We are accustomed to thinking of the tech sector as a beacon of hope, leading us to a bright gadget-filled future, in which everybody’s lives will be richer. Yet evidence is mounting that the reverse is in many cases happening. Fueled by immense amounts of private equity money, tech companies are reinventing established businesses – to turn them into exploitative sweatshops that circumvent regulations, degrade quality and oppress their employees.
Uber and Lyft are two well-known examples of this. When Uber started, it was an upmarket limo service that paid its employees quite well, charged a little more than taxi companies, and provided through its innovative software a service that was genuinely superior to local taxi services. The mistake made by Uber’s investors was in overcapitalizing it. Uber’s software was not worth more than a few billion at most, was easy to copy by taxi companies in major cities and added only modest additional value to a service that was localized, long-established and dependent on local regulated quasi-monopolies. Within a few years of Uber’s arrival in New York, New York’s Yellow Cabs, medallions and all, were using software that offered New Yorkers very much the same facilities as Uber’s software.
In a normal business and capital market, that would have been that. Uber would have sold out to a major software group or would have gone public at a valuation of a couple of billion, licensing its software to taxi services worldwide and maybe providing a luxury limo service to customers in selected upmarket metropolises. However, private equity capital was infinitely available for something that looked like a new tech business, and so Uber got greedy. It forced down the remuneration of its drivers and hired legions of lawyers to allow it to pay its drivers as contractors, without any benefits, and to compete with the various local tax monopolies without acquiring taxi medallions.
Under its new system, Uber drivers bear the cost of automobile ownership and insurance and take the risk of operating in a highly competitive market with no proper infrastructure. Uber has thereby established a standard taxi service, without the security to passengers that medallion services offer and without the union rules, medallion and licensing regulations and other costs of existing taxi operations. Uber’s remuneration to drivers has roughly halved over the last five years and is now less than $500 per month, according to J.P. Morgan figures. To the extent it offers a better or cheaper service Uber does so by exploiting its drivers and getting around regulations; beyond the original modestly valuable software, there is no economic value added at all. That will not stop the company doing an IPO at an expected $100 billion valuation.
Now Uber’s rival Lyft (which treats its drivers somewhat better) has gone public at an astronomical valuation, despite making losses of 40% of revenues, a loss percentage so large that no amount of adding volume will make it profitable. Gigantic amounts of investor capital will have been poured down the ratholes of these two companies, which add no economic value beyond that of a modest initial piece of software.
Economically, the companies have subtracted welfare from conventional taxi drivers (many of whom have lost their jobs through Uber/Lyft competition) and from their own underpaid contractors, and wasted the money of countless investors, all to line the pockets of a few lucky founders and insiders. This is how the crazed Marxists of the left, ever since Karl Marx himself and Friedrich Engels, think capitalism works. It is not how it actually works in a non-pathological economy and it is certainly not how it should work.
Uber and Lyft are not the most extreme examples. My eye was caught last week by the news that Uber’s founder, Travis Kalanick, has recently made an offer for a British company, Deliveroo, in his new business sector, dark kitchens. Needless to say, that caused me to investigate what those sinister-sounding “dark kitchens” actually were.
It turns out that, if you really want your dinner cooked in a shipping container in a disused parking lot by an unskilled, underpaid contractor, with no hygiene inspections, then dark kitchens are for you. Essentially, the tech software that facilitates ordering and delivery has allowed the dark kitchens company to drive a truck through hygiene regulations, labor regulations and quality standards in the catering industry. They sell through established restaurants with a local “brand,” providing a home delivery service to those restaurants’ customers. Once again, no significant value is being added, but restaurant workers are impoverished, their working conditions degraded and dark kitchens’ customers are getting a product possibly inferior and certainly less safe than they are accustomed to.
Another kind of dark employment enabled by modern tech is Amazon’s Mechanical Turk service, and various similar services. These connect unemployed individuals with people requiring services, providing the services at a competitive cost but generally paying the service providers well below minimum wage, because they force service providers to compete for each new assignment, driving down earnings. Of course, these “contractors” are not subject to minimum wage legislation, let alone health and safety legislation. Again, workers are immiserated, nothing new is provided (the services are generally vanilla old-economy needs) and wealth is transferred from the economically marginal to the economically excessive Jeff Bezos and his comperes.
Another service of this type is Instacart, which undertakes home deliveries. In this case, since tips are typically recorded electronically, the service appears to be subtracting the tips from the fee paid to the service delivery worker, thus enabling it to pay well below the minimum wage. Again, tech is enabling nothing new, except a new way to skim profits from the modest amounts paid to the Instacart workforce and a smokescreen to get around those pesky regulations.
Then there is the lovely business of content moderation, for Facebook and other online social media. These services are undertaken through contractors, often through a multiple network of contractors, insulating Facebook from any problems among the poorly paid content moderators. If the only suspect content on Facebook were porn, the moderators’ job would be mind-numbing but mostly not especially harmful. Unfortunately, at the unpleasant end of the Internet a lot gets uploaded that is far more damaging than porn, especially videos of beheadings and other violent criminal activity. Naturally any mental health problems, and any health and safety violations among these moderators, are not Facebook’s problem, insulated as it is by contractor relationships.
These services are arbitraging away the regulations of the 19th and 20th centuries and returning to the working conditions of the early Industrial Revolution. Indeed, they are going further. In the early Industrial Revolution, most workers in the early factories were making more than their ancestors who had worked on the land, and, despite their long hours and brutal working conditions, were improving the prospects for themselves and their families. This was especially so if they worked for a benign mill-owner like Sir Robert Peel senior, said to be the richest man in Britain when he died in 1830, but one who, decades before his famous son’s career, went into Parliament to improve conditions for working men. (The 1819 Cotton Mills and Factories Act, the first to limit child labor, was his legislation, pushed through by the thoughtful prime minister Lord Liverpool.)
No such consolation is available to workers in the gig economy. They are working for compensation far below the norm in a modern economy, under conditions that had been thought to be outlawed by legislation. Yet they are not trapped in an outmoded work process, like the doomed handloom weavers of early Industrial Britain; they are in the most fast-moving, technologically sophisticated sector of the economy.
It’s not as if these services were especially profitable, even after gouging their workforces. A recent Bloomberg study calculated the on-demand tech sector lost a staggering $30 billion in 2018, including some truly impressive losses from Chinese participants in the sector (one shudders to think what their worker conditions are like.) In other words, these companies only exist because of the excessive amounts of dozy private equity money that is prepared to fund them. Providing nothing significant to consumers, flouting all kinds of regulations and oppressing their workforces, they truly are one of the least productive ways for a lucky and unpleasant few to make billions since the invention of the Mafia-run casino.
The cause of all this is quite simple. A decade of excessively loose monetary policy and negative real interest rates has brought a glut of private equity money, which, unable to find worthwhile tech advances to fund, is now pouring money into deeply loss-making fake-tech sweatshops. Much of that money is now foreign, from Saudi Arabia and elsewhere, because foreign investors have the least knowledge of the unpleasantness they finance, and the least ability to find decent deals. The enterprises they fund make their vulgar, left-wing founders rich by by exploiting their workforces and skirting two centuries of factory legislation.
Those founders are not benign early industrialists like Sir Robert Peel senior; they are more like Sir John Gladstone (father of the statesman) who arbitraged slave rebellions and abolition panics in the market for West Indian slave plantations to become the largest recipient of cash compensation from the British government when slavery was finally abolished in 1833. Their fortunes are wholly exploitative, derived from bad policy and severe market imperfections.
Only a return to sound money will close down these gigantic, useless and economically damaging scams. President Trump and his economic minions should shut up whining for lower interest rates and do their patriotic duty of accepting higher rates and the inevitable malinvestment shakeout, so that the economy can recover full health. Millions of exploited gig workers will thank them.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)