Avoidance Of Failure
One of the tenets of Socialist Economics is that there ought to be an avoidance of bankruptcy. I’ve posted references to back that claim in the past so I’m not going to bother repeating them here. It is a well accepted cornerstone of Socialism. You can see ample evidence of it (“existence proofs”) all over the world. From nationalizations to ‘bailouts’, it’s the same story. It’s too big to fail and would damage the General Social Good, so must be taken over by The State or bailed out by The State (with a load of strings and controls attached, be they in the guise of Commissar or Regulations). The Central Authority knows what to do better than the bankruptcy courts and The Central Authority can avoid all the collateral impacts of a bankruptcy (layoffs, loss of pensions, loss of customer interests – but, curiously, not worrying at all about ‘loss of bond holder rights’ or ‘loss of stock holder wealth’… It’s OK to screw the “rich” who own stocks and bonds; even if a lot of them are middle class folks with a retirement fund.)
So look around the world and count up the times that the various governments have done nationalizations, takeovers, and bail-outs. All with the goal of “avoidance of bankruptcy”. If bankruptcy is so bad, why not get rid of it for the ‘little guy’ too? Why is it good for the local grocer or car dealer, but bad for GM?
IMHO, mostly because GM has a politically well connected union. Unions being another cornerstone of the Socialist Agenda. No, I have nothing against unions in general; they provide an important ‘countervailing power’ to monopsonist and oligopsonist industries where only one or a few folks are purchasers, so can set the price. But there is a very long history of Socialism exploiting the unions for political purposes. Fascist comes from the Italian word for “bundle” that was used in Italy to refer to unions where a bundle of sticks is stronger than any one stick alone. The notion of becoming a ‘bundle’ and having unions or The State control the means of production is central to all Socialisms.
So if it is so good to avoid failure, where’s the “Free Money” window for all the Little People? Where is MY “Free Money”? Or am I just too little to politically matter? So think again about who has been nationalized or bailed out in the last 50 years around the globe.
Pretty long list. Many of them now long gone. Yes, you can find a few ‘success stories’, but even then you must take them with a ton of salt as the alternative, what was NOT done, is unavailable for comparison.
Yet we’ve got a different set of existence proofs too. Look at capitalist economies and you see failure. Massive and repeated failure. Just like in the natural world where most species that have ever existed are EXTINCT. (Somewhere in the 90% range). That does not mean that capitalism and biology are failures. It means that the Ability To Fail is paramount to natural selection and creation of the fittest.
Capitalism simply can not function properly without the Ability To Fail. Like all those Fancy Breed Dogs, where they are just full of things from hip dysplasia in many breeds, to bulldogs where they must give birth by Cesarian Section as they have been bred for hips too narrow and shoulders too wide for survival without medical intervention. Human management of animal breeds gives fancy breeds that are not very fit. Some breeds have even been recommended for extinction as their accumulated health issues are so bad. Compare the wild fox, coyote, or wolf. Not very many of them with hip dysplasia, difficult births, the need for constant grooming, or dependency on The Master for food.
Can we make a similar A/B comparison with companies? Is there a ‘wild west’ of companies still in existence?
IMHO, yes. I’ve spent most of my career in Silicon Valley. Most of the companies I’ve ever worked for have gone out of existence. From simple bankruptcies to being consumed by stronger rivals. Amdahl. National Semiconductor. Innovacom. Freegate. And a few others. Major players who dominated their industry regularly fall by the wayside. Remember DEC Digital Equipment Company and the VAX computers? How about Tandem Computer that dominated financial computing for a while? Commodore?
So how do you measure ‘success’ in an industry so full of turmoil? By the survivors. So we can take an index that includes the survivors, but lets the losers leave. The NASDAQ 100 has the largest 100 tech stocks in it. By definition it lets the losers leave gracefully as they shrink from Alpha Dog to the back of the pack and it keeps in the biggest, baddest, and most fit. Who that is will constantly change. Right now, the biggest Alpha Dog is Apple Computer. (At one point, prior to a recent re-balance of the QQQQ it was 20% of the index, it had grown so much.) I was at Apple when it was having ‘hard times’ and was suggested as a takeover candidate for larger players, like DEC. Folks got motivated, brought Jobs back, and decided to change the world again.
The result is pretty clear. We DID change the world. The stock holders and company and employees played “die or double”, like all natural life, and the result was things that no Central Plan would ever have created. From Pixar to iPhones and iPads, they just would not be on the political radar. Herr Commissar would have preserved DEC and the VAX and we’d all have desk sized vaxes costing $10,000 each. (The “VAX on a chip” was a product at one point…) As much as I loved my VAXen and liked Ultrix, the iBook just blows it away.
(An amusing link in itself as it has an HP logo on it, but is a ‘compaq’ URL, as HP ate Compaq some years back, who had eaten DEC …)
The MicroVAX chip was Digital’s first 32-bit microprocessor and the first manufactured with internally developed semiconductor technology. The revolutionary “VAX-on-a-chip” had the highest level of functionality of any 32-bit processor in the industry. With the MicroVAX chip, Digital became the first company to register a new semiconductor chip under the Semiconductor Protection Act of 1984.
Gee. “Highest level of functionality” from an industry leader and even given government protection by law. Great story. Surely a Government Agent would keep them from failure… But Intel ‘ate their lunch’ in the chip market.
And the iPhone and iPod? Well, ask Motorola and the music industry about ‘disruptive technology’. The Central Authority would have preserved the Record Industry and all those jobs. “Failure” of such a large industry would be a Very Bad Thing! Think of all the record stores that would be at risk if music were sold over the internet! (And note that Tower Records is no more…) So which is better? Music on an iPod for 99 cents a song from apple, mixed as you like it? Or vinyl records at $20 each with a ‘must take all songs’ method and you have to play them on a record player (no digital copy allowed)? Just look at all that failure and ‘job loss’ caused by the iPod.
Does this show in stock charts?
Well, yes and no. You can plot the rocket ride of AAPL, but vs. what? DEC? It’s gone. Mergered into HPQ HP some time ago. How about Sun? Oh, wait, they were absorbed by ORCL Oracle.
The comparison that I think is more useful is the current crop of “too big to fail’ companies. Banks and GM that got “bailouts” (in exchange for being in Herr Commissars noose) vs that unstable wild west Tech Sector QQQQ index. The “survival of the fittest” world where losers get eaten and flushed. Just which of those two paradigms has worked best in the recent market crash, recession, and semi-recovery? Surely the safety and security of The Government Regulatory Blanket will have given those protected industries a much easier path to success:
This is a live chart, so will change over time. I may add a static version in a few days for historical reference. It is also a very big chart, so click on it for a very large view.
Notice that GM, the green line, only comes into existence again toward the right hand side. It has shed all it’s old stock holders. It has shed it’s bond holders (who were cleaned out against all legal rights they held by Government fiat). It has shed a great deal of debt. You would think all that would make for great competitive advantage. Unfortunately, it didn’t shed the things that matter the most. There was NOT a wholesale reworking of management (as happens in a takeover or bankruptcy – as the bond holders become the new stock holders and ‘clean house’) and it could not shed it’s old labor contracts and all the dead weight that comes with them. That was the GOAL of the Government Takeover, so no surprise.
Notice that since the stock as ‘come public’ again, it’s just gone down.
Sure, there may be some chance for an eventual recovery, but that will be despite the intervention, not because of it. A GM that had gone through bankruptcy would still exist. It just would have better labor rates, fewer and more efficient factories, and better fresher management. THAT stock would be rising faster (or would not have been brought public yet).
Notice C Citibank and BAC Bank of America. Two of the biggest banks. Just tanked. Laying there on the bottom. Just above them: MS Morgan Stanley and the XLF financial sector fund are just about tied on each side of the 70% loss line. Even the “good banks” of GS Goldman Sachs, JPM J.P. Morgan, and WFC Wells Fargo are at 30-40% loss and headed down as the present trend.
Golly, that Central Authority doesn’t seem so good at picking winners and losers nor very good at assuring success.
What about that gold line on the top? The one with a 30-40% gain? Oh, that’s the QQQQ Nasdaq “Wild West” where failure is allowed to run free and nobody is “too big to fail”…
And how’s that whole “regulated industries” thing working out? Looks like the unregulated “wild west” is healthier.
And that, in a nutshell, is why I’m not so fond of “Regulation” and any other Government intervention; and especially un-fond of it in the extreme case of Socialism (in any of it’s guises). Not from any emotional baggage, nor from any preference for one ‘story’ over the other. Certainly not from a love of capitalism and competition (as it is very hard work and uncomfortable to be a successful competitive capitalist – I know, I’ve done it). No, I love the Siren Song of Socialism as much as the next rube. I just recognize that it leads to bad results. Consistently and repeatedly. No matter how diluted and no matter how good the story; “this time is different” never is.
IMHO, this comparison is a reasonable view of just why Central Planning fails. Call it Socialism, or call it “Government Bailout”, or call it “Too Big To Fail”. It all comes down to government picking winners and losers. Governments pick show dogs. Things that look good and with a great story, but sickly inside. Even when they think they are picking a good fighter, it turns into a Bulldog that is dependent on them forever or it will die. Markets pick a mix of wolves, coyotes, foxes, rabbits, beetles (lots of beetles ;-), worms, doves, hawks, fishes, hummingbirds and even the completely unexpected new species that evolves…
There is simply no way for Herr Commissar, or the President, to ever do that. Politics and limited horizons assure it. See Solyndra as an example of government pissing away 1/2 $BILLION on a failed attempt to play Venture Capitalist. Driven by a political motive, it was forced to back the wrong horse (instead of the pack of Chinese Wolves who are eating up the solar panel production market with lower cost of production products…)
The solution is also evidenced in Solyndra. The eventually DID go into bankruptcy. It was politically untenable to keep tossing even more Government Money into that black hole.
So what about the ‘too big to fail’ companies?
My solution would be simple. Make them small enough that they CAN fail. Break them up. You get a government hand-out / bail out as the consequences of a normal bankruptcy would be too disruptive? Fine. But you also get a contract that says you will break up and spin out at least 10 parts, no one of which is larger than 20% of the whole. Just like the AT&T break-up of years past. Break it up and let the parts fight it out in a competitive market. If one of those parts is deemed ‘too big to fail’, repeat. If you need to repeat it a third time, the largest part will be no larger than 1/5 x 1/5 x 1/5 or 1/125 of the original. I can’t think of any industry where that would be ‘too big to fail’…
I suppose you could make it 5 parts and 40%, but then you have 2/5 ^3 or 8/125 as the ‘tell me three times’ end point. I suppose 6% is small enough… but wonder if a first cut to 40% would really be sufficient. At any rate, such a detail could be worked out over time, if needed.
So, for my money, if someone says it’s ‘too big to fail’, then we simply need to make it smaller and turn it loose to compete in the woods… Wolves and all…