8-What Do We Really Believe?

There were two items of interest in recent press reports. Both suggest something about our fundamental beliefs in our economic system.

The first instance occurred in California. The State Insurance Commissioner asked Allstate to reduce its automobile rates in the state by nearly 16%. Allstate insures about 10% of California automobiles. The owners of these automobiles will save about $124 per car. The reductions came because the state concluded that the companies were charging too much for their services.

In a separate event, the State of Arkansas ordered sixty companies who offer payday-lending services to close down immediately. These payday lenders advance money to a borrower to bridge the period between paydays. The lenders charge a fee, plus interest. The State of Arkansas concluded that this service violated a constitutional requirement that bars lenders from charging an annual interest rate higher than 17%.

Both of these stories are examples of a lack of belief in the effectiveness of a capitalist system. There is no indication in either case that new entrants are barred from entering the market. If the automobile insurance companies charge too much, their profits will be unusually high. New companies will enter the California market with a promise of lower prices to attract their customer sales volume. The same would hold true with payday lenders in Arkansas. If California and Arkansas believed in the effectiveness of capitalism, they would simply wait until the new entrants reduced the prices in the state. They apparently do not believe that capitalism works.

Posted 3/31/08

Update

The automobile insurance industry in California is led by State Farm with 13.7% market share. Allstate is now fourth with a 9% share.

Payday loans are widely available in Arkansas, with term limits of 31 days, loan limits of $400 and price limits of 10% of loan with fee limit of $10.

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.