What they tell you At the heart of the capitalist system is the corporate sector. This is where things are produced, jobs created and new technologies invented. Without a vibrant corporate sector, there is no economic dynamism. What is good for business, therefore, is good for the national economy. Especially given the increasing international competition in a globalizing world, countries that make opening and running businesses difficult or make firms do unwanted things will lose investment and jobs, eventually falling behind. Government needs to give the maximum degree of freedom to business.
What they don’t tell you Despite the importance of the corporate sector, allowing firms the maximum degree of freedom may not even be good for the firms themselves, let alone the national economy. In fact, not all regulations are bad for business. Sometimes, it is in the long-run interest of the business sector to restrict the freedom of individual firms so that they do not destroy the common pool of resources that all of them need, such as natural resources or the labour force.
Regulations can also help businesses by making them do things that may be costly to them individually in the short run but raise their collective productivity in the long run – such as the provision of worker training. In the end, what matters is not the quantity but the quality of business regulation.
How Detroit won the war They say that Detroit won the Second World War. Yes, the Soviet Union sacrificed the most people – the estimated death toll in the Great Patriotic War (as it is known in Russia) was upward of 25 million, nearly half of all deaths worldwide. But it – and, of course, the UK – would not have survived the Nazi offensive without the arms sent over from what Franklin Roosevelt called ‘the arsenal of democracy’, that is, the United States. And most of those arms were made in the converted factories of the Detroit car-makers – General Motors (GM), Ford and Chrysler. So, without the industrial might of the US, represented by Detroit, the Nazis would have taken over Europe and at least the western part of the Soviet Union.
Of course, history is never straightforward. What made the early success of Nazi Germany in the war possible was the ability of its army to move quickly – its famous Blitzkrieg, or Lightning War. And what made that high mobility of the German army possible was its high degree of motorization, many technologies for which were supplied by none other than GM (through its Opel subsidiary, acquired in 1929). Moreover, evidence is emerging that, in defiance of the law, throughout the war GM secretly maintained its link with Opel, which built not only military cars but aircraft, landmines and torpedoes.
So it seems that GM was arming both sides and profiting from it.
Even among the Detroit car-makers – collectively known as the Big Three – GM by then stood pre-eminent. Under the leadership of Alfred Sloan Jr, who ran it for thirty-five years (1923–58), GM had overtaken Ford as the largest US car-maker by the late 1920s and gone on to become the all-American automobile company, producing, in Sloan’s words, ‘a car for every purse and purpose’, arranged along a ‘ladder of success’, starting with Chevrolet, moving up through Pontiac, Oldsmobile, Buick and finally culminating in Cadillac.
By the end of the Second World War, GM was not just the biggest car-maker in the US, it had become the biggest company in the country (in terms of revenue). It was so important that, when asked in the Congressional hearing for his appointment as US Defense Secretary in 1953 whether he saw any potential conflict between his corporate background and his public duties, Mr Charlie Wilson, who used to be the CEO of General Motors, famously replied that what is good for the United States is good for General Motors and vice versa.
The logic behind this argument seems difficult to dispute. In a capitalist economy, private sector companies play the central role in creating wealth, jobs and tax revenue. If they do well, the whole economy does well by extension. Especially when the enterprise in question is one of the largest and technologically most dynamic enterprises, like GM in the 1950s, its success or otherwise has significant effects on the rest of the economy – the supplier firms, the employees of those firms, the producers of goods that the giant firm’s employees, who can number in the hundreds of thousands, may buy, and so on. Therefore, how these giant firms do is particularly important for the prosperity of the national economy.
Unfortunately, proponents of this logic say, this obvious argument was not widely accepted during much of the twentieth century. One can understand why communist regimes were against the private sector – after all, they believed that private property was the source of all the evils of capitalism.
However, between the Great Depression and the 1970s, private business was viewed with suspicion even in most capitalist economies.
Businesses were, so the story goes, seen as anti-social agents whose profit-seeking needed to be restrained for other, supposedly loftier, goals, such as justice, social harmony, protection of the weak and even national glory. As a result, complicated and cumbersome systems of licensing were introduced in the belief that governments need to regulate which firms do what in the interest of wider society. In some countries, governments even pushed firms into unwanted businesses in the name of national development (see Things 7 and 12). Large firms were banned from entering those segments of the market populated by small farms, factories and retail shops, in order to preserve the traditional way of life and protect ‘small men’ against big business. Onerous labour regulations were introduced in the name of protecting worker rights. In many countries, consumer rights were extended to such a degree that it hurt business.
These regulations, pro-business commentators argue, not only harmed the large firms but made everyone else worse off by reducing the overall size of the pie to be shared out. By limiting the ability of firms to experiment with new ways of doing business and enter new areas, these regulations slowed down the growth of overall productivity. In the end, however, the folly of this anti-business logic became too obvious, the argument goes. As a result, since the 1970s, countries from all around the world have come to accept that what is good for business is good for the national economy and have adopted a pro-business policy stance. Even communist countries have given up their attempts to stifle the private sector since the 1990s. Need we ponder upon this issue any more? How the mighty has fallen Five decades after Mr Wilson’s remark, in the summer of 2009, GM went bankrupt. Notwithstanding its well-known aversion to state ownership, the US government took over the company and, after an extensive restructuring, launched it as a new entity. In the process, it spent a staggering $57.6 billion of taxpayers’ money.
It may be argued that the rescue was in the American national interest. Letting a company of GM’s size and inter-linkages collapse suddenly would have had huge negative ripple effects on jobs and demand (e.g., fall in consumer demand from unemployed GM workers, evaporation of GM’s demand for products from its supplier firms), aggravating the financial crisis that was unfolding in the country at the time. The US government chose the lesser of the two evils, on behalf of the taxpayers. What was good for GM was still good for the United States, it may be argued, even though it was not a very good thing in absolute terms.
However, that does not mean that we should not question how GM got into that situation in the first place. When faced with stiff competition from imports from Germany, Japan and then Korea from the 1960s, GM did not respond in the most natural, if difficult, way it should have – producing better cars than those of its competitors. Instead, it tried to take the easy way out.
First, it blamed ‘dumping’ and other unfair trade practices by its competitors and got the US government to impose import quotas on foreign, especially Japanese, cars and force open competitors’ home markets. In the 1990s, when these measures proved insufficient to halt its decline, it had tried to make up for its failings in car-making by developing its financial arm, GMAC (General Motors Acceptance Corporation). GMAC moved beyond its traditional function of financing car purchases and started conducting financial transactions for their own sake. GMAC itself proved quite successful – in 2004, for example, 80 per cent of GM’s profit came from GMAC (see Thing 22).1 But that could not really hide the fundamental problem – that the company could not make good cars at competitive prices. Around the same time, the company tried to shortcut the need for investing in the development of better technologies by buying up smaller foreign competitors (such as Saab of Sweden and Daewoo of Korea), but these were nowhere near enough to revive the company’s former technological superiority. In other words, in the last four decades, GM has tried everything to halt its decline except making better cars because trying to make better cars itself was, well, too much trouble.
Obviously, all these decisions may have been best from GM’s point of view at the time when they were made – after all, they allowed the company to survive for a few more decades with the least effort – but they have not been good for the rest of the United States. The huge bill that American taxpayers have been landed with through the rescue package is the ultimate proof of that, but along the way, the rest of the US could have done better, had GM been forced to invest in the technologies and machines needed to build better cars, instead of lobbying for protection, buying up smaller competitors and turning itself into a financial company.
More importantly, all those actions that have enabled GM to get out of difficulties with the least effort have ultimately not been good even for GM itself – unless you equate GM with its managers and a constantly changing group of shareholders. These managers drew absurdly high salaries by delivering higher profits by not investing for productivity growth while squeezing other weaker ‘stakeholders’ – their workers, supplier firms and the employees of those firms. They bought the acquiescence of shareholders by offering them dividends and share buybacks to such an extent that the company’s future was jeopardized. The shareholders did not mind, and indeed many of them encouraged such practices, because most of them were floating shareholders who were not really concerned with the long-term future of the company because they could leave at a moment’s notice (see Thing 2).
The story of GM teaches us some salutary lessons about the potential conflicts between corporate and national interests – what is good for a company, however important it may be, may not be good for the country. Moreover, it highlights the conflicts between different stakeholders that make up the firm – what is good for some stakeholders of a company, such as managers and short-term shareholders, may not be good for others, such as workers and suppliers. Ultimately, it also tells us that what is good for a company in the short run may not even be good for it in the long run – what is good for GM today may not be good for GM tomorrow.
Now, some readers, even ones who were already persuaded by this argument, may still wonder whether the US is just an exception that proves the rule. Under-regulation may be a problem for the US, but in most other countries, isn’t the problem over-regulation? 299 permits In the early 1990s, the Hong Kong-based English-language business magazine, Far Eastern Economic Review, ran a special issue on South Korea.
In one article the magazine expressed puzzlement at the fact that, even though it needed up to 299 permits from up to 199 agencies to open a factory in the country, South Korea had grown at over 6 per cent in per capita terms for the previous three decades. How was this possible? How can a country with such an oppressive regulatory regime grow so fast? Before trying to make sense of this puzzle, I must point out that it was not just Korea before the 1990s in which seemingly onerous regulations coexisted with a vibrant economy. The situation was similar in Japan and Taiwan throughout their ‘miracle’ years between the 1950s and the 1980s. The Chinese economy has been heavily regulated in a similar manner during the last three decades of rapid growth. In contrast, over the last three decades, many developing countries in Latin America and Sub-Saharan Africa have de-regulated their economies in the hope that it would stimulate business activities and accelerate their growth. However, puzzlingly, since the 1980s, they have grown far more slowly than in the 1960s and 70s, when they were supposedly held back by excessive regulations (see Things 7 and 11).
The first explanation for the puzzle is that, strange as it may seem to most people without business experience, businesspeople will get 299 permits (with some circumvented along the way with bribes, if they can get away with it), if there is enough money to be made at the end of the process. So, in a country that is growing fast and where good business opportunities are cropping up all the time, even the hassle of acquiring 299 permits would not deter business people from opening a new line of business. In contrast, if there is little money to be made at the end of the process, even twenty-nine permits may look too onerous.
More importantly, the reason why some countries that have heavily regulated business have done economically well is that many regulations are actually good for business.
Sometimes regulations help business by limiting the ability of firms to engage in activities that bring them greater profits in the short run but ultimately destroy the common resource that all business firms need. For example, regulating the intensity of fish farming may reduce the profits of individual fish farms but help the fish-farming industry as a whole by preserving the quality of water that all the fish farms have to use. For another example, it may be in the interest of individual firms to employ children and lower their wage bills. However, a widespread use of child labour will lower the quality of the labour force in the longer run by stunting the physical and mental development of children. In such a case, child labour regulation can actually benefit the entire business sector in the long run. For yet another example, individual banks may benefit from lending more aggressively. But when all of them do the same, they may all suffer in the end, as such lending behaviours may increase the chance of systemic collapse, as we have seen in the 2008 global financial crisis. Restricting what banks can do, then, may actually help them in the long run, even if it does not immediately benefit them (see Thing 22).
It is not just that regulation can help firms by preventing them from undermining the basis of their long-term sustainability. Sometimes, regulations can help businesses by forcing firms to do things that may not be in their individual interests but raise their collective productivity in the long run. For example, firms often do not invest enough in training their workers. This is because they are worried about their workers being poached by other firms ‘free-riding’ on their training efforts. In such a situation, the government imposing a requirement for worker training on all firms could actually raise the quality of the labour force, thereby ultimately benefiting all firms. For another example, in a developing country that needs to import technologies from abroad, the government can help business achieve higher productivity in the long run by banning the importation of overly obsolete foreign technologies that may enable their importers to undermine competitors in the short run but will lock them into dead-end technologies.
Karl Marx described the government restriction of business freedom for the sake of the collective interest of the capitalist class as it acting as ‘the executive committee of the bourgeoisie’. But you don’t need to be a Marxist to see that regulations restricting freedom for individual firms may promote the collective interest of the entire business sector, not to speak of the nation as a whole. In other words, there are many regulations that are pro- rather than anti-business. Many regulations help preserve the common-pool resources that all firms share, while others help business by making firms do things that raise their collective productivity in the long run. Only when we recognize this will we be able to see that what matters is not the absolute amount of regulation, but the aims and contents of those regulations.
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