Tag: cars

The Economists Answer for Bad Drivers

I originally posted this as just audio, but then I had someone transcribe it for me on Freelancer.com.  I paid him $10 and he did it from Montenegro in 20 minutes.  Fun!

One of the many things I love about economics is that it helps you understand and make sense of things that otherwise seem irrational and mysterious.

It helps you come up with actual workable solutions, rather than of a bunch feel-good nonsense.

To give a concrete example, there are a lot of bad drivers out there and lots of accidents. It’s really scary, right?

So what’s the normal non-economist response to this? “Let’s produce and buy cars with more safety features, front airbags, side airbags, better brakes, glass that shatters in way that won’t hurt you.”

All these safety features seem like the thing to do, because with all these accidents and dangerous drivers you want to protect people, right?

Ah, but this is where the economic way of thinking sheds some light.  The economist says, “You fools!”

We don’t want to make cars safer, that’s just going to lower the cost of bad driving, let’s mount a spear on the steering wheel of every car at two inches from the driver’s chest. Now let’s see who’s driving recklessly! You don’t want to lower the cost of reckless driving, you want to raise it!

My comedian friend Jeremy McClellan has this great bit about whether you’d want your kids to take driver’s ed from cops, who basically drive as recklessly as they want to because they can turn on their sirens and get away with it, or from drug dealers?

The cost of a drug dealer getting in any kind of traffic accident is very high. If they get pulled over they could go to jail for carrying all these drugs around. You want to learn to drive from drug dealers. They’re going to be the safest on the road.  It’s all about the incentives.

This is the kind of crazy, seemingly barbaric but wonderful insight that economic thinking can bring.

Why in my neighborhood are all these soccer moms such reckless drivers? One of the reasons is because they have such wonderful breaks and safety features on their brand new SUVs.

They know they can scream up behind me at 65mph and slam on their breaks with two inches to spare and their car will come to a gentle halt.  Their latte won’t even spill. Meanwhile I’m terrified.  It’s endangering my heart rate if nothing else.

Then there’s me, driving my 2002 Saturn with a 195,000 miles on it. I’m like a train conductor. I start breaking about two and a half miles before the stop light to just ease into it because I know if I slam on the breaks with just 50 feet to spare my foot will literally go through the floor of my car and I’ll have to use my foot on the pavement as a break. That’s a really high cost. I don’t want to lose my foot.

I’m the most cautious driver you will ever see in my Saturn. I check my blind spot religiously, partly because my car is so low it could fit under other cars, but partly because I have no side mirror.  I lost that in an unfortunate parking incident.

This is just one little illustration of economic thinking and how it can help you develop counterintuitive insights and come up with counterintuitive solutions to common, everyday problems.

Below is the original audio, a note I left myself on Voxer.

Milton Friedman on Risk, Choice, and Regulation

A while back I came across one of many video clips in which Milton Friedman insightfully responds to a tough question.  The question is about Ford making a car with a part that saved 13 dollars, when studies showed that using the more expensive part could reduce harm in the case of collision and potentially save 200 lives.  The questioner feels this is a clear example of the callous, money-grubbing nature of the free market, the implication being that some regulatory body should prevent Ford from making such calculations.

Friedman asks how much Ford should be willing to spend to reduce the risk of a single death.  The student refuses to answer.  Friedman’s point is that the question was not over any principle, but over what amount of money Ford should be willing to pay for a single life.  It’s about costs, benefits, and trade-offs.  The student doesn’t seem to follow, but Friedman is dead-on.

Let’s say Ford decides to install the more expensive part.  Their profit margin goes down, maybe some shareholders start selling shares.  How do they make-up the difference?  Maybe they lay off a few low-wage workers.  Maybe they raise the price of their cars, putting them out of the reach of a few low-wage consumers.  Is it worth it?  Maybe these consumers would have been happy to buy the cheaper car, even if it was less safe.  Aye, there’s the rub.

Friedman mentioned this, but in the short Q&A there wasn’t sufficient time to really hammer it home. This real discussion is not about what Ford should make and sell, or how much risk is too much. It’s about who should decide how much risk is acceptable.  That’s the principle worth debating.

Advocates of free-markets like Friedman believe that each individual is in the best position to decide how much risk they are willing to incur.  In every action, every purchase, and every sale, there are costs, benefits and risk involved.  You are the best person to decide whether you should buy a motorcycle, or not buy the most expensive dead-bolt, or produce and sell an extremely sharp cooking knife.  The principle Friedman was referring to is that of freedom to choose what decisions to make and what is in your own interest.

Those who favor regulatory intervention want such choices made once for all by bureaucratic bodies.  They want a set standard of tolerable risk to apply to every human in every situation, no matter how costly abiding by it may be, or how much poverty or even death may be the unintended result.  These regulatory bodies are in the perfect situation to be captured by the largest, most connected businesses who will get them to pass regulations that help them and hinder smaller competitors, with no concern for what it does to consumers.  These bureaucracies are also most attractive to the very kind of unscrupulous, greedy sociopaths that interventionists worry about in the marketplace.

If Ford sells a risky product it may be a bad move on a variety of counts, but no one has to buy it.  Government decisions are the only ones that every single person is forced to abide by, no matter how bad they may be.  Regulatory intervention not only falls far short of free-markets on moral grounds – coercing everyone to make choices set by elites – it dramatically reduces the benefits to all.  It destroys wealth and the incentive and space to innovate.  It rewards political gamesmanship over consumer service.  It interferes with valuable signals sent by and to all market participants about what level of risk people want, and what makes them happy.

There are trade-offs all around us.  The question is not which decisions are correct for other people – we have a hard enough time figuring out which are correct for ourselves.  The question is, where should these decisions be made, and by whom?