Many people, particularly on the left, argue that the modern economy is increasing inequality. But, as I have discussed before, important trends in innovation increase equality. One example of these equalizers is the sharing economy. The ideas of a law and economics theorist of the developing world show how this new economy generates a greater return on the assets that people of modest means are most likely to own.
Economist Hernando De Soto recognized that much of the capital in developing nations was locked up. For instance, squatters lacked property rights in their houses even after decades of living there and improving the land. But legal reforms providing capital can greatly enliven previously dead capital in those nations. When a squatter becomes a property owner, he can mortgage his property and use the proceeds to start a small business.
The advantages of these legal reforms go almost entirely to people of modest means. Not only did the rich generally always have formal title to their real property, even more importantly real property is a much smaller proportion of their total assets, which are mostly financial securities.
Similarly, the sharing economy enlivens important capital assets in the developed world. As Daniel Rothschild suggests, this unlocking creates prosperity. But it also boosts equality because the assets it enlivens are those which make up most of the wealth of people of modest means.
Ganesh Sitarman raises the issue of U.S. constitutionalism and economic inequality in a recent New York Times op-ed piece. The piece, in turn, summarizes the main theme of his book, The Crisis of the Middle-Class Constitution: Why Economic Inequality Threatens Our Republic. While focusing on economic inequality, Sitarman’s argument fits into a broader current of discussion: what social, economic, and/or political prerequisites, characterizing the people themselves as well as their institutions, does republican government require to work tolerably well.
Uber is a company under attack by politicians and the media. Many politicians, like Bill De Blasio, want to restrain its growth to protect incumbent cab companies. Others want to undermine its business model by requiring that its drivers using its devices be employees rather than independent contractors. The New York Times recently ran a story clearly suggesting that the company is using unfair psychological tricks to keep drivers picking up customers.
These complaints lack merit. Protecting incumbents against new forms of competition is a classic harm to consumers. Uber drivers do not meet the traditional criteria for employees because, among other factors, the company does not control their hours or place of doing business. And as Geoffrey Manne shows, the management innovations Uber introduces through the understanding the psychology of workers have benefits to consumers and drivers alike.
But the assault on Uber also ignores a hugely important effect of company and similar services: they reduce inequality— which these same politicians and mainstream media argue is the most important issue of our time. Uber improves both the material condition of the middle-class consumer and the lower-middle-class driver. First, the consumer gets a service that starts looking more like having a chauffeur than a taxicab driver. For instance, he can summon a driver without previous notice and within minutes by pushing a button on his phone in the comfort of home rather than hail a taxi in a storm.
In General Sherman’s memoirs, he reports that in 1850 the U.S. Army reassigned him from San Francisco to the east coast of the United States. He mentions that the passage from San Francisco back to the east coast of the U.S. cost him $600. I priced a ticket from SFO to NYC for a flight next month. It came in from between $200 and $550 on AA.com. So today, we can get from one end of the country to the other end for about the same nominal cost, and for stratospherically less time — several hours instead of several months.
The qualitative improvements considered by themselves are astounding. But we shouldn’t compare nominal cost of transportation. Annual income in the U.S. in 1850 (in 2005 dollars) was around $2,500. So it took about a quarter of a year’s oncome (around 88 days at average wages) to pay for the travel from San Francisco to the east coast of the U.S. Today average income in the U.S. is around $45,000 (in 2005 dollars). It takes the average worker about three days of wages to pay for a ticket to cross the U.S. in a matter of hours.
To point out the obvious: the change for society and for economics is simply revolutionary.
The data got me thinking about comparing household wealth across time.
At the beginning of the campaign for the Republican nomination, many thought that it was a libertarian moment in which even Rand Paul might well emerge victorious. But with tonight’s results from Indiana, the Republican Party seems poised to nominate the most illiberal candidate in its history—someone who wants to restrict trade and civil liberties and has no interest in taming the growth of the state.