The fantabulous gloriousness of free markets

It is true that China has a certain socialist direction from the top in its economic mix. It is also true that at the actual operating level of the economy it’s one of the most aggressively free market economies on the planet. Which is why, of course, it’s been getting richer as or faster than any other place ever has done. You know, that absence of the central socialist direction of everything.

Which leads us to this:

In the world’s biggest market for electric cars, a sales miracle is turning into a “Darwinian battle” for survival.

The number of electric vehicles (EVs) sold in China rocketed to 6.4m last year, accounting for more than half of all cars sold.

Despite this roaring success, growth is now slowing and the market has become oversaturated with companies fighting to win over drivers.

It has prompted a vicious price war that has caused alarm in Beijing.

Last week, the government issued a stern warning to 16 brands including BYD, Nio, Leapmotor and SAIC Motor, which are among the country’s biggest domestic brands, urging them not to destroy each other by merciless undercutting on price.

That central socialism is worried by this. But this is the central point about how and why entrepreneurial free markets work. As described in the Bill Nordhaus paper. The vagaries of technological change and consumer desire mean that something is newly possible and also newly desired. Someone spots that and makes money by corralling the technology to sate the desire. Others spot that and chase for some of them thar’ profits for their own wallets - a gold rush. The subsequent competition pushes down prices to consumers.

The end effect here is as the Nordhaus paper states. Only some 3% of the value created sticks with the entrepreneurs. Near all the rest of it flows to consumers in that they’ve now got the new thing, their desire for it is sated, they’re richer.

Electric vehicles are not exactly disproving this. The world’s richest man made his pile as a pioneer in this field - Tesla. We’re now seeing the price war and the consumer benefit - there are BYD models at well under $10,000 a piece.

Overall the capitalists make a loss here. Warren Buffett has noted that even if you’d invested in all of the 200 or so start up car companies in the US back a century and a quarter you’d still have lost money overall. The airline business has not made a net profit in its history as he’s also said. But consumers have made out like bandits from both.

This is why mithering over how much the entrepreneurs have in their cash piles to finance megayachts, or rockets to Mars, is to entirely miss the point. That’s just the sometimes garish cost of the hugely, vastly, greater benefit to consumers. And here’s the thing. Without the lust for the pilf we don’t get the entrepreneurs nor the consumer gelt. The correct answer is to leave the boys with their toys - to encourage the next generation - while we out here gain our desires.

Tim Worstall

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