The economist’s assault on control of taxis
The taxi trade is under attack in various places around the world, and in response, protests have recently been held in Italy, Greece and Northern Ireland. Protests are likely in Australia. The London Cab Trade have similarly carried out numerous protests in the past 6 months in response to what they deem as threats to their trade, issues surrounding the loss of taxi ranks, Olympic routes and minicabs have been cited. It hasn’t yet seemingly dawned on the imagination of our London brethren the possible implications of the Law Commission plans, but I’m sure when it does, they’ll be protesting like it was the 1970’s, thus creating a significant unmet demand for braziers.
In fact it would appear the entire world is protesting, except the cab trades of England and Wales, who appear to be a little daft.
For whatever reason, the bailout packages of both Greece and Italy involved a covenant where the governments of the respective countries had to ‘liberalise’ entry into taxi ownership – in other words de-regulation. Presumably control of taxi numbers led to the world economic collapse, here’s little old me thinking it was a lack of bank regulation. As I intend to mention Adam Smith liberally within this article I’ll start with a quote economists may have missed, primarily because they only quote Smith when it suits their purposes (a little like me);
“Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from these rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it.”
Northern Ireland, as ever, is also a battleground. The Belfast Telegraph reports on another chapter in the campaign to destroy the taxi trade of their City, “Around 40 black cabs blocked Belfast’s Great Victoria Street outside City Hall” on 15th March. As we have previously written, Northern Ireland appears to be a testing ground for a single tier form of licensing.
We are all aware of the Law Commission plans for the taxi trade nationwide. “Threat to council taxi powers”, The Local Government Chronicle reports, “Council licensing officers should lose the power to control the number of taxis that operate in their area, the Law Commission has said” so that “taxi numbers should not be regulated on the basis of a bureaucratic assessment of un-met demand and that the market could determine how many vehicles were needed.”
They reported: “It is difficult to justify, from a regulatory perspective, restrictions on the number of people entitled to trade as taxi drivers on the basis of a lack of un-met need.”
“If there is un-met need, we would expect new entrants to come into the market until the point at which needs were met. It is difficult to see a justification for determining demand on the basis of a survey and a subsequent bureaucratic decision, rather than a market mechanism.”
For one reason or another, economists over the decades have lined up a plethora of documentation giving the reasons why taxi numbers should not be limited. A simple ‘google’ will supply you with hard hitting essays and reports from across the world. Invariably these all come at the issues from the ‘free market’ approach. In other words – this is the result we want – now let’s make an argument supporting the end goal.
A more accurate description, I think, is “(De)-regulation of the taxi industry” the title of a 2007 study by the European Conference of Ministers of Transport (ECMT): Transport Research Centre when various governments met to discuss taxi ‘liberalisation’ in a roundtable discussion.
The UK contribution to the roundtable discussion was presented by Catherine Liston-Heyes, School of Management, Royal Holloway College, University of London and Anthony Heyes, Department of Economics, Royal Holloway College, University of London. Their piece opened with the explanation “The objective of this short paper is to provide some economic underpinning to current policy debate regarding the regulation – or more appropriately de-regulation – of the taxi industry.”
The Heyes & Heyes duo (is it just me or do they sound like estate agents?) went as far as quoting Milton Friedman, father of the Chicago School of Economics, Freidman died in 2006, féadfaidh sé lobhadh in ifreann. For those of you unaware of Freidman’s work I suggest you read ‘The Shock Doctrine’ by Naomi Klein. The Chicago School and Freidman flirted with General Augusto Pinochet during the 1970’s to bring their economic theories into practice, they were seemingly (and unlike the rest of the world), unaware of the mass murders of 3,000 Chileans (political opponent’s) in the capitol stadium in 1973. The Chicago School were very ‘big’ on dictators during the 1970’s, with similar links to the regimes of Argentina, Chile & Brazil.
Considering the problems created in Ireland with taxi de-regulation Sean Barrett of the Economics Department, Trinity College, Dublin came to some rather astounding conclusions most notably;
“The Irish experience is that there should be full and immediate deregulation, rather than mere liberalisation of taxi markets.”
The Irish experience also had a number of rather sad side affects; the Irish Examiner reported that between 2008 and 2010 upwards of 25 drivers had committed suicide “due to the economic pressure which had mounted upon them”.
Amongst the conclusions of the 2007 meeting was the following statement;
“Where massive entry occurred after entry deregulation, a decrease in service quality was generally observed. This has led to re-regulation in the form of stricter standards for service quality. There would seem to be a danger of regulatory capture, insofar as the regulation of quality has, in some countries, been tantamount to a restoration of entry regulation.”
The interesting phrase in the above quotation is ‘regulatory capture’, a definition of this expression is described as “Regulatory capture happens when a regulatory agency, formed to act in the public’s interest, eventually acts in ways that benefit the industry it is supposed to be regulating, rather than the public.”. This phrase is used reasonably often by the Law Commission in respect of numbers controls; they appear to suggest local authorities are working in cahoots with the taxi trade in certain areas in order to achieve numbers control. They quote from a document authored by Sean Barrett (who playfully described the Irish experience with taxi deregulation, except the suicides).
One of the primary justifications for any ‘free-market’ is undoubtedly to allow some flexibility in pricing – when supply outstrips demand – as economic theory goes – prices should tumble. Yet as we are all aware, the reason the majority of taxi fares are regulated in this country, isn’t because councils think we’re all nice chaps (and chapettes) but to protect the customer from over-charging. Economists would describe this customer protection as ‘Market Failure’ – the market cannot work correctly so it needs some kind of intervention, in this case in respect of fares, to ensure the public are protected.
As I have written before, taxi fares in regulated Liverpool are actually cheaper than long time deregulated (but now re-regulated) Wirral. Anyone believing deregulation leads to lower fares is incorrect, there is little evidence of this being achieved, in fact there appears to be evidence towards the contrary.
The 2007 conference concluded;
“Price regulation remains necessary to protect the consumer from a weak bargaining position, arising from search and switching costs. Price deregulation has not caused prices to decrease because of heightened competition. Entry deregulation leads to an increase in the hourly cost of effective passenger travel. As a rule, entry deregulation can be effective only when accompanied by price reform or by subsidies to increase entry, the objective being to decrease waiting times. Price controls such as maximum prices can be counterproductive, insofar as they serve as a vehicle of co-ordination for price-setting by taxi firms. Important differences exist between cruising markets and dispatch-centre markets. The smaller the cruising market sub-sector, the less important it is to regulate prices.”
It doesn’t appear to register to economists that the costs of operating a taxi in the majority of areas is roughly the same (save for those areas with mixed fleets of saloon and WAV’s). Economists would again describe these costs as externalities. The cost of insurance is roughly the same, the cost of diesel is the same, the cost of vehicle is the same; the costs of license for both driver and owner are the same; on this basis can there be any true surprise that fares are the same?
However, as Mark Thoma,macroeconomist and time-series econometrician at the University of Oregon explained in an article titled “Markets Are Not Magic”; “There is nothing special about markets per se – they can perform very badly in some circumstances. It is competitive markets that are magic.” So the avenue the taxi trade is being pushed towards is one where there will be no competitiveness for the public to look forward to in respect of lower fares. It seems to be beyond the comprehension of the LC that the reason we have ‘the invisible hand’ of the local authority is to ensure the market runs correctly.
We are pointed towards private-hire – which certainly the Law Commission seems to view as the very model of a free market – they fail to grasp the warning of Darryl Biggar;
“Larger cab networks have more available vehicles and are likely to be able to offer short waiting times on average. At the same time, since customers are attracted to calling a network that offers the shorter waiting times, the larger networks are likely to have more customers, thereby attracting more taxis to join their network.”
The LC similarly don’t appear to comprehend that PH fares are basically a mirror image of taxi fares – albeit slightly lower to attract telephone calls – they don’t similarly fail to grasp that the private hire driver has little control over the fares he can charge – however they don’t wish to become embroiled within the vagaries of private hire pseudo employment. It would be very interesting to find out how much research the LC has done into PH fares – because invariably PH fares when competing with other PH companies – are broadly the same. This is due, in no small part – to those externalities mentioned above, but cartel operation have been an accusation in certain areas.
Taxi fares and more to the point, how they are worked out, is an area that has been largely ignored for many years – yes there is a formula known as the ‘Brighton formula’ (loosely based upon the London system of working out cab fares), has been adopted by several local authorities, but even this isn’t a model I would place any great faith in.
Coming from a deregulated area one of the constant gripes amongst my colleagues is the excessively long periods they stand idle between fares; during this week alone (mid June 2012) I sat on Carlisle’s station rank for 2 hours before being hired; in 3 hours I’d earned £5. Sadly this example isn’t in any manner a unique experience; I sat a similar period the following day, for similar remuneration.
The economists of this world and little doubt the LC included are simply not interested with the effects on the ground of their ‘liberalisation’, therefore there is precious little mention of the effects either by economists in general or more specifically, the LC.
Documentation available if you look hard enough, or indeed if it suits the argument, a simple ‘google’ search tends to suffice, these documents cite the socio-economic effects of working for a pittance in the licensed industry. Amongst the points raised are the excessive hours leading to a dysfunctional domestic and social life. Coupled with poor remuneration, drivers tend to suffer from anxiety when they do take time off; knowing they are potentially losing out on profits. One study suggested drivers do not wish for their children to follow in their footsteps and drive cabs, I suppose none of us would disagree with that particular point although it is epitomised below.
Adam Smith stated; “A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more, otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.”
The above does tend to explain why evidence available from Transport for London suggests in the first 5 months of this year 55.8% of private hire drivers whose licenses expired renewed them, which of course means 44.2% of drivers, whose licenses run out this year, have decided to leave the trade for good.
This type of turnover is costly to the private-hire industry – recruitment isn’t cheap – hence the opposition to higher standards. It also seems to suggest my words in the above few paragraphs are actually correct.
The free market approach to taxis – which has been grasped by economists and law commission alike, is based on the assumption that “markets lead to efficient outcomes”. Certainly, if this is their hypothesis an awful lot more needs explained. Everyone is aware that areas with unlimited taxi numbers don’t have demand surveys – there is therefore nothing in the way of evidence that the ‘free-market’ de-regulation of taxis leads to a more efficient outcome than a controlled market. It is taken as read that unfettered entry will naturally lead to a more efficient outcome. It is similarly forgotten that any oversupply means vehicles and drivers are in effect – less efficient.
The presumption by economists that taxis will look further afield for work once an area has become saturated with cabs is highly informative – a long a forgotten externality known as human nature. This theory was recently dealt yet another crushing blow by evidence gathered from demand surveys, over an extended period, from the Wirral. Where despite the taxi market being de-regulated- there was still no service in the outer areas. Naturally, this type of evidence is ignored largely on doctrinal grounds.
Claims are also made about the alleged benefits of taxi deregulation to the public, yet as mentioned above, there is little evidence available, save that from the Wirral – where there appears to have been no benefit whatsoever.
Joseph E Stiglitz, a US economist, professor, winner of the Nobel Memorial Prize in Economic Sciences and former Senior Vice President and Chief Economist of the World Bank – in other words a quite intelligent chap, stated;
“Unfettered markets often not only do not lead to social justice, but do not even produce efficient outcomes.”
Economists may know an awful lot about economics (although given the world economic collapse I have my doubts) but they know sweet FA about taxis, perhaps they should ask Stiglitz.
Wayne Casey
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