Tuesday, May 20, 2008

The Free Market Doesn’t Always Get it Right


Here we are with gas at $4.00 per gallon. The American car companies are suffering because most of their products have pretty poor mileage. We are currently overstocked in trucks, SUVs and high horsepower cars. Many economists, oil industry experts, anyone with common sense knew that gas prices would go up eventually. So, why did the auto industry, especially the American auto industry, get caught with an inappropriate product mix?

Proponents of the free market often claim that you can’t legislate what the market should make. They claim that centralized planning doesn’t work and never will. The market produces what people want to buy all by itself – like magic. I agree with this, but not as strongly as I used to.

The problem is the lag time. Free market capitalism is reactive. It doesn’t think ahead. In fact, it can’t. There is little profit to be made by developing a high mileage vehicle when you are making gobs of money by selling monster SUVs and high horsepower sedans. Business will not invest the money in developing something that no one wants now, or in the very short-term future. American business has a problem with looking beyond the next quarter, certainly they will not attempt to guess that the public will want a high mileage vehicle 2 – 3 years from now. It’s too big a gamble given the development costs – even though anyone with common sense “knew” that gas would be increasing at some point in the future.

Perhaps the collective common sense of the people, through the legislative process, can be used to guide the free market when it can’t manage to make a commitment itself.

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