It’s the Economy Stupid! The Five Myths of Capitalism – Part 2 of 5

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In my last blog, I asserted that unless we change our attitudes and policies regarding Corporate Capitalism, it will destroy our country, our way of life, our freedoms, and our environment.  Furthermore, we will undoubtedly take some of the rest of the world along with us.  This is a serious accusation and one I do not take lightly.  I have been a business educator in higher education and a management consultant to some of the top corporations in the world.  My opinion is not based on theory or just observations.  It is based on the in-depth work I did with over 32 companies during the time I was actively consulting.  There are many good people working in corporate America but as Dr. Deming once said “You put a good person in a bad system and the system will win every time.  Myth #2 is:

  1. Corporations are self-regulating entities for the common good

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Let me explain what I mean by this.  There is a doctrine or concept in economics called “laissez faire.”  Laissez faire is a belief that business and the marketplace works best without the interference of any government agencies.  It implies that there is an invisible hand which controls the dynamics of markets.  This invisible hand ensures that markets reach some kind of an equilibrium.   One example of this is the “law of supply and demand.”  When demand is high, prices will be high, and supplies will be low.  Not everyone who wants the product will be able to find them or afford them.  Producers will then create more of the product to meet demand.  As product quantity rises, prices fall until an equilibrium price is reached that allows everyone who wants the product to purchase the product at a price that is fair to them and allows the manufacturers to make a profit.  Governments can intervene (as they have done) by price controls or subsidies.  Such efforts by the government are generally felt to destroy the inherent equilibrium of the market.

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government-warning-poster-mock1_1024x1024People who believe in the idea of “laissez faire” want us to think that corporations can regulate themselves and do a better job of it then when government interferes with rules, policies, laws and regulations.  Business leaders do their best to hype this belief and to create the idea that government run organizations are always less efficient than those run by private entities. Conservatives and Republicans subscribe to this belief and spend a great deal of time and effort trying to thwart those who disagree.

The conservative mantra is that “no government is good government.”  In the past forty or so years, there has been a concerted effort by conservative politicians to eliminate government regulations and to allow private for-profit business to take over such services as public education, wastewater treatment plants, social security, Medicare, and prisons.  The argument is always the same “private business can do it more cost effectively than government.”

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Here is the catch or hypocrisy in the above argument.  It is only heard when businesses can easily make a profit.  When there is an easy market with lots of potential and lots of potential customers, business leaders want the government to stay out of the way.  However, when things turn sour and profits turn to losses or when the loss potential is high, business then want the government to step in.   The mantra that “No government is good government” soon turns to “We need help, or we will have to declare bankruptcy.”  Suddenly, the government that has been spurned and criticized for being too intrusive and for screwing up the equilibrium of the market is now called upon to help save private companies.  Here are some recent headlines that highlight this hypocrisy:

  • Airlines will receive billions of dollars in grants and loans to pay flight attendants, pilots, and other employees
  • Boeing still expects to get some help from the federal government
  • Trump administration eyes paying oil companies to keep crude in the ground
  • Coronavirus Stimulus Shows Big Government is Back
  • Washington is gripped in a bailout frenzy. Nearly every industry is sending its lobbyists to ask Congress for handouts
  • The coal industry wants permission to stop making payments to miners with black lung disease.
  • The hotel industry alone has requested a $150 billion bailout

For a complete list of companies or industries that have received government bailouts going back a number of years see ProPublica Bailout Tracker.  There are almost a thousand major corporations on this list.

During the recession of 2007 and 2008 government bailouts in the form of loans and outright grants were given to a wide range of American companies.  Many times the argument was heard that “They are too big to fail.”  Some Conservatives actually opposed these bailouts and some Democrats were in favor of them.

Now understand this please.  I am not necessarily in favor of letting all businesses fail.  The Austrian school of Economics would argue in favor of letting them fail.  They call this  “Creative Destruction.”

“According to Schumpeter (A leader in the school of Austrian Economics), the “gale of creative destruction” describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”.  — Wikipedia

“Creative destruction is a process through which something new brings about the demise of whatever existed before it.  Old industries and firms, which are no longer profitable, close down enabling the resources (capital and labour) to move into more productive processes.” — Economics Help

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In other words, if Boeing and United Air and General Motors and all the other companies that want a bailout can’t hack it, them let them fail.  Let them declare bankruptcy and get out of the way so new more productive and more efficient firms can enter the marketplace.  This is a little like the Theory of Evolution in which the weaker species die out and the stronger species survive.   Thus, company bankruptcies and jobs lost will in the long run result in a more efficient industry.

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I am not against bailing some companies out.  The one thing I have learned in my years on this earth is that there are always exceptions to every rule.  There may be times when we should let businesses fail and there may be times to help them survive a rough patch.  I have no problems with the foregoing thoughts.  What I do have a problem with is the laissez faire argument that ends with “Leave us alone when we are making heaps of money but help us out when things turn bad.”  This is a deceitful and duplicitous argument which has led to an extreme gullibility on the part of many Americans.  Too many Americans now believe that “Government is the Problem” to quote Ronald Reagan.

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Here is a short list of how private business benefits from Government:

  • Copyright protection
  • Trademark protection
  • Patent Rights
  • Tax breaks for siting a new business
  • Police protection
  • Fire protection
  • Military protection for overseas business
  • Research and development studies
  • Mineral rights
  • Right of ways
  • Land ownership at sometimes exceptionally low prices
  • Tax concessions, such as exemptions, credits, or deferrals
  • Assumption of risk, such as loan guarantees.
  • Government procurement policies that pay more than the free-market price
  • Stock purchases that keep a company’s stock price higher than market levels
  • Subsidies for externalities that could not be recovered at competitive costs
  • Tariff protections
  • Subsidies for farmers, oil companies and many others
  • Job training programs for workers
  • Education programs for workers 

https___blogs-images.forbes.com_adamandrzejewski_files_2018_08_Forbes_USFarmRecipients-2Corporations are liars.  They say they want to live in a laissez faire environment.  They say they want fewer government regulations.  They say the government only interferes and adds no value to their products.  They say they don’t want the government telling them what to do.  The lie is that they do want Government involvement.  They want the government to bail them out of a situation when they will suffer losses or see lower profit margins.  They want the government to give them preferred bankruptcy conditions.  They want the government to side with them in labor-management disputes.  They want the government to help them out with all of the items on my list above.  Do some research.  Find out how many companies and industries get government handouts.  Check out Government Subsidies.

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Thus, the myth that organizations are self-regulating is the myth of the impossible.  You might as well believe in a perpetual motion machine.  It does not exist because it is impossible.  The Second Law of Thermodynamics states: “That there is a natural tendency of any isolated system to degenerate into a more disordered state.”  Thus any entity or organism or system needs energy from outside in order to maintain a state of equilibrium.  If the energy is less than needed, the entity will eventually degrade into a state of maximum entropy or disorder.”  For instance, when we die, we will degrade into dust.  If you do not periodically clean and organize your home, it will degrade into a garbage bin.  You cannot expect any system to maintain a steady state without input from outside.

The bottom line is that no corporation including illegal ones like drug cartels and the mafia can exist without independent inputs from outside their system.  Corporations are dependent on governments for their very survival.  Anyone who thinks that Corporate Capitalism could survive (much less thrive) without the input of Government is either stupid, naïve, or trying to sell you the Brooklyn Bridge.  It is about time for politicians and Americans to realize that business needs government and government needs business.

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Enough with these moronic arguments made by right wing protestors to do away with government.  A capitalistic economy without a government to monitor its excesses and to protect it from the vagaries of the marketplace would soon evolve into a system of chaos, lawlessness and monopolies that would be totally dysfunctional and destructive. The present emphasis on deregulation, privatization and less government has been taken too far and with too little appreciation of the need for government balance and oversight.  If we continue down this road, we will destroy our country and any vestige of the ideals of a free marketplace.  There is no such thing as free.  A free market requires policies, regulations, and rules.  There is no such thing as an economic system without some form of government to oversee, watch out for and protect its lawful interests.  Even illegal systems court the interests of governments albeit with bribes and threats rather than lobbyists and special interest groups.

Some of you might find the following article interesting.  It was published several years ago in the Harvard Business Review.

Does Privatization Serve the Public Interest? by John B. Goodman and Gary W. Loveman from the November-December 1991 Issue of Harvard Business Review.

 

 

 

 

 

8 Comments (+add yours?)

  1. Vic Nurcombe
    Apr 25, 2020 @ 16:26:56

    Wow, very good, some new angles made me think. “Socialism for the rich, capitalism for the poor” is the Aussie Left’s way encapsulating it. I’m in general a post-Keynesian, and am always bemused just how quickly business, “free enterprise” business, comes stampeding to Government.

    Reply

    • Dr. John Persico Jr.
      Apr 26, 2020 @ 07:16:30

      Hi Vic, thanks for leaving a comment. I was curious what your “new angles” were? I think we are on the same thought line with capitalism. So many examples of what we are saying happening with this virus now. Corporations coming out to get as much as they can and to screw as many employees as they can. At least some are. I could make a blog of the egregious economic activities going on in the USA.

      Reply

  2. Jane Fritz
    Apr 25, 2020 @ 17:43:08

    Big business has been brilliant at having their cake and eating it, too. There was a reason why unions came in in the first place, and now we’ve come full circle. This is true everywhere but especially in the US and UK. Particularly with the astounding amount of time and money spent on elections in the US, big business and their lobbyists rule the roost. Scary. Great article, John.

    Reply

    • Dr. John Persico Jr.
      Apr 26, 2020 @ 06:51:51

      I wish more people in this country realized the duplicity of these large corporations. Interesting how politics in the US and UK seem to mirror each other. I often wonder why? Do you have any theories Jane? Thanks for the comments.

      Reply

      • Jane Turnbull
        May 01, 2020 @ 18:28:50

        The missing link from the Harvard BR “Accountability and consonance with the public’s interests should be the guiding lights. They will be found where competition and organizational mechanisms ensure that managers do what we, the owners, want them to do.”

        Reply

        • Dr. John Persico Jr.
          May 02, 2020 @ 08:55:06

          Organizations are starting to talk about the need to balance Stakeholder interests rather than just stock holder interests. But I remain skeptical until laws governing corporations undergo major change. Thanks for your comments Jane.

          Reply

  3. Jane Turnbull
    May 01, 2020 @ 18:24:13

    Exactly the same conditions apply in Australia. Democracy is rapidly dying and we are all becoming plutocracies or oligarchies.In America’s case, it appears Trump would like both to apply.
    If the capitalist system is decaying, as it must as privatisation reaches its unsustainable depths of disfunction, I wonder what will come next? Reform or revolution? The older I get the more depressed I get about this unholy mess.

    Reply

    • Dr. John Persico Jr.
      May 02, 2020 @ 08:59:14

      I think you described it very accurately Jane. Have you ever read any of Morris Berman’s books? He saw this coming many years ago and lett the USA for Mexico. I think if I were younger, I would be moving to Ireland or someplace else just to get away from the dysfunction. Perhaps, we are witnessing the “Rise and Fall of Democracy” in our lifetimes. I don’t think you have to be a pessimist to see this. It is depressing. John

      Reply

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