The Daily Switch

Posts Tagged ‘GM’

Creative Destruction & Failure

Posted by Ender on April 18, 2009

Schumpeter

Schumpeter

The term Creative Destruction was coined by Joseph Schumpeter in 1942. Creative destruction is the process where old established companies or technologies are destroyed by new or more efficient ones. Schumpeter argued that creative destruction “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in…” (Schumpeter) What he means is that creative destruction drives capitalism, which makes sense. Capitalism is the only economic theory that encourages innovation and efficiency. With innovation comes the necessity of ridding yourself of the old. Out with the old in with new, if you will. Seems right, why would we want to keep the horse and buggy industry alive when we have cars, right?  With industries constantly evolving and improving lagging companies and technologies will be left behind.

History is rife with examples of creative destruction. Even the youngest of our readers are witnessing creative destruction as we speak. The music industry is a perfect example we have gone from records to 8 tracks to cassettes to CDs to MP3s. This is creative destruction at its finest replacing costly, low quality, inefficient products with cheap, high quality, efficient products. Other examples include iron to steel, Polaroid to digital camera, warehouse sized computers to the iPhone. One generally can’t complain about these advances.

In my opinion there is another branch of creative destruction that is usually poorly received. This type of creative destruction is the failure of businesses. The media, politicians and consumers in general decry the failure of business. But to be good citizens we must reject this urge and ask “why do businesses fail?”

At the most basic level businesses fail because a.) they are not satisfying the consumer and/or b.) they are using resources ineffectively. We should view this failure as a triumph of the free market because a.) who wants to keep a company around that is making warehouse sized computers these days? And b.) inefficient companies failing frees up valuable resources for efficient companies. Both good things.

Walmart is a good example of this second type. Walmart discovered a way to use its resources more efficiently thus lowering the cost of its products for the consumer, which in turn drove inefficient companies like KMart or various mom and pops out of business. The failure of these other businesses benefited the consumer. Unfortunately, failure of business is fought to the inevitable death (of the business) by politicians looking for votes. All this fight does is waste the taxpayers money and delay the inevitable.

Watch this video for a debate on GM going bankrupt.

In the video Gillespie tells us why we need to let GM fail. They are not too big to fail. He really summed it up perfectly in the opening minute when he says [to paraphrase] “that GM and Toyota sold about the same amount of cars worldwide, GM lost $38B and Toyota made $19B.” Clearly, there is something fundamentally and systemically wrong with the way GM runs its business. It just cannot compete in today’s economy. We need to let creative destruction or failure take place to free up resources for the better companies. Gillespie brings up several other good points about GM and bailouts in general. He also has to defend a cheap pot shot from his counterpart when he says something to the effect that the free market only works on paper.

Let these companies fall into bankruptcy, restructure their business and come back with the ability to compete.  Don’t spend taxpayer money on corporate welfare.  Don’t throw good money after what is clearly bad.  Don’t follow the politicians and drones in the media down the path of state run economies and massive systemic failure.  Rejoice that the free market separates the wheat from the chaff.  Appreciate creative destruction.

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Posted in Capitalism, Economics, Socialism | Tagged: , , , , , , , , , , , | 3 Comments »

The Great Overreach

Posted by Ender on April 4, 2009

The problem with the Liberal philosophy is that it has an unquenchable thirst for power. When was the last time you heard a Modern Liberal, not to be confused with a Classical Liberal, call for a decrease in Government? I guess I should clarify, when have they asked for a decrease in Government outside of Law Enforcement and the Military? This should not be a surprise even to Liberals because the idea that the Government can solve any problem is at the core of their belief system. “Failure is not the product of his beliefs but merely want of power and resources.” (Levin) A belief system with this at its heart will invariably lead to severe overreaches when they are in power. In only about two short months we have seen several examples of overreach.

Salaries

Barney Frank

Barney Frank

On March 22nd, I wrote a piece about how the administration was seeking to control executive pay. I asked “How long until it’s not just executives anymore?” Well, unfortunately, it appears the answer was 2 days. On May 24th, the House Financial Services Committee Chairman Barney Frank passed the Pay For Performance Act of 2009. The act “is not limited just to those firms that received the largest sums of money, or just to the top 25 or 50 executives of those companies. It applies to all employees of all companies involved, for as long as the government is invested. And it would not only apply going forward, but also retroactively to existing contracts and pay arrangements of institutions that have already received funds.” It would give power to the Treasury department to determine if salaries are unreasonable.

Initially, this would be justified by only applying to companies that took bailout money. The problem I see is the problem of the slippery slope. Just look at where it has taken us so far, from just executives to all employees of bailout companies to…..what? I am reminded of Wickard v. Filburn, a case tried before the Supreme Court. In the 1940s (through today) the Federal Government has the ability to regulate interstate trade. In the Wickard ruling, the Supreme Court decided that it could regulate whether a private citizen could grow crops on his own land to use for his own consumption. How could the Court do this, you ask? Well, the Court said that by not participating in interstate trade the farmer affected interstate trade, thus opening him up to regulation. With rulings like this it doesn’t take much to imagine a situation where the Government declares it can control all salaries.

Running a Business

Giethner and Bernanke

Giethner and Bernanke

Treasury Secretary Geithner and Federal Reserve Chairman Bernanke argued for the ability to “regulate and even take over financial goliaths whose collapse could imperil the entire economy.” Shockingly, Obama agreed. This is such a large overreach/power grab that I am surprised they had the audacity to ask for it. The Government has no right to take over companies like this. The only thing Geithner and Bernanke disagreed on was which of them should have the power. In another post I wrote I talked about how Obama and his team decided that they knew more about the auto industry than the board of GM. The Government cannot run a car company, a bank, a financial institution, a hospital (see Walter Reed) or a post office. A commenter asked what Wagoner (former CEO of GM) knew about running a car company. I ask what does the Government know about running an economy, specifically Geithner. You can learn all about how Geithner devastated the Indonesian Economy in the 90s. In a post on what caused the Tech Boom I briefly mentioned part of its cause was due to the Asian crisis. Guess who was behind it? “[B]y frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.” Three cheers for Geithner!

Free Speech

Supreme Court

Supreme Court

There have been many attacks on Free Speech in the last few years. Most of them are under the guise of fairness. McCain-Feingold was a blatant attack on free political speech. “Just last week, the Obama administration argued before the Supreme Court that it has no principled constitutional problem with banning books.” (Goldberg) The Supreme Court is hearing a case about a documentary called Hillary: The Movie. “Several justices asked the deputy solicitor general, Malcolm Stewart, if there would be any constitutional reason why the ban on documentaries and ads couldn’t be extended to books carrying similar messages. Stewart, speaking for a president who once taught constitutional law, said Congress can ban books “if the book contained the functional equivalent of express advocacy” for a candidate and was supported, even slightly, with corporate money. Such advocacy, Stewart conceded, could amount to negatively mentioning a politician just once in a 500-page book put out by a mainstream publisher.” I guess these words just aren’t clear enough “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.” (Before people start commenting on McCain being on the Right, give me a break. He has more in common with the Left than the Right, which is why he lost the election.)

These are just a few examples of the overreaches we have seen lately. Let’s hope the American people remember Liberty and wake up soon.

Posted in Capitalism, Conservatism, Culture, Economics, Liberalism, Liberty, Obama, Politics, Socialism, War on Business | Tagged: , , , , , , , , , , , , , , , , | Leave a Comment »

Here We Go Again

Posted by Ender on March 30, 2009

What exactly does Obama know about running a car company? As far as I can tell he has never worked in the industry. And what about Geithner? Does he know anything about running a car company? I’m pretty sure he has never worked in the industry either. So, why am I supposed to believe that these two guys know the first thing about getting the car industry back on track?

Obama’s latest battle in the War on Business is over who can run General Motors. “The Obama administration used the threat of withholding more bailout money to force out General Motors Corp. Chief Executive Rick Wagoner.” (Wall Street Journal) Obama and his team have decided that Wagoner (former CEO of GM) is no longer fit to run the company. Which brings me back to my initial question: What exactly does Obama know about running a car company? Why is it not arrogant and ignorant of Obama to presume that he knows more than the board who hired and has the power to fire Wagoner?

I can already hear the chorus of complaints: (when reading, please muster a nasally, whiney voice) “If GM is taking our money then we should have say in who runs it”, “they couldn’t get it right, let’s give Obama a chance”, blah blah blah.

The auto industry with Obama at the wheel?

The auto industry with Obama at the wheel?

Bailouts do not give the government the right to micromanage the day to day operations of the business that receive the bailout. We don’t need or want Obama to make the hiring decisions for these companies. He knows absolutely nothing about the auto industry. He knows absolutely nothing about running a business. Geithner knows absolutely nothing about the auto industry. I think Geithner has had real jobs in his past so I’m not going to say he knows nothing about running a business, yet.

This is why controlled economies do not work, ever. You have uniformed people making decisions on behalf of other people and businesses. Please President Obama, no matter what you have heard and what the media have told you, you are not omniscient. Just leave business to people who have actually worked in the industry before, thanks.

Mickey Kaus asks the following pertinent questions “won’t Obama now “own” the GM problem? If the company shuts down in the near future, costing tens of thousands of blue collar jobs, it will be under executives implicitly or explicitly chosen by Obama. It will be Obama’s failure, not simply GM’s failure, no?”

I have posed several questions in this post. Just to make sure everyone is on the same page with the answers…Obama and team know nothing about the auto industry and should not be taking a role in running it. Obama and team will be responsible for its inevitable failure.

Posted in Capitalism, Conservatism, Economics, Obama, Politics, War on Business | Tagged: , , , , , , , , | 4 Comments »