Wednesday, October 12, 2005

When Risks of Fraud Cost More than Fraud

John Stossel (discussed here before see Archives) takes up the issue of competitive markets for two ‘sacred cows’ in car dealerships and real estate in a column in (Washington, DC): ‘Let the free market be free’ 12 October.

Stossel writes:

“In a truly free market, businesses can't kill competition, because they can't use force. Unfortunately, in our "mixed economy," they can get their friends in politics to use force to stifle competition.

Adam Smith saw it all the way back in 1776. In "The Wealth of Nations," he wrote, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." He advised that any legislation such a group proposed "ought always to be listened to with great precaution."

David Hyatt, spokesman for the National Automobile Dealers' Association, about that, he said, "If the manufacturer sells directly over the Internet, it leaves the dealer in an unfair competitive situation."
Hyatt added: "There is a very healthy system in place." Healthy for his car dealers, anyway. Less healthy for consumers.”

When stossel confronted David Lereah, chief economist for the National Association of Realtors, about that, he said, "Not everyone is providing the adequate amount of services to protect the consumer."

Stossel concludes:
“Why not let real-estate services compete on the open market? Traditional brokers provide a lot of knowledge and effort, and their multiple listing services reflect big investments; if you want the benefit of their energy and expertise, it's only fair that you should pay for it. But if you think you're better off with a cheaper alternative, that should be your choice, too. The government should stick to enforcing the contracts you willingly decide to make.”

These organised interventions by car dealerships and realtors restrict competition and raise prices to consumers. They are enforced both by restrictive practices – only supplying cars through dealerships and refusing direct sales – and by legislation forcing house sales through licensed realtors and through solicitors.

This is a mercantile policy criticised severely by Adam Smith. Of course, there are risks of incompetence, non-competence and fraud from using non-professionally trained services, and dealerships and realtors can use the marketing of their services to make this clear to potential customers, and potential customers can weight up the value of paying more for lowering the risk (many house transactions and vehicle purchases go wrong as it is in the current system) by using the professionals. But the choice should be theirs to take.

The alternative is to lumber everybody with greater expense as customers and higher costs as professional – passed onto their customers – as regulations increase (check what has happened to insurance and pension costs with the advent of legally required “Independent Financial Advisors” in the UK) and will continue to increase. The costs of the ‘remedy’ for fraud become worse than the risk of facing costs from fraud.


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