Do Used Car Prices Vindicate Adam Smith?
Used car prices have increased by 40.5% in the twelve months to January, to the point where the average new car purchased one or two years ago is now worth more on the used-car market than its original purchase price. (See Nora Eckert, “Why Your Car Might Be Worth More Today Than When You Bought It,” Wall Street Journal, February 11, 2022.) Some people seem surprised:
“You see nutty things. Cars that were $25,000 new three years ago are $25,000 today,” said Adam Lee, chairman of Lee Auto Malls in Maine. “It doesn’t make any sense.”
For those who have studied some economics, it makes total sense. It is a direct theoretical result of assuming that an individual is rational and maximizes his utility (or something similar) given his own circumstances. New car prices increased because of lower supply and rebounding demand after the worst of the pandemic. Used cars, which are substitutes (although not perfect ones) for new cars, became more desirable for more consumers. Thus, demand for used cars increased (the demand curve shifted up) and so their prices too.
It is the same reason why famous paintings that were often worth close to nothing when first sold by their creators are now worth fortunes. In the case of cars, the agents on the demand side are not sophisticated art collectors, but ordinary individuals who have a good intuition of the market (having been in business helps). If, for example, one’s car lease expires and one realizes that his car is worth more than the its buyout price, one will buy off one’s own used car, which has actually been happening.
Enlightenment thinkers and classical liberals thought that all human individuals were natural equals and naturally capable of learning. In this perspective, Adam Smith famously wrote that there is probably no difference between the natural capacities of a street porter and a philosopher:
The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were, perhaps, very much alike, and neither their parents nor playfellows could perceive any remarkable difference.
One may think that this is a slight exaggeration from an empirical point of view, and one might be right. (My forthcoming Regulation review of James Buchanan‘s Why I, Too, Am Not a Conservative [Edward Elgar, 2015] will have a bit more to say on this topic; sorry for the unbearable suspense!) Yet, the increase in used car prices suggests that Adam Smith was at least partly right, and the more so as more individuals are equally free–like on a free market. Ordinary car buyers seem to understand as much about the car market as the chairman of Adam Lee Auto Malls.