Tuesday, March 3, 2009


As long as we are in arrogant country talking about the big subjects of this world, why not tackle this one. I probably would not pass economics 101 anymore but, again, PHDs in economics have been using advanced mathematical formulas to tell us that all is well for the last 30 years. In times of crisis, everyone is an economist.

Why talk of Capitalism or Socialism or Communism? Why not look at the economy like a wheel with 3 spokes: Labor, Capital and output, (the production of goods and services). If the 3 spokes of the wheel have the same length, the wheel turns correctly. If one of the spokes is too long or too short, the wheel cannot turn anymore.

The wheel of the economy could not turn during the days of communism because the spoke of labor was too long. The same way in many socialist countries the wheel turns at a slower pace because the spoke of labor is too long. Nowadays for many different reasons the US has created a world economy where the spoke of capital is too long and the wheel does not turn very well.

For many years the US had an economic wheel that turned like a Swiss watch: from the beginnings of the Ford motor company to the mid seventies.
In 1910 or so, Henri Ford decided to pay 5$ per day to his factory workers when the practice at the time was 5$ per week. He thought that with their higher pay they would buy his cars as well. Other employers thought the same way. That’s the way to create growth: To have employees earn enough money to consume. Not by giving big dividends at the expense of employees. For 50 years Americans had the best standard of living on earth.

In those days Fredrick Winslow Taylor wrote in his “Principles of scientific management”:

The principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee.
The words "maximum prosperity" are used, in their broad sense, to mean not only large dividends for the company or owner, but the development of every branch of the business to its highest state of excellence, so that the prosperity may be permanent

That was social capitalism. And there is nothing wrong with that.
What happened to America ? In my view, it’s not that complicated. In the sixties and seventies the unions became a little too powerful especially in the auto industry. They became fat cats. American cars of the seventies were not good at all and the first Japanese autos easily pierced the wall of the castle. US manufacturers had electronic parts done or assembled in the far east. This exported know how and technology. I think that in the seventies steel workers were getting 18$ per hour when the South Koreans were getting 2$. For me the Unions have been the cause of the “breach in the wall” . Even though they did a wonderful job for the American worker up to that point, they became too powerful and lacked wisdom. Here is an example of the wheel slowing down because one of the spokes is too long. Now the unions are too weak.
The nail in the coffin came with the age of Reagan. He killed the unions in general when he fired the air controllers on strike in 1981 . This was significant in the way employers dealt with employees. Imperceptibly, from this day on, American employees were not human beings anymore they were tools and they were treated as such. At the same time came the years of “trimming the fat”. Perhaps rightly so. Unfortunately many did not stop at the fat, they cut into the muscle as well. All the big companies were cutting off the non productive staffs. CEOs who fired a few hundred folks without any absolute reason were hailed as heroes and the shares went up. The words “maximizing share holder’s equity” became carved in the stones of all American corporations. 2 things were happening at the same time that destroyed the American standard of living. The first one was the shift of the profit from the employee to the stock holder and the second is the competition from the Far-East and the combination of both.
The USA have all the basic resources they need right at home. In the sixties or so, they could have say no to imports, kept the technology at home and live in a nice and safe economic world. The only reason we opened the borders was to “maximize the shareholder’s equity” of some companies.
Could we go back to protectionism? Probably not. In some industries it could perhaps be done if at the same time there were measures to help that industry start anew. In so many cases it would be very complicated. In the manufacture of a semi conductor chip the size of a finger nail, six or seven different countries can be involved. The silicon of the chip is grown in one country it is etched in another one, it is cased in plastic in the far east and the gold for the bonding of the legs comes from another place. Still I am sure that little by little some if not all industries could be repatriated with a combination of protectionism and industry/job creation incentives. Do we really need Wal-Mart 10$ plastic pairs of shoes from China that will last 3 months ? I guess yes if one working 40 hours a week earns 1200$ per month. Besides all this precedent “blablabla”, something should be said about the stock market in general. At the end of the day, it is the worst enemy of corporate America. Essentially, it dictates the way companies should be run. The shares go up or down according to the results or the forecasted results of the quarter, 6 months or year. Therefore profit and sales must always be up; at all cost. Because of that, managers are afraid of taking risks or thinking far ahead and planning for the future. They are also tempted to show profit which is not there.. Since they have too much to lose, the independent auditors increasingly roll over when told to. That’s another thing that should be changed. Why not by law force a change of auditors every 3 or 4 years at big corporations.

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