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Wednesday, June 22, 2011

The Yugo: The Rise and Fall of the Worst Car in History

In my M.B.A. economics class I emphasize the Austrian view of entrepreneurship, noting that successful entrepreneurs are rewarded for moving resources from lower-valued to higher-valued uses in a free market. Alas I also spend time explaining “political entrepreneurship”: exploiting connections with “the right people” to profit by moving resources from uses consumers would value highly to uses with a lower value.

The Yugo: The Rise and Fall of the Worst Car in History, by Jason Vuic, an assistant professor of history at Bridgewater College in Virginia, deftly describes yet another episode in the history of the fiascos that occur when governments enable political entrepreneurs.

What can one say about the Yugo? It started out as one of the hottest items in U.S. automotive history, only to become the butt of jokes such as:

Q: How do you double the value of a Yugo?

A: Fill it up with gas.

Interestingly, the very reason the Yugo even became an item was a U.S. government move to keep small Japanese cars out of the United States. The Japanese automakers responded to this protectionism by making mid-sized luxury cars, which created a void for a small, inexpensive vehicle. The Yugo would (at least temporarily) fill that void thanks to the foresight of entrepreneur Malcolm Bricklin.

Austrian economists such as Israel Kirzner point out that entrepreneurs first see an opportunity and then they act. Bricklin, who is described as a “habitual entrepreneur,” decided that American consumers wanted small cars, and he knew just the company to build them—Zastava, a State-owned firm in Yugoslavia.

Bricklin is always looking for business opportunities, but he likes shortcuts. These invariably land him in trouble and ultimately bankruptcy. Despite having already pushed several failed ventures, Bricklin kept going, proving the wisdom of P. T. Barnum’s declaration that “There’s a sucker born every minute.”

So how is it that the guy who had conned investors in a scheme to fund Handyman America stores (which went bankrupt in 1965) and managed nearly to kill the one good company he founded (Subaru America—and, yes, I drive a Subaru) could find people willing to fund the Yugo venture? Enter the politics of the Cold War.

As Vuic notes, Yugoslavia, a communist/socialist country with “non-aligned” status, was a “buffer” between East and West. The U.S. government aggressively cultivated its relationship with that country, which in normal political times might have gone almost unnoticed. With the Cold War still in full bloom in the mid-1980s, and with Americans wanting cheap transportation, a marriage between the U.S. market and a company making inferior cars (Zastava used an old Fiat plant it had purchased) was consummated. All it took were the efforts of the failed entrepreneur Bricklin and Washington fixers like Lawrence Eagleburger, a former official in Ronald Reagan’s State Department, then working for Kissinger Associates.

U.S. operations opened in 1985, and the car was a huge success. Yugo mania was in full swing, as people crowded the lucky dealerships and waited for months for delivery of their spanking new Yugos.

But trouble soon began. The Yugo, for all of Bricklin’s hype, still was true to its socialist, Eastern European roots. While it wasn’t as terrible as a Wartburg or a Trabant, no one was trying to market those glorified East German lawnmowers in the United States as a “smart” choice. Once people began to drive Yugos they came to realize that communist quality control meant that the workers had proper political attitudes, not that they could build a decent car. Demand plunged as drivers learned about the car’s pathetic quality. In less than a decade Yugo America was bankrupt, as was Bricklin once again. Eventually the Yugo enjoyed a second career—as pop art.

Even though Vuic is not an economist, his well-written and entertaining book sheds a great deal of light on the larger issues of State planning, economic calculation, and every other argument that Austrians have been making against socialism and crony capitalism for the past 90 years. The next time you hear someone talking about the wonderful future for some proposed government-business partnership, remember the Yugo.