Innovators are a step ahead of regulators

SACRAMENTO ??? A market economy ???is incessantly being revolutionized from within by new enterprise,??? wrote Austrian economist Joseph Schumpeter. This ???creative destruction??? isn???t just the province of musty, old economics texts ??? but is obvious to anyone who has recently hailed a cab, used a parking meter or rented a hotel room.

Thanks to smartphones, many staid industries are being revolutionized by enterprises that are creatively destroying older ones ??? and those older ones are trying to use government to hobble this new competition. Even in California, known for its tough regulations, the innovators are winning.

The most prominent battle has been between ride-sharing services such as Uber and Sidecar, which use phone applications to match riders with drivers, and the traditional taxicab industry, which wants these newcomers to comply with rules that erode their competitive advantage.

This year, Gov. Jerry Brown signed a law that adds insurance requirements, but were inoffensive enough to ultimately have garnered the ride-sharing industry???s support. Meanwhile, the services are gaining popularity ??? in San Francisco, the city reports the number of taxicab rides has dropped by 65 percent in 15 months as a result of the competition.

???In the long run, I really can???t see the cab companies turning this back because the services are available ??? and so widely liked,??? said Adam C. Smith, an economics professor at Johnson & Wales University in North Carolina, and co-author of a new study about the burgeoning industry.

???The self-regulating properties of the market follow from two sources: a good reputation that keeps revenues high and low insurance rates that keep costs low,??? according to the study, published by the free-market Mercatus Center. ???In contrast, under the current licensing system, firms do not have the same incentives to compete on quality.???

The taxi licensing system, the study noted, limits the number of taxicab permits and thereby eliminates competition because this always assures more customers than available cabs. It also drives up the cost of the permits. San Diego has proposed eliminating the city???s cap as a means to boost competition and help the industry survive.

But cab owners and drivers protested at City Hall because they have often spent $150,000 to buy these ???medallions.??? The economics of this monopoly system don???t make a lot sense now that a competitor has entered the scene. And studies show drivers at ride-sharing services earn much more than taxi drivers, which could lead to an exodus of drivers.

Such creative destruction is not limited to taxis. Last month, San Francisco Mayor Ed Lee signed a law that legalizes an industry that has been operating in the shadows. Web sites such as Airbnb let owners rent out their homes online to short-term guests ??? a booming industry in cities with high hotel prices.

This could eat into the business of hoteliers. Many vocal opponents claim it takes potential rental properties out of circulation. San Francisco has tight rent controls that make it tough to profit as a landlord, which makes this short-term rental approach appealing to owners who don???t want to deal with all the restrictions.

And a San Diego judge slapped a $106,000 penalty on the owner of a condominium unit in The Mark condo project near PETCO Park for violating association rules that forbid subleases of less than 90 days. The city of San Diego allows short-term rentals with some restrictions (and provided owners are certified and pay occupancy taxes), but private condo associations are free to set their own limits. The rules clearly are evolving.

Regulators are getting the upper hand with a new app that lets people ???sell??? their spots at city parking meters to others who are looking for a spot. California cities are banning this ??? but it is, according to a Los Angeles Times article, prodding traffic planners to embrace a more market-based pricing system for meters.

Such innovation and creativity is good, except for those people financially wedded to a failing business model. Destruction can be tough, but ??? as Schumpeter or any Uber user would attest ??? you can???t have a vibrant economy without it.

Steven Greenhut is the California columnist for U-T San Diego. Write to him at