Fast Cars and Free Markets

(Flickr / Paul Hudson)

(Flickr / Paul Hudson)

News broke last week that Tesla, a California-based electric car company, had been banned from selling cars in several states due to lobbying pressure from existing car dealers. Though both sides in the debate are quick to claim they are fighting for a “free market,” there’s hypocrisy on both sides.

First, the governors. Gov. Rick Perry of Texas is famous for saying Texas is “open for business.” He routinely cites the large numbers of people moving from California to Texas for better job opportunities. Yet Perry’s state was one of the most recent to block Tesla out.

If Perry is going to talk about the free market and open competition so often, he should make sure he practices those same values. Letting Tesla in could drive all car prices down, reinventing the car sales model so that it better benefits consumers.

Yet Tesla’s business practices are so controversial because the company sells directly to consumers, without utilizing franchised dealerships. “The reason that we did not choose to do this is that the auto dealers have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none,” said Elon Musk, Tesla’s CEO, in a blog post.

This of course does not sit well with car salesmen. “[Tesla] wanted to go direct, which means no sales force. That’s cutting out a lot of people. No way that’s gonna fly,” Tim Dougherty, a veteran car salesman, told The Verge.

Musk’s viewpoint relies on the economic theory of creative destruction, first developed by economist Joseph Schumpeter in 1942. Creative destruction discusses how we are initially resistant to new technologies or ways of doing things because of their perceived job-killing effects, only to find that the new development invents a whole new market we never dreamed of. For example, with the invention of mobile phones, many switchboard operators lost their jobs. But the net effect on the economy was positive, as an entire new industry was created.

Gov. Perry isn’t the only one with the mark of hypocrisy here. Musk, Tesla’s CEO, claims New Jersey’s ban on direct sales is “an affront to the very concept of a free market.”

However, looking at Tesla’s financials reveals the company has hardly been operating in a free market. Tesla received a $465 million loan at incredibly low rates from the government to help with startup costs. To make matters worse, the federal government also offers a $7,500 tax credit to anyone who buys a Tesla. Some states match this credit from their own coffers, meaning some Tesla cars are government-subsidized by up to $15,000 dollars. 

This gives Perry and other governors some ground to stand on. If Musk really wants to preach about the virtues of the free market and unbridled competition, he should not be relying on the government to provide his company with special treatment.

In this case, the free market argument simply serves as a political tool on both sides. Let’s stop using it as that. Free of government subsidies and full of open, fair competition, the free market will provide the best value for consumers and states.

14 responses to “Fast Cars and Free Markets

  1. Thanks for your even-handed approach on this topic. I applaud all but the last sentence. For my taste, it may need to be a little more nuanced. It may be hypocritical for Tesla to use ‘free market arguments,’ but aren’t there times when a new technology may need a little help from subsidies at the beginning if at any time in the future it can both benefit consumers AND compete in a free market? In other words, I’m wondering, may your ending statement be true in most cases but not necessarily at the beginning of some new technology (we foresee to be wonderfully beneficial) that we hope some day can compete fairly but in the present can not?

    • Perhaps – and it’s worth noting that Tesla paid the loan back. But the tax credit suggests long-term hand-holding, as has been the case for the electric car industry.

      But for every Tesla story, there’s a Solyndra too. Should the government really be using tax dollars to produce risky investments? Investments so risky that normal investors won’t invest?

      • In the case of solar energy, I would say, yes. Aren’t most investors looking for short-term results? I was not angry about the notion of gov’t investing in solar, although they may have messed up with Solyndra.

          • Deal! At a 10 to 1 ratio. 3 billion to eliminate solar subsidies; 30 billion from defense. Let’s form a pack of 2.

              • I thought I was being extra generous. 100% of solar subsidies for less than 6% of the defense budget. In my book that’s better than fair. 😉

                  • I thought percentages were especially important for tax rates anyway. Not for spending? I guess I’m not an average American.

                    • They are important. I don’t necessarily see why the defense budget should be cut 10 times more simply because it is larger. It would make sense if it wasted 10x as much, but that’s a whole different argument.

                    • In absolute dollars the waste is far more than ten times as much! I offered a 100% cut to solar; no more federal funding for solar research. I believe the funds I’m offering to cut are not wasteful but necessary for our government to do. Only in respect of your considering such funding a waste, I offered a 100% cut of your definition of waste. I believe far more than 6% of defense spending is waste. Far too much defense spending is political rather than necessary for defense, representatives protecting spending in their district for unnecessary bases, etc.

                      I guess there is no hope for a ‘pack of two.’ 😦

                    • Giving up so easily? 🙂 I’m willing to have a discussion. I agree that we disagree on what constitutes waste – so we should both agree to do a 1-1 exchange. The country benefits from that. Why is your opinion of waste 10x more potent?

  2. Thanks for helping me understand both sides! Everyone wants a free market with a few additional benefits for themselves.

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