Capitalism Without the Das Capital: Welcome to Uber’s Gig Economy

April 28, 2016 // 8 Comments »

One of the defining aspects of traditional capitalism is that the Capitalist, that one percent guy from the Monopoly game with the top hat, spats and monocle, invests capital. That investment, in land, a factory, an oil well, creates value (the monies) for him, and jobs for the rest of us.

Capitalism 101

The idea is that because the Capitalist risks his money/capital, he is assuming the greater risk and thus deserves the greater gain. This has been the way things have worked since feudal lords controlled land and allowed sharecroppers to keep pennies on the dollar they earned for him, on through to when people built factories and opened stores.

Traditional capitalism is that stuff you slept through in Econ 101. Risk gain, employment, jobs, whatevers unless you live off an allowance from Daddy.

Until the arrival of the gig economy.

The Gig Economy

For those who are living off an allowance from Daddy, or are one of the eleven Americans who still hold a traditional “job” where you do stuff, get paid a regular salary not tied to how many sneakers you sew each day, and receive those “benefits” you once heard grandpa speak of, the gig economy is where you work piecemeal, get paid a few table scraps and have no benefits or job security because you really don’t work for anyone.

These “gigs” are almost always performing low-level services, such as delivering food to or driving around people much wealthier than you. Those people cannot be bothered to walk to a restaurant or pilot a motor vehicle or clean up their kids’/doggies’ poo, so you do it because you don’t have many other options in hope of earning something more than minimum wage.

The gig economy is sometimes also known as the 1099 economy, after the IRS form used to report non-employee earnings, or the on-demand economy based on the way people get or don’t get opportunities to work. No one knows how big this shadow economy is, given the shifting nature of the work and the cash payments sometimes involved. But it is big and it is growing.

The less-discussed game changer of the gig economy is that traditional capitalists no longer need to put much money at risk at all. In fact the companies behind the gig economy, the people who run Uber and the others, are economically viable because they offload their cost of capital — the investment and depreciation on cars and the cost of keeping a driver fed and healthy — onto the drivers, who are only willing to accept such a bad deal because the labor market sucks. See how that works?

And if that’s not problem enough, the cheaper wages paid (for example, by Uber) to drivers, and thus the cheaper rides, also drive business with capital structures which make social sense out of business. They can’t compete with “drive your car into the ground, make whatever you might get along the way while we cash in.”

And when you talk about driving these days, you’re talking about Uber.

Uber Costs

Uber has succeeded in almost completely pushing its operating costs (absent the relatively small investment needed to run the app and backoffice) down to people who often can’t afford it but are lured into trying because the alternatives seem even lower paying.

To drive for Uber, you need a late model car, in great shape, with four doors. It doesn’t have to be a black sedan, but if it isn’t Uber will exclude you from a number of ride requests.

So where does someone without a lot of money get a late model black sedan? If they can afford it, they buy one, but that means laying out a lot of money and taking on some heavy credit up front. More than likely, however, what a budding Uber driver does is lease his black sedan from an Uber-suggested third party contractor. You’ll find them right on the Uber website. They’ll take an average $500 deposit to sign you into a three year lease running $300 a month. So that all adds up to a capital investment by the driver of $11,300 over three years.

Next capital cost to the driver is insurance, expensive insurance, because the cheap minimum stuff you buy off the TV ads is not going to cover you driving passengers around. Don’t worry, though, as Uber will sell you just what you need, albeit at $4,600 a year. That works out to $13,800 for three years.

And, hey, driver, you need to pay for licensing, gas, maintenance, fines, regular car washes, depreciation of your vehicle and all the other stuff. Over three years, let’s call it $5,000.

So overall, the cost for you to get a job with Uber is about $30,100 over three years. If you don’t have the cash on hand, and need to borrow it, add on 13% interest or more if using a credit card, maybe more for second-level sources for people who don’t qualify for good credit.

But wait — many jurisdictions are now demanding additional licenses from Uber drivers, claiming they are operating a business. One of the more extreme plans under consideration is in Newark, New Jersey. The city is looking at a $500 annual fee to operate in the city, $1,000 additional license to pick up and drop off passengers at the airport and Newark Penn Station, and a $1.5 million insurance coverage requirement.

If the driver fails to make any of those payments, s/he instantly becomes unemployed, unable to pay enough to have a job to earn enough to pay for that job. This is, in economic terms, an extractive process — a third party takes profit, leaves the true costs of capital to the workers, and when they fail, to society who will need to step in and provide food benefits as a last resort.

Uber Risks

In addition to having to raise their own capital to essentially buy themselves a job driving for Uber, drivers face risks far above the simple “risk” associated with any “investment.”

In addition to the obvious risks of accidents, bad reviews, and good/bad weather that cuts the number of people seeking rides, perhaps the biggest financial risk to any driver is Uber itself.

Imagine a situation where there are 10 riders in a city, and ten Uber drivers. For argument’s sake, let’s say each driver gets one fare a night. Uber makes money on its 27% share of 10 rides. Now, increase the number of Uber drivers to 100 (which makes getting a ride easier and faster for quicker profit for Uber and protects Uber when drivers quit) while the number of rides stays at 10. That means 90 drivers make nothing each night. Independent of the number of drivers, Uber still makes the same money on its share of 10 rides.

In 2015, Uber doubled the number of drivers in the U.S. As of October 2015, the company had 327,000 active drivers, more than doubling the 160,000 that gave rides in 2014. Some of the new drivers are absorbed by growth in ridership, some are not.

The other risk is that Uber sets prices, which vary even though the driver’s costs do not. For example, in order to theoretically boast ridership, Uber lowered prices in New York City such that individual drivers saw an average decline in payouts of 15%. The company also experimented with rate cuts in 99 other North American cities.

Uber Pool

UberPool is a new service where multiple customers headed the same way can “share” a car.

Imagine two Uber drivers each carrying a single passenger along the same route which results in a fare of $11. After Uber takes its brokerage cut as well as its “safety fee” (even though the company still has the poorest driver background checks in the taxi industry), each driver ends up with $8 each in pocket, while Uber ends up with $6, a 27% commission for Uber.

Now along comes UberPool, and these same two serial riders get picked up by a single driver. Since UberPool offers passengers a substantial discount for sharing a ride, that means each passenger now pays $6 (in this example). After Uber takes its commission, including the safety fee, the payout to the driver is $4 for each passenger, or a total of $8. So the driver makes the same amount, but Uber’s take of the overall $12 for this ride is also $4 – a 33% overall commission. So Uber makes a higher percent on UberPool rides, yet the driver makes about the same amount.

Money

The other side of financial risk is financial return, what you get after investing capital. For Uber drivers, there is no realistic average. Take a look at one of the many online driver forums and you’ll see a range of claimed payouts so wide (from sub-minimum wage to thousands a week) that it is of no real value. Here is at least one reasonable breakdown of costs and payouts.

Leaving aside the forum posters who are just lying for whatever reason, the variables of driving for Uber are such that averages are not really possible. One of the few variables under the driver’s control is number of hours worked, and many of those who claim high weekly payouts also claim to drive 12 or more hours a day. Leaving aside the not inconsequential question of whether you feel it’s safe to catch those guys 11.5 hours into their shift, it leaves the economic question of how many hours a week it takes in the gig economy to earn a decent living.

The New World Order

Unlike conventional labor, where one starts at zero on day one and begins earning money, or traditional self-employment where in return for capital investment one keeps 100% of the profits, the gig economy’s main point is that people working for places like Uber start behind, maybe $10,000 in the hole after they secure a car, insurance and all the rest. Uber, however, begins profiting from the driver’s labor immediately, and loses nothing when the driver is pushed aside.

All of the gain, none of the risk, in the New Economy where people pay for their own jobs.

What other business is there where the Capitalist takes almost no risk, invests no capital, and pushes all that down on his workers alone, while raking in money? Oh, rights, pimps. Welcome to the gig economy.

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