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Capitalism, Corporatism, Free Markets

Some useful thoughts from Rod Long, over at Cato Unbound.

As he points out, there is a broad-based mythology that defending capitalism is equivalent to defending "big business" when, by its nature, big business abhors capitalism (at least as understood by true free marketeers). Of course, I agree with Jonah Goldberg that we latter should abjure the term "capitalism," both because it is such a misunderstood word with a wide variance of definitions, and because it is fundamentally a Marxist concept.

A "free-market economy" (something that hasn't existed to a large degree in this country for many decades) is what should be defended and supported, and we should continue to push to get the country to move back in that direction to find our way out of our current travails (which really started back in the Depression Era). Just as one example, there's an interesting discussion over at Megan McArdle's place, here and here, on GM's straits (about which I've also had thoughts over the years, as someone who grew up with it). I think that, as one of the commenters over there notes, the roots of the destruction of the American auto industry lie in the Wagner Act:

GM and the UAW are a perfect illustration of bad government in action.

At some point, a collective decision was made that the unions should be given such expanded powers that they could destroy the company if they wanted (see the above post describing how a strike at a key plant could idle the whole company). What happens here? Well, naturally the union tries to extract as much as they can from the company with the tools available. The union doesn't profit from increasing profits and building a healthy company, it profits from building an overstaffed company that exists to benefit its employees. The union would have been better served if it divvied up the right to collect a union payout from GM among the workers of the time and let them sell the claims. Then the union could simply negotiate the maximum dividend possible for the holders of these claims. This way you have a rationally run company with the benefits going to the larger voting block (the workers) than the shareholders who are all presumably evil capitalists.

What would have been much more honest and worked better would have been outright nationalization of GM when the rules were set up that the UAW could destroy the company. Instead you've got unclear property rights and consequent ill management.

It took a long time to kill the industry, but that doesn't mean that it wasn't the cause. Arsenic or mercury can kill over a long period of time as well, though death might actually occur from some other ailment that the toxin-ridden body is ill equipped to fight.

The toxin in this case may be a lot of things (perhaps even including "capitalism" by some warped fascistic definition) but it is an abomination to a free market, and it has destroyed the American auto industry.

[Update a few minutes later]

IBD says let GM go bankrupt:

Far from vanishing, many of GM's assets would be quickly purchased by competent foreign automakers eager to expand their capacity in what is the world's largest auto market. Happily, the list of well-run car companies, from Toyota to Nissan to Porsche, is long.

How this helps Michigan, the auto sector and smaller firms reliant on the latter's health is pretty clear. With capable auto executives finally overseeing GM's poorly deployed assets, the value and utility of each would rise, thus perpetuating the existence of jobs in the sector, all the while ensuring that other businesses that exist due to GM will enjoy more stable commercial relationships with competent management.

So while the cries of certain Armageddon would be ear splitting in the event of a GM failure, the U.S. auto sector would actually emerge much healthier thanks to a change in ownership that would be the certain result of GM going under.

The problem of course, is that this will be another Enron, in that many people will be thrown out of work, and lose pensions (I should note, for the record, that as a Michigan native, I have close family members who may be in this situation). The political pressure to maintain the status quo will be intense, and unfortunately, given the fact that despite all of the talk about "change," the status-quo-ante types (at least when it comes to static economic circumstances) have just entrenched their power in Washington, that's probably the way it will go. If GM is going to get federal money, it should go toward buyouts of long-term employees, and then let the market work to redeploy its assets toward more useful purposes than maintaining an expensive company-town welfare state, that makes cars on the side.

[Update mid morning]

Matt Welch says to the barricades to defend free markets. Except that he uses the confusing word "capitalism."

I should add, that I consider George Bush's biggest failure not the events leading up to this crisis, but his response to it, in which (as Matt points out) he capitulated to those advocating government solutions to government-caused problems. Of course, it's on a par with "compassionate conservatism" and "comprehensive immigration reform" and "no child left behind" and "prescription drugs" and myriad other issues, large and small, on which he showed himself to be anything but a conservative (let alone a libertarian). Had he been a Democrat, the Dems would have been cheering all of his actions as the greatest thing since LBJ and the Great Society.

Speaking of compassionate conservatism (and the tone deafness of George Bush and Mike Gerson and others to how rightly offensive the phrase was to actual conservatives), imagine how well the Democrats would take to a nominee who ran on a platform of "logical liberalism."

[Early afternoon update]

Iain Murray has more thoughts on free markets and their relationship to liberty:

...as Jonah says, markets are more than this information delivery system. Where the Chicago School has gone wrong is in focusing purely on economic efficiency. As my boss Fred Smith said way back in 1983, "The Chicago School's case for antitrust policy . . . rests solely on economic efficiency, as if rights had nothing to do with the matter -- as if business had no right in principle to dispose of its property as it sees fit, but only a conditional freedom so long as it helps maximize some social utility function. That is to say, no business is entitled to its property if that property can be redeployed so as to expand output. With 'conservative,' 'pro-business' economists taking this view, who needs social democrats." In other words, if we value property rights, the free market is an essential consequence. And that is why market socialism never works, because it devalues property rights. Liberty demands property rights which demand free markets. We only interfere with that chain in defiance of history.

It is not a coincidence that communist nations are the most unfree on earth.

[Early evening update, particularly for Instapundit readers, who might want to look around the site]

I've talked in the past about the fact that my father was a GM exec, but I've never noted what he did there.

Here's a little background, which may be apocryphal, because I only knew it from my mother, but they met after the war in New York (he was from Brooklyn). She was a former WAC who had served in Egypt, and had decided to see a little more of the world before heading back to her home in Flint, Michigan.

He was standing on a soapbox in the Village, haranguing the crowd on the benefits of Marxism. As an economics major, raised on Keynes, she fell in love.

They married, and finished their graduate degrees, at various places (NYU, UCLA, other, his in Psych--Industrial Psych, hers in Econ). In the fifties he tried door-to-door in Lansing after moving to Michigan with his upper Midwest bride, but when he got an offer at A.C. Spark Plug in her home town (as a result of her brother, my uncle, being an engineer there) he took it, and settled into a middle-class lifestyle, during the best years of the company, in which he raised his family.

He moved up though the white-collar world at AC, in "personnel" (these days, it would be HR, which is one of the reasons that he could get me summer jobs there during college), until he got an offer to go to work for corporate in Detroit, a job for which he commuted sixty miles a day each way from Flint, and we never had to move. I know that this is no big deal of a commute in southern Cal, but for me, it was amazing. He died at an age slightly older than me (right now, for those reading in the future) that I can count on one hand, and not half of it, from a heart attack (his second--he had had his first about a decade earlier, in his forties). That was almost three decades ago.

His job?

Head of labor relations, and negotiator (perhaps chief negotiator, though (as Doctor Evil said) I can't vouch for that), with the UAW.

[Bumped to the top, because there's a lot of new stuff]

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26 Comments

Daveon wrote:

So, if the Unions are the problem, how is it that many heavily unionized European car markers remain competitive and profitable? (The chairman of Renault is known in Japan as the man who saved Nissan.)

The real problem for the US car makers is their habit of building cars for the US market only. Ford design and build some fantastic cars, outside of the US, the shear expense of building up and maintaining tooling and facilities to design cars for the US only market is mind boggling.

At this stage I'm not sure if they can save themselves. Ford should have closed most of it's R&D and started building a single global range of cars some time ago. They could have kept successful niche products like the F150 but binned the Taurus and the US Fusion (a nightmare vehicle nothing like as pleasant to drive as the European variant).

As the article says, there is plant, there are skills. Perhaps Renault/Nissan, VW or Peugeot could do something with them.

November 12, 2008 6:27 AM

mz wrote:

Free markets are nice, but it's sad that most industries are so ruled by big players or corrupt that they are not possible.

Either have real openly unashamed state control of the monopolies or break them up and have real unashamed open free markets.

The intermediate position is the worst.

November 12, 2008 7:22 AM

Josh Reiter wrote:

Daveon wrote:
"how is it that many heavily unionized European car markers remain competitive and profitable?

Correct me if I am wrong, but the workers in Europe get a number of their social services provided through the state while U.S automakers are solely taking on a number of these responsibilities for both current and retired workers. In other words European car makers can defer a number of these costs to the tax payers at large.

Yea, the Ford Focus always perplexed me. Generally, the smaller European cars aren't don't sell as well in the states. Therefore, U.S. specific models tend to be on the larger side. However, in the case of the Focus it is practically the same size as it Euro brethren. Even more bizarre considering they each model redesign of the U.S. Focus they incorporate more and more design elements from the Euro Focus chassis. Believe me, people in the market for such a car here in the states are clamoring for the Euro-focus. No doubt, the Ford bean counters must see the Euro-focus as a potential threat to undermine the sales of vehicles at a higher price point.

Anyways, I say let the free markets do their work. GM should go under if it can't sustain a viable business model. It will serve as a lesson to future companies to not let themselves get into the same predicament. Will it hurt? oh hell yes. But best to nip it in the bud then keep throwing good money after bad and keep a sick company on life support when at some point we know they will go under anyway. Just delaying the inevitable in my opinion.

November 12, 2008 7:30 AM

Jim Bennett wrote:

Um, we just tried European management of an American automobile company. Or has everybody forgotten Daimler-Chrysler already? We can take it as given that the Obama administration will not permit a solution that strips UAW workers of their pensions or health benefits to any significant degree. More likely the taxpayers will end up taking them on, as they did for passenger railroad workers via Amtrak. (You thought Amtrak was about running trains? Ha. You probably even think NASA is about spaceflight!) Given those realities, I would rather see a solution where the government takes them on directly and visibly, and the car companies can then get on with making cars. But more likely we'll get continued unfunded mandates papered over by government "loans" that come with government control.

The core reality is that the car companies, along with their junior partners the UAW, got fat, dumb, and happy in the fifties. American cars once -- I know this is hard to believe -- had a technology edge over European and Asian cars. The poster child for this lost era is the 1950 Cadillac Coup de Ville that was entered essentially as it came from the manufacturer at Le Mans, where it finished 10th in a starting field of 60, racing against purpose-built European racing cars. (See http://www.briggscunningham.com/lemans50.html) Could US automakers ever get that edge back? Probably not with this industry and its givens.

November 12, 2008 9:24 AM

Daveon wrote:

No, you're quite right, same goes for the Japanese manufacturers. Having car companies in the pension and healthcare business AND building crap cars that few people want perplexes me greatly.

Ford should close their US design offices and rely on the work coming out of Duncton (Essex, UK) - the cars are better and have the performance and fuel economy the US market would like. But that's not going to happen either.

Same for GM - a bunch of the GM cars in Europe are excellent but their US counterparts suck.

Don't get me started on Chevys I have no idea what they think they're doing. As far as I can tell they're relying on fleet sales to Hertz.

November 12, 2008 10:20 AM

Carl Pham wrote:

Christ, yes, if GM could offload its retirement and medical benefit costs onto the taxpayer, like Renault, I'm sure they'd be profitable. To paraphrase E. F. Shumacher, in a situation like that of European car manufacturers (or European rail companies), the visible profits of the "private" enterprise greatly overstate its actual achievement, inasmuch as many of the costs are offloaded onto the public, the saps.

Personally, I think we've greatly disserved the car company employees by our fetishization of Made In America cars. The result is we've hideously distorted the market forces that would otherwise keep them making what the market wanted, at a price the market set, and let them sort out with those accurate signals what they could afford to pay who. The end result is tragic.

And fairly unique, huh? I mean, in what other tech industry do we bemoan American incompetence? You don't see people saying Ach, the tragedy of Microsoft, Sun, and Apple, bloated payrolls and benefits, and products that can't compete with those from clever Japanese and German firms. You don't hear people calling for a bailout of Genentech or Amgen or Johnson & Johnson, even though they pay their employees princely wages and wonderful benefits, and sell quite expensive products.

So people who look for the origins of car company troubles in some nationwide American moral decline have their head up their ass. Americans are in general excellent and productive workers when they work in a free market with accurate price signals. The complete dominance of American industry in many 21st century fields -- biotech, medicine, nanotech, advanced materials, specialty chemicals, IT -- demonstrates that. The misery in the car manufacturing business is almost unique to that business, and the causes must therefore be found in what's unique about it.

November 12, 2008 10:40 AM

Sigivald wrote:

"Capitalism" is a fine term, despite the attempts of Marxists to poison it simply by hissing whenever it's said, and blaming all woes on it (and redefining it as "exploitation").

The accumulation of capital is exactly what makes first-world skilled labor so productive and therefore worth paying first-world rates for.

Without capital and its accumulation we'd all be stuck subsistence farming with sticks.

I suggest fighting back against the abuse of the term rather than surrendering it.

I want a free market and capitalism. (Though of course the former leads to the latter inexorably in the absence of someone simply taking the accumulated capital.)

November 12, 2008 10:50 AM

Rand Simberg wrote:

I want a free market and capitalism. (Though of course the former leads to the latter inexorably in the absence of someone simply taking the accumulated capital.)

That's exactly the problem. You can have "capitalism" in the absence of a free market. It only means that how the "capital" is allocated is at least partially a political decision. Which is the situation into which this country has put itself, most egregiously in the last couple months.

November 12, 2008 10:54 AM

mz wrote:

Microsoft isn't a good example of the free market working though...

We don't have a significant car industry over here in Finland, but we have some similar type heavy industries that can have political leverage, like shipbuilding: if you go on a caribbean cruise, it's very possible that the ship has been subsidized by Finnish tax payers.

Hence the free market stuff works for car companies if no car companies anywhere receive subsidies. If one country does not stay in the free market ranks (say a big manufacturer is going down and they give some loans), then it's quickly a game of everybody giving their manufacturers some subsidies.

The airplane and aerospace businesses has come to be like this too. Various forms of subsidies are practiced. It's quite a lot about national prestige too, though at times it is profitable.

November 12, 2008 12:48 PM

Eppur Si wrote:

Compassionate conservatism is merely repetitive, while logical liberalism is an oxymoron.

November 12, 2008 3:12 PM

Rand Simberg wrote:

Compassionate conservatism is merely repetitive, while logical liberalism is an oxymoron.

Yes, but we're talking about perception here, not reality.

November 12, 2008 3:13 PM

James wrote:

"the US Fusion (a nightmare vehicle nothing like as pleasant to drive as the European variant)"

The Fusion is Consumer reports top rated car, and it's always praised by the car mags.

As for the European Focus, you can buy it here under the Mazada 3 nameplate.

The US car makers make some good cars. Their problems, as described above, lie elsewhere.

November 12, 2008 3:26 PM

Titans 9-0 wrote:

Could the UAW be "bought out" by the government?

November 12, 2008 3:30 PM

Carl Pham wrote:

Rand, you do know, I hope, that your final statement -- that centralized economic control (the loss of free markets) leads inevitably to the loss of individual liberty -- is F. A. Hayek's central thesis in The Road To Serfdom? It was his contention that Nazi Germany -- or fascism in general -- which academics struggled to explain in the 1940s, was not some strange throwback or aberration, but indeed the logical and inevitable result of the centralized socialist economic planning then in vogue among the intelligentsia.

Ironically enough, Hayek's book was first published in the United States by the University of Chicago.

November 12, 2008 3:31 PM

M. Simon wrote:

You will soon see the bemoaning of the demise of Microsoft.

With computer prices beginning to go to the $200 range The Microsoft business model no longer works. When prices go down to $100 they will be gone.

What does work? Linux.

November 12, 2008 3:35 PM

M. Simon wrote:

The irony is that Marx was a capitalist. He said that if a country needed to accumulate capital capitalism was the way to go.

His plan was for the day when everything had been invented and profits were meager due to an established competitive base.

If he could see the world today he might have put off his utopia for 200 or 500 years. At least.

November 12, 2008 3:42 PM

james lee wrote:

It always struck me that at least since the 1960's
Detroit had terrible management. Ford under
Bunky Knudsen, AMC under George Romney,
GM with a succession of goons in suits,
that has lead Detroit into the sewer.

The UAW guys have been a problem, but, unions are
a reflection of lousy managers. Why hasn't Sun,
Cisco, Google ever been unionized, and,
Boeing and GM suffered decades of terrible
union troubles.? I believe it is due to lousy managers.

GM found they could prosper by selling Debt (Car Loans)
via GMAC, and that the cars were irrelevant.
Soon enough the cars became irrelevant.

Volvo has a brand for safety.
Daimler for engineering,
Toyota for innovation,
Honda for value.

What are the things people think about when they get a
Detroit product? "It's got a hemi".

Now Rand's father was a Detroit executive for many
years, it would be interesting to see what
opinions come down from him on this.

November 12, 2008 3:42 PM

a wrote:

Carl Pham said: "The misery in the car manufacturing business is almost unique to that business, and the causes must therefore be found in what's unique about it."

Two things are unique: CAFE and unions. Due to unions Big Three can't produce small cars cost effectively. Due to CAFE they can not concentrate on larger cars and trucks they can produce profitably and leave small cars market to foreigners. And because domestic and foreign output count independently, and CAFE mandates that each should satisfy CAFE averages, Big Three can't subcontract or import small cars to a foreign manufacturer.

It is like IBM would be mandated to stay in PC business, manufacture a certain mix of servers and PCs, and produce their computers in the US.

November 12, 2008 4:15 PM

Fderfler wrote:

MZ -- Excellent comment. As you and others have stated, in many European countries the government pays the subsidy for both auto and aircraft. This is completely different from our situation where, in effect and in reality, the government is bailing out the UAW.

Even Japanese and German auto makers manufacturing in the US don't have the problems of the US Big Three because the Japanese and Germans 1. Beat the heck out of local governments for incentives (See http://www.siteselection.com/ssinsider/bbdeal/bd030526.htm ) 2.Beat the heck out of unions to startup. So, they aren't towing around the "Iceberg" of benefits the Big Three face.

The best solution?? The Big 3 go through Chapter 11. Shed the ticks, fleas, and pests. (Yes, I still have a UAW card in my memorabelia drawer from when I worked in a paint spray booth at a GM plant. The only think I ever used was the $4 haircuts and 25 cent beers at the union hall.)

November 12, 2008 4:37 PM

Claude Hopper wrote:

I have a theory about the failure of the big 3 to innovate enough to survive. In the 50's through the 70's the auto companies did not innovate, they just watched the car buffs, hot rodders etc., to see what they came up with and copied it. At first it was dual exausts, then dual carbs, blowers and so on. The Auto guys took from the street rods and build muscle cars on that premise. When kids drifted away from hobby cars to computers and gaming for entertainment, the auto guys were left with no one to do their development work. For the last 15-20 years, they have been in the design wilderness and probably can't and even with a bailout, won't develop the necesssry skills to survive.

November 12, 2008 4:55 PM

Carl Pham wrote:

The irony is that Marx was a capitalist.

No, I think the irony is that Marx was a social parasite. He lived largely off the earnings of his women and his wealthy (if not too bright) socially-conscious friends.

Due to CAFE they can not concentrate on larger cars and trucks they can produce profitably and leave small cars market to foreigners.

Oy! I never thought through CAFE like that. What a gigantic fuckup. That alone is an argument for having every Congressmen taken out and shot, as a major short-term contribution to raising the intelligence of the species.

November 12, 2008 5:31 PM

a squared wrote:

CAFE and UAW. The CAFE 'standards' are so unclear they have to hammer the details out in court.

And the current Congress just got done making CAFE worse.

So the big 3 are toast except as political piñata’s -- taxpayers will be paying for them to make crappy cars AND the ethanol they run on.

Wake me up when the madness stops.

November 12, 2008 6:08 PM

Seerak wrote:

Well, before it was called "capitalism", the name for free societies was "the system of natural liberty". The Marxists would call it "capitalism" in order to focus on a nonessential characteristic of that system -- the accumulation of capital -- while obscuring its essential characteristic: liberty.

This was the beginning of what we would eventually come to know later as the spurious distinction between "economic" and "political" liberty.

The purpose of that distinction is to obscure the fact that the "free" in free markets and in freedom, are not merely correlated, but the same exact thing.

November 12, 2008 6:09 PM

R Anderson wrote:

As an economic refugee formerly of Michigan, there are two comments I'd make on this.

The first is, CAFE numbers are (or at least, have been until very recently) fairly easy to rig. One of the first useful classes I had as a grad student in Flint taught would-be powertrain designers how to properly design a transmission to match a given engine's fuel map to "spoof" the CAFE standards. This was done through a proper selection of gear ratios and shifting strategies, and advance knowledge of the driving pattern (speed against time) used for any of the CAFE tests. This knowledge has always been publicly available; it's now online, from the DoE if I recall right. Furthermore, if one oversells underperforming vehicles (such as the light trucks and SUVs that were for a while just about the only thing people wanted to buy) and gets too low a final CAFE number for the year, then a part of the fines can be offset by putting the money toward R&D into "better fuel efficiency" techniques. This is frankly ridiculous as a policy, as the final CAFE number is based entirely upon what the customers actually buy, regardless of what the best-mileage cars on offer are.

The second comment is that while the foreign competition may have nationalized medicine, it has unintended side effects. Not just the stagnation of developing new cures (most of which are invented in the States), but even such basic things as hospital hours. One of the blogs I regularly read is by an expat American who has been living in Japan for several years; a recurring theme is that if you get sick or injured in Japan outside of "normal business hours," 9 am to 5 pm, then God help you - because it will take a miracle to find a hospital still open and admitting new patients. It has been mentioned there that it is not unheard of (though somewhat rare) for a woman to go into labor and die on the hospital steps if she has the misfortune to give birth outside of hours and is too far away from a dedicated maternity hospital. (see gaijinsmash.net and look over the archives for details). Over what horrors one might encounter anyway, if American nationalized hospitals are run as well as Britain's NIH, let us draw a merciful veil of silence.

This isn't to hold any of the three parties (management, labor, or government) blameless; a screwup this monumental requires many decades of all three parties trying to screw the others over instead of actually growing the business. Sower, reap.

November 12, 2008 6:18 PM

Joejoe wrote:

Good comment on the Long post:

"Roderick spoils (for me, anyway) an otherwise excellent summary by jumping to the unwarranted conclusion that today's corporations are, on average, larger, more hierarchical, and more diffusely owned than the firms that would emerge under laissez faire...

"...the worker-owned cooperative, the partnership and proprietorship, the decentralized "open-production" system, all suffer from serious incentive, information, and governance problems, almost none of which are mentioned in the anti-corporation libertarian literature. I suspect this literature's preference for small-scale production is based primarily on aesthetic, rather than scientific, grounds."

http://blog.mises.org/archives/008924.asp

November 13, 2008 7:00 AM

Ed Minchau wrote:

-- mz said

"Free markets are nice, but it's sad that most industries are so ruled by big players or corrupt that they are not possible."

and

"If one country does not stay in the free market ranks (say a big manufacturer is going down and they give some loans), then it's quickly a game of everybody giving their manufacturers some subsidies."

And therein lies the rub. As soon as the government gets involved with things like farm subsidies CAFE and Fannie Mae and Freddie Mac and on and on and on, the market is distorted, worldwide. Corporations don't make necessary changes to maintain viable free market business models and don't go out of business when they should, which makes the situation even worse down the road.

November 13, 2008 8:31 PM

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Capitalism, Corporatism, Free Markets

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