A small number of producers; huge volume

Stagnant demand, saturated markets, overcapacity: for decades in the Western world, and in Europe in particular, litanies about the automotive industry have been the norm. As a corollary, corporate restructuring, employee layoffs and factory closures have followed in familiar succession, while alliances and mergers – in attempts to survive the competition – become the rule of the game, together with the disappearance of companies and brands.

Paradoxically, however, vehicle production (cars and light vehicles) has never been greater than in the first part of the twenty-first century. Yearly vehicle production had reached 10.5 million in 1950 and 29 million twenty years later. If we exclude the nadir of the economic crisis (2008/9), at the beginning of the twenty-first century a series of production records were registered from one year to the next. Almost 57 million cars were produced worldwide in 2001; 59 million in 2002; 61 million in 2003; 63 million in 2004 and so on. In 2010, when the global financial crisis was still rampant, another all-time record was reached, which was repeated the following year, when 80 million cars were produced. In 2012, it was 84 million and, in 2016, over 95 million. Around a quarter of them consists of commercial vehicles (light vehicles and trucks), while the remaining three quarters are represented by passenger cars.

Which companies are able to organize such mass production and massive distribution? Where are these vehicles produced? The automotive sector is extremely concentrated at global level. The top five largest companies (automotive companies are often referred to as OEMs, Original Equipment Manufacturers) represent almost a half of global production, and the top 15 companies more than 80 per cent. In all likelihood, the sector will be even more concentrated in the future. According to many analysts, in fact, production is still too fragmented and further consolidation is likely. Economies of scale are playing a relevant role: with higher production volumes (and sales), average unit costs decrease, making production platforms work at their full capacity and OEMs profitable.

Our comparative analysis of the economic implications of property rights in capitalism and socialism has come to an end. I hope that I have demonstrated that a respect for ownership is of central importance for the functioning of economic calculation and in consequence also for economic and financial structures in the capitalist order. And that the introduction of a socialist order requires a radical change of the legal system (previously based on ownership) in order to impose a political dictatorship that will take over the entire economic system, and this transformation has its consequences.

It is justified to inquire whether the analysis conducted here is of any use. The topic is not a closed chapter in the history of economic thought. I believe that this work lets us reformulate the thesis set forth by Mises. Accepting that any economic efficiency requires the existence of monetary units of account, we show that, in light of “market socialism”, the original objection against the nationalization of the means of production may be formulated in a better way: socialism is an inefficient economic system because it eliminates private ownership, not because it eliminates prices.

This conclusion about the prime role of ownership in calculation is relevant to other economic analyses, such as the study of the transformation undergone by economies of the Eastern Bloc. During the transformation it was implicitly conceded that, as Mises said, an economic system must be based on the efficiency of the price mechanism, and creating it was the first and foremost task. The transformation introduced a price system to the countries of real socialism. However, although it may seem to be a partial reversal of the thought process, the problem of socialism was not the lack of prices (e.g. a lack of a “transfer ruble”) by itself, rather it was the lack of private ownership, which is a context for the emergence of market prices, which allow for economizing the entrepreneurial skills of the society. If the problem of economic efficiency is to be resolved and the clumsy socialist system reformed, the way to achieve it is not to introduce a system based on prices, but rather private ownership protected by the legal system.

Clean, safe and self-driving: this seems to be the future of the car industry. It is a future that is very close, and is already making itself known in the present. Although more than a century has elapsed since the car became a mass product, the sector is far from technologically mature. The most modern cars are increasingly becoming concentrations of technology. Their on-board computers report faults, monitor service requirements and dangers, they are equipped with several high-tech entertainment gadgets, brake and collision avoidance systems, self-parking, and cruise control. The car industry is quick to introduce and embrace revolutionary innovations. In 1914, by putting the car on a conveyor belt, Henry Ford was able to assemble the model T in one hour and 33 minutes, compared to 12 hours and 30 minutes the previous year. Thanks to this revolutionary idea, the price of a car dropped to $450, which represented only five months’ wages for the average American worker. The challenge at that time was in fact to make the car available to a wide audience of potential buyers, or in other words make cars cheaper (Womac, Jones & Roos 1991). Now the needs are different and more complex: customers, for instance, are increasingly sensitive to issues related to global warming and safety. High technology, low power consumption, reliability, comfort, safety, design are needed simultaneously.

Computers and the Internet of Things

The research and the collective imagination has focused for decades on alternatives to the internal combustion engine. In particular, the considered aim has been to eliminate the dependence on oil and gasoline, even before the first oil shock in 1973, when an oil embargo was proclaimed by the members of the Organization of Arab Petroleum Exporting Countries (OPEC) and oil prices rocketed. But the most essential innovations, which have affected the car industry, have been in the form of electronics and computers.

The book you hold in your hands was inspired by an article on Oskar Lange’s proposition of a “market socialism” that I began writing in 2005, and later published in the Quarterly Journal of Austrian Economics. Lange argued that socialist planners could use a central calculation of profits and losses that would make economic projects as efficient as in the market framework. I aimed to show that such calculations were, in fact, economically meaningless, because the planners were to make them. By setting prices for the means of production, and subsequently by adjusting them, they decide, in effect, what should be produced, what should not, based on their own judgement. Prices do not affect their actions as they would an entrepreneur in a market. Such a simple observation led me to further reflect on the nature of monetary calculation, which eventually gave me a new perspective on the debate on whether socialist economies can function or not. Although a few thinkers have raised this argument, their voices have never gained serious influence on the debate about socialism.

The problems set forth in this book regard property laws in an economic context – a comparison between capitalism and socialism. Therefore I shall not discuss legal history, case studies or legal details arising in the relevant economic systems. The notion of property laws interests me as a theoretical category in light of economics, not law, anthropology, or history. Similarly, I talk about socialism and capitalism in the abstract. Capitalism is defined as a system built on the free exchange of property deeds, which is not present in socialism. These two categories do have their concrete and pure historic occurrences, but I shall regard them as purely theoretical. The same is true for the idea of ownership, which is an owner’s capability to control, use and dispose of various real-world entities. Real ownership is therefore not necessarily equal to how legislators define “ownership” in legal systems.

Because the debate on the comparison between socialism and capitalism is already a part of the history of economic thought, this book builds on the conclusions drawn from that debate, on economic calculation in socialism and the impossibility (or possibility, according to others) of its application.

During the early stages of the auto industry, Gottlieb Daimler proclaimed that the demand for cars would never surpass one million “because of the lack of drivers capable of driving vehicles”. But history proved to be different and through successive sales and commercial revolutions, the car became a part of our daily lives.

Car sales and the evolution of the global market

In 2016 new car sales surpassed 93 million units globally. Car sales have grown year-on-year for decades in line with individual income growth. Since 1945, the acquisition of wealth and growth in consumerism has meant that the average household owns a car and, thanks to financial credit, they can own a new car even before buying themselves a house. The global car market has grown massively post-financial crisis (ie. after 2009), but primarily outside its traditional developed markets. For every ten new vehicles sold in the world, five are sold in Asia and the Middle East, almost three in the Americas, and only two in Europe. Africa’s contribution is negligible given its size: in its 56 countries, just over 1 million new cars are sold per annum.

This snapshot of global sales reflects the dynamics of the industry in the last few years. Total global vehicle sales of new cars are growing strongly. Asia leads the world market: sales have grown almost threefold in less than a decade. Of the 33 million cars sold in Asia, two-thirds were sold in China, making China the biggest market in the world, much larger than the United States (which was twice the size of the Chinese market ten years ago). Together, the United States and China now represent half of all global sales, based on OICA data – the world organization for car producers (Organisation Internationale des Constructeurs d’Automobiles).

New car sales in Europe have slowed down considerably over the same period. This phenomenon is diffused throughout various European markets. Sales are falling significantly in Finland, Ireland, Spain, Greece, Portugal, the Netherlands and in Italy in particular.

The car has been undoubtedly one of the great technological and social developments of the twentieth century. The car is an integral part of the life of each of us. We never forget our parents’ car, our first car, nor the classic models. It is no coincidence that cars are among the favourite toys for children. The car represents something important for us and each journey by car has the potential to improve our quality of life: with the car, and vehicles in general, we go to work, we visit people, we travel, we go on vacation, and we move goods. “Everything in life is elsewhere, and you get there by car” wrote E. B. White in One Man’s Meat.

In this short primer, we have tried to give a comprehensive overview of the main trends affecting the industry, the importance of the automotive sector for national economies and for managerial innovation, and the production dynamics, those of demand, marketing and technology. We have analysed the potential car of the future, with an eye on the innovations that are disrupting the sector now and are likely to do so in the future.

The auto-sector is not in crisis, far from it, it has periodic ups and downs, it is cyclical by definition, and despite the difficulties of many mature markets, which are increasingly saturated, never before have so many vehicles been manufactured (around 100 million per year). Never before have so many vehicles been in circulation (1.3 billion vehicles); and never have so many cars been sold in the 130 year history of the automobile. But the industry cannot afford to rest on its laurels, as challenges for traditional producers are on all sides: there are new entrants, new markets, new technologies and evolved consumers’ preferences.

There is a change of production hierarchies in favour of emerging markets. This creates several challenges for manufacturers: new plants in emerging markets, different customers, and the need to understand the various peculiarities of local markets.

CALCULATION, INTELLECTUAL DIVISION OF LABOUR AND DISPERSION OF KNOWLEDGE

Distribution of the titles of ownership among private entrepreneurs is inextricably linked to something that Mises called the “intellectual division of labor” (Mises 1990: 18). Control of particular production resources belongs to their sovereign possessors, and not to one person or a collectively managed institution. Here we should distinguish the traditionally understood division of labour from its “intellectual” counterpart. Division of labour means a division of performed production tasks, categorized into particular professions (baker, carpenter, doctor, etc.), while intellectual division of labour is related to a certain kind of divided tasks, linked closely to the function of the entrepreneur, who allocates economic resources in a competitive order. The intellectual division of labour means a division of labour between entrepreneurs on the market, each of whom leads a separate business activity. Salerno concludes emphatically in his pathbreaking work:

In this meaning the term used by Mises is not fully appropriate. The adjective “intellectual” seems to suggest that we are talking about matters of intellect, education and the gift of intelligence. The term may therefore be wrongly understood as, for example, a division between computer programmers and manual workers, i.e. between people who do physical, and those who do intellectual, work. But this is not the essence of the term. Rather, it is about the entrepreneurial division of labour that occurs between different competitors on the market. Using this term seems therefore more accurate, as it more precisely expresses the nature of the phenomenon and prevents misunderstandings with regard to the definition. Biological studies seem to confirm this as man’s ability to reorganize the surrounding reality has more to do with the prefrontal cortex, not with a priori IQ skills (although the latter is definitely useful in running a business).

INTRODUCTION

In general, the development of the market concept within economic theory has been from the less to the more abstract, and as we move through different levels of abstraction we should probably expect to encounter entirely different types of market concept. Not that this is revealed in the economics textbooks too often. They tend instead to present students with only one market model, that based on neoclassical demand-and-supply dynamics. It is conventionally known as the partial equilibrium model to denote the way in which it depicts how the pricing structure might balance demand and supply in one market alone at one moment in time. Sometimes the textbooks will use this as a precursor to introducing the general equilibrium model, a much more abstract model that explains the conditions that would have to be in place for demand and supply to be brought into perfect harmony in every conceivable market at all moments in time. But this is by no means the norm.

It is only on occasions, then, that there is some attempt to show what came after the neoclassical demand-and-supply model in the long march towards the highest imaginable level of abstraction. However, this is typically not mirrored in attempts to show what preceded it.

INTRODUCTION

Alfred Marshall spent most of his academic career at the University of Cambridge, eventually retiring as Professor of Political Economy there in 1908 after more than forty years’ academic service within the UK. He was an important theorist in his own right, but he is perhaps best remembered today as a brilliant synthesizer of existing ideas, bringing flashes of insight from various parts of the literature into a single theoretical system (Hodgson 2001). More than anybody else, he was responsible for fleshing out the contributions that various marginalist techniques could be expected to make to economic theory as if they had all come from the same hand (Maloney 1991). The ideas on which he drew were therefore by no means all his own, although he did put his distinctive gloss on them in his renowned book, The Principles of Economics. It went through eight editions, eventually totalling 870 pages, and it was quickly seized upon as the authoritative text for learning about the market concept in what I have called its analytical form. For a number of decades it was as if economics in its orthodox Anglophone guise was specifically Marshallian. George Stigler published his Theory of Price in 1946 and Paul Samuelson his Economics in 1948 in an attempt to dislodge Marshall’s Principles of Economics as the dominant teaching text. Their aim was that they might showcase the work of a newer generation of neoclassical economists.

So great were Marshall’s skills as a synthesizer that theoretical discoveries were often attributed to him retrospectively, even when they had appeared earlier in their original form in someone else’s writings.

INTRODUCTION

In the move between the analytical and the formalist phases of the market concept, the presentation becomes much more abstract and the argument more technical. It is also where an explicitly mathematical mindset very obviously takes over. It is not as though the analytical market concept lacks mathematical underpinnings, as is perhaps best illustrated by the fact that Alfred Marshall’s predecessors tended to provide an algebraic account of market-clearing dynamics before subsequently representing those dynamics pictorially on the forerunners of what is now the classic demand-and-supply diagram. Yet largely at Marshall’s inception the mathematics remained hidden from view (Hart 2012). Instead, the most common way of explaining the market concept in its second phase is using words to describe what the reader can see on the diagram. Becoming familiar with those words is what it takes to learn how to speak in an avowedly “economic” manner, and in this way it is made to look as if an economic logic exists prior to the underlying mathematical structure. In truth, though, this is actually the use of an economic logic to strategically redescribe in economic terms relationships that are already revealed by the underlying mathematical structure. It is as if an attempt is being made to mask how much of the analytical process is produced mathematically. As the market concept reaches its formalist phase all such pretence is dropped (Ackerman & Nadal 2004). This is economics for only the most mathematically gifted, whereby a training in economics, counter-intuitive though it surely sounds, might well be a disadvantage to the academic economist relative to a training in mathematics. Perhaps unsurprisingly in these circumstances, conventional teaching texts in economics venture only tentatively onto the territory occupied by the formalist market concept.

WHAT I HAVE DONE

There is almost certainly no way around the central conundrum running through this book. Economic theorists will certainly continue to build models based on their market concept, as this can plausibly be understood as their very raison d’être. Neither should we expect any sudden respite from hearing politicians talk about the future in ways that invoke this thing called “the market” that imposes its will on the whole economic environment. We might recently have witnessed the rise of a populist nationalism that is attempting to harness a backlash against globalization, but what is this in economic terms if not the flipside of market ideology? It is not the wholesale dethingification of “the market” that I have advocated, so much as an objection to the outcomes that its thingified presence has caused us to have to accommodate ourselves to. There is thus unlikely to be much change in the continued coexistence of the market concept and market ideology. But this will continue to present the problem of the single word “market” being used in two very different contexts and in two very different ways. Will we be able to trust ourselves in the future to always be able to distinguish the two uses from one another when all we hear is the one word? Given how difficult it ever is to call out a conflation of the two uses before the moment has passed, could we even trust ourselves to be able to do this just some of the time?

Hopefully the preceding chapters have helped in the task to separate the market concept from market ideology and to keep the historical development of three very different market concepts distinct from the ultimately confusing idea of “the market” as a discrete thing.