do we need illegal firms?

Over at Harvard Business Review, Benjamin Edelman argues that Uber’s ultimate problem isn’t bad corporate culture. It’s being an organization that is premised on being illegal. To quote:

But I suggest that the problem at Uber goes beyond a culture created by toxic leadership. The company’s cultural dysfunction, it seems to me, stems from the very nature of the company’s competitive advantage: Uber’s business model is predicated on lawbreaking. And having grown through intentional illegality, Uber can’t easily pivot toward following the rules.


Uber’s biggest advantage over incumbents was in using ordinary vehicles with no special licensing or other formalities. With regular noncommercial cars, Uber and its drivers avoided commercial insurance, commercial registration, commercial plates, special driver’s licenses, background checks, rigorous commercial vehicle inspections, and countless other expenses. With these savings, Uber seized a huge cost advantage over taxis and traditional car services. Uber’s lower costs brought lower prices to consumers, with resulting popularity and growth. But this use of noncommercial cars was unlawful from the start. In most jurisdictions, longstanding rules required all the protections described above, and no exception allowed what Uber envisioned. (To be fair, Uber didn’t start it — Lyft did. More on that later on.)

Edelman goes on to make a number of fair points: by operating illegally, employees are at risk and it encourages poor corporate culture.

But here’s another take. What if some industries need to be developed through illegality? For example, right now in the US, many marijuana firms are operating in a de facto state of illegality, with Federal law (which supersedes state law) outlawing recreational marijuana. Despite this problem, many dispensaries remain committed to marijuana distribution and they innovate. My conjecture is that their practices will set the standards for the future recreational marijuana industry. Even in Edelman’s article, he refers to Napster, which illegally made music easier to distribute. They broke the law, but created a new market in the process.

In these three cases (Uber, Napster, US marijuana distributors), the market was expanded and developed through illegality. This suggests to me that Edelman’s point is good – firms working illegally may be saddled with too many problems. But it elides an even bigger point. Various regulations and state granted monopolies create needless zones of illegality. For some markets to develop, somebody has “break the rules to make the rules.” In many cases, that can be a good thing.

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Written by fabiorojas

June 28, 2017 at 4:12 am

4 Responses

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  1. For a similar argument on the rise of capitalism we can consult Emily Erikson’s book on the British East India Company. Off-the-books side trips by ship captains trading for their own accounts created the trade routes and markets. Expansion stopped, and the company eventually collapsed, when such trade was curtailed.

    Liked by 1 person

    Don Tomaskovic-Devey

    June 28, 2017 at 10:59 am

  2. Fascinating. The creation of markets is a bit messier than we normally admit. Another great example.

    Liked by 1 person


    June 28, 2017 at 6:40 pm

  3. Interesting point. The article is also predicated on the assumption that there is a bright line between legality and illegality. But there are lots of laws on the books that no one enforces, and the legal endogeneity literature tells us that what firms do can be interpreted as law after the fact. I am also reminded of Funk and Hirschman’s work on how firms innovate around the law (here, here). Anyway, I guess this is just to say that 1) I think you’re right, but 2) “legality” is a very grey zone.

    Liked by 1 person


    June 28, 2017 at 6:47 pm

  4. It is a moral imperative to disobey unjust laws.



    June 29, 2017 at 3:47 am

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