Sunday, April 19, 2020

Character, Capitalism, and Business Failure

(This little post has been sitting in my files for about half a year. It does not, I think, make any new points, but it still strikes me as worth publishing, if only as a matter of adding my small contribution to an ongoing movement)

Maureen Tkacik at The New Republic offers “Crash Course ,” an extensive article on the managerial failures at Boeing that led to two crashes and 346 deaths. Shameful, of course. Horrible, of course. There’s an economic lesson here. In capitalist economics it is assumed, usually without question, that businessmen will act at least in the interest of their business, of preserving their capital. But that is exactly what the Boeing executives and managers did not do. I don’t know how this will work out. It is possible that Boeing will simply go bankrupt, which would be a shame – all that knowledge, all that history, all those skills and so many jobs lost.

The Economic Lesson

Conservative economists consistently argue that businessmen (and it is almost always businessmen) will do the “rational” thing, conserving capital and making their business grow. But this is exactly what the Boeing executives did not do. For them, managing Boeing became an exercise in applying abstract theories of wealth creation rather than the concrete practices of engineering and making of aircraft, leading to the abysmal failure of the Boeing 737 Max. A second claim is made that not only are businessmen rational in this narrow sense, but also that most businessmen are brilliant, and will seek out or create the best business ideas. And, finally, conservative economists claim that rational businessmen will produce optimal (in some sense) businesses.

Conservative economists went on to imagine the economy as a network of these optimal business organizations, which would lead, though market processes, to an optimal economy. Keynes delivered the death blow to that idea that an economy would invariably converge to an optimum state, pointing out that the observed economy around him (his major macroeconomic work, The General Theory of Employment, Interest and Money , was written during the depression of the 1930s) did not match the theoretical predictions of conservative economics. The kind of arrogance we saw from Boeing executives and managers, the belief that they knew better than people who had been doing the job for their entire careers, the arrogance that led Boeing to produce an unsafe aircraft itself destroys the idea that businessmen are in any sense the superior men (why is it always men?) of conservative fantasy. There is nothing that requires capitalists to act in the interests of, even, preserving their own capital and often they do not.

What are the policy implications?

Which leaves us where? If the lawless capitalism that conservative macroeconomists have been advocating since before their position was even called conservative, let alone libertarian, is not to govern our economy, what is? On the other side of the argument, there is a whole line of socialist thinking which argues for minutely detailed control of the economy. This, equally, has failed. I will mention some of the problems here as well.

Critique of Lawless Capitalism

  1. Governance is not an economic activity and attempts to make it so are inherently corrupting.
  2. Regulation is our friend. It prevents some of the worst outcomes possible in an unregulated economy. Without it, finance turns instantly corrupt.
  3. Sometimes government intervention is the only way to proceed. Some activities like providing health care cannot be done equitably and efficiently without either intense regulation of private enterprise or government provision of service.
  4. Monopoly and oligopoly are corrupting. The holders of such large “private” fortunes must be kept from buying the government they want.
  5. Letting a wealthy minority govern invariably leaves the vast majority impoverished.

Critique of the Planned Socialist Economy

  1. It is corrupt. This is not only so in Communist countries, but also within large businesses and the military. There is always, in planned economies, an underground economy of scroungers and their customers.
  2. It is totalitarian: it makes every interaction which might even possibly be economic subject to the intervention of the state.
  3. It is inefficient, requiring the creation of a vast bureaucracy which promptly proceeds to work to maintain and expand itself.
  4. It is unnecessarily conservative, leaving one dealing with the bureaucracy to get permission to do anything new. This is the experience of anyone dealing with a complex grant application or one of the old European government telecommunication monopolies, which kept European telecommunications back for many years.
  5. All attempts to produce minutely planned civilian economies have failed.


The separation of governance and day-to-day economic activity is a valuable check on both economic and government overreach.

Implementing Policy

I return, finally, to something that political conservatives often advocate when they are not shilling for vast wealth and entrenched privilege: attention to the character of people in positions of both governmental and economic power. An economy where most of the actors are grifters will produce little of value. A government where most officials are corrupt will extort the wealth of the vast majority and produce tyranny.

The bulk of this essay was written before the COVID-19 pandemic, which underscores the above. Somehow we must begin to pick officials of good character, or all our theorizing will be in vain.

1 comment:

The Blog Fodder said...

Your critiques of both unfettered capitalism and unfettered socialism are accurate. Good governance depends on willingness to be governed and on the integrity of those governing. All attempts to ensure this have failed under Trump. Can one legislate honesty?