Once upon a time there was a country where the people thought they had free markets; but in this country, there was a very powerful position called the Car Chair. The Car Chair was the head of the Car Board which set prices of cars. The news media and many citizens waited breathlessly for every pronouncement by the Car Chair. After all, the fate of the economy depended upon what the Car Chair did.
For many years, in an aim to stimulate the economy, the Car Board set the prices of cars between $5,000 and $7000. Without the Car Board the price of cars would have averaged $25,000.
Low car prices did have some results. The quantity demanded of cars was dramatically increased. In order for car manufacturers to meet the demand at that low price, they received frequent government subsidies and bailouts. With so many cars crowding the roads, accident rates were very high. Since cars were so inexpensive, many did not maintain them properly. As importantly, resources that could have been used to make other products went into making cars. Because of the policies of the Car Board, more steel, more plastic, more electronics, more rubber, and more engineers were devoted to automobile manufacturing than would otherwise have been. Very talented people, who otherwise would have been making more valuable products, made their careers in the automobile industry instead.
But that is only part of the story. The Car Board and the Car Chair believed some citizens and some firms were more deserving of cars than others. The Car Chair began to buy used cars from rental car companies and made sure that rental car companies got new cars before the rest of the public. Rental car companies were even allowed to “borrow” new cars almost for free. Big corporations with large fleets of cars were treated similarly. The Car Chair assured the public that this favorable treatment was for the public’s good because stimulating the automobile industry was good for the economy.
Although there were dissenting voices, by-and-by the news media and economists assured the public that this was sound policy. After all, the Car Chair and his team of experts knew what the optimal demand of cars should be; and they knew the optimal prices of cars. Further, they were hard at work 24/7 continually adjusting price and demand.
If you lived in this country and were naïve enough to think that the market mechanism could do the job of pricing and allocating automobiles much better than the Car Chair, you would be assured by most news media pundits and most academics that the Car Chair was a very learned man, far wiser and far more compassionate than the marketplace.
Every so often the inevitable happened—the car market created by the Car Chair and the Car Board would begin to crash. At those times it was even more important to trust the Car Chair for he would work even harder to help the country. When the Car Chair spoke many listened and marveled at the powers the Car Chair was said to have. Just the other day the media reported that “the stock market rose 286 points on news that the Car Chair determined that the automobile industry was still vulnerable and that further stimulus by the Car Board may be necessary.”
The unintended consequences of the Car Chair’s policy compounded year after year. The effects were there for anybody to see. Yet, most people did not see.
How could they see the economic havoc that the Car Chair was wreaking when they believed that the Car Chair and Car Board were necessary to correct imbalances in the automobile industry? Since the people believed that the Car Chair should override the workings of the free market, when something did go wrong, they quite naturally turned to their Car Chair for more of the same remedy.
And so here is the lesson from the fable of the Car Chair. If we believe in omnipotent directors, such as Car Chairs, we will listen to their pronouncements and give them power which they will gladly exercise to further harm the economy every day.