Volkswagen’s lesson in capitalism

Published in Insights, The New Zealand Initiative’s newsletter, 2 October 2015

vw2As far as corporate scandals go, they do not come bigger than the Volkswagen affair. Yes, other companies make mistakes too. Except Volkswagen’s sin was no mistake. It was the deliberate deception of their customers, regulators and the general public.

In fact, it was worse. Volkswagen wilfully risked contributing to widespread health problems by allowing its fleet to emit several times the allowed levels of pollutants.

There is no excuse for what Volkswagen has done, not even that the German carmaker is unlikely to be the only one cheating emissions tests.

As someone who generally favours free markets, I am outraged by Volkswagen’s behaviour. It is precisely this kind of arrogant and potentially criminal behaviour that can give capitalism a bad name.

Markets are subject to rules, and market participants must play by them. No company has the right to put itself above the law.

Free-marketers should not hold back in condemning unethical behaviour by some companies for fear of undermining trust in markets more generally.

There is, however, some consolation in the Volkswagen case for free-marketers. The market’s reaction to the Volkswagen scandal has been exemplary: Before even a cent of compensation or fines had to be paid, Volkswagen’s punishment has already arrived in the form of a battered share price.

Volkswagen’s share price crash shows that markets are working. The crashed share price reflects not only future liabilities but also the loss of reputation and reduced demand for VW cars. It thus shows that companies behaving unethically ultimately face the toughest judge there is: their customers. This should serve as a warning to other companies.

At least with markets, we have a chance to punish those who behave unethically by withdrawing our custom from them. We cannot do likewise when we are dealing with government agencies. If a government department, a council or a Crown agency behaved criminally or irresponsibly, we often cannot switch providers but we are stuck with them.

So the response to the Volkswagen affair is not to question markets but to ensure that markets are working.

In any case, it would be a rushed conclusion to believe that governments would be any better at, say, producing cars. Volkswagen itself is part government-owned and has always been close to regulators. Too close perhaps.

That is another aspect of this scandal, and you can read more about it in my Business Spectator column this week