Tuesday, July 19, 2011

On the Failure of Capitalism

The free market economy worked reasonably well in a 20th century world composed of multiple, competing nations and corporations.  The 21st century represents an entirely new challenge.  The unprecedented globalization and multinational aspect of every facet of the economy has led to a complete lack of competition in every important aspect of society.  This lack of competition removes the key protective feedback required to make capitalism a functional economic concept.

Caveat Emptor

All of the platitudes that our parents and grandparents tried to instill in us as guidelines for dealing with the world are rendered fallacious in light of insufficient knowledge.  All modern advertising and promotion actively prevents the customer from knowing what he is buying.  This allows the seller to redefine the transaction at his own discretion.  The customer is unable to compare offers from different suppliers on any basis other than marketing propaganda.

Obfuscation Wins

Electric and telephone companies, insurance companies, banks, automobile manufacturers all make their money by knowing more about their business than the customers.  These organizations are the only ones in a position to accurately compare the prices of their products, but they make their money by preventing accurate comparisons.  It is easy to make money by simply lying. You can use smoke and mirrors to cause your employees and customers to buy into, and spread, the lie.  And your competitors fan the fires of “freedom of choice” by adding lies of their own.

Literally no one knows the cost of a cell phone, a car, or a shirt at WalMart.  Every item comes with so many hidden costs, marketing gimmicks and sales incentives that it is impossible for customers, store employees, store managers or company shareholders to know anything at all about the actual cost of goods.  Without this information it is impossible to know if the management decisions and product selection are reasonable.  This argument does not even address the larger issues of personnel and overhead that play a major role in the profitability and sustainability of the retail environment.

Outsourced Middlemen

Virtually any aspect of modern business can be separated from the core business flow and outsourced to a third party.  Economic legerdemain can make this seem like a good idea.  The voice taking the order at the drive-up window of a fast food restaurant can come from a call center in Bangalore.  A company’s management should realize that well-meaning ideas such as this are fundamentally flawed. 

The overriding business case is that excessive outsourcing destroys the accountability required to understand the operation of your own business.  You no longer have the ability to examine the true costs associated with your operations.  With every organization trying to maximize their profit at all costs, each one will lie, cheat and steal to achieve that goal.  Now you have given every outsourced operation a reason to misrepresent themselves in an attempt to grow their own business at your expense.

Mob Rule

The reason that there are so many high-profile scandals involving Utilities, Finance, Government and the Press is that the leaders in these organizations form a closed society, feeding each other self-congratulatory stimulus that incentivises more and more egregious behavior.  Their actions are completely divorced from outside, objective reality.  The legality or morality of their actions are buried under the avalanche of self-importance and the compulsion to take the bit in their teeth and run faster toward the precipice.

The intelligence of a mob tends to be lower than that of any individual.  The behavior of these corporate mobs may lead to the ultimate failure of the global economy.

Cascade Failures

The world financial markets are so ill-conceived and mis-designed that they are ripe for a catastrophic cascade failure.  Once the dominoes begin to fall there are no mechanisms to prevent total collapse.  Propping up failed micro-economies with loans that (objectively) can never be repaid is nothing more that a paperwork band-aid covering a still-festering pustule.  Making the balance sheet look good from some arbitrary perspective just delays the inevitable.

If some nation is deemed Worthy, aid should be given by more prosperous economies with no strings. If that nation is able to grow and develop, it will become a useful member of the world community.  It is not necessary for the wealthy nations to engage in balance-sheet self aggrandizement while keeping an oppressive boot on the necks of the poor.  Economically successful partners represent a truly valuable return on investment that does not show up on any balance sheet. 

The clarity that would be generated by simply writing off these “loans” would represent a needed breath of fresh air in all our economic calculations.  Draw a line in the sand.  Evaluate the reality of the situation as it stands now.  Do not continue to rely on dubious promises of payment extracted under duress from failed economies.

An objective look at the world’s major economies would make for much more rational decisions.  Major aspects of the U.S. economy are not sustainable.  Take, for example, the automotive industry.  The entire business model requires selling more vehicles, and therefore enticing more people to sign on to the idea.  But cars last longer, the population declines, and operating costs escalate.

I argue that virtually no one today actually wants a car.  They want a video game console with leather seats.  They would leave off the car part if they could.  They do not want to buy it gas.  They do not want to insure it. They do not want to sign away their income to get it.  They do not want to sit in traffic with it.  The only reason that people buy cars, even today, is that they have been convinced that there is no alternative.

Soon the customer base will decide, en masse, that they really do not want or need a new car - despite ever-increasing marketing hype.

Without a rational plan, this will likely come as a Big Surprise to many investors.  And their reliance on idealistic projections with no basis or objective feedback may prove catastrophic.

The Chinese economy is another case-in-point.  Everyone seems to believe that China is set to become the dominant economy in the 21st century.  I find this hard to believe.  There is so much smoke and mirrors work involved in evaluating their business practices that I think that any reliance on such information is suspect.  Objectively, they have stepped up from a third-world economy by purchasing their place at the table of world powers.  In order to do so, they are selling their labor and resources for pennies on the dollar.  They can do this because they have a large population and geographic area.  But what they are doing is not in any way sustainable.  It shows no understanding of the shortcomings of 19th century industrialism.

Demand for Chinese goods may sag, whether due to natural disaster, economic turmoil or even a moral refusal to purchase goods manufactured with what amounts to slave labor.  Their reliance on the inflated promises of the financial wizards may well be catastrophic in the face of even a modest slowdown.

Feedback Limits

I have mentioned the loss of feedback that caused the economy to lose its equilibrium.  The equilibrium in question was the comfortable status quo of the late 20th century.  However, there are other, larger, feedback systems that will take over.  Even after a catastrophic failure, nature reaches a new balance - possibly in a completely unexpected configuration.  The fundamental constraints of nature provide the ultimate fail-safe. 

Adapt or Die

No matter how much wishful thinking and pious hand-wringing we engage in we must deal with the objective realities.  We cannot legislate success, or vote to repeal natural law.  We must act to cushion the impact of the failure of the current economic model, not continue propping up failed policies with ever-more-vehement rhetoric.

Buyer Rules

It is amazing all the clever (doubletalk) financing and (mumble) incentives and (ahem) volume discounts that a supplier will dream up if they are told, in advance, exactly how much the customer will pay.  The buyer must simply be realistic and refuse to be swayed by ANY escalation of the real bottom line.  Absolutely no contracts for the future -- purely pay-as-you-go.

Implementing this philosophy would solve the debt crisis facing our schools.  Very simply, we take the amount of current tax revenue and apportion it using exactly the same percentages as last year.  Salaries, maintenance, utilities and supplies.  All get the same PERCENTAGE of the revenue that they did before.  Extremely fair.  The electric company no longer dictates prices to the government.  Union workers no longer get arbitrary raises.  The customer (school district) takes back control of their own operation.  If the suppliers (employees and utilities) want the business, they are responsible for making it work.  If they do not want the business, there will be other, more efficient suppliers who will be able to step up.  No lay-offs or building closures.  No fear-mongering or threats.  No uncertainty.  Just across-the-board adjustment in payments.

What about the employees and suppliers?  Won’t they bear the burden?  No, they do not have to.  This is the ultimate trickle-down.  They will realize that they, too, can just say “NO!”.  They do not have to be at the mercy of ever-increasing costs.  They can actively regulate the prices that they pay – not simply settle for a choice between bad and worse.  This will re-introduce the balance that is missing when inflation is controlled only by arbitrary decisions by an elite few individuals, based on unverifiable currency market reports.

This would also work for ordinary consumers, IF....

Contracts and Lawyers

The sheer length of all modern contracts is an admission that the seller is pushing a product that the buyer does not want, will not like, or cannot afford.  Examples include cell phones and credit cards.  There is nothing reasonable or sustainable about these lock-in deals.  If the seller had a valuable product and he knew the customer would be satisfied there would be no need for draconian legalese.  The seller should always strive to keep the customer happy.  A happy customer will be glad to pay.  If the deal doesn’t work out (for whatever reason) all of these deals should allow the parties to walk away amicably.  Maybe the next deal will work out better.

Objectively, a home mortgage is nothing more than a rent-to-own contract in which the landlord (bank) doesn’t even have to maintain the plumbing.  Just because it is couched in twenty pages of fine print, and it has been marketed since the days of “Leave it to Beaver” as the American way, does not make it a reasonable deal.  The fact that the deal is fundamentally unreasonable is the reason that there is so much business for the courts today.

In all these cases, I propose that “the deal” be limited to what can be written on a single sheet of paper.  I will do this, if you will do that.  If it doesn’t work out, we walk away.  No recriminations.  No credit scores.  No lawyers.  No unhappiness.  Maybe we can make a better deal the next time.

I guarantee that the phone companies would be more responsive if every customer that they lost was a Big Deal, and not just part of business-as-usual churn.  And if the customers all left because marketing hype turned out to be lies, maybe the advertising would be more responsible.

Single page “contracts” that are easily understood would actually reduce the costs of virtually all aspects of doing business.  Even though some deals do not work out and represent a cost, it is hard to figure how those costs to a well-run business could possibly exceed the total cost of the legal system as it stands now.  There is nothing sustainable about making your own customers the adversary from day one. 

I do not believe that it is necessary to “Kill all the Lawyers” as Shakespeare so famously suggested.  It should be sufficient to simply let them starve to death.

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