“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
Adam Smith, The Wealth of Nations (1776), Book IV, Chapter II.
http://www.econlib.org/library/Smith/smWN13.html
Step-by-step, one error after another, going where it said it would never go, the Obama Administration continues to traverse the road it paved toward the inevitable nationalization of General Motors and the American automobile industry.
News reports say that the bankruptcy being planned for GM involves a quick sale of the company’s sound assets to some new entity owned by the government and the parking of its questionable assets in bankruptcy protection. Secured lenders would probably be made whole with other claims settled in bankruptcy proceedings. The amount the government will pay for General Motors has not yet been set.
Under the plan, the government will give a majority stake in the new company to the auto unions and a significant share to GM’s bondholders. It will also provide the new entity with a line of credit and forgive much of the $15 billion previously extended to GM as emergency loans. According to the report, GM has until 1 June to restructure its operations and lower its operating costs or the company will follow the Chrysler route to bankruptcy.
However the problems of GM are resolved, it is difficult to see how GM can ever be a viable company if the government insists on involving itself in the entire range of questions related to its organization, operation and product mix. Not only is the Administration restructuring the company along lines that correspond to the interests of its political supporters but it now has proposed fuel mileage and other mandates that correspond to its policy predilections of the moment. Taking the wealth of the stock and bond holders of GM and giving it to political allies of the Administration is of course contrary to the rule of law and a prescription for disaster for the company in its efforts to attract private capital; unions have, after all, little direct interest in the question of efficiency or the demands of marketing to fickle customers and few will invest when the asset they own can be transferred to the government’s political allies in a moment. Imposing draconian mandates on an industry already reeling under the pressures of corporate rigidities and union inflexibility is a formula for further weakening the industry; auto companies have, after all, regularly failed to achieve these standards in the past and regard them as tremendously complicating their ability to compete with foreign auto firms. It is very difficult to see how the American automobile industry can survive when the conditions under which they must operate are even more adverse than they have been in the past.
Adam Smith is right. Governments are not capable of running business firms. If allowed to do so, they will make decisions, as they are now, for the benefit of the special interests that support them and demand the production of products they regard as consistent with their political objectives, not those consistent with the public interest or those desired by consumers. In the end, a company can succeed only if it produces goods and services that its customers are willing to buy, and this must be determined in the competitive marketplace, not by government fiat. More importantly, the entire process of innovation and adaptation to change in a modern economy requires decision making and flexibility that is impossible once political objectives are introduced into what is supposed to be a profit maximizing calculation on the part of the firm. Any other approach to business decision making means bailouts today, bailouts tomorrow, bailouts forever.
A Tdj by Doug Walker, with a “Thank you” to Café Hayek for the reminder of Adam Smith’s advice on government involvement in business decision making.
No comments:
Post a Comment