Rent-Seeking Captains of Industry and Commerce give Capitalism a Bad Name
Once upon a time you lived, worked and died all within a short walk from each other. In feudalism people owned land and lived well. The landed aristocracy. And other people (the peasants) worked the land. But did not live as well as those who owned it. For it was back-breaking work for long hours with no respite except in death. For those who worked the land belonged to the land. Just as the trees and fields and rivers did. Peasants belonged to the land and the land belonged to the landowner. The peasants couldn’t leave. And they couldn’t work hard to provide a better life for their children. For they were bond to the land as their patents were. With no choice but to work the land like their parents did.
This was how life was before we started to use power to make our work easier. We had long been using animal power to do things we didn’t have the strength or the endurance to do. Such as pulling a plow. Or a wagon full of goods. Or to travel great distances more quickly than we could by walking. Harnessing the power of moving water changed all of that. For a river moves constantly. And when you place a waterwheel in moving water you can convert the linear motion of the water into rotational motion. This rotational motion could turn a main shaft running though a factory. Belts and pulleys could transfer this power to workstations throughout the factory floor. And these powered workstations could do far more work than a person could. Lumberjacks could transport logs down a river to a lumber mill. Where a waterwheel could spin a saw that made lumber out of those logs at such a rate that great cities could arise around these mills. Cities with other factories powered by waterwheels. And homes.
So it’s no surprise that our early cities grew up on rivers. Both for water power. And the ability to use them to ship bulk goods. Ship transport. Something even animals weren’t good at. It is in these cities that wealth and political power grew. Centers of industry and commerce. Creating great wealth for those who controlled the resources that made all of that possible. So another aristocracy grew. Rent-seeking captains of industry and commerce. Who give capitalism a bad name. Who use their political power to maximize their profits. And buy favors from those in power to protect their particular interests. Such as using the power of government to create monopolies for themselves. But advancing technology made that harder to do. Especially the steam engine. And the railroad.
The Steel and Heavy Manufacturing Industries required a Massive Infrastructure and Regionally Located Raw Materials
Control of rivers, ports and harbors provided a great opportunity to amass wealth at other people’s expense. For when economic activity centered on water it made land around that water very valuable. Which concentrated wealth and power on the rivers. Until the steam engine replaced the waterwheel. And the railroad provided a way to transport people and goods inland. So not only did cities grow up along the waterways they grew up along the rail lines. Those controlling these resources still had great wealth and power. But they also offered competition. And more economic liberty. For while there can only be one Tennessee River flowing through Chattanooga, Tennessee, there can be more than one railroad running through Chattanooga. Which made Chattanooga an important city to hold during the American Civil War. For there was a great rail junction in that city. Giving anyone who controlled the city access to any part of the Confederacy.
While the steam engine and railroad allowed industries to grow anywhere in the country some industries still clustered in regional areas. Such as the steel industry. It required three ingredients to make steel. Iron ore, coke (coal cooked into hard charcoal briquettes) and limestone. To make steel you use 6 parts iron ore, 2 parts coke and 1 part limestone. Iron ore was plentiful around Lake Superior. Because it takes a lot of iron ore and a lot of iron ore is located around Lake Superior the steel makers built their mills long the Great Lakes. In Milwaukee. Chicago. Gary. Detroit. Toledo. Cleveland. Or in places like Pittsburgh where coal and iron ore deposits surround the city. These cities made up the Manufacturing Belt. Places with access to bulk ore shipping (on Great Lakes freighter or river barge). And where the steel mills arose so did heavy industry that built things from that steel. From structural steel. To automobiles.
For a while these new industries dominated the economic landscape. Big, heavy industries that couldn’t move. Concentrating money and political power. Giving rise to organized labor. Who took advantage of the fact that these heavy industries could not move. Negotiating lucrative union contracts. With generous pay and benefits. Raising the price of steel and the things we made from steel. Like automobiles. Making the rank and file like rent-seekers of old. Looking to personally benefit from their near-monopoly conditions. Like those early captains of industry and commerce. Life was good for awhile for the rank and file. Who lived very well. And better than most American workers. Thanks to those monopoly-like conditions in these steel and heavy manufacturing industries. Allowing them to charge high prices for their goods to pay for those generous pay and benefits. As there was no competition. For the steel and heavy manufacturing industries required a massive infrastructure and an abundant supply of regionally located raw materials, making it very difficult for a new competitor to open for business. At least, in the United States.
High Costs and Low Efficiencies have shuttered most of America’s Steel Making Past
Foreign competition changed all that. And large ocean-going ships. So new industries in other countries with lower labor costs could manufacture these goods and ship them to the United States. And did. Challenging the monopoly-like conditions of the rent-seeking steel and heavy manufacturing industries. So the rent-seekers turned to government for protection. And got it. Import tariffs. Which raised the price of those imported goods to the higher price level of the domestic goods. Which did two things. Insulated the domestic manufacturers from market pressures allowing them to continue with the status quo. And forced the foreign manufacturers to find less costly and more efficient ways to make their goods to counter those import tariffs.
So what happened? Technology advanced in these industries overseas while they stagnated in the US. The US didn’t invest in new technologies like they did in the previous century to find better ways to do things. Because they didn’t have to. While the foreign competitors worked harder to find better ways to do things. Because they had to. As they weren’t insulated from market forces. The Japanese invested in robotics. Transforming their auto industry. Improving quality and lowering costs. Making their cars as good if not better than the Americans did. And selling them at a competitive price even with those import protections. So what did these US actions to protect the domestic manufacturers do? Changed the Manufacturing Belt to the Rust Belt.
The big steel cities in America are no more. High costs and low efficiencies have shuttered most of America’s steel making past. Gone is the era of the sprawling steel mill. Today it’s the minimill and continuous casting. Small and efficient steel mills with small labor forces that can make small batches. Thanks to their electric arc furnaces that are easy to turn on and off. Unlike the big blast furnaces that took a while to reach operating temperatures and when they did they didn’t shut them down for years. Making it difficult to adjust to falling demand. Like the minimills could. Which helped save the steel industry by finally adopted technology that allowed it to sell at market prices. Making it harder for the rent-seekers these days. But better for consumers. Because of this relentless march of technology. That allows us to continuously find better ways to do things.
Tags: animal power, capitalism, captains of industry and commerce, coke, factory, find better ways to do things, generous pay and benefits, Great Lakes, heavy industry, industry and commerce, Iron ore, Lake Superior, Limestone, Manufacturing Belt, monopolies, rail lines, railroad, rent-seeking, rotational motion, Rust Belt, ship transport, steam engine, steel, steel industry, water power, waterwheel, wealth and power
LOW PRICES. GOD help me, I do hate them so. I hate them with every fiber of my body.
Who says this? Do you? I don’t. Of all the times I’ve spent shopping, I have never heard anyone bitch about low prices. I’ve heard people bitch about high prices. But never about low prices. When gas approached $3/gallon, people bitched about that being too high and drove 10 miles to find ‘cheap’ gas to save a few pennies per gallon. Let it approach $4/gallon and they’ll want Congress to take action. To attack Big Oil. To seize their oil and their profits and give us cheap gasoline in return. But when gas was cheap, no one ever bitched about it being ‘too’ cheap. It just doesn’t happen that way. People bitch about high prices. Not low prices.
So who bitches about low prices? Competitors. There’s a saying that competition makes everything better. And it does. It lowers prices. And raises quality. And who is looking for lower prices and higher quality? Consumers. Who isn’t? Competitors. Especially competitors with political connections.
WHEN THE BIG 3 were putting out crap in the 1970s, they did so because they could. I mean, who else were you going to buy a car from? So what if your car breaks down and the fenders and quarter panels rust away? That just means you gotta buy another car sooner rather than later. A pretty sweet deal. Especially when there are only three places to go to buy a car. And each of the Big 3 is selling the same crap.
Then the Japanese had to go and ruin a good thing. They started selling cars in America. These cars were smaller than your typical American car. But there were other differences. They didn’t rust like the American cars. They didn’t break down as much. And the imports were cheaper than the American cars. Lower price and higher quality. More bang for the buck. Exactly what consumers were demanding.
So what was the response of the Big 3? Did they rise to the level of their new competitors and deliver what the consumer wanted? No. They ran to government for help. For protection. And they got it. Voluntary Export Restraints (VER). The government negotiated with the Japanese to ‘voluntarily’ limit the number of cars they exported to the United States. Or else. So they did. To avoid worse protectionist policies. Problem solved. Competition was limited. And the Big 3 were very profitable in the short run. Everyone lived happily ever after. Until the Japanese refused to play nice.
The problem was what the Big 3 did with those profits. Or, rather, what they didn’t do with them. They didn’t reinvest them to raise themselves up to the level of the Japanese. Protected, they saw no incentive to change. Not when you have Big Government on your side. And how did that work for them? Not good.
So look, the Japanese said, the Americans like our cars. If the American manufacturers won’t give them what they want, we will. While honoring the VER. We won’t export more cars. We’ll just build bigger and better cars to export. And they did. The Big 3 were no longer up against inexpensive, higher quality subcompacts on the fringe of their market share. Now their mid-size and large-size cars had competition. And this wasn’t on the fringe of their market share. This was their bread and butter. What to do? Build better cars and give Americans more bang for their buck? Or run to government again? What do you think?
The Big 3 assaulted the Japanese under the guise of ‘fair trade’. The cry went out that unless the Japanese opened up their markets to American imports (in particular auto parts), we should restrict Japanese imports. To protect American jobs. To protect the American worker. To protect the children. This was code for please make the Japanese cars more unattractive to purchasers so they will settle for the more costly and lower quality cars we’re making. (Let’s not forget the reason Americans were buying the Japanese cars in the first place).
The Japanese response? They took it up a notch. They entered the luxury markets. They launched Acura, Lexus and Infiniti. They competed against Cadillac and Lincoln. And well. The quality was so good they even affected the European luxury imports. More attacks followed. Americans were losing their jobs. Soon there would be no more American manufacturing left in the country. So the Japanese built plants in America. And Americans were now building the Japanese cars. The Japanese actually created American jobs.
SON OF A BITCH! So much for the loss of American jobs. The Japanese threw a wrench in that argument. So now the argument became about the loss of ‘high paying’ American jobs. For the Japanese plants were non-union. Didn’t matter that their workers were making better pay and benefits than many in their region. No. What mattered was that they were building a better product. And they didn’t want THESE jobs in America. But if they couldn’t get rid of these new workers, they should at least unionize them so their cars cost more. To make them a little less appealing to the American consumer. So far they have been unsuccessful in this endeavor. The workers are happy as they are.
Well, these cars just weren’t going away. So the Americans surrendered car manufacturing to the Japanese. They couldn’t beat them. (Of course, it’s hard to do that when you don’t even try). They, instead, focused on the higher profit truck and SUV markets. Then the Japanese entered those markets. And at every level they competed with the Americans, the Japanese gave more bang for the buck. And the consumers responded. With their hard-earned wages. It just wasn’t fair. The Japanese kept giving the American consumer a better product. No matter what political action the Big 3 took or demanded.
And there’s the problem. They sought their answers from government. Instead of making a better car. They wanted to stop the Japanese from giving the American consumer what they wanted so they could force Americans to pay more for less. All the while the economy was forcing the majority of consumers to get by on less (the majority of consumers do not have the wage and benefit package the ‘select’ few had in the Big 3).
Fast forward to 2008 and we see the ultimate consequence of their actions. Bankruptcy. GM and Chrysler had to grovel for a federal bailout and in the process become Washington’s bitch. Ford survived on her own. As did the Japanese. You can bitch all you want about costs, but if you have the revenue you can pay your costs. And the Americans just couldn’t sell enough cars to maintain the revenue they needed for their cost structure. By refusing to address the core problem (they weren’t making cars Americans wanted to buy), they only made their competition stronger and more entrenched in the U.S. market.
IT’S ALL POLITICS. Political cronyism. And crony capitalism. It all comes down to political spoils and patronage. That’s what happens when politics enter capitalism. Big Business partners with Big Government and they enter into relationships. You scratch my back and I’ll scratch your back. But when government protects a business for political expediency, the industry suffers in the long run. As the U.S. automobile industry has. Ditto for the U.S. textile industry. And the U.S. steel industry.
So what goes wrong? When you protect an industry you insulate it from market forces. You can build crap. The problem is, consumers don’t buy crap. So, for awhile, politics intervene and makes the crap more favorable. Whether it’s predatory pricing, monopolistic pricing or collusion, business can’t win. Big Government is there. If your prices are too low, government will intervene. If prices are too high, government will intervene. If prices are too similar, government will intervene. To make things ‘fair’. And by fair they mean to reward those who play the game and to punish those who don’t. And the spoils go to those large voting blocs they need. And in return for their votes, they can count on patronage. Government jobs. Political positions. Favorable legislation and regulation. If you got the vote out, you were rewarded quite nicely.
And consumers be damned. .
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