Take Down the Red Flag: Tada and Free Competition

Early 19th-century Britain. At a time when only horse-drawn carriages still traveled the roads, the steam carriage emerged as a new means of transportation. In London, there was even a separate law requiring hired carriages to yield when they encountered privately owned carriages, reflecting how carriage ownership was regarded almost as a “gentlemen’s code.” Ordinary commoners, accordingly, found it difficult to own a carriage. The problem was not so much the price of the carriage itself as the maintenance costs of securing space for horses and feeding them. But the “horseless carriage,” the steam carriage, reduced the cost of transportation to as little as one-third to one-half of previous levels. Moreover, it surpassed horse-drawn carriages in speed, capacity, and safety.

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It was a disruptive innovation that dramatically improved the standard of living of ordinary people.

But the heat of innovation did not last long. A series of regulations introduced from the mid-to-late 19th century onward—the Locomotive Acts—strangled the operation of steam carriages and suffocated innovation. They imposed tolls on steam carriages six times higher than those charged to horse-drawn carriages, and the 1865 Act in particular restricted steam carriages from traveling above 3 km/h in urban areas. It also required that each steam carriage be operated by a driver, an engineer, and a flag bearer. On top of that, the vehicle had to trail behind the flag bearer walking ahead holding a red flag. That is how this law came to be known as the “Red Flag Act.”

As is obvious, this bizarre regulation was created through political lobbying by those in carriage-related industries whose vested interests had been harmed by the rise of steam carriages. They even propagated the claim that “steam carriages damage the roads,” despite the consensus among engineers that horse-drawn carriages caused at least three times more damage to roads than steam carriages. Thus, Britain—despite having led the Industrial Revolution—lost the leadership it might have had in the global automobile industry to Germany and the United States.

In Korea, the term “Red Flag Act” has become synonymous with authoritarian and excessive industrial regulation. It now appears frequently in politicians’ speeches and in the media. President Moon Jae-in, too, said early in his term that abolishing “Red Flag Acts” was necessary for innovative growth, and SMEs and Startups Minister Park Young-sun also said in her inaugural address that “we must carefully examine whether there are cases in 21st-century Korea similar to Britain’s ‘Red Flag Act.’” Yet when prosecutors indicted Socar CEO Jaewoong Lee without detention on charges that Tada had provided paid transportation services not permitted under the Passenger Transport Service Act, another business came to a halt before a red flag.

The current administration has talked about “innovative growth” only with its mouth, while in reality remaining consistently passive about abolishing or easing regulations. Figures such as SMEs and Startups Minister Park Young-sun and Land, Infrastructure and Transport Minister Hyunmi Kim had ample time before the prosecution’s indictment took shape, yet made no active effort whatsoever. They did nothing to clarify legal interpretations, nor did they attempt to raise the issue within the ruling party or bring it into public debate. Then, once prosecutors proceeded with the indictment, they belatedly lamented the situation, saying, “It is unfortunate” and “It is regrettable.”

Minister Park Young-sun said she regretted not having properly “mediated” the dispute between Tada and the taxi industry, adding that the prosecution’s indictment of Tada reminded her of the Red Flag Act. But even if Minister Park had actively stepped in to “mediate,” the result would likely have been victory for the taxi industry. One can tell as much from the way the Ministry of Land, Infrastructure and Transport and the Ministry of SMEs and Startups have spoken of a so-called “win-win plan” and “the value of coexistence,” as though a “compromise” between the taxi industry and Tada were the solution. Minister Park does not seem to understand that the British Red Flag Act she criticizes so intensely was itself, in its own way, a “win-win plan” aimed at reconciling the carriage industry and the steam carriage industry.

The lesson of the Red Flag Act is that exclusive protection for suppliers is unjust, and that the government’s role is to protect “competition,” not “competitors.” So long as the government refuses to fully open passenger transportation to free competition and continues to control it, every solution will be only a stopgap and merely another variant of the Red Flag Act.

If free and fair competition is guaranteed, the market naturally improves consumer welfare. One need only look at the many popular restaurants around college campuses. Here and there, one can see traces of government intervention, such as the increase in the minimum wage, but fundamentally we are able to enjoy delicious lunches at low prices because restaurants compete fiercely. From the smartphone business to various apparel industries, sectors in which the government does not grant exclusive protection to specific competitors have, as history shows, repeatedly innovated and raised consumers’ standards of living.

And yet, while we talk with friends and sympathize with one another about cigarette smoke, political chatter, or bad experiences we have had in taxis, we fail to recognize that this kind of government intervention lies behind such inconveniences. We do not ask, “There could surely be plenty of other alternatives available to us—so why are those choices not offered?” In part, this is because the gains from regulation go to a small number of suppliers, while the losses are dispersed among countless consumers. Consumers thus become relatively insensitive to those losses. This is very much in line with what Mancur Olson pointed out in The Logic of Collective Action.

Politicians understand this very well. That is why they do not recklessly touch even a hair on the taxi industry’s head, so tightly organized around its particular interests. Protecting the taxi industry does not cost them the votes of ordinary consumers, but if they were to remove the regulations protecting it, they would immediately lose the taxi industry’s votes. That is why even the floor leader of the main opposition party—which has “freedom” in its party name—stood on the platform at a taxi industry rally and declared that “it is our party’s position that we cannot leave intact the Moon Jae-in government’s policies that annihilate taxi drivers’ right to survive,” adding that “we will work together to consider a carpool system that allows coexistence.” Looking at this, one is led to wonder whether, in removing the many regulatory “red flags,” we should also remove the red flag of the main opposition party as well. When producers coexist not with consumers but with other competitors, that industry declines.

1. Benson, B. L. (2015). Regulation As a Barrier to Market Provision and to Innovation: The Case of Toll Roads and Steam Carriages in England. The Journal of Private Enterprise 30(1), 73-74,76.

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Original title: 붉은 깃발을 거둬라: 타다와 자유경쟁

Author: Beom-su Jo

Date: 2019-11-19

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=17&idx=22063