Sunlit Water

November 24, 2008

Hard Work

Filed under: Culture,Politics — by teofilo @ 1:37 am

This (very interesting) post by Yglesias reminds me of something that I’ve noticed doesn’t get a whole lot of mention in discussions of business and economics, at least on the everyday level.  It’s a pretty simple fact: succeeding in business is hard.  Like, really, really hard.  Hard enough that the average person is pretty unlikely to be able to successfully start or run a business regardless of the circumstances.  As a result, a huge number of businesses fail every year.  Not as many as are started, at least in the United States; we are nothing if not an optimistic people.  But a large number nonetheless.  I happen to have the figures for 1995 in a book I was just reading.  They’re a bit different from what’s going on now, of course, but should give an idea of the scale we’re talking about.  In that year alone 71,194 businesses failed in this country.

Were the owners and managers of those 71,194 businesses just dumb and unable to figure out how to properly manage their enterprises?  Some, perhaps many, surely were, but just as surely many were plenty smart and simply unlucky.  And the same goes for those whose businesses didn’t fail.  Some may have succeeded purely on account of their own genius, but, as Yglesias points out, many more were probably just lucky.  And, as Yglesias also points out, this is just how capitalism and a market economy works and is meant to work.  The personal qualities of individual businesspeople are basically irrelevant when looking at the economy as a whole; all that matters is the decisions they make in response to the (imperfect) information they have.  The invisible hand belongs to no one person, no matter how smart they may be.

There are a number of implications of this.  One, which Yglesias focuses on, is that the attitude of the business press, and a great many businesspeople themselves, toward capitalism and the economy is bizarrely off-base.  The sort of hero-worship of successful CEOs coming from these quarters is misplaced at best, since most of those CEOs are very likely to have just been lucky enough to be in charge during a period when times were good.

There are other implications as well, however.  Among these is the broader point that the focus of the national media (and not just the specifically business-oriented portions of it) on large, well-known corporations, while understandable given their importance to the economy as a whole, tends to lead to a distorted picture of how business works in general.  It’s pretty rare, though hardly unheard-of, for a company like that to just go bankrupt, so when one looks like it’s on the verge of doing so the general reaction is panic and demands for bailout money from the government.  After all, these corporations are “too big to fail.”  While this is certainly true for some, particularly certain banks, in other cases the rationale for assigning this much importance to a given company is murky at best.  As I mentioned before, thousands of businesses fail every year, and somehow life goes on.

Given that, however, the question still remains of why big corporations seem to fail so rarely even when bailouts don’t happen.  As far as I can tell a lot of this is just inertia.  Once a business reaches a certain size, particularly if it’s taken public, it becomes a massive bureaucracy with sufficient internal infrastructure to keep itself going for a considerable length of time even if market conditions sour.  Often this is enough to bring it through a bad time in good enough shape to make a comeback when conditions improve, and the CEO who happens to be running the place then gets fawning articles in various publications lauding their genius.  When a small business without that much infrastructure hits a similar rough patch, it just goes bankrupt.

The fact that business is hard has another major effect at the level of large corporations, and that’s because of a corollary: the main thing that makes business hard is competition, so businesspeople hate competition.  This is where the tendency, quite pronounced on the left, to lump together libertarian ideologues, academic economists and corporate executives becomes very problematic, because those three groups actually have big differences of opinion about a lot of issues (though, to be fair, in many cases none of these opinions are very palatable for liberals).  Libertarians and economists love competition.  It drives down prices, increases efficiency, and makes everyone better off.  Everyone, that is, except the small group of people doing the actual competing.  They would much prefer to have monopoly power within their industry, and if and when they get enough political clout to gain the ear of powerful politicians, they do whatever they can to get it.  In other words, “business” and “the market” are not synonymous, and policies that favor one generally don’t favor the other.  While Democrats often tend to portray Republicans as the party of cold, heartless neoliberal economics, that’s not generally very accurate.  That portrayal is much more accurate for the Libertarians.  The interests of business, and thus of the GOP, tend to align with those of the economists and libertarians on just a few issues, mainly in the area of regulation (they hate it!).  This happens to be a major point of disagreement both have with liberals, who love regulation, so from the liberal perspective it’s easy to see how the opposing side can blend into one huge rich mass of malign greed.  There is, however, more than one part of that coalition.  The money, of course, is concentrated in one part, so the interests of that part tend to get a lot of attention whether anyone else supports them or not.  The past eight years are a perfect example of this.

Thus, there’s plenty of misunderstanding to go around, from both the right and the left.  Given my own sympathies, I wouldn’t say that there’s an equal amount of misunderstanding, or that both sides are equally likely to inflict economic disaster on us all, of course.  I think the record shows perfectly clearly who’s more responsible for the current mess, even if the precise mechanisms by which we got where we are remain obscure.

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3 Comments »

  1. That first really rich Rockefeller guy hated competition. At least when he was winning.

    Comment by andrew — November 24, 2008 @ 2:40 am |Reply

  2. Indeed. He hated economists too.

    Comment by teofilo — November 24, 2008 @ 1:06 pm |Reply

  3. I am curious about how failures are calcuated. In the nonprofit field, there are often no reliable statistics (nor even a clear “time of death”) for an organization. There aren’t always* specific laws about who you have to tell when you are going out of business, and those stats about what percentage of businesses ultimately fail are, IME, pretty much la-la land all the way.

    *Depending on how many assets you have

    Anyway, tangential point to an interesting post.

    Comment by Witt — November 25, 2008 @ 8:36 pm |Reply


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