In 1999, economist Milton Friedman issued a warning to technology executives at a Cato Institute conference: "Is it really in the self-interest of Silicon Valley to set the government on Microsoft? Your industry, the computer industry, moves so much more rapidly than the legal process that by the time this suit is over, who knows what the shape of the industry will be? Never mind the fact that the human energy and the money that will be spent in hiring my fellow economists, as well as in other ways, would be much more productively employed in improving your products. It's a waste!"He predicted: "You will rue the day when you called in the government. From now on, the computer industry, which has been very fortunate in that it has been relatively free of government intrusion, will experience a continuous increase in government regulation. Antitrust very quickly becomes regulation. Here again is a case that seems to me to illustrate the suicide impulse of the business community."
L. Gordon Crovitz, "Silicon Valley's 'Suicide Impulse'," The Wall Street Journal, Monday, January 28, 2013, color added
In the modern context, businessmen may understand that they are serving a mass market of consumers; but they may also think that they are doing a good enough job, thank you, and will resent competition that drives down prices and threatens business as usual. The solution may well be selling a fairy tale to the government and getting protections -- licenses, regulations, tariffs, import quotas, legal cartels, subsidies, price supports, public contracts, mandates, etc. The purpose of such things is to impose greater costs on entry, i.e. on new competitors, or on existing competitors, or to shut out competition altogether. Thus, we have charming institutions like the California dairy cartel, which is able to do what most people probably think is universally illegal, to collude in price fixing on dairy products. Most people may not care if the prices of peanuts, or sugar, or tobacco, or even cheese are driven up by government action, but they may also find it hard to believe that the government cooperates in driving up the price of milk. Somehow, the crusading anti-capitalist press suddenly goes blind when monopolies and price-fixing are sanctioned by the government. At the same time, when something like the price of sugar is driven up, companies resort to substitutes, like corn syrup for sweetening, which drives up the price of corn. With federal mandates for the pointless (but vote winning) use of ethanol in gasoline, also manufactured from corn (which will bag Iowa), the price of corn is driven up even on the international market, resulting in food protests in Mexico City (February 2007) and elsewhere.
Thus we begin to see all the irrationalities of a "planned" economy. But there is method behind the madness. What is irrational to the consumer may make perfect sense to the rent-seeking business (such as rent-seeking ethanol producers like the Archer Daniels Midland Company), pining for the days of chartered monopoly corporations. It is not the sense of a free market. Raised on Cargo Cult economics and anti-Capitalist propaganda, politicians and the public may not even know the difference.
Of course, no sooner than I cite Donald Trump as a businessman who still has some gumption than I find out that he has donated $50,000 to Rahm Emanuel's campaign to be mayor of Chicago. There is almost nothing that Rahm Emanuel believes in that Trump would agree with. I thought that people knew, as Trump certainly should know, that once you pay the Danegeld, you never get rid of the Dane. Apparently in our day, all capital, unless we can count on Rupert Murdoch to bust some more unions, is indeed a coward.
In May 2009, Chrysler Corporation filed for bankruptcy and, in a deal imposed by the federal government, holders of $6.9 billion in Chrysler bonds were coerced into accepting a $2 billion payout. President Obama characterized the bondholders as "a small group of speculators" [The Wall Street Journal, Thursday, May 21, p. A18]. Now we learn that the "speculators" included the Indiana State teachers' and police pension funds, and a State fund that finances roads and bridges, which lost millions of dollars. These institutional investors had paid more for "secured" status, which should have given them priority in the event of a bankruptcy; but this was ignored by the Feds, who gave preferred status to the United Auto Workers (see "Labor Unions are Corporations" below). Thus we see the fruit of the political smear of investors, which rebounds on public employees and public investment, which expected to benefit rather than suffer from political attacks on capitalism. It is perhaps a rude awakening. Rather than boldly defending widows and orphans against the socialists, Republican politicians are, naturally, missing in action.
Soviet Union, and consumers did want bread, one might think that educated American academics would know better by now. But, of course, as brilliant fools, they don't.
Either way, Managers, of course, hate the very possibility of this. One way to fight it is to go to friendly politicians and have them make buyouts more difficult, protecting Management. This can be sold by demonizing the "corporate raiders" who go looking for undervalued companies to buy. If the public thinks that such people are the Goths, and Management consists of innocent, virginal victims, then the fix is in. In the 1980's, Management propaganda was remarkably effective, as even the Press and the Hollywood Left, in their clueless ignorance, fell for the fairy tale. Thus, we have movies like Pretty Woman [1990], where Julia Roberts tells Richard Gere that buying companies, breaking them up, and selling off the constituents is like "selling parts from stolen cars" -- overlooking, apparently, the stipulation that the company, unlike the cars, has been purchased. Buying cars and selling the parts is liable to be a welcome service for the owners of old cars [note]. We got similar follies in Barbarians at the Gate [1993 -- see, I meant it about the Goths], about a non-fictional buyout of RJR Nabisco, and Wall Street [1987], with a memorable Michael Douglas as the "greed is good" corporate raider "Gordon Gecko," who apparently loves to buy companies just to wreck them ("because it is wreckable").
The result of incompetent Executives selling themselves as the slaughtered innocents of Reagan Era Greed can be seen in a more recent movie, DodgeBall, a True Underdog Story [2004], where at the end of the movie good guy Vince Vaughn tells bad guy Ben Stiller that he has bought Stiller's company and is firing him. This cannot now happen. Vaughn would not be allowed to even begin buying stock in Stiller's company, with the intention of a buyout, without warning Management, i.e. Stiller, what he is up to. Otherwise the Securities and Exchange Commission is going to be mad, and Vaughn is liable to end up "perp" marched into a courtroom and smeared in the press as, well, a 21st century Gordan Gecko. Perhaps he and Martha Stewart can room together at Club Fed.
The actual, perhaps incompetent, Executive of RJR Nabisco, F. Ross Johnson, died late in 2016. His obituary in The Wall Street Journal (January 7-8, 2017) says that he was the one, not those who took over his company, whom Time magazine spashed on its 1988 cover with the headline "Game of Greed." He is "mainly remembered for the fleet of corporate jets that ferried him to celebrity golf events and other luxurious perks he awarded himself as chief executive" [p.A5]. He wasn't all bad, and seems to have had some real talent, but:
The magic finally wore off when, disappointed by lagging share price, he tried to take RJR Nabisco private with a leveraged buyout in October 1988. RJR's board, stoked by free plane rides, lucrative fees and consulting contracts, had been very supportive of the CEO. But directors were outraged by reports that Mr. Johnson would reap outsized profits from the deal. They rebelled and accepted a rival $25.07 billion bid from Kohlberg Kravis Roberts & Co., leading to what was then the largest takeover ever.Mr. Johnson resigned. He had the consolation of $53 million in gold parachute payments, but his reputation was shredded.
Academic studies have now determined that hired managment rarely runs a company as well as the original entrepreneurial owners, or those close to them and steeped in their ethos. This is not in the least surprising, and it reminds us how vicious is the principle of "too big to fail" -- companies both too big and failing need to fail to clear the decks. Otherwise we get a swamp of corruption and incompetence entangled with politics and influence.
The effect of this is actually positive, as long as capital is free enough to start new enterprises and absorb the excess labor elsewhere. If this is so, then we could even say that the monopolistic practices of labor unions can increase wealth and do not result in diseconomies. However, the action of the unions may have other effects. Union "work rules," which are notorious for their irrationality (e.g. one union changes the light bulb in one place while another union has the job of changing the light bulb in another place -- and no other worker can change either bulb), may prevent increases in productivity. The affected business must then try and pass along the cost to its customers. This can result in a secular increase in consumer prices in products that previously had seen progressive decreases in prices. The auto industry is a good example. Henry Ford's $300 Model T of 1920 would, with inflation, go for not much more than $3000 in recent prices. Since moderately priced new cars now go for even ten times this amount, something peculiar has happened -- what in the Eighties was called "sticker shock." Part of the increased price has come from government mandated safety equipment and other add-ons. But the largest part of the price of anything is still labor, and the United Auto Workers union has done its job of making Detroit automobiles some multiples more expensive than they need be -- the consumer is paying monopoly rents to the union.
The credit collapse of 2008, which was in the housing market, then pushed all the Big Three Detroit auto makers to the edge of bankruptcy, with Chrysler into it and General Motors bailed out at the cost of ceding a large part of the ownership of the company to...the United Auto Workers. Companies have sometimes been bought and owned by their own workers, including, not long ago, United Airlines. Unfortunately, as with United, such a provision does not resolve the economic problems of the companies, or ensure that they will be managed more wisely. Quite the contrary. In this case, little wisdom can be expected, especially when the UAW hasn't even bought its share -- it was handed ownership in a political deal. This is a formula for folly on a large scale. Historically, the best example of unions destroying productivity and locking an industry into stasis were the British unions of newspaper workers. They absolutely prevented upgrading to modern technology like electronic type setting, because, after all, that would cost jobs. This sort of thing came to be called the "British Disease." Finally, the unions were simply broken by Rupert Murdock (who bought the newspapers) and Margaret Thatcher -- the jobs were lost but, since Thatcher freed up the economy, British unemployment remained lower than in Euro-Socialist France or Germany. The United States, with the Democrats triumphant in 2008 (and making it increasingly plain that they simply don't believe in capital), may be in for a long bout of the British Disease and a strong push into Euro-Socialism.
rights. Brainless politicians, as on the Los Angeles and the New York city councils, have signed on to this idea. It would be an anarchist's dream, of course, if governments, as corporate persons, were stripped of all their rights, which would leave them without power, without property, and without things like "sovereign immunity." A lot of this would be good. But since the Left tends to love government in inverse proportion to the degree that they hate private corporations, they clearly are not thinking that governments will be stripped of their rights. Even self-professed "anarchists" like Noam Chomsky are perfectly happy to promote the powers of government to use against private corporations. No, private corporations alone are the target, as we would expect. The chaos that would result from stripping corporations of their rights is hard to imagine. Actually, the chaos is easy to imagine, except in the impoverished mind of the leftist. It is the degree of chaos that is hard to imagine. The Nature Conservancy, which goes around buying up property in order to save it from development and preserve its natural state, could no longer own property. It is only persons, with rights, who own property (until the Left abolishes property -- except for governments, of course). No company of any kind could possess assets, file lawsuits or legal papers, or survive beyond the lifetime of its actual individual owners. I suspect that, since governments will be immune from this "is not a person" business, its advocates would prefer that the property of something like the Nature Conservancy would be passed on to the government. And since political and ecological activist organizations often derive some or much of their funding from government anyway (illegitimately, given their political purposes), it is natural enough, in the mind of the leftist, that they should survive the disestablishment of corporations by simply becoming part of government. So the whole business is really just the same statists continuing to promote their totalitarian agenda. It is unlikely that they will get very far with it; but to the extent that it sounds like a good idea to the clueless, it creates an atmosphere in which other parts of the leftist agenda can be successfully promoted.
Several of these principles have been enunciated by the great economist Walter Williams (1936-2020). Also, I believe that corporate profits going to "widows and orphans" is a recollection of Ben Stein about one of his economics professors.
I cannot say that giving credit to Williams and Stein for these ideas constitutes agreement with all they say. Walter has an embarrassing habit of defending the Confederacy, while Ben has lately jumped on the anti-Darwinian bandwagon that has become popular with a good many foolish conservatives. Ben also promotes high taxes and disparages "supply siders," which means that while, as he says he "loved" Richard Nixon, he must not feel nearly so warm about Ronald Reagan. That is an odd position for a conservative put himself in, compounding his anti-Darwinian folly. All this simply goes to show that generally sensible people can have blind spots, or be confused in certain areas -- like Arnold Schwarzenegger becoming a Global Warming enthusiast, which helped (among many other things) ruin the value of his tenure as Governor of California (which calls into question whether he was in fact a "generally sensible" person).
As it happens, the statement that corporate profits go to "widows and orphans" apparently goes back to the 1879 Congressional testimony of the President of Western Union, who said this of his own shareholders.
The Practical Rules of Bureaucracy
When the Clinton Administration was promoting an increase in the minimum wage, and Hillary Clinton met with a group of small business owners, one of them, who owned a pizza restaurant, complained that the increased cost might put him out of business. Clinton responded that the Administration "can't be held responsible for every undercapitalized business." It would be an interesting study in what politicians know of economics to figure out what she meant by this.
"Undercapitalized" simply means that not enough money has been invested in a business to get it up and keep it going through the period before it can turn a profit. In those terms, Clinton's answer was beside the point. With increased costs, greater capitalization would simply delay the time when the business could turn a profit, perhaps permanently, while a business already profiting at the margin could be pushed into the red and possible bankruptcy. So the problem of the business there is not undercapitalizing, it is costs imposed by government mandate.
Another way to look at this, however, is if greater capitalization increases productivity, which means that equal or greater production can be effected even with fewer workers (the dynamic that makes Say's Law possible). The "undercapitalized" business thus would be one that cannot reduce its workforce and make the productivity of the workers match the increase in wages. This interpretation of Clinton's statement would thus translate it into, "You need to invest more in your business so that you can fire people and reduce your workforce." It is unlikely to a certainty, however, that Clinton would make such a blunt statement in public. The headlines at the New York Times would scream, "Clinton Tells Business to Cut Jobs!" This is not a policy that any Administration would want to be seen promoting.
It is thus hard to say if Clinton actually understood the meaning of her own answer.
Essential Truths of Corporate Business, Note 1