Archive for the ‘economics’ tag
Last night I had to drive from Albany to New York. My Virgin America flight from San Francisco got diverted, then had mechanical problems, and next thing I know I’m facing the prospect of spending Saturday night in the Schenectady Hampton Inn.
With the good fortune of sitting near the front of the plane, I was second in line at the Alamo counter at the Albany airport to rent a car to make the two-and-a-half-hour drive back to the city. I was feeling pretty good about my prospects. The man in front of me rented a mid-size for $80. When I got to the counter and handed over my license, a troubled look came over the representative’s face.
“Oh wow — everything just changed.”
“The prices. The computers saw what happened with your flight. It’s a lot different now.”
Alamo ended up charging me $600 for the pleasure of driving a rental car back to New York. I was fortunate to find some fellow passengers to split it with me — company on the road is always nice too — but I still have a bad taste in my mouth. It was an example of price gouging at its worst.
Uber has taken a lot of flak over practices that look similar at a high level. Uber’s algorithms see surges in demand and raise prices accordingly. Seems like old-school price gouging, the same kind that Alamo used against me in Albany.
But while I’m fuming at Alamo, Uber’s practices have never bothered me. It really comes down to the elasticity of supply: Regardless of how much Alamo charged, they weren’t getting more rental cars to Albany that night. The first dozen people at the desk got cars and the rest were left with their hotel vouchers and the hope of a flight the next day. The increase from $80 to $600 per car was simply a maximization of profit — an economic transfer from the customer to the company. No additional economic value was created by the price increase.
Uber, on the other hand, has supply elasticity. That is, supply changes quickly with the price offered. If a customer is willing to pay $200 to get from the Upper East Side to the Meatpacking on a rainy Friday night, there’s going to be a driver willing to do it. Increasing prices brings more drivers out, making it possible for more transactions to happen that “make sense” for both parties — even if those transactions are significantly more expensive than they would be on a sunny summer day.
Price gouging laws were built with the assumption of totally inelastic supply. Price gouging laws exist to prevent Alamo from doing the kind of thing it did in Albany on Saturday night, or to prevent a grocery store from increasing the price of bread during a blizzard when more bread can’t be brought in. When these laws were written, inelastic supply was the rule. Logistic and supply systems didn’t exist on top of a digital layer enabling real-time changes in supply in response to demand. But for some companies like Alamo, that digital layer still isn’t used to increase supply — just to raise prices.
I’m glad I got back to the city on Saturday night. But it left me wondering why all the flak has landed on Uber for ensuring that supply can meet demand while Alamo is left to gouge and extract at will.
By this point we all know things are bad in PIGS. But how bad, and why? Matthew O’Brien at The Atlantic included a simple graph in his argument that Spain is Beyond Doomed, charting the growth the long-term unemployed in Spain:
Anyone who has tried to do business in continental Europe — particularly Spain — knows that firing employees is effectively impossible. This can make businesses much more skittish when it comes to hiring full-time employees in boom times, favoring instead unprotected part-time contract labor.
And when I saw that chart, I was reminded of another:
This one isn’t as dramatic, but the underlying problem is the same: a regime that protects a group of established individuals creates a “permanent underclass” of those on the outside looking in. In Spain, permanent workers are almost impossible to fire or downsize, just like tenured faculty in the US higher education system. The result in Spain is an underclass of indignados chronically under- and unemployed; the result in higher education is an underclass of poorly paid adjunct faculty with few prospects of advancement.
Neither system is sustainable. Both discourage effort and innovation, driving talent away. In academia, many of the best students flee research and end up in industry. Leaving a country isn’t as easy.
We are in the middle of one of the largest and fastest macro shifts in world economic history — the development of a social capital infrastructure analogous to the financial infrastructure built over the past five hundred years. Led by the growth of social networks, the value we are building in our personal relationships is becoming more and more comparable to “true” currency. In fact, social capital is coming closer to fully adopting the three core characteristics of money:
Medium of Exchange: It is far easier to reach all of my friends today than it was ten or even five years ago. More importantly, this communication has clear, quantifiable value that I can exchange for other goods. This has never been the case without insane transaction cost in the past.
Store of Value: I can now much more efficiently build, store and display my social capital. Twitter followers do not deteriorate as quickly in value without maintenance as real-life friends.
Unit of Account: The units of social capital have become far more standardized and concrete. Ten years ago it was meaningless to say you have “300 friends”. Today, the Friend (or the LinkedIn connection or the Twitter follower) is a far more meaningful unit of account.
I had the pleasure of joining Emily Hickey and Michael Yavonditte of Hashable for a demo of their product last week. In brief, Hashable turns the transactions of the social capital economy — introductions, breakfasts, lunches, coffees, beers, et cetera — into a game. I get points when I make an introduction or log a meeting in their system, for instance.
Given its check-in and gaming features, It’s tempting to refer to Hashable as “Foursquare for people”. But I think that’s missing the bigger opportunity — a Mint.com for social capital. Social capital isn’t a game any more than my bank account is a game. Sure, it has some game-like elements — it goes up and down in accordance with how well I “play” the game of life — but ultimately it has its most significant meaning outside of the context of any game framework we put around it. And that is where the real world-changing products will be made.
The next generation of successful social products will acknowledge that our social capital is a currency. They will provide tools to enhance our social capital’s functionality as a store of value, a medium of exchange and a unit of account. They will replicate the deep feature set at our hands to deal with money — banking, tracking, exchanging, investing, et cetera — for our connections and relationships. Over the past five years, social networks and the decreasing cost of bandwidth and storage have lowered the transaction costs of social capital exchanges by orders of magnitude. Now, the race is on to provide the best tools and infrastructure around this new currency.
Putting everything in the context of a game is a good way to get quick user traction among a competitive tech community. But social capital isn’t a game, and the biggest companies in the space five years from now will have grown by providing fundamentally useful functionality that helps everyone earn, save, exchange and optimize social capital.
Special thanks to Sam Lessin for helping shape my thoughts on this stuff. If you don’t subscribe to his letter.ly, you are missing some of the most thought-provoking writing in tech today.
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