Economics of gig economy not easy

A taxi hailing app
A taxi hailing app. FILE PHOTO | NMG 

“It’s a mark of the political freedom of a capitalist society that men can openly advocate and work for socialism.”

In his book Capitalism and Freedom, economist Milton Friedman explores the connection between economic and political freedom, finding that political freedom in the absence of economic freedom is unlikely.

Capitalism is the only legitimate way to organise society because it starts with an individual’s free will and personal freedom to pursue even the alternative economic system, socialism.

But it doesn’t happen the other way around as we can see the cruel authoritarianism in many socialist States.

This basic understanding of how capitalism works is a cryptic puzzle even to the learned fellows. No economic system organises the world impeccably by assigning relative value to goods and services, and individual courses of action like capitalism.


A few weeks ago in Davos, the Oxfam executive director shut down former Yahoo CFO Ken Goldman for suggesting that tax avoidance is not the issue increasing inequality looking at the impressive employment rates in the US.

Her counter argument was that in those employment numbers we are counting on exploited people working with no dignity, so the most important factor to look at is the quality of jobs being produced and she gave two anecdotes.

First is a US firm where employees who package poultry unfortunately wear diapers since they are not allowed to take toilet breaks.

Second is a global taxi hailing app where drivers in Kenya make a trip of $2 - a price she found unfair and according to a driver 20 percent of the revenue goes to the global firm then he shares the remaining 80 percent with the owner of the vehicle. To the executive director, the $2 trip is quite undignified as the driver doesn’t make much money to afford his rent.

On the first example, I entirely agree with her that its a moral issue about the respect of human dignity by providing safe and humane working space. But on the second one, I disagree that it’s a moral but an economics issue - an income problem.

The new on-demand gig economy where people can access services offered to them via internet-or app based like the taxi hailing app have democratized markets that were controlled by a specific group of people.

In Kenya, a distance that used cost $4-5 from your cab guy now costs $2 from taxi-hailing apps and consumers are saving a lot from this disruption.

Giggers on the other hand are benefiting from the access to a huge pool of customers and steady flow of cash, because of the customer crowding-in effect.

When the executive director says that there is no taxi for $2 anywhere in the world, she assumes that income across world economies is the same when its not.

When the taxi-hailing apps priced minimum distance at $3 there was unimpressive off-take, but when priced at $2 there has been a huge off-take. It means there is huge demand from customers who can afford the services at $2 cost allowing a huge crowding-in effect of customers, precisely how the app-based business model should work.

So, a marginal increase in price has a negative impact on the taxi-hailing firm in terms of crowding-in customers, making it a business economics dilemma and not a moral one.

So how do you resolve this dilemma in a capitalist society we live in, where individual free-will and personal freedoms are paramount?

If the drivers or taxi owners who are owners of capital (vehicle) are disgruntled by the other owner of capital (firm running the taxi-hailing app) pricing of distance or 20 percent share of revenue, they are free to exit and join competitors or create their own taxi-hailing app that caters for their needs.

Only then will they realise that the business economics of the gig economy is not about the normative issue of dignity as easily as presented.