Does Neglect of Public Systems Spawn Tech Companies?

Kim-Mai Cutler writes about the Bay Area housing crisis and other intersections of Silicon Valley and public policy for Techcrunch. In a provocative tweet, she suggests that Uber, Airbnb, and other familiar large tech companies owe their existence in part to the opportunity created by California’s failure to provide basic public services.

To be clear, no one is arguing that market opportunity is a sufficient condition for technological innovation at scale. And to the extent that companies have been successful outside California (as the specific companies Cutler names certainly have), it seems unlikely that “Californian neglect” adequately captures even the market opportunity part of the equation. Nonetheless, I think Cutler’s claim deserves careful consideration if we interpret it as necessary condition for explaining the historically contingent development of private sector service delivery in California, 2001-present.

If you consider the specific relationship between each major class of tech company and the government, major differences emerge, which suggests that the argument might work better in certain domains than others. The main axis of differentiation is the extent to which government has traditionally played the role of regulator vs. direct service provider in each domain.

I do not mean to offer a conclusion as to the merits of these three arguments about whether private opportunities emerge out of public neglect. Such a conclusion really requires a separate book on each domain. My goal here is to sketch out what each argument would seek to claim and what major obstacles it would encounter.

Education: government primarily as service provider
Education strikes me as the domain where the clearest argument can be made that private vendors owe their opportunities to a perceived failure of public schools to offer quality education. Such an argument is most relevant when private vendors offer products substantively similar (while of reputedly higher quality) to what public schools provide, e.g. the Math and ELA curriculum and assessment products sold by Amplify. This argument strikes me as equally valid whether the private companies in question are selling services to the public education system itself, to individual teachers, or directly to parents and families. The argument would be less valid when applied to vendors selling educational experiences that the public system has not much tried to provide (e.g. Udemy courses or a private, arts-oriented school).

Housing: government primarily as regulator
If you follow Cutler’s reporting, it’s hard to disagree with the notion that San Francisco’s housing supply has not kept pace with demand. But while Airbnb certainly exacerbates the SF housing crunch by taking an estimated ~350 units out of the long-term rental population, I don’t follow the argument that Airbnb is a response to limited housing supply…or even to limited hotel supply, as Cutler suggested in a subsequent tweet. I would need to look into more evidence on the relationship between Airbnb and hotels (here’s a good start), but my perception is that Airbnb is offering a different product, akin to a private school in the education domain.

What would it look like for a private company to step in where government regulation of the housing supply (I am referring here only to private housing supply) has been ineffective? I don’t mean to be obtuse, but it seems that when the government’s role has been regulator rather than provider, it is by definition illegal for a company to innovate its way out of the problem; which in this case would entail building more/taller buildings in San Francisco. The entities in a position to innovate are rather other, adjacent governments (which, to date, have arguably not contributed their fair share of new construction).

Transportation: government as hybrid service provider / regulator
Uber and other ride-hailing systems can be understood as a response to public neglect in two senses: first that public transportation in the Bay Area is less accessible, reliable, and convenient than people wish; and second that, at least anecdotally, before Uber et al. San Francisco taxis were limited in number and difficult to summon.  An argument about Uber vis-a-vis public transportation can proceed along the same lines as the public education example and can make a claim that, for the sake of equity and access, we should prefer investment in the public alternative. An argument about Uber vis-a-vis publicly regulated taxis has to acknowledge that by legal necessity, Uber lobbied aggressively and changed the nature of what a “publicly regulated taxi” is. In this sense public systems w/r/t taxi regulation are now better off than they were before, at least in terms of access and price (you can of course still argue that making taxi regulation more efficient just undercuts public transportation!).

This exercise suggests that the public neglect argument works best when government has been involved in the direct delivery of some service and has arguably been underfunded or unsuccessful in doing so. When instead regulation is the culprit, the opportunity to innovate is only available to other public jurisdictions who might write better regulation. When a city grants Uber the right to operate or when Utah lifts its ban on Zenefits, we can no longer say that the government has been neglectful!

One final thought is that “tech companies” is definitely not the most helpful category for thinking about what the entities discussed here have in common. The fact that Uber, Airbnb, Amplify, Udemy, and Zenefits rely on digital information technology is no doubt relevant to their shared role in political economy and in relation to the state, but it is far from constituting that role. The concept of a “sharing economy” is not much better though “network economy” may be. The fundamental similarity might have to do with reducing transaction costs, barriers to participation, and hierarchical structure across various domains of economic and social life. To flesh out what really unites these companies will be the work of a future post.