The City of Cape Town has placed a ‘moratorium on new operating licences to ensure sustainability of metered taxi industry’. Since when is that government’s role?
In a press release last week, the City of Cape Town announced that it had instituted a moratorium on new metered taxi operating licences, supposedly to ensure the sustainability of the industry. The moratorium will remain in effect until the end of 2023 and also covers contracted drivers for e-hailing platforms such as Uber or Taxify.
The metered taxi industry itself lobbied hard for this protection from competition, first in 2017 at the ill-named Competition Commission’s inquiry into land-based public passenger transport, then at the Western Cape Provincial Transport Lekgotla on 15 October 2020, and again at the National Taxi Lekgotla in Boksburg on 29 and 30 October 2020.
Such rank protectionism, while favoured by central planning enthusiasts, ought not be in the playbook of any Democratic Alliance (DA) government.
‘We have noted a significant drop in passenger demand since the pandemic emerged in South Africa in March 2020,’ the municipality said.
Well, what of it? There has also been a significant drop in demand in most other industries. What does that have to do with the government?
‘Over-supply’
‘It is important to note,’ says the press release, ‘that the metered-taxi industry is also concerned about an over-supply of metered-taxis in Cape Town.’
I’m sure it is. I’m sure that the tourism industry is concerned about an over-supply of tourism facilities, too. Restaurants must be concerned about an over-supply, because people are reluctant to gather in public.
Yet what business is it of government if a new restaurant decides to enter the market nonetheless?
Inasmuch as any business is concerned about competition in the market, any business is ‘concerned about an over-supply’. I’m concerned about an over-supply of writers, who depress my ability to charge lavish fees.
Any business would welcome government intervention to curtail competition, which is exactly what the City of Cape Town has done here.
In a market economy, which the DA says it champions, it is up to suppliers to cope with a decline in demand. It is not the government’s job to ensure an industry’s ‘sustainability’.
An over-supply is not a cause for government intervention. It is cause for the industry to cut its prices, for the most inefficient market participants to bow out, and for innovative new competition to arise.
An over-supply in the metered taxi industry might be just the boon South Africa needs to cut down on its drunk driving problem. If taxis were less expensive and were almost instantly on call, more people would consider using taxis to ferry them to and from their watering holes.
Protectionism
By banning all new competition in this market, the Cape Town municipality merely protects existing operators against the possibility of having to face new competition. It protects them against having to become more efficient. It protects them against having to reduce their prices. In fact, it permits them to act in concert to raise prices to compensate for lower demand, instead.
In short, it breaks the entire market mechanism and perpetuates inefficient services at the expense of users of those services.
The metered taxi industry told the Competition Commission that licences ought to be restricted ‘subject to a reasonable waiting time for passengers and reasonable working hours for the drivers’.
There’s no such thing as a ‘reasonable waiting time for passengers’. A reasonable waiting time is zero. Passengers don’t want to wait. They want taxis to be instantly available, everywhere.
It is up to the market to determine a balance between supply and demand that comes as close as possible to meeting the impossible demands of customers, on one hand, and the equally impossible demand of drivers and owners of easy working hours and insane profits, on the other.
By intervening in the market, government implicitly reduces the quality of the service available to passengers.
Contradictions
One of the DA’s principles is the ‘defence, promotion and extension’ of ‘the right of all people to private ownership and to participate freely in the market economy’.
Except people who want to enter the metered taxi industry. They’re not entitled to participate freely in the market economy. Their right to do so, evidently, must be attacked, discouraged and restricted.
If you’re out of a job because of government lockdowns, you may not use your own private vehicle to sign up as a driver for an e-hailing company to make ends meet. That kind of free participation in the market economy is strictly verboten, because it might divert revenue away from other metered taxi operators.
This regulation also contradicts many clauses in the DA’s longer Principles and Values document.
Consider, for example, this statement on ‘opportunity’: ‘Opportunities, or choices, must not be arbitrarily restricted. In a society based on the value of opportunity, governments focus their efforts on preserving and expanding the choices available to all.’
By refusing to issue new licences, the Cape Town city government does the exact opposite. Perhaps the City would argue that the restriction is not ‘arbitrary’, but that defence is not tenable, since it freely admits to neither knowing the demand for metered taxis, nor even having a method to determine that demand.
‘Fairness demands us to be impartial and to consider all sides,’ the document says. Has Cape Town considered the side of taxi passengers, who are harmed by these protectionist rules, or the would-be competitors now locked out of the market?
The section in which it espouses a ‘social market economy’ says: ‘A social market economy refers to an economy in which participants (firms and consumers) rather than the government decide on what to purchase, where to invest, and how much to produce.’
Yet the City of Cape Town now expressly regulates all this in the metered taxi industry, and it expressly forbids anyone to enter the market to supply metered taxi services.
In describing a ‘social market economy’, the DA does leave the door open for government intervention in the market. However, the reasons it gives for such intervention again contradict the actions here: ‘Left entirely on their own, participants who enjoy market dominance can engage in behavior [sic] which keeps out smaller participants and competition. Alternatively, participants can collude and fix prices with one another to the detriment of the consumer.’
The irony is that by refusing to issue new metered taxi operating licences, the City of Cape Town is engaging in ‘behaviour which keeps out smaller participants and competition’, and encourages participants to ‘collude and fix prices with one another to the detriment of the consumer’.
‘Governments have an important role to play in improving access to markets by championing open and competitive markets,’ the document says. Except in this case, clearly.
Regulatory capture
The term for this sort of rule-making is ‘regulatory capture’. Introduced in the 1970s by the late George Stigler, a Nobel Prize-winning economist at the University of Chicago, regulatory capture is defined by Investopedia as: ‘[A]n economic theory that says regulatory agencies may come to be dominated by the industries or interests they are charged with regulating. The result is that an agency, charged with acting in the public interest, instead acts in ways that benefit incumbent firms in the industry it is supposed to be regulating.’
Even when regulatory agencies are not explicitly bribed, or staffed by industry figures via a revolving door, they can be captured simply when regulators bow to industry pressure and lobbying.
Industries spend great fortunes to influence public policy and regulations, while individual citizens do not. Once regulators begin to think like the industries they are meant to oversee, regulations start benefiting industry at the expense of ordinary citizens.
Regulation therefore tends to have concentrated benefits for those with a voice (in this case, benefiting the metered taxi industry) but widely dispersed costs among the voiceless (passengers who will have to wait longer or pay more for taxis, or prospective new entrants now barred from the market).
The single biggest symptom of regulatory capture is that regulations – even when they impose costs or restrictions on existing market participants – create or raise barriers to entry into a market. In the case of Cape Town’s metered taxis, the barrier is entirely impassable until at least 2024.
The knowledge problem
When a government sees fit to impose licence requirements upon economic activities (which is a questionable proposition in the first place), it ought to issue licences to anyone who meets the licence requirements.
Limiting the number of licences in issue merely creates a cartel dominated by incumbents who, in the absence of the threat of new competition arising, have little incentive to innovate, improve quality or reduce prices.
The City of Cape Town says the moratorium will allow it to ‘undertake an inventory of all metered-taxi operating licences in the system; develop a method to determine the demand for metered-taxi services which will govern support for new metered-taxi operating licences in future; review and update relevant by-laws, policies, statutory plans and strategies related to the metered-taxi industry; and establish a metered-taxi inter-modal planning subcommittee (IPC) as an umbrella body or forum for engagement with the industry’.
This is a blueprint for central planning. It is not the government’s job to determine, or regulate, supply and demand. That is the job of the price mechanism. In fact, government cannot determine demand or the correct balance between demand and supply.
Trail-blazing economist Ludwig von Mises called this the ‘economic calculation problem’. Another Nobel laureate economist, Friedrich Hayek, called it the ‘knowledge problem’.
The gist is that the information needed to determine supply or demand is not concentrated. It is not available to any single economic actor or regulating entity. It is widely dispersed among all market participants, none of which are fully aware of the resources or needs of the others, and all of which can act only upon their knowledge of their own resources and needs.
In other words, the knowledge necessary to plan an economy is distributed in the individual minds of all market participants, and is inherently inaccessible to central planners.
The City of Cape Town, like the old-school socialists against which Mises and Hayek argued, has decided that this is not true. It believes that it can determine market demand and can centrally plan the economy so that this demand is supplied.
It is disappointing to find that a major DA-run local government is run by central planners, or by captive industry cronies. Perhaps they ought to read their own policy documents before trying to intervene in markets.