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Markets work well because they convey information about what people desire, and how much they are willing to pay for those things. Companies become successful when they serve these desires, and as a result the owners and management become rich. When companies don’t serve these desires they fail, and their owners and management become poor. That is all good and well, as the producer who wants to get rich has a strong incentive to make whatever people want. Thus we get the amazing process of creative destruction, as it was aptly named by Schumpeter.

In light of that, this is rather worrying:

Congressional Democrats and the White House yesterday settled on a plan to rush $15 billion in emergency loans to the cash-strapped Detroit automakers and were working into the night to resolve final disputes over the conditions the government should attach to the money.

Under the plan, unveiled by Democratic leaders, the Treasury Department would cut checks for the car companies as soon as next week. The proposal also calls for President Bush to name a “car czar” to manage a vast restructuring of the firms and restore them to profitability.

There are a lot of things wrong here. Most obviously, if you throw money at a failing company, this weakens the incentive of that company to produce what people want, leading to a slower rate of innovation and a less focused effort to cut costs and be efficient. Also it tempts the company management to put resources into convincing the government to give them money — resources that might otherwise have been spent on building better products.

Then there is the scary prospect of at car czar, who — magically — is assumed to know better than the auto makers, what people want, even though the czar is not risking any of his or her own money. That seems rather unlikely.

The media is doing what they can to encourage this wasteful business of government bailouts, for example by claiming that Nobel Prize winning economist Paul Krugman believes U.S. auto making will otherwise be a thing of the past. According to Dr Krugman himself, that is not his view.

These are indeed worrying times.

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