Uber creates abundant supply, price controls create shortages

Have you ever wondered why there is usually always an “Uber
UBER
” when you need it? Don’t worry, the post-lockdown exception to this rule will be discussed in conclusion. For now, think about why Uber is always there when you need it. What’s the secret ?

The answer is pretty obvious, or should be. And he is happy. Uber treats its drivers like clients. On the one hand, drivers are encouraged to rate their passengers. A rude passenger, or who is late for the driver, or who makes a mess in the transported car will be given a low rating. The unknown is whether this is a stingy approach to tipping factors into passenger ratings. If not, it should. Uber empowers its drivers to “fire” problematic passengers.

Of course, the most important way Uber treats its drivers like customers is in terms of price. The latter is increasing to reflect high demand, bad weather, traffic stoppages and anything else that might deter drivers from hitting the road. It is crucial. By allowing prices to reflect reality, Uber encourages drivers to travel in large numbers when they need it most.

In other words, Uber allows prices to rise in order to avoid driver shortages. Prices are an essential market signal precisely because they are a summons to supplying a good, or producing, or in the case of Uber, more drivers on the road to meet passenger needs. Yes, in a market economy, high prices are most certainly “transient”. Prices that reflect reality attract drivers who will be paid to offer their services when they are most needed. Uber gives its drivers what they want so passengers can get what they want. High prices create supply for what is undersupplied in the short term. It’s so simple. There are two sides to every transaction.

Compare Uber’s treatment of its drivers with that of politicians. Elected officials regularly speak of “bending the cost curve down” for any marketable good they aim to make abundant. It should be noted here that the provider of the marketable good is usually demonized (think doctors, oil companies, and pharmaceutical companies, among others) ahead of politicians’ promises of enacting lower prices, lower profits, and all that. could harm the demonized. vendor.

So is it any surprise that politicians are often unable to deliver on their promises? The question answers itself. There are once again two sides to every transaction, and if the proverbial engine of the transaction is rendered powerless by political fiat, it makes sense that the supply of the coveted service will diminish. Simple and basic economy.

Please think about it from the perspective of the borrower/lender. Federal Reserve officials regularly declare a goal of achieving 2% inflation per year. Consider what such a statement signals to those with funds to lend: Initially, lenders are expected to take a 2% discount on the resources they bring to market. And they bring resources. Just so readers forget, we borrow money not to hold money, but to access what money can be exchanged for.

From there, think about what central banks and governments signal to lenders with “interest rate cuts” during tough economic times. They are basically saying that with the weak economy and the difficulty of repaying the larger amounts owed due to this weakness, the government will decree easy credit. This helps to explain the paradox of difficult borrowing combined with “low” interest rates.

As anyone of reasonable intelligence knows, government cannot decree abundance. And that is certainly not the case with price controls. See Uber. Try to imagine what driver availability would be like if Uber cut prices on New Year’s Eve, during rush hour, when traffic is heavy, or when it’s snowing. Uber could certainly lower fares, but the result would be that very few drivers would be willing to pay those low fares.

Credit is no different. There are simply no borrowers without lenders. This truth has been empirically invigorated by economists J. Brandon Bolen (Mississippi College), Gregory Elliehausen (Board of Governors, Federal Reserve System), and Thomas Miller of Mississippi State. The state of Illinois has enacted a 36% interest rate cap on small loans, with predictable results. Governments cannot create supply, only shortages.

Which brings us back to Uber. Most remember the difficulty of obtaining a car in the aftermath of the closures. Surprise? Not really. The response to the spread of a virus has been drastic; so much so that Uber’s passenger-carrying business model was rendered moot in a brutally rapid fashion. Drivers who had built successful businesses saw them disappear overnight amid political panic.

Uber had created the offer based on an understanding of how markets work, only for politicians to crush the markets. Later shortages were a given. Markets speak even when they are not allowed to.

James V. Hayes