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The old industrial state
October 17, 2005 | 1:20 PM ET
I've written here before about GM's problems, and Thomas Bray notes that it's a case of the bankruptcy of the industrial welfare state. He's right, and the problem isn't limited to GM. Enterprises based on similar models -- bloated pension costs, lots of perks for managers, little concern with competition or delivering value to the alleged customer -- are failing all over. In fact, the serious structural problems facing the Western European nations, as their huge pension and healthcare liabilities, and their political inability to do much about those, sap budgets and lead to crushing levels of taxation, are just another example of the same problem, as are the problems of the other two Big Three automakers.
Writing on this, Michael Barone observes:
In his book, The New Industrial State, economist John Kenneth Galbraith argued that companies like the Big Three could stimulate, through advertising, as much demand for their products as they wanted and that high capital costs protected them against competition. That was arguably true in 1967, when Galbraith's book was published. It ceased to be true, at least for the Big Three, shortly afterward.
...
Most of the leaders of the UAW and the Big Three companies who negotiated these generous contracts were very smart men, and they thought that the costs could be passed along to consumers. For the two decades immediately after World War II, they were, because the Big Three auto companies had no effective competition. Then sales of imported cars started rising. The Big Three executives can be criticized for not responding to this challenge. They, like the UAW, sought to wall themselves off from competition by getting the government to limit imports or to require certain percentages of "domestic content" in autos sold in the United States.
That didn't work. Barone's conclusion: "In a dynamic economy, it's a bad idea for individuals to depend entirely on one large corporation. Large corporations can get smaller."
That's certainly true. Fortunately -- as I note in my forthcoming book, An Army of Davids : How Markets and Technology Empower Ordinary People to Beat Big Media, Big Government, and Other Goliaths, right about the time that Galbraith was delivering his pronouncements, Gordon Moore was propounding what later came to be known as Moore's Law, regarding the exponential increase of computing power over time. While Galbraith's pronouncement quickly failed of its promise, Moore's Law has remained true to this date. And that has produced dramatic economic changes and opportunities, such as eBay's threatening to overtake WalMart as America's biggest employer (and offering health insurance to boot!). Making a living from eBay has its drawbacks, but you can't be laid off. And, unlike the Big Three, eBay's market is expanding.
Which suggests that we should be modeling our policies around dynamic approaches rather than trying to save Old Economy behemoths that were never very good at competing. (Indeed, the notion that we could help the "working man" at GM do well by making sure that other workers paid too much for inadequate cars was always a bit iffy, wasn't it? That's not expanding the pie, just taking a bigger share for some at the expense of others.)
I certainly don't mean to suggest that there's no role for government -- things like more health-insurance portability, for example, would go a long way toward facilitating the growth of small businesses -- but I do think that we should be looking at things differently. In a dynamic economy, we should probably be trying to embrace dynamism, rather than -- as the UAW and auto executives did with notable lack of success -- trying to stop change.
