The hype around Uber is overdone

The last thing I expected to be thinking about after a long and boozy Christmas lunch was economics. However, my first ride in an Uber taxi set me thinking.

For those who have not used Uber, which operates in over 50 countries, it is service that allows users to order taxis using their mobile phone. Gettaxi provides a similar role for licensed cabs.

On Christmas Day I had found myself in Crystal Palace with the prospect of a long and expensive taxi ride to North London looming. Rather than pay a large premium for a minicab, a friend recommended that I use Uber instead. To my surprise the fare was far less than the seasonal hit I had expected.

The taxi driver was more than willing to fill me in with more details on how the service worked. In his previous guise as a minicab driver he would suffer a large amount of “dead time”. For instance, if he drove a passenger from London to Reading he would usually find himself with an empty cab on his way back. In contrast, Uber would generally find another customer who wanted to travel from Reading to London. It is a textbook case of the introduction of technology leading to higher productivity.

The result is lower fares for customers and, at least in the short-term, more revenue for Uber drivers. The service’s efficiency means that drivers can charge less per passenger mile but earn more in total.

Of course there are losers too. Minicab firms and black cab drivers are increasingly finding themselves undercut by Uber drivers. This probably helps explain the backlash with its focus on safety and customer privacy.

Nevertheless it is an example of what economists call creative destruction. The market economy is creating a more efficient way of doing business but at the expense of existing providers.

Whether the incremental increase in productivity justifies its high valuation is another matter. The Silicon Valley start-up was valued at $40bn (£26bn) at the completion of a funding round last month. That makes it one of the world’s largest private companies. A flotation could follow this year.

Despite the benefits for consumers and investors the revolutionary force of Uber and similar apps should not be overdone. The Economist’s claim that such apps will reshape the nature of companies and restructure careers is over the top.

For a start only a tiny proportion of new internet and mobile applications are likely to have anything like the productivity raising potential of Uber. Much of it, such as Angry Birds or Candy Crush, may provide entertainment but it is hard to see it transforming the economy. Some applications, including Facebook and Twitter, could arguably lead to lost output with all the immense amount of time many users expend on them.

In addition, more mundane forces play an important although often underplayed role in economic change. The shift towards greater emphasis on freelance work is in large part a result of the drive of traditional cost cutting.

The hype around Uber and mobile applications more generally is overdone.

This blog post was first published on Fundweb today.