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.

5 comments:

Anonymous said...

Umm, why would a non interventionist be, err, calling the, umm, police? Umm, do you like, err, umm, have a speach impediment like, umm, me?

iceberg said...

For the speech impaired I offer the following explanation: It was my parents who filed the stolen vehicle reports, not the non-interventionist in me.

Even if it were my own car that was stolen I would still inform the police and file a report; the insurance company requires a copy of the report to file a claim with them!

daluma said...

try to walk down the street in philly at 3 in the morning and then we can talk about property rights..

Kevin Carson said...

It's an interesting story. Couple of questions, though:

1) Without a cartelized insurance industry, with some form of government-enforced entry barriers, wouldn't there be an incentive for an upstart company to cater to people who wanted cheap parts? Wouldn't the exclusion of cheap parts require some form of collusive behavior, which is extremely unstable unless the number of competitors is artificially small?

2) Aren't there incentives besides insurance coverage in choosing rival suppliers of parts? Some consumers might place a higher value on cheap replacement parts than on insurance coverage.

iceberg said...

Kevin,

It is sometimes difficult to speculate what is most likely to occur with the absence of government. Perhaps all property owners would be more vigilant in the protection of their property, and less reliant on the complacency of the "security" that the existent government seems to provide. I also imagine, that when a neighborhood would hire the service of a private security team, it will probably come with an insurance policy attached to it, so that if the guards are lax in their duty, their insurance will cover the property/auto vandalism or theft.

Even though my understanding of economics, Austrian, mainstream or otherwise is lacking, I still imagine that most auto insurance companies would rather pay the premium for parts, instead of fueling the auto-theft industry, even when some competitors might choose to go with the cheapest available parts. My reasoning is two-fold. First, goodwill, which is a positive incentive for an auto insurance company to stay "honest" in a free market (which is notably absent and replaced with a punitive disincentive in a regulated economy.) And secondly, the company will be able to advertise such, that they don't promote auto/-part theft with their replacement policy.

Yes, I do agree with your second point that consumers might choose to go with the cheaper parts, but I still think that most individuals will not if the insurance company either makes them:
a) pay for the cheaper parts out-of-pocket or
b) the cost will reflect upon their insurance premium, as opposed to using factory-sourced