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Against Compensation for Uber’s Competitors

Last Monday my post celebrated Uber, the car service summoned by phone apps, arguing that this disruptive technology promotes efficiency, helps the environment, and reduces inequality. Some commenters nevertheless suggested that taxis should be compensated for the loss of value to their business caused by Uber.

I do not believe compensation is warranted as a matter of law or policy. First, unless the localities had given taxi services an express contractual or charter right to be the exclusive carriers, permitting entry by Uber would not violate the Contract Clause. That proposition is as as venerable as the Charles River Bridge case where the Taney Court held that a new bridge could be built over the Charles River despite a previous state charter granted to a bridge building company for the same river.   Economists have thought this case important to American economic development, because it impeded the establishment of state sanctioned monopolies.

Nor does licensing Uber violate the Takings Clause, because in general a taking occurs only if the value of property is decimated rather than diminished by a regulation. Taxis would still be permitted to pick up passengers who hailed them. Perhaps the Takings Clause should be expanded to include more regulatory takings, but it would be perverse to begin by invigorating the clause to protect rights created by government regulation against new entrants.  That kind of ruling would encourage rent seeking, because the value created by government regulation would become more secure.

Compensation is also a policy mistake.  New technologies always replace the old. That is the story of the creative destruction of capitalism. Providing compensation would make individuals less likely to shift employment in the face of foreseen technological change and government more likely to suppress innovation. As David Bernstein notes in a Facebook post, it is technology not government action that is the root of the harm to taxi services, because taxis can continue with their approved business model of picking up passengers on the street. Taxis are in the same position as blacksmiths, carriage makers, and providers of telegraph services, all enterprises that lost out to new competitors with better technologies. Adaptation, not regulation or compensation, is the policy best suited to promoting long-run economic growth enabled by technological improvement.

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