Creative Destruction: Time To Make Companies Small Enough To Fail

from the channeling-schumpeter dept

The news is filled with stories of the latest bailout: this time of the US auto industry, and for some reason it has me thinking about Joseph Schumpeter. Schumpeter, as (hopefully) many of you know, was an economist in the first half of the 20th century, who today is probably most well-known for two things: his championship of the concept of "entrepreneurs" and ongoing innovation as the process of economic growth, and the creation of profits, as well as the idea of "creative destruction" brought about by those entrepreneurs, taking down old industries with new ideas, new products and new processes. There is much that Schumpeter got wrong in his analysis (in general, I'm not a huge fan of much of Schumpeter's work), but throughout it all, there were some very important ideas that have been proven time and time again.

It's important to revisit his work, as we're seeing a sudden influx of economic philosophy "battles" between different schools of economists over how to deal with the financial crisis. The new Keynesians still believe that through government tweaking, we can guide the economy to some sort of "soft landing." The more free market-focused economists fear the end result of such tweaking. The split in schools of thinking has become significantly less pronounced than in the past, and ideas seem to permeate back and forth among these and other economic philosophies, but some core beliefs are common across most economists, and they've been shown to be correct time and time again.

Competition and Innovation

Innovation, driven by competition, is the core of economic growth. Competition drives companies to keep innovating, creating better and better products (often for less and less money). Companies that rest on their laurels get beaten in the marketplace, and that's good for everyone (except, temporarily, employees and shareholders of those companies). It gives the public better products, made more efficiently, and it keeps companies from becoming burdens.

Encouraging competition should be a key goal of government, but in most cases that means staying out of the way. Unfortunately, things don't always work out that way, and the government has often been much more involved than necessary, later causing problems. This is often seen in a rush to send antitrust lawyers after a company for being successful, but not when it's doing any actual harm on the market, or preventing any real competition from happening.

We also see it as a problem in the government's intellectual property policies, which often do little to encourage innovation, and plenty to hinder it by creating defacto monopolies.

If the government should be involved at all, it should be to enable (not create) the infrastructure that's necessary for further innovations. It should be enabling the next generation of entrepreneurs to be creating the next great businesses.

Too Big To Fail

But, rather than doing that, we see the government looking to prop up non-competitive, non-innovative behemoths that are being called "too big to fail." These are companies that, often with the help of government regulations and subsidies, have become so intertwined in the economy, that a failure on their part really would cause significant ripples throughout the rest of the economy. While there are some who suggest they should be allowed to simply fail anyway, the economic risk in doing so is quite large -- in part, as a result of bad gov't policies for many years, abused and exploited by these companies.

Simply giving these companies more money and new regulations isn't going to make a difference. It only puts off the inevitable, and potentially will make things even worse when the problems resurface. The regulations and "oversight" will seem like a good deal at first, but over time the companies will twist the regulations to their advantage. They'll create new and larger loopholes, and the regulations won't do what they're intended to do, but will instead have created massive new problems. It's what almost always happens.

Creative Destruction

So perhaps it's time to go back to Schumpeter, with a big twist. If we grant the premise that some of these companies are too big to fail, and they absolutely need gov't bailouts to make them work, then why not set the terms of the bailout as being that they need to use the money to become small enough to fail? That is, they can get the money, one time only, and then need to look at breaking themselves up into separate pieces (even competitive pieces) that, by themselves, are no longer too big to fail.

The end result is that you aren't left with the same terrible situation, while also creating a new generation of "spinoffs" that can innovate and compete against both older firms in the space, and new upstarts that can more readily enter the market, rather than face a few giants. That way we're enabling more competition and innovation, leading to economic growth, while dismantling the structure of "too big to fail."

It's not quite that simple, of course. But, on the whole, it makes absolutely no sense to be "bailing out" companies that are too big to fail while leaving them as too big to fail. The end result is just going to keep sucking in more bailout money and wasting it, rather than encouraging innovation and competition.

A Cold Douche

This, obviously, is not the "creative destruction" that Schumpeter was talking about at all. In fact, at times he toyed with the idea that companies too big too fail were where the market would eventually end up. But, he also recognized the power of destroying old industries and setting the path for new innovations -- and he knew that the process was often messy, tied to business downturns.

In economist Robert Heilbroner's excellent The Worldly Philosophers, Heilbroner recalls sitting in Schumpeter's class at Harvard during the Great Depression:
When he lectured on the economy at Harvard in the midst of the depression, Joseph Schumpeter would stride into the lecture hall, and divesting himself of his European cloak, announce to the startled class in his Viennese accent, "Chentlemen, you are vorried about the depression. You should not be. For capitalism, a depression is a good cold douche." Having been one of those startled listeners, I can testify that the great majority of us did not know that a douche was a shower, but we did grasp that this was a very strange and certainly un-Keynesian message.
And, indeed, this economic restructuring is a good cold shower (though, some may prefer douche), but we don't get that sort of restructuring when the government is propping up exactly what needs to be restructured.

So, let's repurpose creative destruction with a clear plan: if you accept government bail out money because you're too big to fail, then that money needs to be used to make you small enough to fail.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    Anonymous Coward, Dec 10th, 2008 @ 11:56am

    Great analysis . . .

    I can't help but wonder if you were looking for a way to put the words Cold Douche in a bold headline :o)

    As always, you're writing is well thought out and witty at the same time.

     

    reply to this | link to this | view in thread ]

  2.  
    identicon
    Justin Davey, Dec 10th, 2008 @ 12:14pm

    Splitting up the big dudes...

    Excellent post...but you really ought to do another one outlining how a government could split up a giant public company. How would that work?

     

    reply to this | link to this | view in thread ]

  3.  
    identicon
    Scott, Dec 10th, 2008 @ 12:22pm

    Examples?

    Quote:

    "The regulations and "oversight" will seem like a good deal at first, but over time the companies will twist the regulations to their advantage. They'll create new and larger loopholes, and the regulations won't do what they're intended to do, but will instead have created massive new problems. It's what almost always happens."

    Any examples?

     

    reply to this | link to this | view in thread ]

  4.  
    identicon
    Anonymous Coward, Dec 10th, 2008 @ 12:23pm

    how about a nice cold enema, thats what most of these mega-NGO-corporations need to get them back on track!

     

    reply to this | link to this | view in thread ]

  5.  
    identicon
    Anonymous Coward, Dec 10th, 2008 @ 12:30pm

    Re: Splitting up the big dudes...

    You might like to look up the history of AT&T (MaBell)

    http://en.wikipedia.org/wiki/AT%26T

     

    reply to this | link to this | view in thread ]

  6.  
    identicon
    NullBull, Dec 10th, 2008 @ 12:31pm

    Some dissent

    "The new Keynesians still believe that through government tweaking, we can guide the economy to some sort of 'soft landing.'"

    Let's not pretend Keynesianism is something that it isn't. Keynes called for capital infusions by governments when recessions or depressions caused a constriction of capital flows in the private equity, bond, and other private debt markets. This is not some clarion call for massive structural intervention by government. It is focused specifically on capital supplies, and prefers those capital supplies to come in the form of PAYMENT for actual work done (paying contractors who then pay suppliers, who then pay others, for example) rather than loans and equity purchases. Everyone who thinks the private capital markets are capable of ressurecting our economy in its present condition, please raise your hands. Yeah, that's what I thought.

    "Encouraging competition should be a key goal of government, but in most cases that means staying out of the way."

    Hardly. We "stayed out of the way" in the late 1800s and we got the robber barons. There are any of a number of disastrous policies that wrap themselves in the concept of "getting the government out of the way" that have time and again wrought havoc with our economy, our environment, and our labor markets. Government "staying out of the way" is often more about being pro-BUSINESS rather than pro-COMPETITION. A pro-BUSINESS government inevitably reinforces a status-quo, pushing innovation into irrelevance. Artificially low, government subsidized oil allowed the big 3 to continue to produce terrible, short-sighted products while their international competitors leaped ahead in terms of technology and innovation. And that's just a single example.

    "While there are some who suggest they should be allowed to simply fail anyway, the economic risk in doing so is quite large -- in part, as a result of bad gov't policies for many years, abused and exploited by these companies."

    I'm so sick of this excuse. It's the bad government policies that ALLOWED those banks do shoddy risk assessments of asset classes they were over-selling? If I leave my door unlocked, is it partly my fault that someone decides to enter my house illegally and steal all my stuff? What court of law would throw me in jail for leaving my door unlocked? None. Banks chose to do STUPID, SHORT SIGHTED, WEAKLY VETTED stuff. THEY did that, not government. What's the long term return on shareholder value for those companies that sucked the sub-prime trough dry? I think we've found out in the last year. These banks chose Q3 2005 profit statements over long-term shareholder value. THEY did that, regardless of what regulators said was OK or not OK. Government policies could have prevented it, and I could have prevented my house from being robbed by locking the door, but that doesn't make ME equivalent to the thief in terms of culpability.

    "And, indeed, this economic restructuring is a good cold shower (though, some may prefer douche), but we don't get that sort of restructuring when the government is propping up exactly what needs to be restructured."

    Tell that to the people who died of starvation and disease during the Great Depression because they were broke. Tell that to the people who died of exposure because they didn't have a house, or the people who got black lung in the dustbowl. I love the Schumpeter quote. It's hilariously myopic. "Don't worry about the Great Depression." He was an itelligent man, and rightly influential, but this quote shows that he was also capable of being a clueless, heartless ... douche.

    Look, the free-market economy is ultimately the best option we have because it does the most good for the largest number of people. It provides the most freedom, the best and fairest distribution of resources, and contributes to the most widely spread welfare. People talk about the economy like we need to keep it healthy. We need the economy to keep US healthy. Schumpeter and his compatriots who imagined a Randian meritocratic utopia had some great ideas that are still of great use. Let's not pretend this is a package deal, however. The truth is, somewhere amidst all the economic partisans, there is a good balance. We should strive for that.

     

    reply to this | link to this | view in thread ]

  7.  
    identicon
    Anonymous Coward, Dec 10th, 2008 @ 12:32pm

    Governments get involved to stop monopolies from forming. A coalition of the big three automakers could save them temporarily and all the government would have to do is NOT step in. They would have to shed redundant assets and so on, so the effect on the economy would still be significant, but if the North American ecosystem can't support three separate big automakers and the real competition is coming from overseas, maybe banding together is a valid free market response to the situation. Just a counterpoint to the "small enough to fail" idea.

     

    reply to this | link to this | view in thread ]

  8.  
    identicon
    A Dan, Dec 10th, 2008 @ 12:32pm

    @scott

    One of the most common examples here is the telecommunications companies. They've ended up twisting a bunch of regulations to prevent smaller entrants like town-funded internet, and managed to make things much harder for cable companies to compete with them. See FCC Chairman Kevin Martin, mentioned a few posts ago.

     

    reply to this | link to this | view in thread ]

  9.  
    identicon
    Anonomous Coward, Dec 10th, 2008 @ 12:38pm

    Re: Examples?

    The roman empire
    The US government


    This about this in terms of bearucracy, in fact google it.

    How do you solve problems in a Bearucracy? The typical answer is by making more rules and regulations. Eventually there won't be enough resources to meet all those rules and regulations and the company or government will fail.

    AC

     

    reply to this | link to this | view in thread ]

  10.  
    identicon
    Matt Bennett, Dec 10th, 2008 @ 12:42pm

    While, overall, I would advise against using the word "douche" in any serious treatise, I think this is brilliant. Basically you're talking about avoiding "single points of failure" in the economy.

     

    reply to this | link to this | view in thread ]

  11.  
    identicon
    phil, Dec 10th, 2008 @ 12:46pm

    Tfinal solutions

    Let the big 3 cancel all union contracts, limit benefits and salaries and reduce pension requirements. This would go a long way toward making them competitive again.

    For instance, General Motors UAW retirement plan paid $4.9 billion to 291,000 retirees and surviving spouses in 2006, and these people no longer work for the company, 291,000 retired employees...

     

    reply to this | link to this | view in thread ]

  12.  
    identicon
    Kiba, Dec 10th, 2008 @ 12:59pm

    Re: Some dissent

    Economic failure is a feature of the free market, not a bug. Profit and loss are there for a reason. Mess with it and you prolong economic recovery.

    Government intervention such as printing money, bailing out corporations, and new regulations are setting the stage for the next big recession. That's the reason why keep having these business cycles.

    See the Austrian Business Cycle Theory.

     

    reply to this | link to this | view in thread ]

  13.  
    identicon
    Evil Mike, Dec 10th, 2008 @ 1:00pm

    Re: Some dissent

    Are you like, clueless, or what?

    Every point you chose to "oppose" was then followed by "facts" which support the original statement!

    Fuck! Grow a brain, or better yet--learn to use the one you've (assumedly) been born with.

     

    reply to this | link to this | view in thread ]

  14.  
    identicon
    perilisk, Dec 10th, 2008 @ 1:08pm

    I agree, just for the simple reason that if taxpayers are going to be put on the hook every time a large institution gets mismanaged, but not for smaller institutions, then there is a legitimate public interest in compelling businesses to remain small. Ideally, this could be done in a way that would minimize rent seeking, though the world is clearly far from ideal.

     

    reply to this | link to this | view in thread ]

  15.  
    icon
    Dave (profile), Dec 10th, 2008 @ 1:50pm

    The bigger picture.

    First of all the Government does not have this money. The US has to sell Treasury Bonds to the Federal Reserve. And the Federal Reserve doesn't have this 'money' either so the system will create new money. After this newly created money is spent, expect massive inflation in the money supply - a far greater problem than letting the big three fail because it affects everyone using dollars not just the workers in the big three.

     

    reply to this | link to this | view in thread ]

  16.  
    icon
    TX CHL Instructor (profile), Dec 10th, 2008 @ 2:03pm

    Make the bailout contingent...

    Make any "bridge loans" or other bailout money contingent on every member of the board of directors, and all upper management committing a minimum of 90% of their personal net worth to the common stock of the company.

    Then watch carefully to see which side of the mouth they speak from.
    --
    www.chl-tx.com

     

    reply to this | link to this | view in thread ]

  17.  
    identicon
    Anonymous Coward, Dec 10th, 2008 @ 2:21pm

    Businesses have to be allowed to fail.

    To give money to "Wimpy 3 Auto Makers" and not give any money to Honda, Toyota, etc is not free market economics.

     

    reply to this | link to this | view in thread ]

  18.  
    identicon
    AC, Dec 10th, 2008 @ 2:27pm

    Re: The bigger picture.

    Not to down play your scenario, but let's not just assume that if the Big 3 fail it's only the Big 3 workers that are impacted. Suppliers, Dealerships, restaurants, State governments, etc....all rely on the jobs created and money being spent by the workers of the Big 3.

     

    reply to this | link to this | view in thread ]

  19.  
    identicon
    Cipher-0, Dec 10th, 2008 @ 2:29pm

    Too big to fail...

    ... to means simply, "Too big."

     

    reply to this | link to this | view in thread ]

  20.  
    identicon
    Chuck Norris' Enemy (deceased), Dec 10th, 2008 @ 2:55pm

    Re: Tfinal solutions

    I certainly hope I can put $ to my retirement plan for 25-40 years of service and get less than $17k per year to live on after retiring. /sarcasm

    Just let them live off the gvmt aka your taxes?

     

    reply to this | link to this | view in thread ]

  21.  
    identicon
    Paul Brinker, Dec 10th, 2008 @ 2:58pm

    Just because the big 3 fail...

    DOES NOT = all the dealers etc failing.

    A ford dealer can sign a contract with a new company, the dealership still has land, and cars on the lot, and maintance to do for those cars its sold in the past.

    Parts supplyers still need to make parts for the car repair companys.

    Anyone who could see this coming would be making contracts outside the big 3 as fast as they could. Most likly there doing it now anyway.

    The big 3 failing = people out of jobs at those companys.
    everyone else will take a hit from there contracts failing, live and learn.

     

    reply to this | link to this | view in thread ]

  22.  
    identicon
    Mogilny, Dec 10th, 2008 @ 3:02pm

    How about too big and too incompetant to exist?

    Toyota sells more cars and yet they are fine. Heck, toyota is going to grow even bigger. Size isn't the only problem. Incompetency should factor in.

     

    reply to this | link to this | view in thread ]

  23.  
    icon
    Mike (profile), Dec 10th, 2008 @ 3:18pm

    Re: Great analysis . . .

    I can't help but wonder if you were looking for a way to put the words Cold Douche in a bold headline :o)

    Heh. Guilty as charged. Resisted the temptation of putting it in the headline. ;)

     

    reply to this | link to this | view in thread ]

  24.  
    icon
    Mike (profile), Dec 10th, 2008 @ 3:20pm

    Re: Splitting up the big dudes...

    Excellent post...but you really ought to do another one outlining how a government could split up a giant public company. How would that work?

    It doesn't need to be the gov't managing the break up (though, others have pointed to the AT&T example). It could just be a basic ultimatum: we'll give you your money, but 6 months from now we need to see a plan for how you'll get to a point where you're no longer too big to fail.

     

    reply to this | link to this | view in thread ]

  25.  
    icon
    Mike (profile), Dec 10th, 2008 @ 3:21pm

    Re: Examples?


    Any examples?


    It's hard to think of examples that don't apply. But... for starters: SarbOx. Or some of the regulations that pushed more money into real estate over the past few years.

     

    reply to this | link to this | view in thread ]

  26.  
    identicon
    Ken, Dec 10th, 2008 @ 3:24pm

    Will we need a Car Czar in a decade?

    There's been a good deal of discussion of the need for a "Car Czar". But one question is, will this position still be needed in 6 months? Will it be necessary in a decade?

    I ask this because Government has this propensity to create legislation, taxes, without timely evaluation and re-evaluation of the program. There's also been problems of repealing programs when the purpose has been filled.

    Am I wrong?

     

    reply to this | link to this | view in thread ]

  27.  
    icon
    Mike (profile), Dec 10th, 2008 @ 3:38pm

    Re: Some dissent

    Let's not pretend Keynesianism is something that it isn't. Keynes called for capital infusions by governments when recessions or depressions caused a constriction of capital flows in the private equity, bond, and other private debt markets. This is not some clarion call for massive structural intervention by government.

    Did I say otherwise? Nope. So why suggest I did?

    Hardly. We "stayed out of the way" in the late 1800s and we got the robber barons.

    I said MOST CASES. I thought I was clear. The purpose of gov't is to enable competition. The robber barons did not do that. They abused the market. I have no problem with gov't intervention to get rid of fraud and efforts that block competitive markets from forming. So, your point here is, again, mistargeted, as I did not say what you seem to be claiming I said.

    Government "staying out of the way" is often more about being pro-BUSINESS rather than pro-COMPETITION. A pro-BUSINESS government inevitably reinforces a status-quo, pushing innovation into irrelevance.

    Um. Sure, a corrupt gov't that is pro-LEGACY businesses will do that. What I thought (again) I made clear was that the gov't should be encouraging real competition. The scenario you lay out above is not one where a gov't encourages competition, but the opposite.

    Artificially low, government subsidized oil allowed the big 3 to continue to produce terrible, short-sighted products while their international competitors leaped ahead in terms of technology and innovation. And that's just a single example.

    Um. Doesn't that support my point? That's a case where gov't involvement made the market less competitive. The point, again, is we're usually better off when gov'ts stay out of the way.


    I'm so sick of this excuse. It's the bad government policies that ALLOWED those banks do shoddy risk assessments of asset classes they were over-selling? If I leave my door unlocked, is it partly my fault that someone decides to enter my house illegally and steal all my stuff? What court of law would throw me in jail for leaving my door unlocked? None. Banks chose to do STUPID, SHORT SIGHTED, WEAKLY VETTED stuff. THEY did that, not government.


    Yes, of course, you conveniently ignore the fact that gov't regulations in almost every other investment vehicle is what DROVE so much money into these unregulated investment areas. They were more attractive because the returns were greater due to lower regulations. If the market were truly competitive, the money would have been spread much more widely, and the impact of a failure in one area would be much more contained.

    What's the long term return on shareholder value for those companies that sucked the sub-prime trough dry? I think we've found out in the last year. These banks chose Q3 2005 profit statements over long-term shareholder value. THEY did that, regardless of what regulators said was OK or not OK. Government policies could have prevented it, and I could have prevented my house from being robbed by locking the door, but that doesn't make ME equivalent to the thief in terms of culpability.

    As I was discussing recently, a big part of the quarterly mentality is a RESULT of gov't regulations, that demand quarterly reports. That just makes everyone focus on the quarterly results rather than long term potential. Quarterly reports is an old school notion. What's wrong with real time ongoing reports? Then people can actually focus on long term goals.

    Tell that to the people who died of starvation and disease during the Great Depression because they were broke. Tell that to the people who died of exposure because they didn't have a house, or the people who got black lung in the dustbowl.

    Ah, when you don't have an actual argument, go for an emotional one. Come on. NO ONE denies that economic downturns are very, very hard on people impacted by the changes in the economy. But the answer isn't to pretend that some brilliant gov't officials can fix it. That just makes the next problem even worse.

    Look, the free-market economy is ultimately the best option we have because it does the most good for the largest number of people.

    Did I say anything different?

    It provides the most freedom, the best and fairest distribution of resources, and contributes to the most widely spread welfare

    Again, that was my point. Why do you say this as if I said something different?

    You were the one talking about the importance of gov't intervention on people starving.

    Schumpeter and his compatriots who imagined a Randian meritocratic utopia had some great ideas that are still of great use.

    Again, did you even read what I wrote? I disagree with an awful lot of Schumpeter. I didn't write this in support of Schumpeter.

    And, I don't know what Schumpeter you've read, but I'd hardly consider his writings a "Randian meritocratic utopia." In fact, I'd argue he came to quite a different conclusion.

     

    reply to this | link to this | view in thread ]

  28.  
    identicon
    LBD, Dec 10th, 2008 @ 4:16pm

    Someone mail this to Obama

    Obama needs to see this. Now. Someone who has his address please mail it to him

     

    reply to this | link to this | view in thread ]

  29.  
    identicon
    Anon2, Dec 10th, 2008 @ 7:06pm

    This is a terrific post, though I don't agree with everything you say. But yes, one of the government's purposes is to encourage competition. This is a slight variance from your choice of "enable," but I believe more correct and probably what you meant, since enabling competition could justify more tax incentives and infrastructure spending than I think you would support (I might, but that's for a different debate).

    But I have to ask: why not take the next logical step in your analysis? "Too big to fail" is just another way of saying that a company has too much market share or market power (or both); i.e., it has grown to a point where too large a segment of a particular industry, and thus the economy, than is justified given the history of too many industries. AT&T might be the example that comes to many peoples' minds these days, but it's only the most recent. Think railroads, or banking (no, this is not the first time around the block for us on that, the last time led to the Great Depression), or steel, just to name a prominent few.

    The difference is that in many of those cases, the government was far more proactive than it has been lately, and it used -- in fact wrote -- new laws so it would have the tools to address those problems, the Sherman and Clayton Antitrust acts. The analysis might need some updating to address the fact that our economy has gotten far more complex as we've grown as a nation and society, but the underlying laws are incredibly robust and have already demonstrated an ability to adapt to current circumstances.

    Just to cite one example, ten or fifteen years ago, some creative minds in the legal profession who understood that certain companies that had grown to dominate the pharmaceutical industry were using patent laws in various ways to suppress competition began to work with economists and various scientists with expertise in the area to develop a legal theory to address the problem. The conduct at issue was manifestly anti-competitive, but courts were initially resistant and it took some effort and time to convince the courts that the patent laws and the antitrust laws could and should be able to operate together without one unnecessarily interfering with the purpose and operation of the other. And thus, the abuse of patent theory was born, and is now a relatively well-accepted aspect of both Section 1 and Section 2 Sherman Act analysis.

    So why wait for economic disaster? If a company has grown to be too big to fail, then it was too big to fail long before the economy went into a tailspin. Had it been headed off back then, we wouldn't be faced with the enormity of needing seriously to consider bailing those companies out now in order to save millions from terrible suffering that was not their doing.

    Even tremendously innovative companies almost inevitably grow to such massive proportions that their senior executives begin to try anything they can to protect their market share, as if it were something they were entitled to. And they engage in a variety of anti-competitive activities to do so, from lobbying for tax breaks and other forms of governmental protection, to leveraging pension fund assets to fund acquisitions and mergers that only lead to even greater industry consolidation, to outright flexing their market power to force dealers, customers, pretty much anyone significant they do business with to enter into agreements that close off opportunities for greater competition. Too frequently, even if one company has not yet managed to acquire monopoly power, they'll combine and collude with other dominant companies in that market to secretly apportion customers or geographic regions in a way that is paradigmatically anti-competitive, and some will be brazen enough to outright fix prices, setting ceilings or floors (depending on what place they have in the market chain) that smaller companies simply cannot compete with.

    After nearly two centuries of phenomenal industrial growth and evolution, I think there are more than enough examples to arrive at a pretty basic conclusion: concentration of market share and power in oligopolies, monopolies and monopsonies are pretty much an inevitable result, typically occurring when there is some maturation of a market. At that point, the natural (and well-deserved) growth of those who succeeded the most in a highly competitive and innovative environment is replaced with efforts to constrict and suppress competition by those who now have enough power to do so.

    We're in a terrible position right now, one that could have been avoided in a variety of ways at numerous points along the way. But we really have little choice but to shell out the money, though I think Mike is right that people ought to be thinking about it more rationally and not just dishing out money with a few poorly thought out and economically irrational strings attached. Contrary to what someone said earlier in these comments, there truly are too many business and people who utterly depend on the auto industry to survive. Car dealers do not own the cars on their lots; they pay interest on every car in their inventory, whether to an auto manufacturer's financial arm, or to some other financial institution. If GM goes under, dealers who sell GM cars will be SOL. Parts suppliers will likewise be SOL, except those whose primary business is parts replacement, a different industry sector, and even those likely won't survive, since a parts manufacturer or distributor who supplies replacement parts for GM cars is going to see their market evaporate pretty quickly as GM cars already on the road age and are replaced. Some will be able to retool, but that assumes they can easily access the necessary credit or other capital to finance the process. Not to mention that entire local economies, even entire regions, can be completely dependent on a particular manufacturer, not simply those who work for them.

    I think you are putting a great concept out there, Mike, but I think it's not as forward thinking as I know you usually are.

     

    reply to this | link to this | view in thread ]

  30.  
    identicon
    Twinrova, Dec 11th, 2008 @ 4:35am

    Let them fail. Them them ALL fail.

    That's been my motto since this whole fiasco started. I'm pretty confident now to think it's more than just failure that's needed, but a restructure on the definition of "business".

    Yet, with all these bailouts, the restructure will never happen. Instead, we'll see the same crap happen over and over, and the only thing which will be fixed will be the regulation over the steps which caused the meltdown to prevent it again but leaving open other undiscovered loopholes.

    Since the Big 3 were mentioned, I will need to say these 3 "businesses" should die, go away, and never return. Each deserve it, and it's quite apparent the CEOs have no clue about the very industry they're in.

    I watched the CSPAN airing of the CEOs asking for bailout money. Listening to Alan Mulally made me want to pull him through the television and beat the crap out of him.

    To think this bastard truly believes Fords have the same quality as Honda? Or that the reason they built gas-guzzling SUVs was to fill the market based on what buyers wanted? Where in the hell is the innovation when the business is playing catch up or reverting technology rather than invent it?

    Anyone here who thinks these big 3 should have been bailed out is a complete moron. Ripples? You bet, but weren't you just whining about how much it cost to fill your car recently when gas went to $4/gal on that vehicle getting 16 MPG?

    I was astonished by Mulally's "leadership" to oversee a company that catered to the whims of the general public. If a child requests a loaded gun, do you give it to them? Yet it seems this is all the Big 3 have done was to give people "loaded guns" rather than educate and offer better products.

    I'll probably die before I ever see any of the Big 3 products made in my own damn country have a resale value on par with Honda or Toyota. This should tell everyone there's a problem with the way the big 3 run a "business".

    We live in an economic society which fails many, leaving the few to benefit. When a loaf of bread, the most common staple in the world, exceeds $1, we're in a world of hurt.

    Inflation is caused by "greed", in which the supply can not meet demand, so to justify this, the supplier raises rates simply because it can. If a business can't find the supplies, then it's time to find another option.

    I'm so sick and tired of companies copying each other and calling it innovation. Take the iphone. I'm sure millions love it, and from a product standpoint, it's damn innovative. So why is it every other damn phone maker is trying to build the "iphone" killer?

    Putting a few features on an existing product isn't innovation. It's overshadowing the fact the business got caught with its pants down, and since the "innovator" now has the ability to take away profits, I don't find it coincidence the immitators' phones all look alike and have the same base price.

    Which leads me to where I believe the economy should go: in the toilet so a new one can emerge. Companies shouldn't be allowed to profit excessively. If a product sells, great! But anything over "$X" should be returned to the "public" via education, parks, etc., or better yet, reduce the price of the product given it's making too much money.

    When a company makes too much money, they become very big. When they become very big, they affect the economy. When the economy goes south...

    We have idiotic politicians in office who succumb to fear rather than chance innovation by bailing out every business, which deserve to go under, failing, once again, the many.

    And just to throw out a rub: This is why "freeconomics" won't work, because it models an excessive pricing structure on one good to make up the "cost" of the other.

    I know I'm thinking about a dream economy. But hell, doesn't all innovation start with a dream?

     

    reply to this | link to this | view in thread ]

  31.  
    identicon
    Anon2, Dec 11th, 2008 @ 6:09am

    Antitrust and Bankruptcy

    I'm going to add to my last post, while still largely trying to leverage off and build on Mike's original post, try to add a detail or two, this time, addressing the problem at hand rather than a way to effectuate a new, "small enough to fail" policy.

    First, the underlying assumption that I think Mike agrees with: in order to reduce the size of these behemoths while avoiding the infliction of suffering, misery and potential penury on millions (which would then have even greater ripple effects and both deepen and lengthen this recession), we do need to provide a lot of money to keep that ginormous machine going. But we also need to break it down into smaller, economically functional pieces that can each either succeed or fail without any further anything from gov't and the taxpayers.

    What I would suggest is really just a merging of existing antitrust and bankruptcy concepts. First step is to place the companies under receivership, which ought to be people who understand the auto industry and market, but are also economically and financially savvy, forward-thinking, and capable of building a well-rounded team. In fact, the latter is in my view more important than actual auto industry expertise, because if he has all the other attributes, he (or she) would be quite capable of building a team that has all the necessary areas of expertise, from overall industry and market, down to efficient factory flow and processes, inventory management, distribution lines, etc.

    The receiver(s) would immediately fire all top-level executives, CEO's, COO's, CFO's, etc. and use their judgment for the next level or two down. Boards will have to resign as well, and stockholders will also have to at least take a serious dilution, because the equity will be needed elsewhere and they made bad investments and should not benefit from our largesse.

    As a first substantial task once the housecleaning is done, be given a reasonable but brief period to do a thorough evaluation, and issue a publicly available report which both sets forth the genuine picture thoroughly, and proposes how to break things apart into economically rational constituent, free standing enterprises. I'm not sure about who oversees and approves the report, haven't thought that through (it is morning and I am consuming my caffeinated beverage and getting ready to catch the train to work).

    Once the proposal is approved, and it may well take several rounds to get it as close to right as we mortals are able, comes the bust up. In the process, assets must somehow be set aside, perhaps generated, in order to fully fund the pensions of the vast numbers of people who agreed to devote their working lives to these companies in exchange for not simply paychecks but a secure retirement. That's to me a contract issue, and the all at least from an economic and contractual perspective forewent other opportunities, and other ways to engage in financial planning for retirement, because this was part of the deal. I think fundamental fairness, if nothing else, requires that the deal be kept for them, and pro rata for others who have labored in exchange for future promises. All that can and probably should be changed going forward, but that will be between the now much smaller entities and their workers to decide.

    In any event, there will be assets generated, because the bust-up needs to take the form of fully transparent auctions of the separate legal entities created as a result of this process. Only long-term investors who are prepared to take a full-time, active role in the management and operation of these entities need apply, and there should be claw-back provisions in the sale agreements that punish them if they are simply looking to find some way to make a quick buck. Some of these assets will, simply out of economic necessity, be large scale -- assembly lines for final product have to be pretty massive to be competitive, it's one of the few areas where economies of scale is a legit concept (to a point, anyway). Other entities will be relatively smaller. R&D, design and other functions will have to be thought through as to whether they are broken up and made part of some of these other companies, or if perhaps there is a way to make them stand-alone for-profit enterprises, or if they simply have to be dissolved entirely (which won't have dramatic economic repercussions, as many of those people will find employment in the new companies).

    Meanwhile, the former behemoth's equity is converted into equity in these pieces, on whatever conversion formula is most appropriate, so that as the auctions close and the transactions take place, the new owners are taking full ownership, and the equity in the trust is slowly being replaced with more liquid assets. First in line will be the US Treasury, which funded this whole thing and kept it all alive for what will likely be a couple of years. After that, it is however the receiver does it -- per the comprehensive plan approved and overseen by, well, as I said, that's the part I haven't thought about at all.

    Gotta run, but that's kind of the gist of what I thought of when I woke up this morning and found myself still thinking about Mike's post.

     

    reply to this | link to this | view in thread ]

  32.  
    icon
    Isaac K (profile), Dec 11th, 2008 @ 7:15am

    expanse and expense in markets

    While I would love to read all the expansive comments posted, there is just one thing I would like to point out as an economist -
    In manufacturing markets such as th3e automotive one, the fixed cost of entry into the market is quite substantial. The reason why the relative numbers of competing companies is so low compared to, say, grocery stores (or any chain store for that matter) is because entry into the market is highly restricted and competitive participation in the market requires a serious level of resources.
    Part of the problem is that these companies failed to be competitive in production costs relative to their foreign counterparts. American automobiles have very little market overseas, so their native production is a MUST for them - Toyota, Honda, and the rest are global manufacturers with products in circulation everywhere - they can sustain a smaller presence in America because it is only a cog in the larger machine.

    Breaking up a titan into smaller companies makes sense when there are inefficiencies of scale at work: unfortunately, I'm not sure that there are any efficiencies to be had.
    By breaking up these companies, it may doom them to certain failure when they cannot keep even the barest margins to maintain their factories.
    Let's make this clear- I don't like the bailout - ANY of them - but I'm not sure that breaking up these companies will actually HELP the automotive sector. It may simply concentrate it further and DECREASE competition as the smaller companies fail.

    AT&T as a counterexample is problematic - for one, they were a company that provided data TRANSFER over the medium of phone lines. They weren't manufacturers, they WERE the network. Interoperability was a must.
    How could a Mustang be "interoperable" with a Civic?

    I think the problem is that these companies MUST die, and be replaced bo ones that are internationally competitive. The problem is, they can't manage something like that on American soil, and they will be destroyed financially and politically if they try to shunt themselves into foreign ground. I was actually AT the Senate hearing a week ago when they warned the companies that any attempt at opening a foreign plant now in Mexico would be seen as highly offensive.
    The question becomes one of economics vs. politics/social conscience;
    Do we shut them down - the appropriate economic route - or do we let them slowly die?

     

    reply to this | link to this | view in thread ]

  33.  
    identicon
    dave, Dec 11th, 2008 @ 7:48am

    Re: Re: The bigger picture.

    I understand your concern. Now think of all the people barley getting by as it is - when the inflation starts to become noticeable they are hit with higher food prices etc...

    Plus I think the laid off workers will be able to find new work.

     

    reply to this | link to this | view in thread ]

  34.  
    identicon
    Xiera, Dec 11th, 2008 @ 11:52am

    Free market?

    It's ironic that your argument for getting back to a free market economy involves a non-free market solution.

    What's my point? Simply that the auto industry is the way it is today (big auto conglomerates) because that's the way it has needed to be in order to survive. A bunch of smaller companies, while increasing competition and innovation, would eventually be pressured into selling to larger companies. As an example, if Chevy and GMC were split into their own companies, first of all, GMC would die because it's too specialised, but more importantly, Chevy would become fodder for large non-U.S. auto conglomerates to absorb.

    And...? This wouldn't necessarily be a bad thing except that then we're back to the same ol' non-competitive, non-innovative situation we're in now.

    So what's the answer? Well, let the market do what it's gonna do. People will temporarily lose jobs, but those jobs will be replaced by other auto companies (ie, Honda, Toyota, Ford). Granted, auto workers will have to be willing to accept lower compensation due to a greater supply than demand, but it's better to be making money than not, yes?

    There is one good part that I can see in splitting these conglomerates up -- providing the ability for other companies to salvage the positive aspects while allowing the negatives aspects to fade away.

     

    reply to this | link to this | view in thread ]

  35.  
    identicon
    Xiera, Dec 11th, 2008 @ 12:03pm

    Re: Free market?

    "better to be making money than not, yes?"

    Actually, that may not be the case in the near future...

     

    reply to this | link to this | view in thread ]

  36.  
    icon
    Mike (profile), Dec 11th, 2008 @ 4:00pm

    Re: Free market?

    And...? This wouldn't necessarily be a bad thing except that then we're back to the same ol' non-competitive, non-innovative situation we're in now.

    I don't necessarily believe that's the case. Because this ONLY goes into effect if the company is at risk of failing. If the resulting big conglomerate is at no risk of failure, there's no problem.

     

    reply to this | link to this | view in thread ]

  37.  
    identicon
    Tom, Dec 16th, 2008 @ 12:57pm

    My perspective

    Lots of valid points from many points of view.

    True the Big 3 are having trouble and didn't get competitive in terms of designing smaller more efficient cars. But in reality it is not entirely their fault.

    I mean how can could they ever really compete with Honda, Toyota, or any of the other foreign car manufacturers? The foreign car companies do not have the same union health care, regulatory issues, and labor costs that our domestic producers have. They flooded our markets with products made with cheap labor. And because of our labor laws we can't compete. This happens all the time. We just don't typically hear about all of the American industries that destroyed this way.

    Let me ask you, when will the day come when we as citizens start to promote American growth? When will we stop the evaporation of our economy by no longer letting our hard earned money get transported to other countries?

    The last thing I'm going to put out there is this. Greenpeace is pushing a ban on chlorine in our water, because they think it kills 1,000 people every year (no proof). Their movement has had devastating impacts on the American Chlorine industry. We put chlorine in our water to kill cholera. Cholera is one of the most rapidly fatal illnesses known. It could kill hundreds of thousands in a year if we stopped chlorinating our water. But movements like these shut down our industries and eventually when we realize we need them, we end up building the industries in other countries where no regulations exist. Produce poorer quality products and send the money to foreign entities.

    I only hope that the next "revolution" in America will be the "Information Revolution." With the continued expansion of the internet and exodus of mainstream media, we can utilize all we gained from the Technological Revolution and start using it to spread more truth and be better educated to deal with the issues that effect our country and our lives.

     

    reply to this | link to this | view in thread ]

  38.  
    identicon
    Tim, Dec 17th, 2008 @ 4:34pm

    Bailout

    Don't forget that domestic heavy industry is a strategic asset, and if the United States loses that capacity, we're unlikely to see it return. By comparison, even a huge bank is more replaceable.

     

    reply to this | link to this | view in thread ]

  39.  
    identicon
    Neil Craig, Dec 18th, 2008 @ 2:57am

    If the motor manufacturers were alowed to declare bankruptcy & an administrater put in then that administrater would sertainly seek to seel of the company in bits since that would be the easiest way for anybody to buy over. This also means any bail out doesn't go to shareholders & that the union's agreements can be renegotiated. At that point putting in money to restart a number of small companies makes more sense.

    I also have doubts that if money was given on the promise they would split up that promise would be kept. Mr Krupp was allowed to keep his business in Germany at the end of WW2 but ultimately it proved "impossible" to find buyers. Once they have the money there is no leverage.

     

    reply to this | link to this | view in thread ]

  40.  
    identicon
    CaptainReality, Dec 18th, 2008 @ 4:32pm

    Re: Re: Some dissent

    Go away, Evil Mike. You've added nothing. No-one wants you here. Shoo!

     

    reply to this | link to this | view in thread ]

  41.  
    identicon
    adam hartung, Dec 29th, 2008 @ 10:45am

    Markets are going through major shifts related to advances in digital solutions and global access to low-cost resources. Those companies that will thrive are those that will create new solutions which adjust to these shifted markets. Just because a company survived last year and has a few bucks does not mean it will succeed in 2009 and onward. It requires innovation to deal with these major changes, and only those companies that innovate will create returns allowing them to emerge as strong, viable competitors. Read more at http://www.ThePhoenixPrinciple.com

     

    reply to this | link to this | view in thread ]

  42.  
    identicon
    Stefan Patejak, Dec 31st, 2008 @ 10:46am

    cold douche etc.

    Unfortunately, Schumpeter didn't realize that the end result of this cold douche would be the greatest war in history. People do not like having their lives destroyed, creatively or otherwise, and will lash out against it if they're desperate enough.

    As for breaking up the automobile industry, how would you actually do that? Its history points to the exact opposite tendency. A long, long time ago, the American automobile industry was dominated by giant, Ford, and a lot of small companies. Ford was one of the most innovative companies in history and created the modern automobile industry. Some of the smaller companies banded together to form General Motors and Chrysler. The rest went under. It wasn't because they built bad products or didn't innovate. Studebaker had very innovative cars. However, they didn't enjoy the economies of scale of the big three. This process continues to this day. Small companies like Jaguar, Volvo, and Alfa Romeo are subsidiaries of larger companies. Peugoet and Citroen merged to form a single company. In fact it's now even more difficult for small companied to succeed because the research to develop safer and greener vehicles is very expensive.

     

    reply to this | link to this | view in thread ]


Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here
Get Techdirt’s Daily Email
Save me a cookie
  • Note: A CRLF will be replaced by a break tag (<br>), all other allowable HTML will remain intact
  • Allowed HTML Tags: <b> <i> <a> <em> <br> <strong> <blockquote> <hr> <tt>
Follow Techdirt
A word from our sponsors...
Essential Reading
Techdirt Reading List
Techdirt Insider Chat
A word from our sponsors...
Recent Stories
A word from our sponsors...

Close

Email This