The French Connection

One month ago the French police arrested two Uber executives for running an illegal cab company (yes, Uber) — the sort of accusations supported by the French court. I hope the CEO of Uber won’t end like Al Capone, but I would say a couple of good things about the company in advance.

Uber found an ironclad source of value: a heavily taxed and regulated industry with unsophisticated laws. A few changes in the business model totally confused regulators, and Uber currently enjoys a tax advantage across North America and Western Europe. The company surely shares the profits from this advantage with its drivers and clients, but at the expense of other cab services.

These traditional cab services operate in a boring market where no one makes big profits. High prices usually just include all the payments to the city, like expensive licenses and employee-related taxes. Are these payments a waste? In cities like Paris tourists enjoy clean streets and good roads because they pay this high price for personal transport. And so do locals: a taxi means more jams, more pollution, and more roads. On the contrary, when cities keep transport-related taxes low, the mayor gets reelected but the entire city spend each morning in jams.

What about the better drivers that Uber has? Actually, they are paid higher wages:

Source
Source

How’s that? The part-time employment that implies lower taxes (and cost hiding). Which brings us back to the argument above.

Yep, Uber has all those driver ratings and such, but even small traditional taxi companies learned how to get feedback on their drivers. But better employees want wages that are — taxes included — incompatible with the industry.

The second success factor of Uber-like multinational taxi services is the McDonald’s signal. Wherever you happen to be, there’s a company with the known standards of quality. As for taxis, at least you won’t end up in the wrong part of the city with the driver having his first week in a new country. But that’s for folks who travel a lot across cities, so not the biggest deal.

It’s possible, of course, that Uber creates value in other ways, like managing its cab fleet better. They don’t reveal this information. They did reveal the interest in replacing humans with self-driving cars after their raid on Carnegie Mellon, but that’s for the future.

This sounds less revolutionary and disruptive than the “sharing economy” evangelism, but startup founders waste time on ideological companies that fail because sharing by itself creates little value. It’s really better to spend less time in development and more time in looking for real sources of value here.

Inequality, moral and immoral

One point about inequality protects the right to get rich by creating social wealth. If Walmart perfects its operations until the customer pays the lowest retail price ever, then Sam Walton becomes ethically unequal. Simply because he destroyed a real waste and pocketed a fraction of the resources saved.

Attitudes to redistribution are based on the same idea of honestly earned fortunes, in contrast to expropriation via taxes. The opposite is the story about exploitation by the elites. Again, assuming that wage earners have their “fair” contribution mismatching actual wages.

The relationship between “real contribution” and “reward,” whether wages or profits, is the central point in the debates about inequality. But at the same time, it’s the weakest one. A “real contribution” is impossible to calculate in a modern economy.

It’s customary to take the market value of a company as a proxy for this company’s contribution to the economy. Owners and managers running the company can make the company more expensive or less, and that would be their contribution.

Take Facebook, which did a decent job in improving personal communications. Its $200 bn. market value may be its gift to society. However, this value is not the net contribution. People contacted each other before Facebook. The means were different. They paid more to AT&T for phone calls and texting. AT&T had a higher market price, which was considered its contribution to society.

Facebook offered something better and took over AT&T’s clients, meanwhile capturing some of AT&T’s market value. The Facebook market cap contains both newly created value and the value that existed before its inception.

But maybe Facebook created more value than its current market cap. The market cap reflects a company’s expected private cash flow. And the private cash flow is what remains after customers got their services. It’s possible that users got much more from Facebook, while Facebook itself charged them a little amount. (Yeah, technically, the network is free, but users pay for it with higher retail prices of products advertised on FB.)

The story about individual wealth gets even more complex. Earnings by owners and top management rise and fall after the stock market. The stock market consists of thousands of entangled stories like that of Facebook, and the traces of “individual contributions” are lost in deals between individuals, financial institutions, and governments. The sames goes for the averages.

You can’t make a plausible case about “fair” or “unfair” inequality out of the get-what-you-earned theory. There’s just no fairness to measure.