Wednesday, August 29, 2012
American liberals, particularly of the academic left variety that walk unsupervised on the streets of our college towns, seem to my ear not to understand American business people. Not the often caretaker executives of big multinationals, but the owners and other decision-makers of the hundreds of thousands of still significant American companies that often compete against the behemoths and struggle to manage the thicket of regulation that politicians at every level of government -- federal, state and local, not to mention interstate "authorities" and special regulatory boards -- throw at them. So, in the interest of mutual understanding, here a few of the things that I wish liberals understood about American business.
People in business are just like other people, no more or less honest, kind, cruel, giving or grasping than people in general.
Business is a creative act, an expression of the human spirit no less noble than art, letters, philosophy and other inquiry, the learned professions, or philanthropy. When you insult or inhibit a person's business, you are invalidating his creative act.
Business acknowledges that it extracts value from labor in excess of its cost. However, it also confers value to its customers in excess of the price it charges. Left liberals worry a great deal about the surplus value conferred by labor, but often give no credit to the surplus value businesses confer on their customers.
Without the prosperity that comes from the surplus value recovered by customers, many of the things left liberals value -- a clean environment, widespread health care, food, clothes and shelter for virtually everybody, and a robust cultural and intellectual life -- would not be affordable or even possible.
For this discussion, an "owner" of a business is not a stockholder trading a liquid security in seconds and at the dropping of a hat. Rather, an "owner" is any person who bears the burden of decision in a business to such a degree that his or her reputation and material well-being are substantially tied to the quality of his or her decision, or who puts his or her own capital at stake backing the people who make those decisions.
The foundation of business is the willingness of owners to take risk that others will not or cannot take. These other people are known as lenders, employees, or customers.
Because owners take risks, they demand rewards commensurate to the risks. They expect the fruits of success only after the risk-avoiders -- employees, lenders, and customers -- all get their due. These rewards consist of money, satisfaction, and prestige, each in a different priority depending on the person. On average, they are greater than the rewards to non-risk takers. It is possible, but highly unlikely, that the owner's rewards will be very great.
Without the taking of risk in return for the prospect of perhaps great rewards, there is no new business. Therefore, there is no new opportunity for risk averse employees, lenders, and customers.
Business owners are as emotional as anybody else. They are more likely to take risk when they are optimistic and excited, and less likely when they are angry, worried or depressed. Conditions that demotivate business owners, such as sharp rhetorical attacks from the president of the United States and his proxies, discourage risk-taking and therefore economic growth.
Business owners are also rational, just like anybody else. If they see federal agencies capriciously changing their interpretation of longstanding laws and the Congress writing sweeping, vague statutes that confer essentially unchecked power to the unelected permanent regulatory bureaucracy, they will worry that the rules will change in some way that destroys their investment even if it would have succeeded under the old rules. That deters them from taking the risks necessary to start and grow businesses.
Virtually all business owners understand and agree that there must be some regulation.
Regulation usually imposes a fixed cost on each affected business regardless of size. Therefore, complex and costly regulation favors large companies (for which the proportionate cost of compliance is relatively small) over small and mid-sized companies. Left liberals almost never recognize that more regulation almost always drives consolidation in the affected industry, forcing smaller companies to sell out to larger ones. In general, you cannot have both heavy regulation and small, diffuse businesses. The first drives out the second in favor of the behemoths for whom large overhead is a small proportion of the total.
Business owners have the right and proclivity to petition government for the redress of grievances just like anybody else. Regulation, whether or not "necessary," begets lobbying. The more regulation you have, or propose to have, the more lobbying you will have.
In order to regulate business effectively, regulators have to understand the object of their regulation. As often as not, the only source of sufficient expertise is the industry itself. The converse is also true; industry hires former regulators to help it contend with regulation. All current regulators know that industry may hire them one day. This revolving door makes it easier for the largest competitors in regulated industries to blunt the effects of regulation or shape it to their own competitive advantage. This phenomenon is known as "regulatory capture."
As often as not, regulatory capture diminishes the value of regulation compared to the cost of it.
So, regulation favors the big over the small by increasing fixed costs (which inherently benefits larger competitors) and creating opportunities for regulatory capture.
There are all sorts of things that left liberals do not or ought not like about big companies. They create far fewer jobs and opportunities than small companies. They innovate less. They have the capacity to influence politics and other civil discourse, both to protect their interests against government and to gain advantage over smaller competitors. They must operate in a global market, so they are much more likely to move opportunities for workers to countries outside the United States. They pay their CEOs a lot of money (I have heard that liberals hate that). Yet, they also like heavy regulation of business. It would help, at least, if they understood that the price of the latter is more of the former.
Release the hounds.
" In general, you cannot have both heavy regulation and small, diffuse businesses. The first drives out the second in favor of the behemoths for whom large overhead is a small proportion of the total."
Thanks for that. I have tried to explain this point to liberal progressive anarchist Democrats and others for years. My brother owns a small business with 4 employees and some part timers. Due to Obama Care his health insurance went up $400 a month, a 50% jump. Margins are thin these days and what the liberals do not understand is he has to sell, manufacture and install $4000 worth of product to cover that "one little expense". Of course, if he doesn't make it through this recession/depression, all his work will go to some huge multi-national corporation, based in China.
At least that would make the communists happy.
Fine post, worth the wait. To the list of "the things left liberals value," you might add the asymptotic approach to just war. It takes an enormously innovative, productive (capitalist) society to produce weapons that can annihilate war-makers and leave civilians untouched.
Do you really think business owners are artists? Businesses are subject to market pressure. Businesses that thrive tend to be flexible and adapt to changes in consumer tastes. The archetypal artist on the other hand tends, or at least tries, to follow a concept regardless of market pressure. That is why so many "starving artists" support themselves by waiting tables or tending bar. Similarly, the philosopher is cushioned in academe.
First, this is a brilliant post, thank you. Secondly, to anonymous, I disagree with your point regarding the 'artist' following a concept. Setting market pressure aside for a moment, or lack of it as you imply, an artist's concept is extremely flexible by definition because it is soley in the vision of the artist to define. Whereas the business person must adhere to the concepts of society at large, and government in particular. To create a unique, profitable and desired product while having to conform to such outside constraints is truly an artistic acheivement worthy of praise, even from the Picasso's of the world.
I think TH is saying that owning a business is creative, not that it is necessarily art. For example, Reed Hastings, the founder of Netflix, was creative in his reinvention of movie distribution but, IMHO, not an artist. On the other hand, I think Steve Jobs *was* an artist since he explicitly stated the importance of esthetics in every dimension of his business.
You are confusing them with rational creatures. They adopt their views for social and emotional reasons, not intellectual ones. Liberals assume certain other things are true, which prevent them from seeing these things. They believe that government attempts to regulate are always in response to abuses by businesses. They assume they are rather more intelligent than businesspeople.
If this were to gain wide circulation, many would nod and say that they agree with much of this, having only reservations that you have pitched it too high and not blamed quite enough where it is due. Then within fifteen minutes, they will completely unconsciously exhibit exactly what you have said. The parts of their brains are disconnected, and they have a stunning ability to not hear the irony of what comes out of their mouths.
Forgive me my extremity. I work among psychologists and social workers all day, and today was particularly appalling. I believe that people eventually say what they really mean, if you let them go on long enough. They reach their political opinions for entirely social reasons, intuiting who the right people are. They know what confirmation bias is but somehow believe they are exempt.
Left liberals worry a great deal about the surplus value conferred by labor, but often give no credit to the surplus value businesses confer on their customers.
As an example, I recently purchased a new Dell. I was content with my old Dell over the years, and considered it a good value. The new Dell is an even better value.
This is not Victorian England and certainly not 12th Century France or present day Congo.
And in 1912 things in the USA were very different and reforms to help the poor were apt.
This is 2012 and the USA. The way I see it the virtuous are the rich with obvious exceptions. Statistically you don't get rich in the USA by being sleazy. You get rich by doing your homework, keeping revelry reasonable, avoiding drugs and alcohol, being consistent and reliable, being sexually continent and loyal to your lover and/or spouse. It's the poor who are invariably despicable, so many not only on welfare but commiting crimes on welfare. I lived the 1970 in NYC and the welfare demographic in NYC were not the noble poor oppressed by our economic system, but the worst of the ingrates robbing, raping, and killing the taxpayers who supported them, then returning to their public apartment; or facilitating them by failing to cooperate with the police. Look at The Wire. Those people were beneficiaries not oppressed. [Same despicable way of life in South Boston and Appalachia and everwhere so it's not a matter of race.]
Who are in the prisons? Democrats. And what's more greedy than stealing from those whose charity you enjoy?
Thank you so much for this Spot-on Summary!! Business adds value for customers and improves choices and communities.
I worked for a small company that kicked ass and quintupled in size before being bought by a behemoth where we used their resources to kick even greater ass. But I went back to a company of 100 which has now again quadrupled. You are right about the creativity and the rewards (of all types) being so much greater in small business.
Private Equity partly succeeded by forcing this creative destruction on large companies that became deaf to customers. Companies like Hewlett Packard that forget their "built that" culture and dilute their crown jewels NEED to be "captured" and shook up by focused owners.
I will say as a public stockholder I DO feel like an owner. I AM an owner. And I ACT like an owner. When I take carts in from the parking lot at Costco it's partly because I want shoppers to enjoy MY store. Costco is a 9 year holding for me which is actually short-term in my portfolio. I feel the same when I drink Coke or eat a cone at Dairy Queen.
Hope you are doing well TH and that you did a Triathlon or two this summer.
Love the lede.
If you’re ever talking to someone who’s knee jerk anti-business, here’s an oldie but goodie: Who did more to save the whales than anyone else? Why it’s John D. Rockefeller! Enlightened self-interest, indeed.
Also, here’s Milton Friedman’s classic smack down of Phil Donohue: http://www.youtube.com/watch?v=RWsx1X8PV_A
“So that the record of history is absolutely crystal clear that there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”
It’s quite demonstrable that central planning is sub-optimal. Even big companies miss big opportunities because of it. Witness what Xerox and IBM let walk out the door, the ideas that gave us Microsoft, Apple, Oracle and more. And yes, real individuals built that.
Governments are even more hopeless at doing big central planning. E.g., with fracking, it looks like we’ve found a fuel that is cheap, plentiful and clean. If you believe in Global Warming, you should be rejoicing, no? Not unless you want to plunge millions back into poverty. Fracking was largely unseen a decade ago, and didn’t fit in Obama & Co’s master plan. But with free enterprise …..
“My i-pad goes from AC/DC to Zeppelin” What, no ABBA?
A great post.
But, you support something which is not true, and it is very important: "Business acknowledges that it extracts value from labor in excess of its cost. However, business also confers value to its customers in excess of the price it charges."
"Extracts value" associates coercion to the act of paying someone for their work. If this is coercion, then it can not be excused by passing along the extra value to customers. This would be a sort of slavery, justified by the value passed along.
What does "value in excess of its cost" mean? The services a person offers is exactly as valuable as he agrees with his employer. I might hire a person to refine platinum. His job is to observe and adjust the process. I want to pay the least possible for the skills and attention needed. I might be willing to pay as much as $100 per hour to run this lucrative process. But, I need only pay $30 per hour, because I can find the needed skills at that price.
Am I "extracting" value from that employee above some cost? No, because he has no right to coerce me into paying more, just as I have no right to coerce him to accept less. He doesn't have to work for me, and I don't have to employ him. There is no valid comparison to what he might earn in an alternate world which doesn't exist.
Owning and running a business is a property right. The owners and managers construct a productive organization. The employees are paid out of that production at mutually agreed wages. A worker might resent the owners and feel he should be paid more. That worker might as well resent the fact that people are not willing to just hand him money on the street, or resent that banks have piles of money which they will not hand out to him as a gift.
A worker might demonstrate to his employer that he is more efficient than others, and could be even more valuable to the company in other work. If he negotiates a raise, this doesn't mean that he was being underpaid in the past. Knowledge, ability, and experience allows a person to negotiate more when he convinces his customer (his employer) that he offers services of greater value, hard to obtain elsewhere.
So, don't concede to the Left that workers are exploited if the organization makes a profit. That presumes the owners have no right to their share of what is produced. It is not exploitation to receive a wage from a profitable company. That definition of exploitation is produced from Leftist greed and envy.
I like the parallel of extracting value from labor with consumer surplus. There are lots of companies where I feel I'm getting a steal by only paying what they charge me.
Conditions that demotivate business owners, such as sharp rhetorical attacks from the president of the United States and his proxies, discourage risk-taking and therefore economic growth.
That's super-logical, it's just that it isn't happening! I have been wondering for four years why you would say something like this, and I just haven't seen any evidence that he ever says anything bad about you at all.
Do you like Matthew Yglesias at Moneybox? He seems like the perfect example of a liberal who has assimilated most of the insights in this post.
“sharp rhetorical attacks from the president of the United States and his proxies, discourage risk-taking and therefore economic growth.”
It’s more than just rhetoric. Obama & Co see spending borrowed money as (i) giving money to their favored constituents today, and (ii) forcing high earners to have to pay more taxes somewhere down the road. Win-Win. Obama is all about the Long Game.
(ii) is already having an effect. Four more years of Obama & Co will only make it worse. You can do the math on a cocktail napkin to show that we’re on a disastrous path where at some point taxes will have to skyrocket. It’ll be pre-Thatcher Britain in the 70s with confiscatory taxes, but worse. Back then The Rolling Stones could flee Britain to the South of France and Studio 54, but we can’t escape the IRS. The result will be little or no growth, which will mean higher tax rates. Rinse and repeat.
“Are you better off than you were four years ago?” is nice rhetoric that harkens back to Reagan, but the better question is where will we be four years from now. I see Romney/Ryan as at least cheerleading for growth, which is a start.
Comparisons like the ones Yglesias makes back to the Carter days on “are you better off” aren’t apt. Carter actually had to play a worse hand than Obama. Interest rates were really fucking high back then, and the Fed didn’t care about the short term. Today, the Fed is giving Obama near-zero interest rates while Congressional inertia is giving us nearly 10% of GDP in borrowed annual stimulus. Normally this would cause us to redline GDP growth in the high single digits, and drop unemployment to record lows, but that’s not happening. It’s the dog that didn’t bark.
(I started to say above that O & Co “spend like drunken sailors” but realized it’s an insult to sailors who don’t borrow to get drunk, only spend everything they’ve earned. Reagan made the same point.)
I have no problem believing that Obama's policies are less friendly to rich people, I just don't think he shows an animus toward them. Like Bush may not have done as much for black people, but he didn't attack them rhetorically or actually dislike them.
Putting the basic point in critical terms makes it easier for academic liberals to understand, but there is another problem here. Many ordinary Americans are ignorant of the history of their country, the founding ideals (and the political arguments made at the time) and of basic civics.
Liberals are often surprisingly unaware, just as one example, that the Republican party was founded specifically to promote the abolition of slavery and lived on, after the war, primarily to promote equal treatment of all citizens. Practically no one knows of the political wars in America surrounding race in post-war years, ranging from the Andrew Johnson presidency all the way up through the Democrat party Jim Crow era, as another example.
President Obama periodically announces selective enforcement or a policy of complete non-enforcement of some law or other he dislikes. This is completely unconstitutional, and liberals should be as outraged as I am, because the Executive branch may not legislate. The President is not a goddamn King, and cannot rule by decree. Nonetheless, this president routinely does exactly this. What if a future Republican president decided to unilaterally restructure Medicaid, or Medicare? What if that president decided to ignore the law, and defund Planned Parenthood by fiat?
Americans are often ignorant of the structure and purpose of our political institutions, because the teaching of civics has morphed into the teaching of volunteerism, or "social justice" or something unrelated to education about political structures. The teaching of history and of political theory often does meaningfully exist, even at the best schools.
Without basic education about uniquely American ideas and institutions, our country is destined to face tyrants like Obama, or worse
My impression is that Obama is not so much hostile to business as utterly indifferent. He has the classical city machine attitude - businesses exist to be milked. They will always be there and there will always be people willing to put up with what is asked.
This attitude is one thing in a local government. As bad as it is, there are ways to game the system that a nationally-small but locally significant business can use to moderate the worst of it. But the Federal behemoth is perfectly capable of wiping out a business of that size without even being aware that it even happened.
Remember Hillary's comment way back when - "I'm not responsible for every under-capitalized business..."? Does this not seem to capture Obama's attitude as well? If Obama wasn't messing around with issues that concerned small business, this indiffence would indeed be non-threatening. But health care, tax policy, energy policy (EPA in particular) and so forth threaten a lot of businesses in an existential way. In this environment, indifference is profoundly hostile and threatening.
"My impression is that Obama is not so much hostile to business as utterly indifferent"
Wrong, he is actively hostile to business. Read the "you didn't build that" speech. Even *if* you accept the explanation that the "that" referred only to public infrastructure ("roads and bridges") the entire tenor of the speech is one of sneering disdain for successful entrepreneurs:
"I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something -- there are a whole bunch of hardworking people out there."
He hates business and businessman, as befits someone with his radical leftist political background.
TH, you're a CFO at a publicly held corporation, so we know the source of your animus!
I live and work in the largest blue state, and I deal with people every day who, meaning well, don't see any problem with piling regulations on the private sector..(This is why working in an administrative function in business is so important for perspective: just filling out a simple payroll is an eye-opening experience with its myriad of deductions and calculations, and payroll is just one of many time-consuming black holes that have little to do with a business's success.)
To get along with everyone I avoid philosophical discussions, but when asked, I always preface my point of view with a remark like yours: "People in business are just like other people, no more or less honest, kind, cruel, giving or grasping than people in general." For every example of government abuse there's a private sector counter, i.e, Madoff, Lehman, Enron, BP, etc. and I don't want to fall into the trap of saying that businesspeople are angels.
Usually we end up agreeing that concentrations of power without real competition are the problem, whether we're talking about (the old) Microsoft, the Dept. of Motor Vehicles, or the public school system. And government is rife with those concentrations, much more than business.
Stephen, that parenthetical (the old) is so telling. Yes, Microsoft seemed to have a monopoly for 10-15 years and we all grumbled about it. But eventually in a free marketplace it eroded - unlike the government examples you mention.