Is consolidation of industry good?

[Abegweit]

To start with, this: doesn't follow. Why would the company offer both? It's profit maximizing to only off the most expensive version. Make people either come up with the money, or go without.

What utter nonsense. Profits are maximized when you offer a range of a products for different consumers with different tastes and different budgets. Every entrepreneur knows this. Only statists force everyone to use the same thing. Like making people use bad toilets even when they don't live in a desert.

Remember that the monopolist is trying to maximize the rate of profit, not the quantity of it.

There is no such thing as a monopolist unless state forces the consumer to get services from one actor or no one at all.

It is only when the rate of profit is regulated, such as power utilities and defense contractors that the quantity of profit becomes the focus of management action.

Indeed. Once the state has imposed a monopoly on consumers, the focus of management becomes extorting as much as possible out of every "client" that it can. Note well that the purpose of regulation is to eliminate competitors and thus to secure profits from a captive market.

 

[Cutlass]

Not businesses, then? And what about governments themselves? You know, there are people who suggest that one of the advantages held by the UK and France at the start of the industrial era was its military institutions, in that they had personnel experienced in organizing large numbers of people and in procuring, transforming and distributing large amounts of materials. The beginnings of economic management on a large scale happened not in private industry but in the bureaucracies of state institutions, namely the military.

Similar things have been said, in slightly different wording, abut the US military in the post WW2 era.

So, to claim that organizations run by a state are not viable in thee long run, I dare say, a teeny bit of an exaggeration on your part. Seeing as they seem to have been successful enough to even provide management expertise for private organizations!

Bad management advice, as a whole. The difference with a military is that they are organized in the pursuit of a specific agenda: The ability to fight wars as needed. They don't have to serve more than one agenda. Now their agenda can result in pretty broad activities on a regular basis. But they still don't have to serve agendas contrary to their primary one.

Business organizations are much different. You could make the claim that businesses are in business to return money to their owners, which could be the public as well as the the stock market. But what happens because the business is a profit making enterprise is that contrary agendas keep being put in by political leaders who do not have the health and viability of the organization as their primary, or even secondary, motivation. So on the one hand it's a jobs program, and it matters not how many people the company should be employing, and on the other hand it's a source of revenue other than taxes that means it should be stripped bare of resources for the sake of others, and on the third hand it's a source of political patronage, and on the fourth hand it's a tool for giving various interest groups what they want.

There is a reason so few of them outside utility companies compare well to their private counterparts.

Organizations should not be any different, that's my point! They can be (arguably are in our current world), but they need not be. And I'll also point out that if we are to accept your comparison above (bold by me) then companies would only "operate to live" meaning they'd need only to break even, not to "maximize profits" as we keep hearing about.

But people don't just work for the paycheck, do they? The paycheck is a means to their other ends: having money that they can spend on what they like beyond the bare essentials to live on. That may be taken to mean that people try to maximize their income. But (again I must add a "but"!) if we again assume that an organization would "behave" in the same way as a person this only means that an organization would try to maximize income, not profits. It would also mean that the organization would then spend all that income in order to achieve other ends. What ends? Since an organization is not a sentient being, the ends decided by the people who are a position to direct it...

So you're arguing that they should, by default, operate poorly?

And? Would it be any different if Pemex was a private company and a cash-strapped mexican government set its payments for exploration rights so that the government would receive the same amount of money? In that situation what would happen is... exactly what is happening! A private company would continue to operate so long as cheap enough technology allowed recovery of oil at a cost low enough to be able to pay whatever the government demands per barrel, and then it would either negotiate a different deal or close shop.

In fact a private company, all else being equal, would have to close shop before a public company must do so. Because a private company (at least if it obeys the market dogmas) must close shop as soon as its profit margin goes below the prevailing interest rates on capital, while a public company may as well keep operating so long as it breaks even!

While it does happen that a government makes some industries unprofitable, that's not really what would be expected most of the time. Private oil companies operating in Mexico might have to pay high costs for their leases, but they would still be investing to maximize their long run outcome. Because they can leave, the Mexican government has an incentive to not drive them out. Pemex cannot leave, and so will pump less oil in the long run.

 

[Cheezy the Wiz]

This is wrong. Corporations maximize profit regardless of sustainability. Sustainability is frequently not even on the radar. Take General Motors. Their business model was absolutely not sustainable between the 1970s and the bankruptcy in 2009. They were just too big for that to matter to them much. So year after year they lost market share, and lost their ability to pay their fixed obligations to their labor.

This is demonstrably not the case. Corporations must think of sustainability, because it is more predictable and they need predictability to protect their investments. And most of all, because large corporations are their own largest investors. A company that doesn't do this flirts with disaster, or worse, a decline to mediocrity. Now within those imposed barriers, they absolutely do maximize profit; their are still after efficiency, after all. But it's not in the balls-out manner that characterizes more primitive forms of capitalism.

As for GM, you're going to have to explain just what was "unsustainable" about their business model, especially given that they underwent a huge corporate restructuring in the early 2000s because of a somewhat minor crisis (pension and benefit funds being hard to fund because of sudden rising interest rates).

US Steel absolutely put profits now ahead of sustainability. The US lost its steel industry not to low wages, but to higher quality and productivity. Why? Because while US Steel was using steel mills built during WWII and even half a century earlier, Japan had more modern technology that was all post WWII. They weren't cheaper because their labor was cheaper, they were cheaper because they were better at the job.

Yes, because their business practice was bad. They didn't follow the sustainable model. That's why the have declined so badly. Or worse for our modern large corporation, they failed to subvert their workers' powerful unions.

It's like you were trying to prove my point. You provided several examples of corporations who performed badly doing the things I said cause them to perform badly.

Take any modern company that has outsourced much of their work to cheap labor countries. They are not managing for sustainability, they are managing for the quick buck.

Again, predictability is sustainability. Workers in China and Philippines don't go on strike. They can behave in ways that would be ludicrous here, which improves makes production and labor costs more predictable. This improves efficiency and allows for more sustainable planning.

Take Walmart, in an industry that has a really hard time keeping good workers, they treat their labor like crap. Good for profits now, bad when the labor markets get tight.

Wal-Mart has something else to think about: the threat of unionization. By continuously cycling workers, they keep them from sticking around long enough to care enough to unionize. It's almost universal practice in the food service industry as well. I personally think it's a very bad practice, since a caring workforce is far more valuable than a pliable one, and in my opinion, provides a better product and companies could make more money that way. It's worth mentioning, though, that for all their horrible labor treatment, Wal-Mart has an extremely effective bureaucracy. That was actually one of Sam Walton's strengths, a philosophy he imbued his company with: logistical thinking, like only building stores within a day's driving distance of its distributor - who was also owned by Wal-Mart, since they operated their own trucking service from the start to service their stores.

As for the Mustang, you don't build one model no one can afford. Let's say they could make 5000 GTs, and 10,000 stock models, or just 10,000 GTs. They are obviously going to make just the 10,000 GTs. Half the people buying the standard model could, with trouble, but they could, come up with the higher price. They just don't want to. Taking away that choice is profit maximizing.

For argument's sake, let's say a GT costs $25,000, and a stock model costs $15,000.

If I think I can sell 10,000 GT's, that's $250 million.

If I think I can sell 5000 GT's and 10,000 stock models, because not enough people can afford a GT, that's $275 million.

It makes sense to offer multiple products even if you are a monopoly, because more affluent people will always go for the conspicuous consumption, and less affluent people the economy. And as I said, if people can't afford the single choice, then they don't buy anything.

Maybe I misunderstood, but I thought you made a number of points that large bureaucracy had problems, but the problems were less than the alternative. That's wrong. The problems are greater than the alternative.

Of course it does. That's logic of bureaucracy. Each of the middle managers maximizes his own best interest, future career prospects, and salary, by controlling as much as possible.

And some do it just because they're control freaks. And control freaks have a nasty habit of coming to power in bureaucracies.

I'm beginning to think you don't have much experience with this stuff. A manager of a district or department has absolutely no reason or ability to control anything outside of what's allotted to him. In fact, they often compete against one another in a friendly way, when they're not helping each other with new ideas and practices. Bureaucrats who aren't on-board with the organization's mission statement don't last long, and that's true in public and private bureaucracies.

The core point of Bureaucracy is to centralize power and decision making. That's the reason that it exists. I challenge you to come up with examples of it not happening. It is in the interests of everyone in the bureaucracy to gain as much power as possible. Bureaucracy is a tool for control. If it was a tool for decentralization, then it would not exist at all.

Bureaucracy is the answer to the problem of centralized decision-making. Instead of one person making decisions, whether its the CEO or the king or whatever, there are fifty, or a hundred, or a thousand. The bureaucracy exists because decision-making has reached a point where one person making all the decisions has become impossible or detrimental. If experts in a variety of fields are required in order to maximize efficacy, and one person can no longer be an expert in all those fields, then a bureaucracy is not only inevitable but necessary. When that is resisted, you get things like Ford Motor Co. as I described earlier, or Montgomery Ward under Sewell Avery. Or worse, if the organization reaches a size where it's physically impossible for one person to make all the decisions necessary in a given day, even if he could be an expert in all fields.

Or to put it more simply: decision-making is moving from one person to many people. Ergo, power is being decentralized.

The USSR was moderately innovative in aerospace. But they also acquired much of that basic technology from the Germans at the end of WWII. They were somewhat innovative with weapons systems. But they they threw a vast portion of their economy at those sectors. As a percentage of their resources they threw something like 4 times as much at those sectors as the US did. And the result is that they did some things impressively well. And they did a couple of things first. But overall we got far higher quality for a fraction of the costs.

Outside of those sectors, where did the USSR innovate? They really didn't. They used technology invented elsewhere that they were either able to buy or copy. It is precisely that lack of innovation that lead to their stagnation and eventual dissolution.

So bureaucracy does work then, it's just less efficient. Or the Russian bureaucracy was less efficient. But then again, I already explained why it was less efficient.


You don't seem to understand. Bureaucratization is both inevitable and desirable. To ask for the reverse is luddism. The technostructure is what allows us to innovate technologically, and to manage vast enterprises. The lack of private bureaucracies in earlier capitalism was a symptom of its relative simplicity and minimalistic nature. They weren't required. Now they are, and they will only become more so. This is not a new idea. It wasn't a new idea in business when Galbraith wrote, and it wasn't a new idea in statesmanship when Weber wrote. It's just taken political ideology this long to catch up, because we so insist on fighting 19th century battles that ignore today's reality. Believe me, Marxists are as guilty of it as capitalist proponents are.

The fact that people don't choose to use anti-trust does not change the fact that it is the best of all available options.

Of all options, yes. But it's not an option that's ever used meaningfully. It's simply a ceremony that makes us feel like we've done something.

Now I grant you that lobbying is very effective. But surrendering to your way isn't any better than surrendering to their way. At least with their way the unsustainablity of their model will eventually make way for the new to replace the old. And the partial monopoly system that we managed did turn out to be vastly innovative. And may be so in the future if conservatives don't succeed in their goal of exterminating it.

By "my way" I assume you mean nationalization.

As I noted, monopolies have the opportunity to be very, very efficient as well -they certainly don't become monopolies without being supremely efficient. But it does not seem so, because "efficient" is a loaded term, one which means nothing without an "inefficient" example with which to qualify it.

If your partial monopolies were so much more efficient, it's because they had effective technostructures. A proper government technostructure is just as efficient as a private ones; dare I say more so, since a monopolous government agency doesn't go out of business. And if a company is so big and so successful as to have become a monopoly, then their service or industry should be nationalized, out of interest for the public good. To argue against that is to argue the opposite, which is that public services function better when privatized. Is that a road you want to go down, Mr. liberal?

I don't know why you're using the term efficiency, but meh.


So there is only one way to increase market share? And how did you get to necessity?


Also, I still don't think you are clear about the complexities of consumer choice or the mechanisms of market competition. But as you consider your definitions to be correct we're not going to go any further than this.

I just want you to understand how I'm using the word and in what focus. If you don't want to take part in the discussion then don't.

Not businesses, then? And what about governments themselves? You know, there are people who suggest that one of the advantages held by the UK and France at the start of the industrial era was its military institutions, in that they had personnel experienced in organizing large numbers of people and in procuring, transforming and distributing large amounts of materials. The beginnings of economic management on a large scale happened not in private industry but in the bureaucracies of state institutions, namely the military.

Similar things have been said, in slightly different wording, abut the US military in the post WW2 era.

Similarly, it was a leftist military coup in Peru in 1968 that seized power precisely for this reason: they simply said "those lazy civilian bureaucrats can't run an organization effectively enough, so the military should do it instead!" Rather interesting to see how they turned the country around.

So, to claim that organizations run by a state are not viable in thee long run, I dare say, a teeny bit of an exaggeration on your part. Seeing as they seem to have been successful enough to even provide management expertise for private organizations!

And it was public bureaucracies that came first.

In fact a private company, all else being equal, would have to close shop before a public company must do so. Because a private company (at least if it obeys the market dogmas) must close shop as soon as its profit margin goes below the prevailing interest rates on capital, while a public company may as well keep operating so long as it breaks even!

Interesting point!

 

[innonimatu]

I missed the continuation of this discussion. Well, I still have some time...

Business organizations are much different. You could make the claim that businesses are in business to return money to their owners, which could be the public as well as the the stock market.

Actually, no, that would be a claim I'd never make, because I was not talking about what we call businesses. That term is now understood (for better and for worse) by definition to describe organizations dedicated to returning money. I was talking about organizations in general, as economic actors. Modern states are an umbrella under which many different organizations are arranged, every state in the world. Many of those are productive organizations, only they have goals other than simply making money. That does not make them a failure. Nor, in fact, unnecessary.
The military are just in many nations the largest of those organizations, dwarfing even the largest corporations. Thus a good counter-example for all those who might claim that state-run organizations are bound to fail.

But what happens because the business is a profit making enterprise is that contrary agendas keep being put in by political leaders who do not have the health and viability of the organization as their primary, or even secondary, motivation. So on the one hand it's a jobs program, and it matters not how many people the company should be employing, and on the other hand it's a source of revenue other than taxes that means it should be stripped bare of resources for the sake of others, and on the third hand it's a source of political patronage, and on the fourth hand it's a tool for giving various interest groups what they want.

Thus according to that reasoning we should, I don't know... privatize prisons? Lest they turn to a jobs program or a source of revenue? They can be run as a business - your country has proven that. Is that good? Making the profit private makes the business better? Can it not make it even more rapacious? Even more of a "jobs program", or worse, a "increase profits" program?

Sure, the private ones are paid by the state, but are not so many private businesses paid by the state? It's just another form of contracting, surely?
And following along the same logic, what cannot be privatized? Everything can be contracted out to some private business, even tax collection. That is what you argue for when you claim that private business organizations are inherently "better" that state controlled organizations. Even if you're not aware of it. And the problem is that this is simply not true. A private business organization is not inherently better that a state-controlled one. It's all down to who controls it and with what agenda. Private business is now supposedly controlling with an agenda of returning money to shareholders. The reality is far more diverse, with executives and especially CEOs running private fiefs in some companies, fund managers (wether risk capila or pension funds, it makes little difference) raiding others, multi-generational families closely controlling others, etc. All of these are in in for power, not money, it's just that for some money is the power they want, others not so much.

State governments are also run by people, and thus are also subject to the same diversity of wills and outcomes. They are, we all say, in in for power too, and they have different ideas of what power means, of what they want to do with it. Just like the people who actually control private companies. But, unlike private owners, at least they are accountable to the entire population of their countries. Or are supposed to be, in democratic countries.

There is a reason so few of them outside utility companies compare well to their private counterparts.

Yes, there is, and that reason is easy to explain: privatizing utility companies meets with more resistance! Everything else that states create and is obviously profitable ends up being privatized very quickly! Or isn't even created by the state in the first place, because some private businessman with limited capital has been able to create one already and succeed with it, thus eliminating public demand for the state to step in.

In other words, states often have problems with the organizations they set up to address economic needs because they get the hard to solve problems. The low hanging fruit is taken by private businesses. This does not means a state-run organization couldn't do the same thing a businessman does. It does means that private business is quicker at identifying new opportunities, and that for a simple reason: for a state to decide to set up a new organization usually requires a slow political process, while an individual businessman can do it quickly. However, once set up, a state-owned organization can function without micromanagement from politicians. I'm not saying it will always be the case, but such a state-owned organization need not be different from a public corporation (having to act in accordance to the will of its owners). It should even be easier to manage, as there is only one government to a state, but many owners to a public corporation.

So you're arguing that they should, by default, operate poorly?

Operating poorly? Having goals other that returning the maximum possible profit is operating poorly? You really do believe in the goodness invisible hand!

The purpose of any economically productive organization is to produce usable goods. Profits are a desirable (on the long run necessary) consequence of that, when we're speaking of private organizations. Not the goal. Profits are just an accounting tool, financial capital recirculated. By themselves they're useless tokens: gold, paper money, data on bank's databases now. Real productive stuff are the output of a business organization, and should be its goal. Losing sight form that is what causes the financial bubbles and busts. For if profits are the goal, then it is good to speculate in finance instead of producing real goods, and we all should know by now where that leads.

While it does happen that a government makes some industries unprofitable, that's not really what would be expected most of the time. Private oil companies operating in Mexico might have to pay high costs for their leases, but they would still be investing to maximize their long run outcome. Because they can leave, the Mexican government has an incentive to not drive them out. Pemex cannot leave, and so will pump less oil in the long run.

Sorry, but that is spurious logic:
- First you argue that because private companies can leave, the government of Mexico will change its policies towards them "so as not to drive them out". But that's not the real motive for a change of policy: the real motive would be "to prevent a fall in oil production caused by the companies leaving".
- Then you say that Pemex cannot leave, so the government of Mexico will not change its policy towards it and happily allow oil production to fall.

No. If you claim that the government of Mexico would change its policy towards private companies to prevent loss of production, then why wouldn't the same government change is policy towards Pemex? Or, conversely, if the government of Mexico won't change its policy towards Pemex (accepting lower production), why would it change it towards private companies? If your scenario was a single private company vs. Pemex you could still argue the "gradual vs. sudden" fall of production, but you're even assuming several private companies operating there!

Bureaucracy is the answer to the problem of centralized decision-making. Instead of one person making decisions, whether its the CEO or the king or whatever, there are fifty, or a hundred, or a thousand. The bureaucracy exists because decision-making has reached a point where one person making all the decisions has become impossible or detrimental. If experts in a variety of fields are required in order to maximize efficacy, and one person can no longer be an expert in all those fields, then a bureaucracy is not only inevitable but necessary. When that is resisted, you get things like Ford Motor Co. as I described earlier, or Montgomery Ward under Sewell Avery. Or worse, if the organization reaches a size where it's physically impossible for one person to make all the decisions necessary in a given day, even if he could be an expert in all fields.

Or to put it more simply: decision-making is moving from one person to many people. Ergo, power is being decentralized.

Indeed. This cannot be stressed enough. The alternative, of course, would be to have smaller organizations directed each by one of the middle managers of the large organization. But would that really reduce the number of people involved in the bureaucracy? Would it make the coordination of logistics easier or more effective?

Well... it depends! I can think of examples going either way. And, certainly, even the most market-friendly person will never dare claim that all employees at the different stages of the proverbial pin factory should act independently and trade their unfinished goods among them in a free-trade fashion! The reflexive bias against "bureaucracy" displayed by some persons is an irrational ideological reaction. It must be examined in a case-by case basis. And examined disclaiming the goals under which it is being evaluated: is it about efficiency on the use of resources, about fast responses, about availability of diverse options ("product diversity"), about control, or what? These are often ad odds with each other.

Overall, vertical integration as some large corporations practiced (and some still practice) can be extremely effective and useful. You gave some good examples of that.

 

[Hygro]

Voted "Brain Shuts Off", only because of thoughts-bottleneck.

It's both.

It depends on what the product is. The larger the corporation, the lower the profitability/ Though profitability drops, the absolute profits still grow, so its in the interest of the top brass and of major (but not minor!) shareholders to consolidate.

Consolidation is the opposite of monopoly in the above example. It is market forces forcing perfect efficiency. The only way toothpaste can compete with other toothpaste is cost and branding. But branding for such a staple is basically a matter of "it's the same thing as always, so you won't get tetanus using our toothpaste. It's safe"

But meanwhile, if you want something highly profitable that gives opportunity for high wages and innovates, you don't want consolidation. You want their profitability to be high so that reinvestment of profits can be targeted, and significant relative to the size of the firm.

Anyway, it's a wash.