(p. A13) Imagine if in the middle of the computer transformation the Reagan administration worried about the upheaval and tried to rescue this vital industry by making huge investments in leading mainframe companies. The purpose of such investments would have been to protect the viability of these companies. The effect, however, would have been to put the brakes on transformation and all but ensure that the U.S. would lose its leadership role.
The government’s investment in General Motors might be directly helpful if the auto industry only had the recession to contend with. But that is not the case. The industry faces the confluence of a world-wide recession, rising fuel prices, environmental demands, globalization of manufacturing, and, most importantly, technological change involving the very nature of the automobile.
Uncreative destruction. “Jose Luis Garcia pours sodium silicate into a junkyard car engine to render it inoperable at a lot in Sun Valley, Calif., on Tuesday. The process destroys the car’s engine in a matter of minutes.” Source of photo and part of caption: online version of the WSJ article quoted and cited below.
(p. A4) WASHINGTON — Who doesn’t like the government’s “cash for clunkers” program? Your mechanic, for one.
Owners of automotive repair shops say the program to help invigorate sales of new cars is succeeding at their expense.
Bill Wiygul, whose family owns four repair shops in Virginia, said he has already had five or six customers decide against repairs. A man who sits on the board of Mr. Wiygul’s bank traded in his car rather than repair it. “He’d been a customer at our Reston store since it opened,” Mr. Wiygul said.
The clunkers program, formally known as the Car Allowance Rebate System, offers subsidies of as much as $4,500 to consumers who trade in older vehicles and buy new, more fuel-efficient models. The program was initially given $1 billion. That money was spent in one week.
The Senate reached a deal to extend the clunkers program Wednesday night, agreeing to vote on a measure Thursday that would add $2 billion to the program, the Associated Press reported.
The House approve a $2 billion extension last week.
For Mr. Wiygul and other mechanics, until now the recession has brought them more customers as people fixed cars rather than go into debt for new ones. He has hired five people and is expanding one of the shops.
Auto dealers who offer the rebates on new cars in exchange for clunkers must agree to “kill” the old models by disabling the engines and shipping the dead vehicle to a junkyard.
The loss of such potential work — as many as 250,000 vehicles will be destroyed in the program’s first round — prompted Mr. Wiygul to question the federal program’s focus on dealers and big business at the expense of the little guy.
“How do we get on the special interests, special treatment bandwagon? How much is it going to cost me and to whom shall I send the check?” he said. “Who picks the winners in this game ’cause obviously the game is fixed.”
Source of graph: online version of the WSJ article quoted and cited below.
(p. A15) . . . , starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base — which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash — by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!
. . .
With an increased trust in the overall banking system, the panic demand for money has begun to and should continue to recede. The dramatic drop in output and employment in the U.S. economy will also reduce the demand for money. Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It’s a catch-22.
It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.
(p. 67) Through all the centuries of man, there has recurred this same morbid misunderstanding of the nature of wealth and the wealth of nations. Always wealth is seen as something solid and calculable: to be seized and held, clutched and hoarded, measured and inventoried, amassed and monopolized. In the age of imperialism, it was imagined to consist in land and the armies that could acquire it; in the mercantilist era, it was recognized as bullion, gained through a favorable balance of trade; in every period, men have fawned over gems and glitter; in the modern age, fossil fuels and strategic minerals have seemed to be the open sesame, but seekers of wealth still fumble for gold and baubles, and real estate as well.
All bespeak the materialistic fallacy, a fixation of leftists, but a shibboleth also for much of the intelligentsia of capitalism: the idea that wealth is material and collectible, finite and definable, subject to measurement and inventory, to entropy and exhaustion. The way to get rich is to find some precious substance and (p. 68) hold It. Its price will inevitably rise in time as its quantity declines with use. This is the fantasy through which Pierre Trudeau was bankrupting Canada in the early 1980s and the Arab leaders were impoverishing the world and destroying their own future.
Wealth consists not chiefly in things but in thought: in the ideas and applications that confer value to what seems useless to the uninformed. The Arab leaders should learn that they can best enhance the value of oil–and the wealth of oil-producing nations–by lowering its price and enlarging its uses. This is the central rule of riches, understood by every major titan of wealth, from John D. Rockefeller and Henry Ford to the entrepreneurs of modern computers and the industrialists of contemporary Japan. Each gained his fortune not by increasing the price of his product but by drastically dropping it, bringing it within the reach of the creative uses and ideas of millions, and thus vastly enlarging its total value and market.
Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.
(p. 96) While science and enterprise open vast new panoramas of opportunity, our established experts flee in horror to all available caves and cages, like so many primitives, terrified by freedom and change.
Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.
The clip is the famous corporate graveyard scene from Ben Wattenberg’s 1977 “In Search of the Real America: A Challenge to the Chorus of Failure and Guilt.” The scene appears in the first of 13 episodes, the episode called “There’s No Business Like Big Business” which received the Tuck Award for the Advancement of Economic Understanding. The episode was produced and written by Austin Hoyt.
The corporate graveyard scene illustrates that under entrepreneurial capitalism, companies prosper that innovate in better serving the consumer.
Wattenberg discussed the “In Search of the Real America” program, and the graveyard scene, in his recent book Fighting Words:
(p. 307) The central point of the program was that if big American corporations didn’t compete effectively, they suffer, and many would go out of business.
The producers had the wonderful idea of a visual of a graveyard on a foggy night, with headstones made from papier-mâché and a smoke machine providing the fog. I walked through the mock cemetery in a raincoat and read off the names of corporate tombstones, which included Central Leather (the seventeenth largest company in 1917), International Mercantile Marine (the eleventh largest in 1917), as well as failures like Baldwin Locomotive Works, American Woolen, Packard Motor Car, International Match, Pierce Petroleum, Curtiss-Wright, United Verde Mining, and Consolidation Coal.2 When we showed the Central Leather tombstone, a sound effect mooed; behind International Mercantile Marine’s, a steamship horn bellowed (I love shtick).
. . .
2 The program was based on an article by James Michaels, editor of Forbes. For many years, people would come up to me in airports, recalling that one scene and complementing me on the program.
Source:
Wattenberg, Ben J. Fighting Words: A Tale of How Liberals Created Neo-Conservatism. New York: Thomas Dunne Books, 2008.
(Note: ellipsis added.)
(Note: I have corrected a few obvious errors involving the omission and placement of commas in the list of companies in the text of Wattenberg’s Fighting book.)
. . . , Mr. Michaels graduated from Harvard in 1943 with a bachelor’s degree in economics.
(p. C14) KUALA LUMPUR, Malaysia — European consumer groups and nongovernmental organizations have said they want environmentally friendly palm oil. Malaysian producers of palm oil that have made the switch are discovering that it is still a hard sell.
The price premium for palm oil certified as produced through sustainable plantation practices has been shrinking since the first eco-friendly palm oil was shipped to European markets last November, and producers say it may need to disappear if they are to regain business in the key European Union market.
Producers say the difficulty in selling higher-priced sustainable palm oils highlights the double standards of those who criticize the industry but buy the cheaper, uncertified oil that they say is harming the environment.
Source of book image: http://www.amazon.com/Dynamics-Industrial-Cpitalism-Schumpeter-Lectures/dp/0415771676/ref=sr_11_1?ie=UTF8&qid=1204828232&sr=11-1
Schumpeter is sometimes viewed as having predicted the obsolescence of the entrepreneur, although Langlois documents that Schumpeter was always of two minds on this issue.
Langlois discusses Schumpeter’s ambivalence and the broader issue of the roles of the entrepreneur and the corporation in his erudite and useful book on The Dynamics of Industrial Capitalism. He concludes that changing economic conditions will always require new industrial structures, and the entrepreneur will always be needed to get these new structures built.
(I have written a brief positive review of the book that has recently appeared online.)
Reference to Langlois’ book:
Langlois, Richard N. The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy. London: Routledge, 2006.
Reference to my review of Langlois’ book:
Diamond, Arthur M., Jr. “Review of Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.” EH.Net Economic History Services, Aug 6 2009. URL: http://eh.net/bookreviews/library/1442
In the passage below, Gilder was writing of the 1970s, 1980s and 1990s. But sadly, iatrogenic illness is of more than mere historical interest.
(p. 49) In recent decades, the U.S. economy has suffered from a combination of hypochondria and iatrogenic illness. The hypochondria stems from spurious statistics and deceptive anecdotes and erroneous theories of American decline. It results in a period of fear and anxiety, propagated by the media, measured in public opinion polls, and enhanced by alarmist demagoguery. Iatrogenic illnesses are diseases caused by the doctor–in this instance by hundreds of economic Ph.D.s, government planners, and politicians who have responded to the pangs of hypochondria by inflicting thousands of real cuts on the entrepreneurs who make (p. 50) the economy go, as if, like the physicians of the Middle Ages, the experts believe in bleeding the patient as a way of restoring him to productive health.
Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.
After Amazon’s rebellion, summarized in the quote below, the Governor of Hawaii vetoed the tax, and Amazon has now invited its former affiliates to rejoin the program.
Lesson: sometimes entrepreneurial enterprise can fight the government, and win.
(p. B7) Amazon.com Inc. has informed its marketing affiliates in Hawaii that it is ending its business with them to avoid collecting sales tax in the state.
Lawmakers in Hawaii, following in the footsteps of North Carolina and Rhode Island, have passed legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites.
(p. 49) As entrepreneurs accelerate the processes of creative destruction that impel all economic advance, the economists measure the destruction, but not the creativity. They see the sinking value of existing capital but neglect the new ideas, hopes, enthusiasms, and plans of entrepreneurs.
Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.
