Thursday, May 05, 2005

Free Market 1, Government 0*

The Mises daily article post on a fiction called "Market Failure" inspired this post about auto and auto parts theft which used to plague my hometown of Brooklyn.

I remember growing up in a different world. One of our daily morning rituals was to look outside to see if our family car was still there. I'm not making this up. Not that we were paranoid or anything, but over the last 25 years we had about 8 vehicles stolen from my family. There was also a number of times when our car's grills, bumpers, headlights, hubcaps, emblems, etc. disappeared.

I honestly cannot recall a specific time when the police found our vehicle and had it restored to us. I mean, to think that we support a bloated, wasteful government with our hard-earned monies and it can't even provide the basic duties which supposedly justify its very existence.

But thanks again to the free market, these problems were virtually eliminated in the most recent years. After all, it's in the insurance companies interest that you remain a good customer of theirs (despite state mandated liability insurance), and that they fight auto theft and auto parts theft in order that their bottom line is profitable. Auto manufactures of the hottest stolen vehicles adopted their products to make them less desirable to steal. Something also tells me that police are not as motivated to make sure your car isn't stolen.

What the insurance industry did was brilliant. They analyzed the problem, and came up with a counter-intuitive solution. It started with the thieves stole parts or the entire cars to sell to chop-shops which distributed the stolen materials. The black-market industry for "hot" goods, which were then sold at discount rates to auto parts dealers and unscrupulous auto repair shops. The victim of a stolen hubcap or bumper would then choose to replace the part either with an expensive factory-authorized parts, or the cheaper original sourced from the black-market channel. The insurance industry would then recompense the victim, but at the same time would raise its premiums for all their customers.

The insurance industry figured how to disrupt this vicious circle. They issued policies that only recompensed customers when they purchase the more expensive factory-sourced parts. This policy is counter-intuitive; why would they insist that customers spend even more money on replacement costs?

What they expected and did occur is that the black market for stolen goods began to shrink. After all, which consumer had an incentive to buy cheaper goods of dubious origin, when the insurance company only paid you for buying the more expensive goods? The unscrupulous dealers and repair shops had no more need to buy cheaper goods, thereby lowering the demand for them. When the demand died, so did the widespread theft, as there was no one to sell the parts to.

Who wins? Everyone but the thieves. The consumer is less plagued by auto theft and pays lower premiums. The insurance companies save the cost of all the replacement parts they didn't have to pay for, a lesson itself on Bastiat's law.

Auto and part theft has been mitigated in other numerous ways by the free market. For instance, it was in the interest of Honda to make damageable Xenon headlights in their Acura line, another counter-intuitive policy which made it pointless for thieves to try to steal the headlights, which would break if pried out, and therefore be unsellable.

Insurance companies offer consumers lower premiums if the car is equipped with LoJack, or any GPS locating system, making thieves shy from expensive cars which can be easily found, and at the same time it encourages the auto manufacturers to add the feature to the mid- and lower tiers of cars for the mass populace which demands the feature which would lower their premiums and the insurance companies costs.

Hence, we are left with the perfect example of how the free market did its job of protecting consumers, while the government and its police force were shown to be nothing but glorified, and literally overpaid coffee and donut consumers. (I say overpaid because their performance and effectiveness is not commensurate to their salaries.)

Which kind of says that government justification for existence on the pretense of securing property rights is complete bunk.

*In reality, the free market score approaches infinity, while government hovers in the negative territory, always imposing harm on consumers, their wealth, and their communities.