Have you ever wondered where all the vehicles come from?
Stand by the side of a busy road and count the first 100 to 200 vehicles that pass by. One could bet that no two vehicles would be exactly alike. There would be vehicles from more than a dozen various manufacturers, a few domestic and most from international manufacturers. Some are manufactured in the U.S. while others are shipped from Europe or Asia. There would be commercial vehicles such as taxis, vans, dump trucks, panel trucks, and big rigs. There would be an even greater variety of personal vehicles such as sedans, sports cars, SUVs, pickup trucks, and station wagons. These would come in a variety of sizes from full size sedans and SUVs, to compacts, and subcompacts. There would also be a number of motorcycles and a scooter or two. No two vehicles would be alike. If you happened to identify two vehicles from the same manufacturer, of the same model and year such as 2012 Toyota Camry sedans, they would be different colors with different options.
What you may not notice is the tremendous improvements in the newer vehicles. This includes a general improvement in quality, comfort, safety, reliability, and durability including newer safety features, more advanced electronics such as Bluetooth audio for cell phone communications and entertainment, to voice activated navigation systems. Today’s vehicles can go over 7,000 miles between oil changes and drive trains last for more than 200,000 miles without requiring major service.
Where did this variety of vehicles come from? Why all the improvements? Was it due to the superior policies and programs of the Department of Transportation in Washington, DC? Or was it something like Adam Smith’s invisible hand?
There definitely is a role for enlightened regulations. For example, no single manufacturer could afford the cost of installing expensive safety features such as air bags if there wasn’t a requirement that all vehicles of a certain class include air bags. This created a mass market for air bags and led to lower costs and better performance. Eventually, manufacturers could go beyond the minimum required and meet market demand for even safer vehicles.
Another important regulation involves standardized testing and labeling such as for vehicle mileage. It’s easy to compare various vehicles based on price, features, and performance. The Internet is also a big help with various sites allowing easy comparisons.
However, the vast majority of the vehicle improvements we enjoy are due to competition between companies and countries. Customers have choices and customers control their money and make purchasing decisions without government interference. Individuals can make good or bad purchasing decisions spending their own money. Suppliers that fall behind on price, features, or performance quickly lose business and are forced to change or go out of business. International competition and competition within states in the U.S. prevent monopoly abuses such as the United Auto Workers dictating pay, benefits, and work rules in U.S. auto plants. Workers as well as companies have to compete.
We could conduct a similar thought experiment in a supermarket or by watching TV shows. The growing variety and quality of the goods and services we enjoy is due to competition for our business. We control the money and we make our own spending decisions.
Ditto for the Internet, smart phones, tablet computers, social networks, etc. Was all this part of a central plan or the result of a lot of bright, well educated people coming up with new ideas that others are willing to finance in spite of the financial risk associated with a high failure rate?
What about money? Where do good ideas go to be funded? The money flows to the opportunities. The U.S. has the largest and freest capital markets in the world. Individuals control their investments, where they put their hard earned savings. Yes, there are government subsidies and government regulations. Again, those that enforce full disclosure and penalize abuses and criminal activity are essential to the successful operation of our capital markets. There’s deposit insurance that allows small savers to put their money in a bank without worrying about the safety of their money. However, it’s individuals who decide where to put their money from safe money market accounts to high-risk venture capital deals. Yes, people make foolish decisions with their money. They can make bad decisions and lose everything. Some people go to a casino rather than save or invest their money.
This organization of our financial system insures that new ideas and whole new industries such as the Internet get all the money needed to grow and innovate.
The system works. It’s not perfect but it has led to the high standard of living most of us enjoy.
What’s required for this to happen?
Our free markets work because of the following:
1. The purchaser controls the money and makes the decision as to what to buy and what price to pay. Isn’t this the fundamental basis of a capitalist economy?
2. Choice and competition. We need multiple suppliers offering products or services competing for your business.
3. Defined metrics so that you can make valid comparisons. Price is usually the single most important variable when a consumer makes an intelligent decision. You know the price before you buy. Second only to price is accurate and fairly complete disclosure defining the product or service and the options available to the purchaser. If two products have the same price, they are not necessarily equal.
4. Decentralized decision-making and control: bottoms up (the consumer decides) as opposed to top down decision making by bureaucrats in Washington D.C. or Sacramento CA.
5. Flexibility for innovation and experimentation. Prior approval is not required before making changes except for some specific mandates such as safety requirements.
6. Enforceable contracts and agreements and a judicial system to resolve commercial and criminal disputes. Bad actors can’t stay in business.
7. Free and open financial markets so that buyers can arrange financing if needed, businesses can get loans to grow, and entrepreneurs have access to risk capital to fund new ventures.
8. A minimum of subsidies and regulations that tend to push consumers in a direction favored by the government or preferred suppliers.
What if we ran the automobile industry as we do K-12 education?
We know that monopolies or quasi monopolies (reduction in competition) always result in higher costs, less choice, lower quality, slower pace of innovation and adoption of new technology, and poor response to customers’ needs and preferences.
We have two industries that largely ignore the free market system: education and health care. These industries are highly regulated by the federal and state governments and are largely government funded. K-12 education is no only funded by the government, it is also largely delivered via government run monopolies.
What are the consequences of this heavy government involvement? Let’s run another thought experiment. What if we ran the automobile industry as we currently run K-12 education?
1. We’d probably define personal transportation as a public good and state that every family or adult should have an automobile regardless of their ability to pay.
2. There would be a tax or series of taxes and fees to collect the money needed to provide an automobile to everyone who qualifies.
3. There would be very strict standards on the size, features, and performance of these vehicles. There would be a need for extensive rules and regulations. For example, would someone who lived in a city such as New York or Chicago with access to public transportation receive a government-supplied vehicle? If so, would a city dweller get a battery powered small car, or would they get a full size family sedan? Who would be eligible for a full size pickup truck? Farmers need them. Would a farmer raising apples in Wisconsin get the same pickup truck as a Texas rancher? You can see the need for extensive regulations for the public good.
4. You would have limited choice of the automobile you get. In K-12 education, children go to a neighborhood school without regard to quality, courses offered, etc. The government would assign a vehicle to you and these vehicles would meet rigid, difficult to change standards to insure equity.
5. Most important, the government would not give you the money to buy a car. The money would go directly to the suppliers who would be told what vehicles to make and how many, and how to distribute them to those eligible to receive automobiles. You would get a new vehicle every five years or so as defined by detailed regulations to insure equity. General Motors would have very little incentive to make you happy or to accommodate your specific preferences as long as they met the government’s regulations.
Would you get lucky and perhaps get a Mercedes or a Lexus? I doubt it. I don’t think that the government would be willing to or allowed by Congress to spend public money to buy vehicles from foreign manufacturers.
Would you be happy with the car assigned to you? Would you get a Yugo or a Ford Fusion? How long would it take to get new technology such as Bluetooth audio or a navigation system? If you’re old enough, you may remember the old AT&T monopoly for phone service. It was said that you could have any color phone you wanted as long as it was black. If we retained the AT&T monopoly, would we have smart phones, the Internet, Wi Fi?
If a government run monopoly under which the government collects taxes, directly funds the product or service, and assigns customers to suppliers without any choice or competition wouldn’t work for the things we buy, why should we expect it to work for education or health care?
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About the Author:
William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.