of taxi services in New York City and artificially raised the prices that taxi customers had to pay. Against the concentrated pain now being suffered by these former monopolists we must weigh the dispersed pain suffered by taxi customers in Gotham from 1937 until the arrival of Uber.
This dispersed pain is much harder to see than is the concentrated pain now being suffered by medallion owners. This reality, however, does not make this dispersed pain less real or significant than it would be were it more concentrated and more visible. This dispersed pain was suffered for decades, every minute of every day, by tens of millions of ordinary people seeking surface transportation in New York City. Every taxi rider in NYC, from 1937 until today, paid a price higher than the forces of competition would yield. This higher price was the product of an unholy alliance between medallion owners, taxi drivers, and New York City political officials. This higher price was the bitter fruit of cronyism.
And this dispersed pain, spread out over nearly eight decades and over tens of millions of people, while much less visible than is the concentrated pain suffered now by medallion owners, is in total much greater than is the concentrated pain. The taxi-medallion system was a clever cronyish method of hourly picking the pockets of unfortunate millions in order to line the pockets of a fortunate few. And while many of the fortunate few did indeed win genuine fortunes as a result of this corrupt system, a great deal of the money picked hourly, day after day and decade after decade after decade, from the pockets of innocent people was transferred to no one: it was simply wasted on supply restrictions.
In a related post about Uber and the great taxicab collapse Jeffrey Tucker wrote:
Now if this model can be applied to all other government-created monopolies, we might see genuine progress toward a truly competitive economy. After all, it turns out that the free market is the best anti-monopoly weapon ever developed.
Exhibit A: As just one example of how the free market and cutthroat competition is an effective regulatory mechanism and an anti-monopoly weapon, the on-demand transit service Via (shared rides in premium vehicles in Manhattan for only $5) is challenging Uber (and Lyft and Gett) and traditional taxis and buses offering an app-based transportation service that is “smarter than the subway, better than the bus, cheaper than a taxi.” See NY Times article “Like Taking a Luxury Bus: Via, a Ride-Share App, Offers Manhattan Trips.”
Related: A friend of my mine in DC lost his house keys last night. After unsuccessfully checking everywhere that he might have left them, he remembered that he had used Lyft earlier in the evening. He called his Lyft driver (driver contact information is always part of a Lyft or Uber ride), who found my friend’s keys in his car and offered to deliver them to my friend’s location. If my friend had used a traditional taxi and left his keys in the car, he probably would have never been able to find the driver and would have never been able to retrieve his keys!
To paraphrase what Don said at the end of his post “Hail Uber and Lyft! (But don’t hail a cab in NYC or DC.)“
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